basis of preparation
These separate financial statements of Wm Morrison Supermarkets PLC (the Company) have been prepared on a going concern basis under the historical cost convention, except as disclosed in the accounting policies set out below, and in accordance with applicable accounting standards under UK GAAP and the Companies Act 2006.
The Directors have been advised that certain distributions (including share repurchases) made in the years ended 3 February 2013 and 2 February 2014 have been made without complying fully with the relevant requirements of the Companies Act 2006. A course of action is being followed to remedy this position without the Company pursuing any rights that it may have to seek repayments of the relevant funds. Further details of this course of action will be provided to shareholders in due course for approval.
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company’s financial statements.
accounting reference date
The accounting period of the Company ends on the Sunday falling between 29 January and 4 February each year.
turnover recognition
Turnover comprises the fair value of consideration received or receivable for the sale of goods in the ordinary course of the Company’s activities. It is recognised when significant risks and rewards of ownership have been transferred to the buyer, there is reasonable certainty of recovery of the consideration and the amount of revenue, associated costs and possible return of goods can be estimated reliably.
Sale of goods in-store and online, and fuel
Sale of goods in-store and online is recorded net of value added tax, returns, staff discounts, coupons, vouchers and the free element of multi- save transactions. Sale of fuel is recognised net of value added tax and Morrisons Miles award points. Revenue is recognised when transactions are completed in-store, or, in the case of food online, when goods are accepted by the customer on delivery.
Other sales
Other revenue includes income from concessions and commissions based on the terms of the contract. Revenue collected on behalf of others is not recognised as turnover, other than the related commission. Sales are recorded net of value added tax and intra-group transactions.
Cost of sales
Cost of sales consists of all costs to the point of sale including manufacturing, warehouse and transportation costs. Store depreciation, store overheads and store-based employee costs are also allocated to cost of sales.
supplier income
Supplier incentives, rebates and discounts are collectively referred to as supplier income in the retail industry. Supplier income is recognised as a deduction from cost of sales on an accruals basis based on the expected entitlement that has been earned up to the balance sheet date for each relevant supplier contract. The accrued incentives, rebates and discounts receivable at period end are included within prepayments and accrued income. Where amounts received are in the expectation of future business, these are recognised in the income statement in line with that future business.
other operating income
Other operating income primarily consists of income not directly related to the operating of supermarkets and mainly comprises rental incomes and income generated from recycling of packaging. Rental income arising from operating leases is accounted for on a straight-line basis to the date of the next rent review.
investments
Investments in subsidiary undertakings and joint ventures
Investments in subsidiary undertakings and joint ventures are stated at cost less provision for impairment.
Investments in equity instruments
All equity instruments are held for long term investment and are measured at fair value, where the fair value can be measured reliably. Where the fair value of the instruments cannot be measured reliably, the investment will be recognised at cost less accumulated impairment losses in accordance with FRS 26 ‘Financial instruments: recognition and measurement’. Any impairment is recognised immediately in profit or loss.
tangible assets
Tangible assets are stated at cost less accumulated depreciation and accumulated impairment losses. Costs include directly attributable costs. Annual reviews are made of estimated useful lives and material residual values.
Depreciation
The policy of the Company is to provide depreciation at rates that are calculated to write off the cost less residual value of tangible fixed assets on a straight-line basis. The rates applied are:
Freehold land 0% Freehold buildings 2.5%
Leasehold improvements Over the shorter of lease period and 2.5%
Plant, equipment,
fixtures and vehicles 10% to 33% Assets under construction 0%
Fixed assets are reviewed for indications of impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. This is performed for each income generating unit, which in the case of a supermarket is an individual retail outlet. If there are indications of possible impairment, then a test is performed on the asset affected to assess its recoverable amount against carrying value. An impaired asset is written down to its recoverable amount, which is the higher of value in use or its net realisable value. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If there is indication of an increase in fair value of an asset that had been previously impaired, then this is recognised by reversing the impairment, but only to the extent that the recoverable amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised for the asset.
Str ategic r epor t Go vernanc e Financial st atements
11 Company finanCiaL statements – ContinueD
11.1 aCCounting poLiCies – ContinueD
intangible assets
Software development costs
Costs that are directly attributable to the creation of identifiable software, which meet the development asset recognition criteria as laid out in IAS 38 ‘Intangible assets’ are recognised as intangible assets. Direct costs include consultancy costs, the employment costs of internal software developers and borrowing costs. All other software development and maintenance costs are recognised as an expense when incurred. Software development assets are held at historical cost less accumulated amortisation and impairment, and are amortised over their estimated useful lives (3 to 10 years) on a straight-line basis.
financial instruments Trade and other debtors
Trade and other debtors are initially recognised at fair value, which is generally equal to face value, and subsequently held at amortised cost. Provision is made when there is objective evidence that the Company will not be able to recover balances in full, with the charge being recognised in the profit and loss account. Balances are written off when the probability of recovery is assessed as being remote.
Cash and cash equivalents
Cash and cash equivalents includes cash-in-hand, cash-at-bank and bank overdrafts. In the balance sheet, bank overdrafts that do not have a right of offset are presented within current liabilities.
Trade and other creditors
Trade and other creditors are initially stated at fair value, which is generally equal to face value, and subsequently held at amortised cost.
Borrowings
Borrowings are initially recorded at fair value, net of attributable transaction costs. Subsequent to initial recognition, any difference between the redemption value and the initial carrying amount is recognised in profit for the period over the period of the borrowings on an effective interest rate basis.
Derivative financial instruments
Derivative financial instruments are initially measured at fair value, and are remeasured at fair value through profit or loss, except where the derivative qualifies for hedge accounting.
Cash flow hedges
A cash flow hedge mitigates the Group’s exposure to variability in cash flows attributable either to a recognised asset or liability or a highly probable forecasted transaction. The Group has cross-currency swaps and energy price contracts designated as cash flow hedges.
The effective part of any movement in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve within equity. Ineffectiveness is immediately recognised in profit for the period, energy price contracts within cost of sales and cross- currency swaps within finance income/costs. Cumulative gains or losses on derivatives held in the hedging reserve are reclassified into profit for the period when the transaction occurs.
fair value hedges
A fair value hedge mitigates the Group’s exposure to changes in fair value of a recognised asset or liability or a firm commitment. The change in FV of the hedged asset or liability that is attributable to the hedged risk is recognised in profit for the period.
Capital management
The capital management policy of the Company is consistent with that of the Group set out in note 6.7.
borrowing costs
All borrowing costs are recognised in the Company’s profit and loss account on an accruals basis, except for interest costs that are directly attributable to the construction of buildings and other qualifying assets which are capitalised and included within the initial cost of the asset. Capitalisation commences when both expenditure on the asset and borrowing costs are being incurred, and necessary activities to prepare the asset for use are in progress. In the case of new stores, this is generally once planning permission has been obtained. Capitalisation ceases when the asset is ready for use. Interest is capitalised at the effective rate incurred on borrowings before taxation of 5% (2013: 5%).
pension costs
A defined contribution scheme is a pension scheme under which the Group pays fixed contributions into a separate entity and provides no guarantee as to the quantum of retirement benefits that those contributions will ultimately purchase. A defined benefit scheme is one that is not a defined contribution scheme.
Pension scheme assets are valued at market rates. Pension scheme obligations are an estimate of the amount required to pay the benefits that employees have earned in exchange for current and past service, assessed and discounted to present value using the assumptions shown in note 11.11). The net pension liability or asset recognised in the Group’s balance sheet is the net of the schemes’ assets and obligations, which are calculated separately for each scheme. The Group has a right to recognise a net pension asset, should one arise, in respect of each of the schemes. The operating and financing costs of the scheme are recognised separately in the profit and loss account in the period in which they arise. Death-in-service costs are recognised on a straight-line basis over their vesting period. Actuarial gains and losses are recognised immediately in the STRGL.
A liability or asset is recognised in the balance sheet in respect of the Company’s net obligations to the scheme and is stated net of deferred tax. The Company also operated a stakeholder pension scheme and contributions were charged to the profit and loss account as they arise.
foreign currencies
Transactions in foreign currencies are recorded at the rates of exchange at the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currency are retranslated at the rates of exchange at the balance sheet date. Gains and losses arising on retranslation are included in the profit and loss account for the period.
provisions
Provisions are created where the Company has a present legal or constructive obligation as a result of a past event, where it is probable that it will result in an outflow of economic benefits to settle the obligation from the Company, and where it can be reliably measured. For onerous leases, this is when the rent payable exceeds rent receivable; for petrol filling station decommissioning costs when the filling station is first constructed and for dilapidations on leased buildings, when the lease is entered into. The amounts provided are based on the Group’s best estimate of the likely committed outflow. Where material, these estimated outflows are discounted to net present value.