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Application of FRS18 in J Sainsbury plc
1 Introduction of J Sainsbury plc
J Sainsbury plc is a public limited company (‘Company’) incorporated in the United Kingdom, whose shares are publicly traded on the London Stock Exchange. The Company is domiciled in the United Kingdom and its registered address is 33 Holborn, London EC1N 2HT, United Kingdom. J Sainsbury plc consists of Sainsbury’ s, a chain of 490 supermarkets and 298 convenience stores, and Sainsbury’s Bank. Sainsbury’s Supermarkets is the UK’s longest standing major food retailing chain and the Sainsbury’s brand is built upon a heritage of providing customers with healthy, safe, fresh and tasty food.
The UK grocery retailing market was valued at ￡123.5 billion in 2005/061 and is forecast to grow at an average annual increase of 2.8 per cent to ￡141.5 billion by 20112. Sainsbury’s growth will be affected by general market issues such as the impact of regulatory and planning regimes on store development and economic factors such as the level of household disposable income. However, Sainsbury’s strategy is aligned with factors such as customers’ preferences for the products they buy. Sainsbury’s is well positioned to anticipate and meet the increasing consumer focus on fresh, healthy, quality foods. The development of our complementary non-food offer addresses our customers’ desire to buy a greater range of non-food products along with their weekly grocery shop and the continued growth of our convenience stores also takes account of the faster pace of people’s lifestyles and the trend towards more frequent top-up shopping trips. Over the past year, Sainsbury’s strengthened its overall market share position to over 14.9 per cent3 although the market can also be defined and market share divided in a number of different ways. Excluding non-food items, Sainsbury’s has the number two position in the market.
Now, the company differentiates itself by offering a broad range of great products at fair prices with particular emphasis on fresh food. Products are improved and developed continually to ensure the company leads in terms of the ingredients used and the integrity of sourcing. A large Sainsbury’s store offers around 30,000 products and many stores also offer complementary non-food products and services. 114 stores provide an internet-based home delivery shopping service. Sainsbury’s Bank is jointly owned by J Sainsbury plc and HBOS plc. With access to over 16 million Sainsbury’s customers each week, operating costs are low, enabling Sainsbury’s Bank to offer excellent value products with extra benefits, all delivered in a simple, accessible way.
2 FRS 18
FRS 18 Revenue was issued by the CCDG in January 2003 and consequential amendments were made in July and September 2004. This Standard is operative for financial statements covering periods beginning on or after 1st January 1997.
Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.
This Standard should be applied in accounting for revenue arising from the following transactions and events:
(a) The sale of goods;
(b) The rendering of services;
(c) The use by others of entity assets yielding interest, royalties and dividends.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue. Similarly, in an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission.
Revenue should be measured at the fair value of the consideration received or receivable. The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity.
In most cases, the consideration is in the form of cash or cash equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable. However, when the inflow of cash or cash equivalents is deferred, the fair value of the consideration may be less than the nominal amount of cash received or receivable. For example, an entity may provide interest free credit to the buyer or accept a note receivable bearing a below-market interest rate from the buyer as consideration for the sale of goods. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest. The imputed rate of interest is the more clearly determinable of either:
(a) the prevailing rate for a similar instrument of an issuer with a similar credit rating; (b) a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services.
3 Application of FRS18 in J Sainsbury plc
The financial of J Sainsbury plc results for the 52 weeks to 24 March 2007 reflect strong progress on the MSGA (Make Sainsbury’s Great Again) plan. Sales (inc VAT) increased by 6.9 per cent to ￡18,518 million (2006: ￡17,317 million). Underlying profit before tax was up 42.3 per cent at ￡380 million (2006: ￡267 million). Underlying basic earnings per share increased to 14.7 pence (2006: 10.5 pence). Profit before tax was ￡477 million (2006: ￡104 million). Basic earnings per share increased to 19.2 pence (2006: 3.8 pence). A final dividend of 7.35 pence per share is proposed (2006: 5.85 pence), making full year dividend of 9.75 pence (2006: 8.00 pence).
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Summary income statement for the 52 weeks to 24 March 2007 |
2007
￡m |
2006￡m |
% Change |
|
Continuing operationsSales (inc VAT)
Retailing – Supermarkets and Convenience
Retailing – Supermarkets and Convenience |
18,227
291 |
16,987
330 |
7.3
(11.8) |
|
Total sales (inc VAT) |
18,518 |
17,317 |
6.9 |
|
Sales (ex VAT)
Retailing – Supermarkets and Convenience
Financial services – Sainsbury’s Bank |
16,860
291 |
15,731
330 |
7.2
(11.8) |
|
Total sales (ex VAT) |
17,151 |
16,061 |
6.8 |
|
Underlying operating profit
Retailing – Supermarkets and Convenience
Financial services – Sainsbury’s Bank |
429
2 |
352
(10) |
21.9
120.0 |
|
Total underlying operating profit
Underlying net finance costs2 |
431
(51) |
342
(75) |
26.0
32.0 |
|
Underlying profit before tax
Business Review operating costs
IT insourcing costs
Debt restructuring costs
Profit on sale of properties
Profit on part disposal of Sainsbury’s Bank
Past service gains on defined benefit schemes
Financing fair value movements |
380
-
-
-
7
10
72
8 |
267
(51)
(63)
(38)
1
-
-
(12) |
42.3
n/a
n/a
n/a
600.0
n/a
n/a
166.7 |
|
Profit before tax
Income tax expense |
477
(153) |
104
(46) |
358.7
(232.6) |
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Underlying basic earnings per share
Basic earnings per share
Proposed dividend per share |
14.7p
19.2p
9.75p |
10.5p
3.8p
8.0p |
40.0
405.3
21.9 |
Profit on sale of properties
Surplus assets were sold during the year generating a profit on sale of ￡7 million (2006: ￡1 million) and cash proceeds of ￡106 million (2006: ￡164 million) which was ahead of target. The Group will continue to dispose of surplus assets and expects the proceeds in the next financial year to be around ￡75 million.
Profit on part disposal of Sainsbury’s Bank
On 8 February 2007, the Group sold five per cent shareholding in Sainsbury’s Bank for ￡21 million to HBOS plc. This sale generated a profit on disposal of ￡10 million.
Past service gains on defined benefit schemes
Following changes introduced by the Finance Act effective from 6 April 2006, the defined benefit schemes have implemented revised terms to provide members with the option to surrender a greater proportion of their pension for a tax-free cash lump sum payment. Accordingly, the Group revised its assumptions used in calculating the retirement benefit obligations in respect of this and certain minor changes in scheme rules and has recognised ￡72 million of past service gains in the Group income statement.
Financing fair value movements
Fair value movements for the Group resulted in a ￡8 million gain (2006: ￡12 million loss, of which ￡4 million loss related to Sainsbury’s Bank).
Taxation
The income tax charge was ￡153 million (2006: ￡46 million), with an underlying rate of 34.8 per cent (2006: 35.5 per cent) and an effective rate of 32.2 per cent (2006: 44.2 per cent). The underlying rate exceeded the nominal rate of UK corporation tax principally due to the lack of effective tax relief on depreciation of UK retail properties. This disallowable depreciation amounted to￡73 million in the financial year and the Group expects it to remain at a similar level in the next financial year. With effect from 1 April 2008 the standard rate of UK corporation tax will reduce from 30 per cent to 28 per cent and as a result will reduce the underlying rate in the financial year ending March 2009.
Underlying basic earnings per share
Underlying basic earnings per share increased by 40.0 per cent from 10.5 pence to 14.7 pence, reflecting the improvement in underlying profit after tax attributable to equity holders, after adjusting for the minority interests at Sainsbury’s Bank.
Dividends
A final dividend of 7.35 pence per share is proposed (2006: 5.85 pence) and will be paid on 20 July 2007 to shareholders on the Register of Members at the close of business on 25 May 2007. The total proposed dividend for the year is therefore up 21.9 per cent to 9.75 pence (2006: 8.00 pence). Underlying dividend cover increased in the year to 1.5 times (2006: 1.3 times). Going forward the Group expects to achieve underlying dividend cover in the range of 1.5 times to 1.75 times.
Cash flow statement
Group net debt as at 24 March 2007 was ￡1,380 million (2006: ￡1,415 million). Adjusting for the impact of Sainsbury’s Bank, which was consolidated in the prior year, net debt reduced by ￡156 million (2006: ex Sainsbury’s Bank ￡1,536 million). Within the overall cash flow movement for the year there were a number of significant one-off items. The significant cash outflows related to a ￡240 million one-off pension contribution made in May 2006 and ￡90 million paid out in relation to one-off costs charged to the income statement in the prior year. These were offset by significant cash inflows relating to ￡93 million received in respect of property disposals and the sale of five per cent shareholding of Sainsbury’s Bank, ￡81 million proceeds from issue of shares and around ￡150 million relating to yearend timing differences on working capital which are expected to reverse in the next financial year. After adjusting for these items, underlying cash flow for the year was ￡162 million favorable. In the next financial year the Group expects to deliver an underlying cash flow neutral position after adjusting for the reversal of the ￡150 million working capital timing differences.
Reference:
1 The Institute of Grocery Distribution (IGD)
2 The IGD’s mid-case scenario forecast
3 Sainsbury’s Bank has been fully consolidated until the Group sold five per cent shareholding in February; thereafter it has been equity accounted as a joint venture.
4 Net finance costs pre financing fair value movements (2006: pre financing fair value movements and debt restructuring costs). |
