GSK Annual Report 2002

37 Reconciliation to US accounting principles continued
Merger transaction costs
Glaxo Wellcome incurred total merger-related transaction costs of
£66 million, excluding integration and restructuring costs. Under UK
GAAP these merger transaction costs were expensed as incurred
during 2000. Under US GAAP, direct acquisition costs of the
acquiring company are included as a portion of the purchase
consideration.
Restructuring costs
The requirements for recording a provision for restructuring costs
are different in certain aspects under US GAAP than under UK
GAAP. Accordingly, adjustments have been made to eliminate the
UK GAAP provisions for restructuring costs that do not meet US
GAAP requirements.
Marketable securities
Marketable securities consist primarily of equity securities and
certain other liquid investments. Under UK GAAP these securities
are stated at the lower of cost and net realisable value. Under US
GAAP these securities are available for sale under Statement of
Financial Accounting Standard No 115 (SFAS 115) ‘Accounting for
certain investments in debt and equity securities’ and are carried at
fair value, with the unrealised gains and losses, net of tax, reported
as a separate component of shareholders’ equity.
Pensions and other post-retirement benefits
The key differences between UK (SSAP 24) and US GAAP in relation
to defined benefit pension plans are:
• under UK GAAP the effect of variations in cost can be
accumulated at successive valuations and amortised on an
aggregate basis. Under US GAAP the amortisation of the
transition asset and the costs of past service benefit
improvements are separately tracked: experience gains/losses
are dealt with on an aggregate basis but amortised only if
outside a 10 per cent corridor.
• UK GAAP allows measurements of plan assets and liabilities to
be based on the result of the latest actuarial valuation. US GAAP
requires measurement of plan assets and liabilities to be made
at the date of the Financial statements or up to three months
prior to that date.
• The pension adjustment also includes the impact of changes in
minimum pension liabilities included within accumulated other
comprehensive income.
During 2002, the Group decided to align the measurement date
for all of its pension plans to 31st December as certain of the
Group’s plans had a measurement date for pension assets and
liabilities of 30th September.
The impact, reflected as a cumulative effect of an accounting
change, was a £37 million credit, net of tax, to income.
The disclosures required by SFAS 132 are included in this Note.
Stock-based compensation
Under UK GAAP share options are accounted for as equity when
exercised, valued at the issuance price. Under US GAAP, the Group
applies SFAS 123 ‘Accounting for stock-based compensation’ and
related accounting interpretations in accounting for its option plans
which require options to be fair valued at their grant date and
included in profit and loss over the vesting period of the options.
Notes to the financial statements GlaxoSmithKline 123
As a result of the merger certain of the Group’s options vested
immediately requiring the acceleration of compensation expense.
The amount of stock-based compensation expense related to this
accelerated vesting was £83 million in 2000. The disclosures
required by SFAS 123 are included in Note 34.
Additionally, the Group is entitled to receive a tax deduction for the
amount treated as compensation under US tax rules for employee
stock options which have been exercised by US employees during
the year. Under UK GAAP this is treated as a reduction of tax
expense whereas under US GAAP a portion of this amount is
credited to equity.
Employee Share Ownership Trust (ESOT)
Under UK GAAP shares of the Group’s stock held by the ESOT
are recorded at cost, less a provision representing the difference
between the cost and the option exercise price, and accounted for
as fixed asset investments. Projected losses on the exercise of the
options covered by the shares are recorded through the profit and
loss account over the life of the options. Under US GAAP shares of
the Group’s stock purchased by the ESOT are accounted for within
shareholders’ equity at cost. Gains or losses arising on subsequent
issuance of the shares to employees to satisfy share options are
recorded as adjustments to shareholders’ equity.
Derivative instruments
Statement of Financial Accounting Standard No. 133, ‘Accounting
for Derivative Instruments and Hedging Activities’ (SFAS 133) as
amended by SFAS 137 and SFAS 138 and as interpreted by the
Derivatives Implementation Group, was adopted by the Group with
effect from 1st January 2001. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively,
referred to as derivatives) and for hedging activities. Under UK
GAAP, some derivative instruments used for hedging are not
recognised on the balance sheet and the matching principle is
used to match the gain or loss under these hedging contracts to
the foreign currency transaction or profits to which they relate.
SFAS 133 requires that an entity recognise all derivatives as either
assets or liabilities in the consolidated balance sheet and measure
those instruments at fair value. Changes in fair value over the
period are recorded in current earnings unless hedge accounting
is obtained. The Group does not designate any of its derivatives as
qualifying hedge instruments under SFAS 133. SFAS 133 prescribes
requirements for designation and documentation of hedging
relationships and ongoing assessments of effectiveness in order to
qualify for hedge accounting.
The Group also evaluates contracts for ‘embedded’ derivatives, and
considers whether any embedded derivatives have to be bifurcated,
or separated, from the host contracts in accordance with SFAS 133
requirements. If embedded derivatives exist and are not clearly and
closely related to the host contract, they are accounted for
separately from the host contract as derivatives.
Gains and losses related to the fair value adjustments of all
derivative instruments are classified in the consolidated statement
of income and cash flows in accordance with the nature of the
derivative.
The fair value and book value of derivative instruments in respect
of financial assets and liabilities as at 31st December 2002 is
disclosed in the ‘Classification and fair value of financial assets
and liabilities’ table in Note 32.