GSK Annual Report 2002

124 GlaxoSmithKline Notes to the financial statements
37 Reconciliation to US accounting principles continued
Valuation of derivative instruments
The fair value of derivative instruments is sensitive to movements in
the underlying market rates and variables. The Group monitors the
fair value of derivative instruments on a periodic basis. Derivatives
including interest rate swaps and cross currency swaps are valued
using standard valuation models, counterparty valuations, or thirdparty
valuations. Standard valuation models used by the Group
consider relevant discount rates, the market yield curve on the
valuation date, forward currency exchange rates and counterparty
risk. All significant rates and variables are obtained from market
sources. All valuations are based on the remaining term to maturity
of the instrument. Foreign exchange contracts are valued using
forward rates observed from quoted prices in the relevant markets
when possible. The Group assumes parties to long-term contracts
are economically viable but reserves the right to exercise early
termination rights if economically beneficial when such rights exist
in the contract.
Dividends
Under UK GAAP, dividends proposed are provided for in the year in
respect of which they are recommended by the Board of Directors
for approval by the shareholders. Under US GAAP, such dividends
are not provided for until declared by the Board of Directors.
Deferred taxation
Under UK GAAP the Group has implemented in 2002 FRS 19
‘Deferred Tax’. This requires deferred tax to be accounted for on a
full provision basis, similar to the requirement for US GAAP, rather
than a partial provision basis as in 2001 and earlier years. As a
consequence the Profit attributable to shareholders and Equity
shareholders’ funds under UK GAAP and the deferred tax
adjustments under US GAAP for prior periods have been restated.
There is no impact to Net loss and Shareholders’ equity under US
GAAP as previously reported. The adoption of FRS 19 has
eliminated most of the differences for deferred tax that previously
existed between UK GAAP and US GAAP. As a result, the
adjustment now primarily relates to the deferred tax effect of other
US GAAP adjustments.
Exceptional items
Items classified as exceptional under UK GAAP do not meet the
definition of extraordinary under US GAAP and are therefore
classified as operating expense.
Consolidated statement of cash flows
The US GAAP cash flow statement reports changes in cash and
cash equivalents, which includes short-term highly liquid
investments with original maturities of three months or less.
Only three categories of cash flows are reported: operating
activities (including tax and interest); investing activities (including
capital expenditure, acquisitions and disposals together with
cash flows from available for sale current asset investments);
and financing activities (including dividends paid). A statement
of cash flows is presented on page 128.
Cash and cash equivalents
Under UK GAAP the cash balance includes only cash at bank and
other cash balances. Under US GAAP cash and cash equivalents
include cash at bank and certain liquid investments with original
maturities of three months or less.
Comprehensive income statement
The requirement of SFAS 130 ‘Reporting comprehensive income’ to
provide a comprehensive income statement is met under UK GAAP
by the Statement of total recognised gains and losses (pages 76 to
77). A statement of comprehensive income under US GAAP for the
three years in the period ending 31st December 2002 is presented
on pages 126 and 127. Under US GAAP the statement includes the
net impact of gains and losses on equity and liquid investments and
translation adjustments.
Recent Financial Accounting Standards Board (FASB)
pronouncements
In June 2001, the FASB approved SFAS 143 ‘Accounting for
Obligations Associated with the Retirement of Long-Lived Assets’
which requires that the fair values of the obligation associated
with the retirement of long-lived assets be capitalised as part of
the cost. This is required to be implemented by the Group with
effect from 1st January 2003. The Group does not believe the
adoption of this standard will have a material impact on its
results.
On 1st January 2002, SFAS 144 ‘Accounting for the Impairment
or Disposal of Long-Lived Assets’ was adopted by the Group.
SFAS 144 develops one accounting model for long-lived assets,
including discontinued operations to be disposed of by sale. It
requires that all long-lived assets be measured at the lower of
carrying amount or fair value less cost to sell whether reported in
continuing or discontinued operations. The adoption of SFAS 144
has not had a material impact on the Group’s financial
statements.
In April 2002, SFAS 145 ‘Rescission of FASB Statements no. 4, 44
and 64, Amendment of FASB Statement no. 13 and Technical
Corrections’ was issued. The statement updates, clarifies and
simplifies existing accounting standards. The Group does not
believe the adoption of this standard will have a material impact
on its results.
SFAS 146 ‘Accounting for Costs Associated with Exit or Disposal
Activities’, was issued in June 2002. SFAS 146 requires companies
to recognise costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an
exit or disposal plan and is to be applied prospectively to exit or
disposal activities initiated after 31st December 2002. The Group
is currently assessing the impact of this standard.
In November 2002, the FASB published Interpretation no. 45,
‘Guarantor’s Accounting and Disclosures requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others’ (FIN 45). FIN 45 expands on the accounting guidance of
other SFASs. FIN 45’s provisions for initial recognition and
measurement should be applied to guarantees issued or modified
after 31st December 2002. The disclosure requirements are effective
for financial years ending after 15th December 2002. The Group
does not believe that the adoption of FIN 45 will have a material
impact on its results.
In January 2003, the FASB published Interpretation no. 46
‘Consolidation of Variable Interest Entities’ (FIN 46). Under FIN 46
the primary beneficiary of the entity must consolidate certain
entities known as Variable Interest Entities. The measurement
principles will apply to the Group’s 2003 Financial statements. The
Group does not believe that the adoption of FIN 46 will have a
material impact on its results.