GSK Annual Report 2002

2 Accounting policies
Consolidation
The consolidated Financial statements include:
• the assets and liabilities, and the results and cash flow, of the
company and its subsidiary undertakings, including Employee
Share Ownership Trusts (ESOTs)
• the Group’s share of the net assets and results of joint ventures
and associated undertakings.
The Financial statements of undertakings consolidated are made
up to 31st December.
Undertakings in which the Group has a material interest are
accounted for as subsidiaries where the Group exercises dominant
influence, as joint ventures where the Group exercises joint control
and as associates where the Group can exercise significant
influence. ESOTs are accounted for as subsidiaries on the grounds
that the Group has de facto control.
Interests acquired in undertakings are consolidated from the
effective date of acquisition and interests sold are consolidated
up to the date of disposal.
Transactions and balances between subsidiary undertakings are
eliminated; no profit is taken on sales between subsidiary
undertakings or sales to joint ventures and associated undertakings
until the products are sold to customers outside the Group.
Goodwill arising on the acquisition of interests in subsidiary
undertakings, joint ventures and associated undertakings,
representing the excess of the purchase consideration over the
Group’s share of the separable net assets acquired, is capitalised
as a separate item in the case of subsidiary undertakings and as
part of the cost of investment in the case of joint ventures and
associated undertakings. Goodwill is denominated in the currency
in which the acquisition is made and financed. In the case of
acquisitions prior to 1998, goodwill was written off against
reserves; on a subsequent disposal of assets from such acquisitions,
any related goodwill is removed from consolidated reserves and
charged to the consolidated profit and loss account.
The Group’s interests in its joint ventures are accounted for using
the gross equity method. The Group’s interests in its associated
undertakings are accounted for using the equity method.
Deferred taxation relief on unrealised intra-Group profit is
accounted for only to the extent that it is considered recoverable.
Assets and liabilities of overseas subsidiary and associated
undertakings and joint ventures including related goodwill, are
translated into sterling at rates of exchange ruling at the balance
sheet date. The results and cash flows of overseas subsidiary and
associated undertakings and joint ventures are translated into
sterling using average rates of exchange. Exchange adjustments
arising when the opening net assets and the profits for the year
retained by overseas subsidiary and associated undertakings and
joint ventures are translated into sterling, less exchange differences
arising on related foreign currency borrowings, are taken directly
to reserves and reported in the statement of total recognised
gains and losses.
In translating into sterling, assets, liabilities, results and cash flows
of overseas subsidiary and associated undertakings and joint ventures
reported in currencies of hyper-inflationary economies, adjustments
are made to reflect current price levels. Any loss on net monetary
assets is charged to the consolidated profit and loss account.
Notes to the financial statements GlaxoSmithKline 83
Foreign currency transactions
Foreign currency transactions by Group companies are booked
in local currency at the exchange rate ruling on the date of
transaction, or at the forward rate if hedged by a forward
exchange contract. Foreign currency assets and liabilities are
translated into local currency at rates of exchange ruling at the
balance sheet date, or at the forward rate. Exchange differences
are included in trading profit.
Revenue
Revenue is recognised in the profit and loss account when goods
or services are supplied to external customers against orders
received. Turnover represents the net invoice value, after the
deduction of discounts given at the point of sale, of products
despatched to, or available for collection by, customers, less
accruals for estimated future rebates and returns. Value added tax
and other sales taxes are excluded from revenue.
Expenditure
Expenditure is recognised in respect of goods and services received
when supplied in accordance with contractual terms. Provision is
made when an obligation exists for a future liability in respect of a
past event and where the amount of the obligation can be reliably
estimated. Advertising expenditure is charged to the profit and loss
account as incurred. Shipment costs on inter-company transfers are
charged to cost of sales; distribution costs on sales to customers are
included in selling, general and administrative expenditure.
Restructuring costs are recognised in respect of the direct
expenditures of a business reorganisation where the plans are
sufficiently detailed and well advanced, and where appropriate
communication to those affected has been undertaken at the
balance sheet date.
Research and development
Research and development expenditure is charged to the profit
and loss account in the period in which it is incurred. Tangible
fixed assets used for research and development are depreciated in
accordance with the Group’s policy.
Environmental expenditure
Environmental expenditure related to existing conditions resulting
from past or current operations and from which no current or
future benefit is discernible is charged to the profit and loss
account. The Group determines its liability on a site-by-site basis
and records a liability at the time when it is probable and can be
reasonably estimated. This liability includes the Group’s own portion
of the costs and also a portion of other potentially responsible
parties’ costs when it is probable that they will not be able to satisfy
their respective shares of the clean-up obligation. When recoveries
of reimbursements are virtually certain they are recorded as assets.
Legal and other disputes
Provision is made for the anticipated settlement costs and legal and
other expenses associated with claims received and legal and other
disputes against the Group where a reasonable estimate can be
made of the likely outcome of the dispute. No provision is made for
unasserted claims or where an obligation exists under a dispute but
it is not possible to make a reasonable estimate. Costs associated
with claims made by the Group against third parties are charged to
the profit and loss account as they are incurred.