GSK Annual Report 2002

84 GlaxoSmithKline Notes to the financial statements
2 Accounting policies continued
Pensions and post-retirement benefits
The cost of providing pensions and other employee post-retirement
benefits is charged to the consolidated profit and loss account on a
systematic and rational basis, based on actuarial assumptions, over
the period during which benefit is derived from employees’ services.
Any difference between this charge and the contributions paid is
included as an asset or liability in the consolidated balance sheet.
Employee share plans
Incentives in the form of shares are provided to employees under
share option and share award schemes. In respect of award
schemes and certain share option grants, the company provides
finance to ESOTs to purchase company shares on the open market
to meet the company’s obligation to provide shares when
employees exercise their option or award; any excess of the
purchase price of the shares above the exercise price of the options
and awards is charged to the profit and loss account over the
periods of service in respect of which the options and awards are
granted. In respect of other share option grants, share options
when exercised are accounted for as share issues at exercise price.
Additional employer costs in respect of options and awards are
charged to the profit and loss account over the periods of service.
Costs of running the ESOTs are charged to the profit and loss
account. Shares held by the ESOTs are accounted for as fixed asset
investments held at cost less a provision to recognise any shortfall
in the proceeds receivable from employees on exercise unless there
is deemed to be a permanent impairment in value.
Goodwill
Goodwill is stated at cost less a provision for amortisation.
Amortisation is calculated to write off the cost in equal annual
instalments over its expected useful life. The useful life is not
normally expected to exceed 20 years.
Intangible fixed assets
Intangible assets are stated at cost less a provision for amortisation.
Acquired licences, patents, know-how and marketing rights are
amortised over their estimated useful lives in equal instalments,
but no longer than 15 years. Items capitalised are restricted to
those related to specific compounds or products which are being
developed for commercial applications. The estimated useful lives
for determining the amortisation charge are reviewed annually,
and take into account the estimated time it takes to bring the
compounds or products to market as marketable products.
Any development costs which are incurred by the Group and
are associated with an acquired licence, patent, know-how
or marketing rights are written off to the profit and loss account
when incurred.
Brands are valued independently as part of the fair value of
businesses acquired from third parties where the brand has a value
which is substantial and long-term and where the brands can be
sold separately from the rest of the businesses acquired. Brands
are amortised over the estimated useful lives but no longer than
20 years, except where the end of the useful economic life of the
brand cannot be foreseen.
Prior to 1998, acquired minor brands and similar intangibles were
eliminated in the Group balance sheet against reserves in the year
of acquisition.
Tangible fixed assets
Tangible fixed assets are stated at cost less provisions for
depreciation or impairment. The costs of acquiring and developing
computer software for internal use and internet sites for external
use are capitalised as a tangible fixed asset where the software or
site supports a significant business system and the expenditure
leads to the creation of a durable asset.
Depreciation is calculated to write off the cost of tangible fixed
assets, excluding freehold land, in equal annual instalments over
their expected useful lives. The normal expected useful lives of the
major categories of tangible fixed assets are reviewed annually
and are:
Freehold buildings 20 to 50 years
Leasehold land and The shorter of lease term and 50
buildings years
Plant and machinery 10 to 20 years
Fixtures and equipment 3 to 10 years
ERP systems software 7 years
Other computer software 3 to 5 years
ERP systems software generally involves significant customisation
prior to implementation and is expected to have a useful economic
life of seven years, rather than the maximum five years of other
computer software.
On disposal of a tangible fixed asset, the cost and related
accumulated depreciation are removed from the financial
statements and the net amount, less any proceeds, is taken to
the consolidated profit and loss account.
Leases
Leasing agreements which transfer to the Group substantially all
the benefits and risks of ownership of an asset are treated as
finance leases, as if the asset had been purchased outright. The
assets are included in tangible fixed assets and the capital element
of the leasing commitments is shown as obligations under finance
leases. Assets held under finance leases are depreciated over the
shorter of the lease terms and the useful lives of the assets. The
interest element of the lease rental is charged against profit.
All other leases are operating leases and the annual rentals are
charged against profit on a straight-line basis over the lease term.
Impairment of fixed assets
The carrying values of fixed assets are reviewed for impairment
when there is an indication that the assets might be impaired.
Any provision for impairment is charged against profit in the year
concerned. First year impairment reviews are conducted for
acquired goodwill and intangible assets. Certain intangibles are
considered to have an indefinite life and are therefore not
amortised. Such intangibles are subject to annual impairment tests.
Impairment is determined by reference to the higher of net
realisable value and value in use, which is measured by reference
to discounted future cash flows. The value of shares held by the
ESOTs is reviewed quarterly to determine if there is any permanent
impairment.
Investments in joint ventures and associates
Investments in joint ventures and associated undertakings are
carried in the consolidated balance sheet at the Group’s share
of their net assets at date of acquisition and of their postacquisition
retained profits or losses together with any goodwill
arising on the acquisition, net of amortisation.