GSK Annual Report 2002

2 Accounting policies continued
Stocks
Stocks are included in the financial statements at the lower of cost
(including manufacturing overheads, where appropriate) and net
realisable value. Cost is generally determined on a first in, first out
basis.
Taxation
The Group accounts for taxation which is deferred or accelerated
by reason of timing differences which have originated but not
reversed by the balance sheet date. Deferred tax assets are only
recognised to the extent that they are considered recoverable
against future taxable profits. Deferred tax on the retained earnings
of overseas subsidiaries is only provided when there is a binding
commitment to distribute past earnings in future periods.
Deferred tax is measured at the average tax rates that are expected
to apply in the periods in which the timing differences are expected
to reverse. Deferred tax liabilities and assets are not discounted.
Current asset investments
Current asset investments are stated at the lower of cost and net
realisable value.
In the case of securities acquired at a significant premium or
discount to maturity value, and intended to be held to redemption,
cost is adjusted to amortise the premium or discount over the life
to maturity of the security. Floating rate bonds are stated at cost.
Interest income is taken to the profit and loss account on a
receivable basis.
Equity investments are included as current assets when regarded
as available for sale.
Derivative financial instruments
The Group does not hold or issue derivative financial instruments
for trading purposes.
Derivative financial instruments are used to manage exposure to
market risks from treasury operations. The principal derivative
instruments are currency swaps, forward exchange contracts and
interest rate swaps. The derivative contracts are treated from
inception as an economic hedge of the underlying financial
instrument, with matching accounting treatment and cash flows.
The derivative contracts have high correlation with the specific
financial instrument being hedged both at inception and
throughout the hedge period. Derivative instruments no longer
designated as hedges are restated at market value and any future
changes in value are taken directly to the profit and loss account.
Currency swaps and forward exchange contracts used to fix the
value of the related asset or liability in the contract currency and
at the contract rate are accrued to the profit and loss account
over the life of the contract. Gains and losses on foreign exchange
contracts designated as hedges of forecast foreign exchange
transactions are deferred and included in the measurement of the
related foreign currency transactions in the period they occur.
Gains and losses on balance sheet hedges are accrued and are
taken directly to reserves, except that forward premium/discounts
are recognised as interest over the life of the contracts.
Interest differentials under interest swap agreements are recognised
in the profit and loss account by adjustment of interest expense
over the life of the agreement.
Notes to the financial statements GlaxoSmithKline 85
Debt instruments
Debt instruments are stated at the amount of net proceeds
adjusted to amortise the issue cost of debt evenly over the term
of the debt.
3 New accounting policies and future requirements
The Group has implemented Financial Reporting Standard 19
‘Deferred Tax’ in 2002 which requires deferred tax to be accounted
for on a full provision basis, rather than a partial provision basis as
before. Comparative information has been restated as necessary.
The effect in 2001 is to increase the business performance tax
charge by £8 million (2000 – £43 million) and the overall tax charge
by £6 million (2000 – £48 million). The net deferred tax asset at
31st December 2001 has been reduced by £127 million.
In June 2002, the Council of the European Union adopted a
Regulation requiring listed companies in its Member States to
prepare their consolidated financial statements in accordance with
international accounting standards from 2005. The Group has
initiated a project to plan for and implement the conversion from
UK GAAP to International Financial Reporting Standards (IFRSs).
The first Annual Report prepared under IFRSs will be that for the
year ending 31st December 2005. The first financial results
announcement prepared in accordance with IFRSs will be that for
the first quarter of 2005.
4 Exchange rates
The Group uses the average of exchange rates prevailing during
the period to translate the results and cash flows of overseas Group
subsidiary, joint venture and associated undertakings into sterling
and period end rates to translate the net assets of those
undertakings. The currencies which most influence these
translations, and the relevant exchange rates, were:
2002 2001 2000
Average rates:
£/US$ 1.50 1.44 1.52
£/Euro 1.59 1.61 1.64
£/Yen 188.00 175.00 163.46
Period end rates:
£/US$ 1.61 1.45 1.49
£/Euro 1.54 1.64 1.61
£/Yen 192.00 190.00 171.00
5 Merger of Glaxo Wellcome and SmithKline Beecham
The combination of Glaxo Wellcome plc and SmithKline Beecham plc
was treated as a merger at 27th December 2000 under UK GAAP.
Under merger accounting, the shares issued by GlaxoSmithKline plc
to acquire Glaxo Wellcome and SmithKline Beecham were accounted
for at par and no share premium arose; the shares acquired by
GlaxoSmithKline in Glaxo Wellcome and SmithKline Beecham were
similarly accounted for at the nominal value of the shares issued.
In the consolidated Financial statements of GlaxoSmithKline, the
results and net assets of Glaxo Wellcome and SmithKline Beecham
were combined, at their book amounts, subject to alignment
adjustments.
In view of the proximity of the merger date to the financial year end
date, and the relative insignificance of any business activity between
27th December 2000 and 31st December 2000, the accounting
date of the merger was for practical purposes taken as
31st December 2000. The whole of the profit for the financial year
2000 of each of Glaxo Wellcome plc and SmithKline Beecham plc
was deemed to relate to the period prior to the merger date.