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An analysis of the financial statements of Marks and Spencer Group plc for the year ending 2021. It covers key areas such as impairments, taxation, and cash flows. information on impairment charges and reversals for UK and international stores, as well as the timing and present value of cash flows. Additionally, it discusses the Group's taxation reconciliation and the effective tax rate.
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Annual Report & Financial Statements 2021 123
FINANCIAL STATEMENTS
Notes
53 weeks ended 3 April 2021
52 weeks ended 28 March 2020 Total £m
Total £m
Revenue 2, 3 9,155.7 10,181.
Share of result in associate – Ocado Retail Limited 3, 5, 29 64.2 (14.2)
Operating (loss)/profit 2, 3, 5 (30.7) 254.
Finance income 5, 6 57.4 46.
Finance costs 5, 6 (236.1) (234.5)
(Loss)/profit before tax 4, 5 (209.4) 67.
Income tax credit/(expense) 7 8.2 (39.8)
(Loss)/profit for the year (201.2) 27.
Attributable to:
Owners of the parent (198.0) 23.
Non-controlling interests (3.2) 3.
(201.2) 27.
(Loss)/earnings per share
Basic (loss)/earnings per share 8 (10.1p) 1.3p
Diluted (loss)/earnings per share 8 (10.1p) 1.2p
Reconciliation of profit before tax & adjusting items:
(Loss)/profit before tax (209.4) 67.
Adjusting items 5 259.7 335.
Profit before tax & adjusting items – non-GAAP measure 50.3 403.
Adjusted earnings per share – non-GAAP measure
Adjusted basic earnings per share 8 1.4p 16.7p
Adjusted diluted earnings per share 8 1.4p 16.6p
124 Marks and Spencer Group plc
Notes
53 weeks ended 3 April 2021 £m
52 weeks ended 28 March 2020 £m
(Loss)/profit for the year (201.2) 27.
Other comprehensive (expense)/income:
Items that will not be reclassified subsequently to profit or loss
Remeasurements of retirement benefit schemes 11 (1,352.0) 927.
Tax credit/(charge) on retirement benefit schemes 256.5 (196.7)
(1,095.5) 731.
Items that may be reclassified subsequently to profit or loss
Foreign currency translation differences
Cash flow hedges
Tax credit/(charge) on cash flow hedges 37.0 (27.0)
(176.0) 102.
Other comprehensive (expense)/income for the year, net of tax (1,271.5) 834.
Total comprehensive (expense)/income for the year (1,472.7) 861.
Attributable to:
Owners of the parent (1,469.5) 857.
Non-controlling interests (3.2) 3.
(1,472.7) 861.
126 Marks and Spencer Group plc
Ordinary share capital £m
Share premium account £m
Capital redemption reserve £m
Hedging reserve £m
Cost of hedging £m
Other reserve¹ £m
Foreign exchange reserve £m
Retained earnings^2 £m
Total £m
Non- controlling interest £m
Total £m
As at 31 March 2019 406.3 416.9 2,210.5 (14.6) 11.7 (6,542.2) (43.9) 6,024.8 2,469.5 (0.3) 2,469.
Profit for the year – – – – – – – 23.7 23.7 3.7 27.
Other comprehensive income/(expense):
Foreign currency translation
Remeasurements of retirement benefit schemes – – – – – – – 927.9 927.9 – 927.
Tax charge on retirement benefit schemes – – – – – – – (196.7) (196.7) – (196.7)
Cash flow hedges
Tax on cash flow hedges – – – (28.5) 1.5 – – – (27.0) – (27.0)
Other comprehensive income/ (expense) – – – 100.9 (6.0) – 8.0 731.2 834.1 – 834.
Total comprehensive income/ (expense) – – – 100.9 (6.0) – 8.0 754.9 857.8 3.7 861.
Cash flow hedges recognised in inventories – – – (21.8) – – – – (21.8) – (21.8)
Tax on cash flow hedges recognised in inventories – – – 4.1 – – – – 4.1 – 4.
Transactions with owners:
Dividends – – – – – – – (191.1) (191.1) – (191.1)
Transactions with non-controlling shareholders – – – – – – – – – 2.6 2.
Shares issued on exercise of employee share options – 0.1 – – – – – – 0.1 – 0.
Shares issued on rights issue^3 81.3 493.4 – – – – – – 574.7 – 574.
Purchase of own shares held by employee trusts – – – – – – – (8.9) (8.9) – (8.9)
Credit for share-based payments – – – – – – – 18.5 18.5 – 18.
Deferred tax on share schemes – – – – – – – (0.4) (0.4) – (0.4)
As at 28 March 2020 487.6 910.4 2,210.5 68.6 5.7 (6,542.2) (35.9) 6,597.8 3,702.5 6.0 3,708.
Annual Report & Financial Statements 2021 127
FINANCIAL STATEMENTS
Ordinary share capital £m
Share premium account £m
Capital redemption reserve £m
Hedging reserve £m
Cost of hedging £m
Other reserve¹ £m
Foreign exchange reserve £m
Retained earnings^2 £m
Total £m
Non- controlling interest £m
Total £m
As at 29 March 2020 487.6 910.4 2,210.5 68.6 5.7 (6,542.2) (35.9) 6,597.8 3,702.5 6.0 3,708.
Loss for the year – – – – – – – (198.0) (198.0) (3.2) (201.2)
Other comprehensive (expense)/income:
Foreign currency translation
Remeasurements of retirement benefit schemes – – – – – – – (1,352.0) (1,352.0) – (1,352.0)
Tax credit on retirement benefit schemes – – – – – – – 256.5 256.5 – 256.
Cash flow hedges
Tax on cash flow hedges – – – 36.8 0.2 – – – 37.0 – 37.
Other comprehensive (expense)/income – – – (150.9) (1.1) – (24.0) (1,095.5) (1,271.5) – (1,271.5)
Total comprehensive (expense)/income – – – (150.9) (1.1) – (24.0) (1,293.5) (1,469.5) (3.2) (1,472.7)
Cash flow hedges recognised in inventories – – – 33.9 – – – – 33.9 – 33.
Tax on cash flow hedges recognised in inventories – – – (6.4) – – – – (6.4) – (6.4)
Transactions with owners:
Shares issued in respect of employee share options 1.6 – – – – – – (1.6) – – –
Purchase of own shares held by employee trusts – – – – – – – (0.8) (0.8) – (0.8)
Credit for share-based payments – – – – – – – 19.3 19.3 – 19.
Deferred tax on share schemes – – – – – – – 4.0 4.0 – 4. As at 3 April 2021 489.2 910.4 2,210.5 (54.8) 4.6 (6,542.2) (59.9) 5,325.2 2,283.0 2.8 2,285.
Annual Report & Financial Statements 2021 129
FINANCIAL STATEMENTS
General information
Marks and Spencer Group plc (the “Company”) is a public Company limited by shares incorporated in the United Kingdom under the Companies Act and is registered in England and Wales. The address of the Company’s registered office is Waterside House, 35 North Wharf Road, London W2 1NW.
The principal activities of the Company and its subsidiaries (the “Group”) and the nature of the Group’s operations is as a Clothing & Home and Food retailer.
These financial statements are presented in sterling, which is also the Company’s functional currency, and are rounded to the nearest hundred thousand. Foreign operations are included in accordance with the policies set out within this note.
Basis of preparation
The financial statements have been prepared for the 53 weeks ended 3 April 2021 (last year: 52 weeks ended 28 March 2020) in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and the International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
The Marks and Spencer Scottish Limited Partnership has taken an exemption under paragraph 7 of the Partnership (Accounts) Regulations 2008 from the requirement to prepare and deliver financial statements in accordance with the Companies Act.
The financial statements have been prepared on a going concern basis. In adopting the going concern basis, the directors have considered the business activities as set out on pages 10 to 25, the financial position of the Group, its cash flows, liquidity position and borrowing facilities as set out in the Financial Review on pages 38 to 46, the Group’s financial risk management objectives and exposures to liquidity and other financial risks as set out in note 21 and the principal risks and uncertainties as set out on pages 48 to 56.
At 3 April 2021, the Group had available liquidity of £1,799.4m, comprising cash and cash equivalents of £674.4m, an undrawn committed syndicated bank revolving credit facility (“RCF”) of £1.1bn (set to mature in April 2023), and undrawn uncommitted facilities amounting to £25.0m. This is an increase of £395.2m compared to the £1,404.2m liquidity position as at 28 March 2020 and has been achieved through the active measures taken by the Group to strengthen liquidity in response to the risks posed by the Covid-19 pandemic. In addition to operational cash preservation actions, the following measures have also been undertaken:
In adopting the going concern basis of preparation, the directors have assessed the Group’s cash flow forecasts which incorporate a latest estimate of the ongoing impact of Covid-19 on the Group. The forecast assumes that the UK government’s four-step roadmap out of lockdown continues as planned, but that a full lifting of restrictions does not occur until Q3 2021/22.
Under these latest forecasts, the Group is able to operate without the need to draw on its available facilities and without taking any supplementary mitigating actions, such as reducing capital expenditure and other discretionary spend. The forecast cash flows also indicate that the Group will comply with all relevant banking covenants during the forecast period, being at least 12 months from the approval of the financial statements.
The directors have reviewed the evolution of Covid-19 and the impact on the business and considered the potential longer-term impacts of the pandemic by modelling a more severe, but plausible, downside scenario. This downside scenario assumes that:
130 Marks and Spencer Group plc
The Group also elected to adopt the following amendment early:
The impact of early adopting the amendment to IFRS 16 is described below.
The adoption of the other standards and interpretations listed above has not led to any changes to the Group’s accounting policies or had any other material impact on the financial position or performance of the Group.
Amendment to IFRS 16: Covid-19-Related Rent Concessions
The Group has applied the amendment to IFRS 16 in advance of its effective date and, as a result, has treated rent concessions occurring as a direct consequence of Covid-19 as variable lease payments rather than as lease modifications.
The amount recognised in profit or loss in the period to reflect changes in lease payments arising from Covid-19-related rent concessions was a gain of £10.9m.
New accounting standards in issue but not yet effective
New standards and interpretations that are in issue but not yet effective are listed below:
The adoption of the above standards and interpretations is not expected to lead to any changes to the Group’s accounting policies or have any other material impact on the financial position or performance of the Group.
Alternative performance measures
In reporting financial information, the Group presents alternative performance measures (APMs), which are not defined or specified under the requirements of IFRS.
The Group believes that these APMs, which are not considered to be a substitute for, or superior to, IFRS measures, provide stakeholders with additional helpful information on the performance of the business. These APMs are consistent with how the business performance is planned and reported within the internal management reporting to the Board and Executive Committee. Some of these measures are also used for the purpose of setting remuneration targets.
The key APMs that the Group uses include: like-for-like revenue growth; operating profit before adjusting items; profit before tax and adjusting items; adjusted basic earnings per share; net debt; net debt excluding lease liabilities; free cash flow; and return on capital employed. Each of these APMs, and others used by the Group, are set out in the Glossary including explanations of how they are calculated and how they can be reconciled to a statutory measure where relevant.
The Group reports some financial measures, primarily International sales, on both a reported and constant currency basis. The constant currency basis, which is an APM, retranslates the previous year revenues at the average actual periodic exchange rates used in the current financial year. This measure is presented as a means of eliminating the effects of exchange rate fluctuations on the year-on-year reported results. The Group makes certain adjustments to the statutory profit measures in order to derive many of these APMs. The Group’s policy is to exclude items that are considered significant in nature and/or quantum to the financial statement line item or applicable disclosure note or are consistent with items that were treated as adjusting in prior periods. The Group’s definition of adjusting items is consistent with prior periods. Previously these were presented in the consolidated income statement in a columnar format; the Group now presents a reconciliation of profit before tax and adjusting items to profit before tax on the face of the consolidated income statement. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of performance. On this basis, the following items were included within adjusting items for the 53-week period ended 3 April 2021:
132 Marks and Spencer Group plc
The types of supplier income recognised by the Group and the associated recognition policies are:
A. Promotional contribution Includes supplier contributions to promotional giveaways and pre-agreed contributions to annual “spend and save” activity.
Income is recognised as a deduction to cost of sales over the relevant promotional period. Income is calculated and invoiced at the end of the promotional period based on actual sales or according to fixed contribution arrangements. Contributions earned but not invoiced are accrued at the end of the relevant period.
B. Volume-based rebates Includes annual growth incentives, seasonal contributions and contributions to share economies of scale resulting from moving product supply.
Annual growth incentives are calculated and invoiced at the end of the financial year, once earned, based on fixed percentage growth targets agreed for each supplier at the beginning of the year. They are recognised as a reduction in cost of sales in the year to which they relate. Other volume-based rebates are agreed with the supplier and spread over the relevant season/ contract period to which they relate. Contributions earned but not invoiced are accrued at the end of the relevant period.
Uncollected supplier income at the balance sheet date is classified within the financial statements as follows:
A. Trade and other payables The majority of income due from suppliers is netted against amounts owed to that supplier as the Group has the legal right and intention to offset these balances.
B. Trade and other receivables Supplier income that has been earned but not invoiced at the balance sheet date is recognised in trade and other receivables and primarily relates to volume- based rebates that run up to the period end.
In order to provide users of the accounts with greater understanding in this area, additional balance sheet disclosure is provided in note 17 to the financial statements.
M&S Bank
The Group has an economic interest in M&S Bank which entitles the Group to a 50% share of the profits of M&S Bank after appropriate contractual deductions.
Dividends
Final dividends are recorded in the financial statements in the period in which they are approved by the Company’s shareholders. Interim dividends are recorded in the period in which they are approved and paid.
Government grants
Government grants are recognised where there is reasonable assurance that the grants will be received and that the Group will comply with the conditions attached to them.
Government grants that compensate the Group for expenses incurred are recognised in profit or loss, as a deduction against the related expense, over the periods necessary to match them with the related costs.
Government grant income is disclosed in note 30.
Pensions
Funded pension plans are in place for the Group’s UK employees and some overseas employees.
For defined benefit pension schemes, the difference between the fair value of the assets and the present value of the defined benefit obligation is recognised as an asset or liability in the statement of financial position. The defined benefit obligation is actuarially calculated using the projected unit credit method. An asset can be recognised as in the event of a plan wind-up, the pension scheme rules provide the Group with an unconditional right to a refund of surplus assets assuming a full settlement of plan liabilities. In the ordinary course of business, the Trustees have no rights to wind-up, or change, the benefits due to the members of the scheme. As a result, any net surplus in the UK defined benefit (DB) scheme is recognised in full. The service cost of providing retirement benefits to employees during the year, together with the cost of any curtailment, is charged to operating profit in the year. The Group no longer incurs any service cost or curtailment costs related to the UK DB pension scheme as the scheme is closed to future accrual. The net interest cost on the net retirement benefit asset/liability is calculated by applying the discount rate, measured at the beginning of the year, to the net defined benefit asset/liability and is included as a single net amount in finance income. Remeasurements, being actuarial gains and losses, together with the difference between actual investment returns and the return implied by the net interest cost, are recognised immediately in other comprehensive income. Payments to defined contribution retirement benefit schemes are charged as an expense on an accruals basis. For further details on pension schemes and the partnership liability to the Marks & Spencer UK Pension scheme, see notes 11 and 12. Intangible assets A. Goodwill Goodwill arising on consolidation represents the excess of the consideration paid and the amount of any non- controlling interest in the acquiree over the fair value of the identifiable assets and liabilities (including intangible assets) of the acquired entity at the date of the acquisition. Goodwill is recognised as an asset and assessed for impairment annually or as triggering events occur. Any impairment in value is recognised within the income statement. B. Acquired intangible assets Acquired intangible assets include trademarks or brands. These assets are capitalised on acquisition at cost and amortised on a straight-line basis over their estimated useful lives. Acquired intangible assets are tested for impairment as triggering events occur. Any impairment in value is recognised within the income statement. C. Software intangibles Where computer software is not an integral part of a related item of computer hardware, the software is treated as an intangible asset. Capitalised software costs include external direct costs of goods and services, as well as internal payroll-related costs for employees who are directly associated with the project. Capitalised software development costs are amortised on a straight-line basis over their expected economic lives, normally between 3 and 10 years. Computer software under development is held at cost less any recognised impairment loss. Any impairment in value is recognised within the income statement.
Annual Report & Financial Statements 2021 133
FINANCIAL STATEMENTS
Property, plant and equipment
The Group’s policy is to state property, plant and equipment at cost less accumulated depreciation and any recognised impairment loss. Property is not revalued for accounting purposes. Assets in the course of construction are held at cost less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs. Leasehold buildings with lease premiums and ongoing peppercorn lease payments are considered in-substance purchases and are therefore included within the buildings category of property, plant and equipment.
Depreciation is provided to write off the cost of tangible non-current assets (including investment properties), less estimated residual values on a straight-line basis as follows:
Residual values and useful economic lives are reviewed annually. Depreciation is charged on all additions to, or disposals of, depreciating assets in the year of purchase or disposal.
Any impairment in value, or reversal of an impairment, is recognised within the income statement.
Leasing
The Group recognises a right-of-use asset and corresponding liability at the date at which a leased asset is made available for use by the Group, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low-value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease.
Lease liabilities are measured at the present value of the future lease payments, excluding any payments relating to non-lease components. Future lease payments include fixed payments, in-substance fixed payments, and variable lease payments that are based on an index or a rate, less any lease incentives receivable. Lease liabilities also take into account amounts payable under residual value guarantees and payments to exercise options to the extent that it is reasonably certain that such payments will be made. The payments are discounted at the rate implicit in the lease or, where that cannot be readily determined, at an incremental borrowing rate.
Right-of-use assets are measured initially at cost based on the value of the associated lease liability, adjusted for any payments made before inception, initial direct costs and an estimate of the dismantling, removal and restoration costs required in the terms of the lease. The Group presents right-of- use assets in ‘property, plant and equipment’ in the consolidated statement of financial position.
Subsequent to initial recognition, the lease liability is reduced for payments made and increased to reflect interest on the lease liability (using the effective interest method). The related right-of- use asset is depreciated over the term of the lease or, if shorter, the useful economic life of the leased asset. The lease term shall include the period of an extension option where it is reasonably certain that the option will be exercised. Where the lease contains a purchase option the asset is written off over the useful life of the asset when it is reasonably certain that the purchase option will be exercised.
The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:
Annual Report & Financial Statements 2021 135
FINANCIAL STATEMENTS
Derivative financial instruments and hedging activities
The Group primarily uses interest rate swaps, cross-currency swaps and forward foreign currency contracts to manage its exposures to fluctuations in interest rates and foreign exchange rates. These instruments are initially recognised at fair value on the trade date and are subsequently remeasured at their fair value at the end of the reporting period. The method of recognising the resulting gain or loss is dependent on whether the derivative is designated as a hedging instrument and the nature of the item being hedged.
The Group designates certain hedging derivatives as either:
At the inception of a hedging relationship, the hedging instrument and the hedged item are documented, along with the risk management objectives and strategy for undertaking various hedge transactions and prospective effectiveness testing is performed. During the life of the hedging relationship, prospective effectiveness testing is performed to ensure that the instrument remains an effective hedge of the transaction. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise.
In 2019/20, the Group early adopted the Phase 1 amendments Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7. These amendments modify specific hedge accounting requirements to allow hedge accounting to continue for affected hedges during the period of uncertainty before the hedged items or hedging instruments affected by the current interest rate benchmarks are amended as a result of the ongoing interest rate benchmark reforms. The application of the amendments impacts the Group’s accounting in relation to a sterling denominated fixed rate debt, for which it fair value hedge accounts using sterling fixed to GBP LIBOR interest rate swaps. The amendments permit continuation of hedge accounting even if in the future the hedged benchmark interest rate, GBP LIBOR, may no longer be separately identifiable. However, this relief does not extend to the requirement that the designated interest rate risk component must continue to be reliably measurable. If the risk component is no longer reliably measurable, the hedging relationship is discontinued.
A. Cash flow hedges Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised in other comprehensive income. The element of the change in fair value which relates to the foreign currency basis spread is recognised in the cost of hedging reserve, with the remaining change in fair value recognised in the hedging reserve and any ineffective portion is recognised immediately in the income statement in finance costs. If the firm commitment or forecast transaction that is the subject of a cash flow hedge results in the recognition of a non-financial asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in other comprehensive income and accumulated in the cash flow hedge reserve are removed directly from equity and included in the initial measurement of the asset or liability. If the hedged item is transaction-related the foreign currency basis spread is reclassified to profit or loss when the hedged item affects profit or loss. If the hedged item is time-period related, then the amount accumulated in the cost of hedging reserve is reclassified to profit or loss on a systematic and rational basis. Those reclassified amounts are recognised in profit or loss in the same line as the hedged item. If the hedged
item is a non-financial item, then the amount accumulated in the cost of hedging reserve is removed directly from equity and included in the initial carrying amount of the recognised non-financial item. For hedges that do not result in the recognition of an asset or a liability, amounts deferred in the cash flow hedge reserve are recognised in the income statement in the same period in which the hedged items affect net profit or loss. B. Fair value hedges Changes in the fair value of a derivative instrument designated in a fair value hedge are recognised in the income statement. The hedged item is adjusted for changes in fair value attributable to the risk being hedged with the corresponding entry in the income statement. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. C. Discontinuance of hedge accounting Hedge accounting is discontinued when the hedge relationship no longer qualifies for hedge accounting. This includes when the hedging instrument expires, is sold, terminated or exercised, or when occurrence of the forecast transaction is no longer highly probable. The Group cannot voluntarily de-designate a hedging relationship. When a cash flow hedge is discontinued, any cumulative gain or loss on the hedging instrument accumulated in the cash flow hedge reserve is retained in equity until the forecast transaction occurs. Subsequent changes in the fair value are recognised in the income statement. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss accumulated in the cash flow hedge reserve is transferred to the income statement for the period. When a fair value hedge is discontinued, the fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to the income statement based on the recalculated effective interest rate at that date. The Group does not use derivatives to hedge income statement translation exposures. Reserves The following describes the nature and purpose of each reserve within equity: A. Share premium account Proceeds received in excess of the nominal value of shares issued, net of any transaction costs. B. Capital redemption reserve Amounts transferred from share capital on redemption or repurchase of issued shares. C. Hedging reserve Cumulative gains and losses on hedging instruments deemed effective in cash flow hedges. D. Cost of hedging Cumulative gains and losses on the portion excluded from the designated hedging instrument that relates to changes in the foreign currency basis. E. Other reserve Originally created as part of the capital restructuring that took place in 2002. It represents the difference between the nominal value of the shares issued prior to the capital reduction by the Company (being the carrying value of the investment in Marks and Spencer plc) and the share capital, share premium and capital redemption reserve of Marks and Spencer plc at the date of the transaction. F. Foreign exchange reserve Gains and losses arising on retranslating the net assets of overseas operations into sterling. G. Retained earnings All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere.
136 Marks and Spencer Group plc
Critical accounting judgements and key sources of estimation uncertainty
The preparation of consolidated financial statements requires the Group to make estimates and judgements that affect the application of policies and reported amounts.
Critical judgements represent key decisions made by management in the application of the Group accounting policies. Where a significant risk of materially different outcomes exists due to management assumptions or sources of estimation uncertainty, this will represent a key source of estimation uncertainty. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
The estimates which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next 12 months are discussed below.
Critical accounting judgements
Adjusting items
The directors believe that the adjusted profit and earnings per share measures provide additional useful information to shareholders on the performance of the business. These measures are consistent with how business performance is measured internally by the Board and Executive Committee. The profit before tax and adjusting items measure is not a recognised profit measure under IFRS and may not be directly comparable with adjusted profit measures used by other companies. The classification of adjusting items requires significant management judgement after considering the nature and intentions of a transaction. The Group’s definitions of adjusting items are outlined within both the Group accounting policies and the Glossary. These definitions have been applied consistently year on year, with additional items due to the transition of the Sparks loyalty programme.
Note 5 provides further details on current year adjusting items and their adherence to Group policy.
UK defined benefit pension surplus
Where a surplus on a defined benefit scheme arises, the rights of the Trustees to prevent the Group obtaining a refund of that surplus in the future are considered in determining whether it is necessary to restrict the amount of the surplus that is recognised. The UK defined benefit scheme is in surplus at 3 April 2021. The directors have made the judgement that these amounts meet the requirements of recoverability on the basis that paragraph 11(b) of IFRIC 14 applies, enabling a refund of surplus assuming the gradual settlement of the scheme liabilities over time until all members have left the scheme, and a surplus of £639.2m has been recognised.
Assessment of control
The directors have assessed that the Group has significant influence over Ocado Retail Limited and has therefore accounted for the investment as an associate (see note 29). This assessment is based on the current rights held by the respective shareholders and requires judgement in assessing these rights. These rights include determinative rights currently held by Ocado Group Plc, after agreed dispute-resolution procedures, in relation to the approval of the Ocado Retail Limited business plan and budget and the appointment and removal of Ocado Retail Limited’s Chief Executive Officer. Any future change to these rights requires a reassessment of control and could result in a change in the status of the investment from associate to joint venture, subsidiary or investment.
Determining the lease term The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease if it is reasonably certain not to be exercised. The Group has several lease contracts for land and buildings that include extension and termination options. The Group applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination, including: whether there are significant penalties to terminate (or not extend); whether any leasehold improvements are expected to have a significant remaining value; historical lease durations; the importance of the underlying asset to the Group’s operations; and the costs and business disruption required to replace the leased asset. Most renewal periods and periods covered by termination options are included as part of the lease term for leases of land and buildings. The Group typically exercises its option to renew (or does not exercise its option to terminate) for these leases because there will be a significant negative effect on trading if a replacement property is not readily available. The lease term is reassessed if a significant event or a significant change in circumstances occurs which affects the assessment of reasonable certainty, for example if a store is identified to be closed as part of the UK store estate strategic programme. Determining whether forecast purchases are highly probable The Group is exposed to foreign currency risk, most significantly to the US dollar as a result of sourcing Clothing & Home products from Asia which are paid for predominantly in US dollars. The Group hedges these exposures using forward foreign exchange contracts and hedge accounting is applied when the requirements of IFRS 9 are met, which include that a forecast transaction must be “highly probable”. The Group has applied judgement in assessing whether forecast purchases are “highly probable”. In making this assessment, the Group has considered the most recent budgets and plans. The Group’s policy is a “layered” hedging strategy where only a small fraction of the forecast purchase requirements are initially hedged, approximately 15 months prior to a season, with incremental hedges layered on over time as the buying period for that season approaches and therefore as certainty increases over the forecast purchases. As a result of this progressive strategy, a reduction in the supply pipeline of inventory does not immediately lead to over-hedging and the disqualification of “highly probable”. If the forecast transactions were no longer expected to occur, any accumulated gain or loss on the hedging instruments would be immediately reclassified to profit or loss. Last year, a £2.9m gain was recognised in the income statement as a result of US$76.6m notional forecast purchases no longer being expected to occur. There was no such occurrence in the current year. During the year, the settlement of certain forecast purchases were delayed as a result of the Covid-19 pandemic and, as a result, the deferred fair value of the applicable forward foreign exchange contracts has been retained in reserves to be recycled in line with the delayed forecast purchases. As discussed above, due to our progressive hedging strategy, this delay does not affect the qualification of “highly probable”. At 3 April 2021, the Group had £4.0m of deferred fair value retained in the cash flow hedge reserve which will be released over the first half of 2021/22.
138 Marks and Spencer Group plc
IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reporting on components of the Group that are regularly reviewed by the chief operating decision-maker to allocate resources to the segments and to assess their performance.
The chief operating decision-maker has been identified as the Executive Committee. The Executive Committee reviews the Group’s internal reporting in order to assess performance and allocate resources across each operating segment.
The Group’s reportable operating segments have therefore been identified as follows:
The Ocado operating segment has been identified as reportable in the current period based on the quantitative thresholds in IFRS 8. As the Group’s reportable segments have changed, the comparative information has been restated.
Other business activities and operating segments, including M&S Bank and M&S Energy, are combined and presented in “All other segments”. Finance income and costs are not allocated to segments as each is managed on a centralised basis.
The Executive Committee assesses the performance of the operating segments based on a measure of operating profit before adjusting items. This measurement basis excludes the effects of adjusting items from the operating segments.
The following is an analysis of the Group’s revenue and results by reportable segment:
53 weeks ended 3 April 2021 52 weeks ended 28 March 2020 UK Clothing & Home £m
UK Food £m
International £m
Ocado £m
All other segments £m
Group £m
UK Clothing & Home £m
UK Food £m
International £m
Ocado £m
All other segments £m
Group £m
Revenue before adjusting items^1 2,239.0 6,138.5 789.4 – – 9,166.9 3,209.1 6,028.2 944.6 – – 10,181.
Operating (loss)/ profit before adjusting items^2 (130.8) 228.6 44.1 78.4 1.9 222.2 223.9 236.7 110.7 2.6 16.8 590.
Finance income before adjusting items 57.4 44.
Finance costs before adjusting items (229.3) (231.6)
(Loss)/profit before tax and adjusting items (130.8) 228.6 44.1 78.4 1.9 50.3 223.9 236.7 110.7 2.6 16.8 403.
Adjusting items (259.7) (335.9)
(Loss)/profit before tax (130.8) 228.6 44.1 78.4 1.9 (209.4) 223.9 236.7 110.7 2.6 16.8 67.
Annual Report & Financial Statements 2021 139
FINANCIAL STATEMENTS
Other segmental information 53 weeks ended 3 April 2021 52 weeks ended 28 March 2020 UK Clothing & Home £m
UK Food £m
International £m
Ocado £m
All other segments £m
Group £m
UK Clothing & Home £m
UK Food £m
International £m
Ocado £m
All other segments £m
Group £m
Additions to property, plant and equipment, and intangible assets (excluding goodwill and right-of-use assets) 50.5 105.0 6.8 – – 162.3 166.5 170.1 15.7 – – 352.
Depreciation and amortisation1,2^ (312.3) (259.4) (25.1) – – (596.8) (350.6) (283.4) (34.6) – – (668.6)
Impairment charges, impairment reversals and asset write-offs^1 (155.1) (34.9) (4.7) – – (194.7) (69.9) (45.3) (10.3) – – (125.5)
These costs are allocated to a reportable segment where they are directly attributable. Where costs are not directly attributable, a proportional allocation is made to each segment based on an appropriate cost driver.
Includes £0.3m (last year: £nil) depreciation charged on the investment property.
Segment assets and liabilities, including investments in associates and joint ventures, are not disclosed because they are not reported to or reviewed by the Executive Committee.
3 EXPENSE ANALYSIS
2021 Total £m
2020 Total £m
Revenue 9,155.7 10,181.
Cost of sales (6,244.1) (6,746.5)
Gross profit 2,911.6 3,435.
Selling and administrative expenses (3,018.9) (3,225.2)
Other operating income 12.4 58.
Share of results of Ocado Retail Limited 64.2 (14.2)
Operating (loss)/profit (30.7) 254.
The figures above include revenue adjusting item charges of £11.2m (last year: £nil) and operating profit adjusting item charges of £241.7m (last year: £335.9m), totalling £252.9m (last year: £335.9m) adjusting item charges within operating (loss)/profit.
The £252.9m (last year: £335.9m) adjusting items charges for the year (see note 5) are further analysed against the categories of revenue (£11.2m; last year: £nil), cost of sales (£86.3m gain; last year: £157.0m charge), selling and administrative expenses (£313.8m; last year: £188.8m), other operating income (£nil; last year: £26.7m) and share of results of Ocado Retail Limited (£14.2m; last year: £16.8m).
The selling and administrative expenses are further analysed below:
2021 Total £m
2020 Total £m
Employee costs1,2^ 1,339.1 1,434.
Occupancy costs 223.9 352.
Repairs, renewals and maintenance of property 95.8 81.
Depreciation, amortisation and asset impairments and write-offs^3 791.7 772.
Other costs 568.4 585.
Selling and administrative expenses 3,018.9 3,225.
Adjusting items categorised as selling and administrative expenses are further analysed as employee costs £100.4m (last year £23.1m); occupancy costs £6.1m (last year: release £25.2m); depreciation, amortisation and asset impairments/reversals and write-offs £188.6m (last year: £139.9m); and other costs £18.7m (last year: £51.0m).
Annual Report & Financial Statements 2021 141
FINANCIAL STATEMENTS
The total adjusting items reported for the 53-week period ended 3 April 2021 is a net charge of £259.7m (last year: £335.9m). The adjustments made to reported profit before tax to arrive at adjusted profit are:
Notes
2021 £m
2020 £m
Included in revenue
Sparks loyalty programme transition (11.2) –
(11.2) –
Included in operating profit
Strategic programmes – Organisation 15, 22 (133.7) (13.8)
Strategic programmes – UK store estate^1 15, 22 (95.3) (29.3)
Strategic programmes – International store closures and impairments 22 (3.6) (2.2)
Strategic programmes – UK logistics 15, 22 (2.2) (10.2)
Strategic programmes – Operational transformation – (11.6)
Strategic programmes – Changes to pay and pensions 22 – (2.9)
Strategic programmes – IT restructure 22 – (0.4)
Directly attributable gains/(expenses) resulting from the Covid-19 pandemic^1 90.8 (166.5)
Intangible asset impairments 14 (79.9) (13.4)
Store impairments, impairment reversals and other property charges^1 15, 22 6.9 (78.5)
Amortisation and fair value adjustments arising as part of the investment in Ocado Retail Limited (14.2) (16.8)
Sparks loyalty programme transition (5.4) –
M&S Bank charges incurred in relation to insurance mis-selling and Covid-19 forward economic guidance provision (2.4) (12.6)
Establishing the investment in Ocado Retail Limited (1.7) (1.2)
GMP and other pension equalisation 11 (1.0) –
Other – 23.
(241.7) (335.9)
Included in net finance costs
Remeasurement of contingent consideration including discount unwind (6.8) (2.9)
Directly attributable gains/(expenses) resulting from the Covid-19 pandemic1,2^ – 2.
(6.8) –
Adjustments to profit before tax (259.7) (335.9)
2020 £m Directly attributable gains/(expenses) resulting from the Covid-19 pandemic – included in operating profit 90.8 (166.5) Directly attributable gains/(expenses) resulting from the Covid-19 pandemic – included in net finance costs^2 – 2. UK store estate impairments – (11.6) Store impairments – (24.2) Goodwill impairment – per una – (13.4) Total Covid-19 gains/(charges) 90.8 (212.8)
142 Marks and Spencer Group plc
Strategic programmes – Organisation (£133.7m)
During 2020/21, the Group announced a commitment to integrate more flexible management structures into store operations as well as streamline the business at store and management level in the UK and Republic of Ireland as part of the ‘Never the Same Again’ transformation. As part of the transformation, the Group has incurred £9.5m of consultancy costs. The changes have resulted in a reduction of c.8,200 roles across central support centres, regional management and stores, with a charge of £99.7m recognised in the period primarily for redundancy costs associated with these changes. The majority of the charges have been settled during 2020/21, with a provision being held on the balance sheet for the remaining charges. The provision is expected to be fully utilised during 2021/22, with no further significant charges anticipated.
During 2016/17, the Group announced a wide-ranging strategic review across a number of areas of the business which included UK organisation and the programme to centralise our London Head Office functions into one building. A further £24.5m of costs have been recognised in the period associated with centralising the Group’s London Head Office functions, with a £9.7m charge relating to the sub-let of previously closed offices. £14.8m of these charges relate to closure costs to further consolidate our London Head Office functions as announced in February 2021. Total costs of centralising our London Head Office functions into one building incurred to date are c.£98m. Any future charges will relate to the updating of assumptions and market fluctuations over the life of the sub-let lease.
These costs are reported as adjusting items on the basis that they are significant in quantum, relate to a strategic initiative focused on reviewing our organisation structure and to aid comparability from one period to the next. The treatment as adjusting items is consistent with the disclosure of costs for similar restructuring and centralisation programmes previously undertaken.
Strategic programmes – UK store estate (£95.3m)
In November 2016, the Group announced a strategic programme to transform the UK store estate with the overall objective to improve our store estate to better meet our customers’ needs. The Group has incurred charges of £562.3m up to March 2020 under this programme primarily relating to closure costs associated with stores identified as part of the strategic transformation plans.
While Covid-19 has continued to impact the Group’s day-to-day operations, the Group has experienced a significant channel shift from stores to online. The pandemic has driven a much faster and more acute switch to online, accelerating the Group’s ambition to now achieve a Clothing & Home online sales mix of at least 40% over the next three years. This acceleration in channel shift has required the Group to revise the UK store estate strategic programme in order to ensure the estate continues to meet our customers’ needs. As a result, the programme has been further accelerated with additional stores identified as part of the transformation, extending the length to 10 years. Coupled with this, the Group is identifying opportunities to unlock value from the estate through redevelopments and new site acquisitions, with charges and gains associated with these activities now included within the UK store estate programme.
The Group has recognised a charge of £95.3m in the year in relation to those stores identified as part of the revised transformation plans. The charge primarily reflects a revised view of latest store exit routes and assumptions underlying estimated store closure costs in response to the unanticipated acceleration in channel shift experienced as a result of the pandemic. The charge primarily relates to impairment of buildings and fixtures and fittings, and depreciation as a result of shortening the useful
economic life of stores based on the latest approved exit routes. Refer to notes 15 and 22 for further detail on these charges. Further material charges relating to the closure and reconfiguration of the UK store estate are anticipated over the next 10 years as the programme progresses, the quantum of which is subject to change throughout the programme period as decisions are taken in relation to the size of the store estate and the specific stores affected. Following the latest view of store closure costs, at 3 April 2021, further charges of c.£268m are estimated within the next 10 financial years, bringing anticipated total programme costs since 2016 up to c.£926m. These costs are reported as adjusting items on the basis that they are significant in quantum, relate to a strategic initiative focused on reviewing our store estate and to aid comparability from one period to the next. Strategic programmes – International store closures and impairments (£3.6m) In 2016/17, the Group announced its intention to close owned stores in 10 international markets. A charge of £3.6m has been recognised in the year, reflecting an updated view of the estimated final closure costs for certain markets and those costs which can only be recognised as incurred, taking the programme cost to date to £148.6m. The net charge is considered to be an adjusting item as it is part of a strategic programme which over the five years of charges has been significant in both quantum and nature to the results of the Group. No further significant charges are expected. Strategic programmes – UK logistics (£2.2m) In 2017/18, as part of the previously announced long-term strategic programme to transition to a single-tier UK distribution network, the Group announced the opening of a new Clothing & Home distribution centre in Welham Green. As a direct result, the Group announced the closure of two existing distribution centres. In February 2020, the next phase of the single-tier programme was announced with the closure of two further distribution centres across 2020/21 and 2021/22. A net charge of £2.2m has been recognised in the period, reflecting an updated view of estimated closure costs and transition project costs relating to these closures. Total programme costs to date are £39.8m with further charges next financial year. The Group considers these costs to be adjusting items as they have been significant in quantum and relate to a significant strategic initiative of the Group. Treatment of the costs as being adjusting items is consistent with the treatment of charges in previous periods in relation to the creation of a single-tier logistics network. Directly attributable gains/(expenses) resulting from the Covid-19 pandemic (£90.8m gain) In March 2020, following the onset of the Covid- global pandemic and subsequent UK government restrictions, the Group sustained significant disruption to its operations. In response to the uncertainty resulting from the pandemic, coupled with the fast-paced changes taking place across the retail sector, the Board approved a Covid-19 scenario to reflect management’s best estimate of the significant volatility and business disruption expected as a result of the ongoing pandemic.