Notes to the Accounts

1.  Accounting policies

(1)           Basis of consolidation

Smiths News plc ('the Company') is a company incorporated in England UK under Companies Act 2006. The Group accounts for the 52 week period ended 28 August 2021 comprise the Company and its subsidiaries (together referred to as the 'Group') and the Group's interests in joint ventures and associates. Subsidiary undertakings are included in the Group Accounts from the date on which control is obtained. They are deconsolidated from the date on which control ceases. All significant subsidiary accounts are made up to 28 August 2021 and are included in the Group Accounts.

Unless otherwise noted references to 2020 and 2021 relate to a 52 week period ended 29 August 2020 and 28 August 2021 as opposed to calendar year.

The Accounts were authorised for issue by the directors on 3 November 2021.

(2)              Accounting basis of preparation

The financial information contained within this preliminary announcement for the 52 weeks to 28 August 2021 and the 52 weeks to 29 August 2020 does not comprise statutory financial statements for the purpose of the Companies Act 2006, but is derived from those statements. The statutory accounts for Smiths News PLC for the 52 weeks to 29 August 2020 have been filed with the Registrar of Companies and those for the 52 weeks to 28 August 2021 will be filed following the Company's annual general meeting. The auditor's reports on the accounts for both the 52 weeks to 28 August 2021 and the 52 weeks to 29 August 2020 were unqualified, did not draw attention to any matters by way of emphasis, and did not include a statement under Section 498 (2) or (3) of the Companies Act 2006. The Annual Report and Accounts will be available for shareholders in December 2021.

The Accounts are prepared on the historical cost basis with the exception of certain financial instruments and are presented in Pound Sterling and rounded to £0.1m, except where otherwise indicated.

The Group Accounts have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

Intra-group balances and unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing Group Accounts. Unrealised gains and losses arising from transactions with the joint ventures are eliminated to the extent of the Group's interest in the entities.

(3)              Going concern

The Company has a net liability position of £57.7m as at 28 August 2021. All bank covenant tests were met at the period end with the key bank net debt: EBITDA (ex IFRS16) ratio of 1.2x, which is below the current facility agreement covenant test threshold of 3.0x. The threshold reduces by 0.25x biannually to 2.25x at 27 May 2023.

The intra-month working capital cash flow cycle at Smiths News generates a routine and predictable cash swing of up to £40m, where necessary the Company utilises the Revolving Credit Facility (RCF) to manage this. At the period end, £35.1m of the RCF remains available as £4.9m of the £40m is allocated against letters of credit.  Post period end, the letters of credit were reduced to £2.4m. Our average Bank Net Debt during 2021 was £82.6m (2020: £98.8m).

3i) Bank facility

The Company has a facility of £112.5 million facility at the balance sheet date, comprising a £37.5 million amortising term loan (Facility A), a £35.0m million bullet repayment term loan (Facility B) and a £40 million revolving credit facility (RCF). Term Loan (facility B) is repayable from any proceeds received from the deferred consideration as part of the sale of Tuffnells and receipt of any pension surplus. The agreement is with a syndicate of banks comprising lenders HSBC, Barclays, Santander, Clydesdale and Shawbrook Bank.

The facility's current margin is 4.25% per annum (5.5% on initial inception) over LIBOR (in respect of Facility A and the RCF) and 4.75% per annum (6.0% on initial inception) over LIBOR (in respect of Facility B).  Post period end a revised senior finance agreement was signed moving the pricing from LIBOR to SONIA.

Consistent with the Company's stated strategic priorities to reduce net debt, the terms of the facility agreement include: an amortisation schedule of £15m per annum for the repayment of Facility A; agreed repayments against Facility B arising from funds received in relation to both deferred consideration received following the sale of Tuffnells and any cash surplus arising from the buy-out of the Company's defined benefit pension scheme; and capped dividend payments for FY 2021 (up to £4m) and FY 2022 onwards (up to £6m per year). The scheduled payment of £7.5m was made in April 2021 reducing the initial £120m facility to £112.5m at the balance sheet date.  A further payment of £7.5m was made in October 2021, post the balance sheet date, reducing the facility further to its current £105m.

As part of the terms of the refinancing, the Company and its principal trading subsidiaries have also agreed to provide security over their assets to the lenders.

The final maturity date of the facility is 6 November 2023.

3ii) COVID-19 impact

The Company continued to generate cash and trade in line with expectations through 2021 despite the second national lockdown in November 2020 and third national lockdown announced in January 2021.  Since the half year, trading has continued to improve gradually as the overall economy has started to recover.  Revenue decline in FY2021 has overall returned to within the historical trend of -3% to -5% annual revenue decline.  The Going Concern assessment assumes revenue decline will continue to be in line with historic trends going forwards.

3iii) Reverse stress testing

The directors have prepared their base case forecast which represents their best estimate of cash flows over the going concern period and in accordance with FRC guidance and have prepared a reverse stress test that would create a covenant break scenario which could lead to the facilities being repayable on demand.

The break scenario would occur in August 2022 if EBITDA (ex IFRS 16) was 49% below expectations. The directors consider the likelihood of this level of downturn and non-receipt to be remote based on:

·          current trading which is in line with expectations

·          year-on-year declines in revenues would have to be significantly greater than historical trends

·          the contracts are secured with publishers until at least 2024; and

·          the Company continues to trade with adequate profit to service its debt covenants.

3iv) Mitigating actions

In the event the break environment scenario moved from being remote to possible then management would seek to take mitigating actions to maintain liquidity and compliance with the bank facility covenants. The options within the control of management would be to:

·          Optimise liquidity by working capital management of the peak-to-trough intra-month movement of up to £40m. Utilising existing vendor management finance arrangements* with retailers and optimising contractual payment cycles to suppliers which would improve liquidity headroom

·          Not pay planned dividends

·          Delay non-essential capex projects

·          Cancel discretionary annual bonus payments; and

·          Identify other overhead and depot savings.

More extreme mitigating actions would also be available if the scenario arose.

*The Company has vendor finance arrangements in place where it has the ability to request early payment of invoices at a small discount, the payments are non-recourse and the invoices are considered settled from both sides once payment is received. The Company has not made use of this facility in FY2021.

3v) Assessment

Having considered the above and the funding requirements of the Group and Company, the directors are confident that headroom under the bank facility remains adequate, future covenant tests can be met and there is a reasonable expectation that the business can meet its liabilities as they fall due for a period of greater than 12 months (being an assessment period of 22 months) from the date of approval of the Group Financial Statements.  For this reason, the directors continue to adopt the going concern basis in preparing the financial statements and no material uncertainty has been identified.

(4)            Alternate 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 (listed in the glossary, are not considered to be a substitute for, or superior to, IFRS measures but 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 Team.

The APMs do not have standardised meaning prescribed by IFRS and therefore may not be directly comparable to similar measures presented by other companies.

(5)            Estimates and judgements

The preparation of these accounts requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

Key accounting judgements

The significant judgements made in the accounts are:

Revenue recognition

The Group recognises the wholesale sales price for its sales of newspapers and magazines. The Group is considered to be the principal based on the following indicators of control over its inventory: discretion to establish prices; it holds some of the risk of obsolescence once in control of the inventory; and has the responsibility of fulfilling the performance obligation on delivery of inventory to its customers. If the Group were considered to be the agent, revenue and cost of sales would reduce by £945.2m (2020: £995.5m).

Tuffnells Deferred consideration

The Tuffnells business unit was disposed on 2 May 2020; the Group is due £15.0m as deferred consideration payable over 3 years. There is a balance of £11.5m included within other receivables (£2.3m non-current and £9.2m current) in respect of the deferred consideration.    The Group has calculated the fair value of the deferred consideration on disposal at £7.1m and has subsequently recognised the receivable at amortised cost. The fair value was calculated by discounting the deferred consideration at 30% which is considered the key judgement. A +/-5% change in the discount rate would have resulted in a decrease/increase of the fair value of the deferred consideration by +/-£1.0m which would change the profit and loss on disposal. For more information see Note 11.  Recoverability of the Tuffnells deferred consideration is a key estimate.  Management have assessed its recoverability and have concluded that no impairment is necessary.  This was assessed using a number of scenarios such as delays in in payments and non-recovery of the balance; changes in these assumptions may lead to an impairment of the balance.

Determining lease terms

In determining lease terms, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

For leases of distribution centres and equipment, the following factors are the most relevant:

·          The Company continually considers the optimal network structure in its judgement over lease terms;

·          If there are significant penalties to terminate (or not extend), the Company is typically reasonably certain to extend (or not terminate);

·          If any leasehold improvements are expected to have a significant remaining value, the Company is typically reasonably certain to extend (or not terminate); and

·          Otherwise, the Group considers other factors including historical lease durations and the costs and business disruption required to replace the leased asset. Most extension options in vehicles leases have not been included in the lease liability, because the Group could replace the assets without significant cost or business disruption.

The lease term is reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the lessee.

Adjusting items

Adjusting items of income or expense are excluded in arriving at Adjusted operating profit to present a further measure of the Group's performance. Each adjusting item is considered to be significant in nature and/or quantum, non-recurring in nature and/or are considered to be unrelated to the Group's ordinary activities or are consistent with items treated as adjusting in prior periods. Excluding these items from profit metrics provides readers with helpful additional information on the performance of the business across periods because it is consistent with how the business performance is planned by, and reported to, the Board and the Executive Team.

The classification of adjusting items requires significant management judgement after considering the nature and intentions of a transaction.  Adjusted measures are defined with other APM's in the glossary.

Based on the nature of the transactions that it had Adjusting items after tax totalling £0.1m (2020: £17.3m) and a breakdown is included within Note 4.

Retirement benefits

In line with the accounting policy the 'buy-in' annuity purchased on 17 February 2021 (Note 5) is recognised as a plan asset consistent with previous transactions. The difference in value between the value of the insurance asset received of £5.4m at the date of the transaction and the asset transferred in exchange for the policy £6.2m was considered an actuarial remeasurement as the obligation to settle the scheme liabilities continues to sit with the pension scheme. The £0.8m impact is recognised within other comprehensive income and is offset by the release of the IFRIC 14 liability.

If this was instead considered to form part of the settlement costs of the subsequent pension 'buy-out' the £0.8m income statement would be accounted for as a charge to the income statement. The offsetting £0.8m, being the release of the restriction, would continue to be included within other comprehensive income.

The Company committed itself to wind-up the pension scheme on 2 March 2021 which was the date the Company and the Trustees of the pension scheme committed to remove the Company's liability to the pension scheme, the 'buy-out' removing the obligations happened on 31 March 2021.

At the balance sheet date, the Company does not recognise the £14.8m pre-tax surplus as an asset, as it does not yet have an unconditional right to the asset. The right of return is dependent on the Trustee reaching a position where it is advised that it can legally distribute the surplus to the employer and completion of activities to trace former members of the Trust impacted by the GMP ruling. Subsequent to the balance sheet date the Trustee confirmed its intention to return the surplus to the Company.  The surplus, net of additional professional fees and tax charged at a rate of 35%, is expected to be paid to the Company in FY2022.  The surplus received by the Company will be used to repay existing debt.

Key sources of estimation uncertainty

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

The key assumption concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Impairment of investments in joint ventures

Investments in joint ventures are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is determined using value in use calculations. The value in use method requires the Company to determine appropriate assumptions in relation to the cash flow projections over the three-year plan period (which is a key source of estimation uncertainty), the terminal growth rate to be applied beyond this three-year period and the risk-adjusted post-tax discount rate used to discount the assumed cash flows to present value.  The assumption that cash flows continue into perpetuity is a source of significant estimation uncertainty.

The Company has since reviewed the business plan for the Rascal Solutions Limited Joint Venture, taking into account the challenges arising from increasing market competition. As a result, an impairment review has been performed.  A value in use of £2.9m has been calculated based on future cash flows of the business and have been discounted at a rate of 15.4% and a terminal growth rate applied of 0%. The result is an impairment loss of £1.6m. Refer to Note 15, for further details.

Property provision

The Group holds a property provision which estimates the future liabilities to restore leased premises to an agreed standard at the date the lease is terminated.  The provision is calculated based on key assumptions including the length of time properties will be occupied, the future costs of restoration and the condition of the property at the future exit date.

The property provision represents the estimated future cost of the Group's onerous leases on non-trading properties and for potential dilapidation costs across the Group. These provisions have been discounted to present value and this discount will be unwound over the life of the leases.

A change in any of these assumptions could materially impact the provision balance.  Refer to Note 23 for further details on the sensitivity of the assumptions used to calculated the property provision.  The property provisions carrying value at the period end is £3.8m (FY2020: £3.9m). 

Recoverability of Tuffnells deferred consideration

The recoverability of the Tuffnells deferred consideration is a key estimate.   Management have assessed its recoverability and have concluded no impairment is necessary.  This was assessed using a number of scenarios such as delays in payments and non-recovery of the balance, changes in these assumptions may lead to an impairment of the balance.

(6)            Non-current assets held for sale and disposal groups (prior period)

In the prior period, non-current assets held for sale and disposal groups were classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They were stated at the lower of their carrying amount or fair value less costs to sell.

Held for sale as assets are assets that have met all the criteria required by IFRS 5 to be classified as held for sale, at which point they are derecognised as non-current assets.

(7)            Discontinued operations

In accordance with IFRS 5 'Non-current assets held for sale and Discontinued operations', the net results of discontinued operations are presented separately in the Group Income statement (and the comparatives restated) and the assets and liabilities of operations are presented separately in the Group balance sheet if they meet the held for sale criteria at the balance sheet date or were disposed of during the year.

A cash generating unit would meet the classification of a discontinued operation when considered a material to the Group's overall results.

(8)            Revenue

Smiths News - Sales of Newspapers and Magazines

Sales of Newspapers and Magazines are recognised when control of the products has transferred, that is, when the products are delivered to the retailer and there is no unfulfilled obligation that could affect the retailer's acceptance of the products, the risks of obsolescence and loss have been transferred to the retailer. Goods are sold to retailers on a sale or return basis.

Return Reserve

Newspapers and Magazines sales are made on a sale or return basis, therefore the Group is required to estimate a value relating to expected returns from retailers. Likewise as the publishers are required to provide the Group with credit for any purchase returns, so a purchase returns reserve is also required.  The key estimates used in calculating the period end reserve are rates of returns (based on historical tends), average shelf life of the product types and average price of each product type.  These estimates are similarly applied to calculate the credit for purchase returns. 

Revenue for goods supplied with a right of return is stated net of the value of any returns. Newspapers and magazines are often sold with retrospective volume discounts based on aggregate sales. Revenue from these sales is recognised based on the price specified in the contract, net of the estimated volume discounts. Accumulated experience is used to estimate and provide for the discount and returns', using the expected value method and revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. A returns reserve accrual and discount accrual (included in trade and other payables) is recognised for expected volume discounts and refunds payable to customers in relation to sales made until the end of the reporting period. A right to the returned goods (included in other debtors) are recognised for the products expected to be returned. Newspapers and Magazines are made on a sale or return basis, therefore the Group is required to estimate a value relating to expected returns from retailers. Likewise as the publishers are required to provide the Group with credit for any purchase returns a purchase returns reserve is also required No element of financing is deemed present, because the sales are made with short credit terms, which is consistent with market practice.

A receivable is recognised when the goods are delivered, since this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.

(9)            Cost of Sales and Gross profit

The Group considers cost of sales to equate to cost of inventories recognised as an expense, net impairment losses on financial assets and distribution costs as these are considered to represent for the Group direct costs of making a sale.

The Group considers gross profit to equal revenue less cost of sales.

(10)           Taxation

Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent it relates to items recognised in other comprehensive income or directly in equity. Current tax is the expected tax payable based on the taxable profit for the year, using tax rates enacted, or substantively enacted at the balance sheet date and any adjustment to tax payable in respect of previous years.

Deferred tax is provided on the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is calculated using tax rates enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which these temporary differences can be utilised.

(11)           Dividends

Interim and final dividends are recorded in the financial statements in the period in which they are paid.

(12)           Capitalisation of internally generated development costs

Expenditure on developed software is capitalised when the Group is able to demonstrate all of the following: the technical feasibility of the resulting asset; the ability (and intention) to complete the development and use it; how the asset will generate probable future economic benefits; and the ability to measure reliably the expenditure attributable to the asset during its development. Subsequent to initial recognition, internally generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

 (13)          Joint ventures

The Group Accounts include the Group's share of the total recognised gains and losses in its joint ventures on an equity accounted basis.

Investments in joint ventures are carried in the balance sheet at cost adjusted by post-acquisition changes in the Group's share of the net assets of the joint ventures, less any impairment losses. The carrying values of investments in joint ventures include acquired goodwill. Losses in joint ventures that are in excess of the Group's interest in the joint venture are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture.

(14)           Business combinations goodwill and intangibles

The Group uses the acquisition method of accounting to account for business combinations. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued, liabilities incurred or assumed at the date of exchange. Acquisition related costs are recognised in profit or loss as incurred. Any deferred or contingent purchase consideration is recognised at fair value over the period of entitlement. If the contingent purchase consideration is classified as equity, it is not remeasured and settlement is accounted for in equity. Any deferred or contingent payment deemed to be remuneration as opposed to purchase consideration in nature is recognised in profit or loss as incurred, and excluded from the acquisition method of accounting for business combinations. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured, initially, at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The non-controlling interest is measured, initially, at the non-controlling interest's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.  Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

Goodwill arising on all acquisitions is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

The carrying value is reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets arising under a business combination (acquired intangibles) are capitalised at fair value as determined at the date of exchange and are stated at fair value less accumulated amortisation and impairment losses. Amortisation of acquired intangibles is charged to the income statement on a straight-line basis over the estimated useful lives as follows:

Customer relationships                - 2.5 to 7.5 years

Trade name                                - 5 to 10 years

Software and development costs   - 3 to 7 years

Computer software and internally generated development costs which are not integral to the related hardware are capitalised separately as an intangible asset and stated at cost less accumulated amortisation and impairment losses.

Assets held under leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. All intangible assets are reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may be higher than its recoverable value. The recoverable value used is the value in use. The value in use is determined by estimating the future cash inflows and outflows to be derived from continuous use of the asset and applying the appropriate discount rate to those future cash flows. Where the carrying value is higher than the calculated value in use, an impairment loss will be recognised.

(15)           Property, plant and equipment

Property, plant and equipment assets are stated at cost less accumulated depreciation and any recognised impairment losses. No depreciation has been charged on freehold land. Other assets are depreciated, to a residual value, on a straight-line over their estimated useful lives, as follows:

Freehold and long term leasehold properties - over 20 years

Short term leasehold properties  - shorter of the lease period and the estimated remaining economic life

Fixtures and fittings                - 3 to 15 years

Equipment                             - 5 to 12 years

Computer equipment               - up to 5 years

Vehicles                                - up to 5 years

Assets held under leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. All property, plant and equipment is reviewed for impairment in accordance with IAS 36 'Impairment of Assets' when there are indications that the carrying value may not be recoverable.

(16)           Leasing

Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

·          fixed payments (including in-substance fixed payments), less any lease incentives receivable;

·          variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date;

·          amounts expected to be payable by the Group under residual value guarantees;

·          the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and

·          Payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.

Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee's incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.

To determine the incremental borrowing rate, the Group:

·          where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received;

·          uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by the Group, which does not have recent third party financing; and

·          Makes adjustments specific to the lease, e.g. term, country, currency and security.

The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.

Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Right-of-use assets are measured at cost comprising the following:

·          the amount of the initial measurement of lease liability;

·          any lease payments made at or before the commencement date less any lease incentives received;

·          any initial direct costs; and

·          Restoration costs.

Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset's useful life.

Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture.

Extension and termination options

Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group's operations. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor.

Modifications

When the Group revises its estimate of the term of any lease (because, for example, it re-assesses the probability of a lessee extension or termination option being exercised), it adjusts the carrying amount of the lease liability to reflect the payments to make over the revised term, which are discounted using a revised discount rate. The carrying value of lease liabilities is similarly revised when the variable element of future lease payments dependent on a rate or index is revised, except the discount rate remains unchanged.  In both cases an equivalent adjustment is made to the carrying value of the right-of-use asset, with the revised carrying amount being amortised over the remaining (revised) lease term. If the carrying amount of the right-of-use asset is adjusted to zero, any further reduction is recognised in profit or loss.  

(17)           Inventories

Inventories comprise goods held for resale and are stated at the lower of cost or net realisable value. Inventories are valued using a weighted average cost method. Costs comprise direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition.

(18)           Financial instruments

Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. The Group derecognises financial assets and liabilities only when the contractual rights and obligations are transferred, discharged or expire.

Financial assets comprise trade and other receivables and cash and cash equivalents. Financial liabilities comprise trade payables, financing liabilities, bank borrowings.

(19)           Financial assets

The group classifies its financial assets in the following measurement categories:

·          those to be measured subsequently at fair value (either through OCI or through profit or loss); and

·          those to be measured at amortised cost.

The classification depends on the entity's business model for managing the financial assets and the contractual terms of the cash flows.

Trade receivables

Trade receivables are initially measured at fair value, which for trade receivables is equal to the consideration expected to be received from the satisfaction of performance obligations, plus any directly attributable transaction costs. Subsequent to initial recognition these assets are measured at amortised cost less any provision for impairment losses including expected credit losses. In accordance with IFRS 9 the Group applies the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics such as the ageing of the debt and the credit risk of the customers. An historical credit loss rate is then calculated for each group and then adjusted to reflect expectations about future credit losses. The Group does not have any significant contract assets.

Classification as trade receivables

Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. They are generally due for settlement within 30 days and are therefore all classified as current. Trade receivables are recognised initially at the amount of consideration that is unconditional, unless they contain significant financing components, in which case they are recognised at fair value. The Group holds the trade receivables with the objective of collecting the contractual cash flows, and so it measures them subsequently at amortised cost using the effective interest method. Details about the Group's impairment policies and the calculation of the loss allowance are provided in Note 17.

Due to the short-term nature of the current receivables, their carrying amount is considered to be the same as their fair value.

Other receivables

Other receivables are recognised on trade date, being the date on which the Group has the right to the asset. Other receivables are derecognised when the rights to receive cash flows from the other receivables have expired or have been transferred and the group has transferred substantially all the risks and rewards of ownership.

At initial recognition, the Group measures other receivable at their fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

Subsequent measurement of other receivables depends on the Group's business model for managing the asset and the cash flow characteristics of the asset. The group classifies its other receivables at amortised cost.

Assets that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/ (losses) together with foreign exchange gains and losses. Impairment losses are presented as a separate line item in Note 3.

The Group classifies its financial assets as at amortised cost only if both of the following criteria are met:

·          the asset is held within a business model whose objective is to collect the contractual cash flows; and

·          the contractual terms give rise to cash flows that are solely payments of principal and interest.

The Group applies the general approach to impairment under IFRS 9 based on significant increases in credit risk rather than the simplified approach for trade receivables using lifetime ECL.

(20)           Trade and other payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method.

(21)           Treasury

Cash and bank deposits

Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short term deposits with an original maturity of three months or less. BACS and next day payments are recognised at the settlement date, rather than when they are initiated, to more appropriately reflect the nature of these transactions.  In the consolidated balance sheet, bank overdrafts are shown within borrowings in current liabilities. Cash and cash equivalents in the cash flow statement comprise cash at bank and in hand and bank overdrafts which form part of the groups cash management.

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued are recorded at the proceeds received, net of direct issue costs.

Bank borrowings

Interest bearing bank loans and overdrafts are initially measured at fair value (being proceeds received, net of direct issue costs), and are subsequently measured at amortised cost, using the effective interest rate method. Finance charges, including premiums payable on settlement or redemptions and direct issue costs are accounted for on an accruals basis and taken to the income statement using the effective interest rate method and are added to the carrying value of the instrument to the extent that they are not settled in the period in which they arise.

Modification/Derecognition of financial liabilities

Financial liabilities are derecognised only when there is extinguishment of the original financial liability and recognition of a new financial liability. Equally, modification of the terms of existing financial liability is accounted for as an extinguishment of the original financial liability and recognition of a new financial liability takes place. 

Foreign currencies

Financial statements of foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period where this rate approximates to the foreign exchange rates ruling at the dates of the transactions.

Foreign currency transactions

Transactions in foreign currencies are recorded using the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at foreign exchange rates ruling at the dates the fair value was determined.

(22)           Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation.  Provisions are measured at the directors' best estimate of the expenditure required to settle the obligation at the balance sheet date and if this amount is capable of being reliably estimated. If such an obligation is not capable of being reliably estimated, no provision is recognised and the item is disclosed as a contingent liability where material. Where the effect is material, the provision is determined by discounting the expected future cash flows.

(23)           Retirement benefit costs

The Group operates a number of defined contribution schemes for the benefit of its employees. Payments to the Group's schemes are recognised as an expense in the income statement as incurred. Following the disposal of Tuffnells, the Group operates one defined benefit pension scheme, the news section of The WH Smith Pension Trust which is closed to new entrants and to further accrual. The Trust formally entered into a buy-out transaction on 31 March 2021, removing all material liabilities from the Trust.  Actuarial calculations are carried out as at 31 March 2021, the final date at which the Trust liabilities are to be valued.  Actuarial gains and losses are recognised in full in the period in which they occur in the group statement of comprehensive income. As at 28 August 2021, there were a small proportion of liabilities within the Trust relating to amounts owed to former members of the Trust as a result of the latest Lloyds ruling in November 2020.  As these liabilities are not long-term in nature, actuarial assumptions at 28 August 2021 are not required.  The Group do not recognise any surplus unless there is an unconditional right to do so.

(24)           Employee Benefit Trust

Smiths News Employee Benefit Trust

The shares held by the Smiths News Employee Benefit Trust are valued at the historical cost of the shares acquired. This value is deducted in arriving at shareholders' funds and presented as the own share reserve in line with IAS 32 'Financial Instruments: Disclosure and Presentation'.

(25)           Share schemes

Share based payments

The Group operates several share-based payment schemes, being the Sharesave Scheme, the Executive Share Option Scheme, the LTIP and the Deferred Bonus Plan. Details of these are provided in the Directors' Remuneration report and in Note 30.

Equity-settled share-based schemes are measured at fair value at the date of grant. The fair value is expensed with a corresponding increase in equity on a straight-line basis over the period during which employees become unconditionally entitled to the options. The fair values are calculated using an appropriate option pricing model. The income statement charge is then adjusted to reflect expected and actual levels of vesting based on non-market performance related criteria.

Administrative expenses and distribution and marketing expenses include the cost of the share-based payment schemes.

(26)           Changes in accounting policies

The Group's accounting policy has been changed to recognise BACS and next day payments at the settlement date, rather than when they are initiated, to more appropriately reflect the nature of these transactions.  The comparative amounts have not been restated as the prior period is unaffected by this change in accounting policy.

The Group has applied the following standards and amendments for the first time for the annual reporting period commencing 30 August 2020:

·          Amendments to references to the Conceptual Framework in IFRS Standards;

·          Amendments to IFRS 3 Business Combinations;

·          Amendments to IAS 1 and IAS 8: Definition of Material;

·          Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate

Benchmark Reform;

·          Amendments to IFRS 4: Extension of the Temporary Exemption from Applying IFRS 9; and

·          Amendment to IFRS 16: COVID-19-Related Rent Concessions.

None of the other amendments listed above did have any impact on the amounts recognised in prior periods and are not expected to significantly affect the current or future periods.

New Standards and Interpretations not yet applied.

At the date of authorisation of these financial statements, the following Standards and Interpretations that are potentially relevant to the Group and which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the UK):

·          Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16: Interest Rate Benchmark Reform - Phase 2;

·          Amendment to IFRS 16: COVID-19-Related Rent Concessions beyond 30 June 2021;

·          Amendments to IAS 37: Onerous Contracts - Cost of Fulfilling a Contract;

·          Annual Improvements to IFRS Standards 2018-2020;

·          Amendments to IAS 16: Property, Plant and Equipment: Proceeds before Intended Use; and

·          Amendments to IAS 1: Classification of liabilities as current or non-current.

There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.