Differences Between UK GAAP and US GAAP

Differences between UK and US generally accepted accounting principles 

The Group prepares its financial statements in accordance with generally accepted accounting principles in the United Kingdom ('UK GAAP') which differ from those generally accepted in the United States ('US GAAP'). The following statements summarise the significant adjustments which reconcile profit on ordinary activities after taxation and equity shareholders' funds under UK GAAP to the amounts which would have been reported had US GAAP been applied.

Profit on ordinary activities after taxation	Notes	1997 £m	1996 £m	1995 £m
Profit on ordinary activities after taxation as reported in the Group profit and loss account under UK GAAP		240.8	220.8	196.1
Significant adjustments :
- pension costs	(a)	10.4	5.2	10.2
- Hyde closure provision	(b)	(1.8)	8.3	-
- capitalisation of interest (net of amortisation)	(c)	(0.3)	(0.3)	(0.2)
- deferred taxation	(d)	-	(0.2)	(1.7)
- disposal of operations		-	-	11.0
- other, net		-	-	(0.3)
Net income under US GAAP		249.1	233.8	215.1
Earnings per ordinary share under US GAAP		36.4p
Earnings per ADS under US GAAP (each ADS represents four ordinary shares)		145.6p

Equity shareholders' funds	Notes	1997 £m	1996 £m	1995 £m
Equity shareholders' funds as reported in the Group balance sheet under UK GAAP		(540.8)	295.3	826.0
Significant adjustments :
- increase in non-current pension assets	(a)	111.6	100.2	99.0
- decrease in non-current liabilities for the Hyde closure provision	(b)	9.2	12.2	-
- increase in tangible fixed assets for capitalised interest	(c)	4.5	3.5	3.7
- increase in non-current liabilities for deferred taxation :
increase in – methodology	(d)	(2.2)	(2.2)	(2.1)
increase in - on adjustments		(53.8)	(36.9)	(39.6)
- decrease in current liabilities for proposed dividend	(e)	66.4	-	-
- decrease in current liabilities for ACT on proposed dividend	(e)	16.6	-	-
- other, net		-	1.6	2.3
Equity shareholders' funds under US GAAP		(388.5)	373.7	889.3

Consolidated statement of cash flows	Notes	1997 £m	1996 £m	1995 £m
Set out below is a summary consolidated statement of cash flows under US GAAP :	(f)
- cash inflow from operating activities		307.0	132.5	218.3
- cash (outflow) / inflow from investing activities		(44.9)	(28.1)	68.8
- cash outflow from financing activities		(284.2)	(32.4)	(426.3)
(Decrease) / increase in cash and cash equivalents		(22.1)	72.0	(139.2)

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Notes to differences between UK and US generally accepted accounting principles :

(a) Pension costs

Under UK GAAP, pension costs are determined in accordance with the UK statement of standard accounting practice ('SSAP') no. 24, with costs being expensed over employees' working lives. Under US GAAP, pension costs are determined in accordance with the requirements of the statements of financial accounting standards ('FAS') nos. 87 and 88. US GAAP requires valuation of plan assets and obligations based on the fair value of plan assets and assumed discount rates in measurement of plan objectives. UK GAAP requires valuation based on actuarial long-term assumptions of both asset values and expected rate of return on liabilities. Gains and losses under US GAAP are amortised on a straight-line basis whereas under UK GAAP these items are amortised as a level percentage of pensionable pay.

(b) Hyde closure provision

Under UK GAAP, the Hyde closure provision included an amount for additional depreciation as permitted by SSAP no. 12 (revised). Under US GAAP there is no impairment as described under FAS no. 121.

(c) Capitalisation of interest

Under US GAAP, interest incurred as part of the cost of constructing fixed assets is capitalised and amortised over the life of the qualifying assets in accordance with FAS no. 34. In accordance with common UK practice, Gallaher does not capitalise such interest in its financial statements.

(d) Deferred taxation

Under UK GAAP, deferred taxation is only accounted for to the extent that it is probable that taxation liabilities or assets will crystallise in the foreseeable future. Under US GAAP deferred taxation is accounted for on all temporary differences and a valuation allowance is established in respect of those deferred taxation assets where it is more likely than not that some portion will not be realised.

(e) Ordinary dividends

Under UK GAAP, the final ordinary dividends and related ACT are provided in the financial statements in the year in which they are proposed by the board for approval by the shareholders. Under US GAAP, dividends and related ACT are not provided for until declared.

(f) Cash flows

The consolidated statement of cash flows presented under UK and US GAAP present substantially the same information but may differ, however, with regard to classification of items within the statements and as regards the definition of cash and cash equivalents.

Under US GAAP, cash and cash equivalents do not include bank overdrafts and borrowings with initial maturities of less than three months. Under UK GAAP, cash flows are presented separately for operating activities, returns on investments and servicing of finance, taxation, capital expenditure and financial investment, acquisitions, equity dividends and management of liquid resources and financing. Under US GAAP, however, only three categories of cash flow activity are reported: operating, investing and financing. Cash flows from taxation and returns on investments and servicing of finance shown under UK GAAP are included as operating activities under US GAAP. Capital expenditure and financial investment and acquisitions and disposals are included as investing activities under US GAAP. Under US GAAP, capitalised interest is treated as part of the cost of the asset to which it relates and is thus included as part of investing cash flows. Under UK GAAP, all interest is treated as part of returns on investments and servicing of finance. The payment of dividends and cash flows associated with bank overdrafts and short-term borrowings are included under financing activities and changes arising from the management of liquid resources are treated as either financing activities, investing activities or as an activity within cash and cash equivalents under US GAAP.

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