ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 Wetherspoon owns and operates pubs throughout the UK and Ireland. The company aims to provide customers with good-quality food and drinks, served by well-trained and friendly staff, at reasonable prices. Contents SECTION 1 Financial highlights Chairman’s statement Income statement Statement of comprehensive income 1 2 9 9 10 Cash flow statement 11 Balance sheet 12 Statement of changes in shareholders’ equity 13 Notes to the financial statements SECTION 2 36 Authorisation of financial statements and statement of compliance with IFRSs 37 Accounting policies 41 Strategic report 43 Independent auditors’ report 48 Directors, officers and advisers 49 Directors’ report 51 Directors’ remuneration report 60 Corporate governance 66 Information for shareholders 68 Pubs opened during the financial year The pubs are individually designed, and the company aims to maintain them in excellent condition. Financial calendar Annual general meeting 12 November 2015 Interim report for 2016 March 2016 Year end 24 July 2016 Preliminary announcement for 2016 September 2016 View this report online: www.jdwetherspoon.co.uk/investors FINANCIAL HIGHLIGHTS Before exceptional items SECTION 1 Revenue £1,513.9m (2014: £1,409.3m) +7.4% Like-for-like sales +3.3% Operating profit £112.5m (2014: £117.0m) –3.8% Profit before tax and exceptional items1 £77.8m (2014: £79.4m) –2.0% Earnings per share (including shares held in trust) 47.0p (2014: 47.0p) Maintained Free cash flow2 £109.8m (2014: £92.9m) +18.2% Free cash flow2 per share 89.8p (2014: 74.1p) +21.2% Full-year dividend 12.0p (2014: 12.0p) Maintained After exceptional items1 Operating profit £106.5m (2014: £117.0m) –9.0% Profit before tax £58.7m (2014: £78.4m) –25.1% Earnings per share (including shares held in trust) 36.7p (2014: 32.8p) +11.9% 1 Exceptional items as disclosed in the notes to financial statements, note 4. 2 As defined in our accounting policies. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 1 CHAIRMAN’S STATEMENT Financial performance I am pleased to report a year of progress for the company, with record sales and free cash flow. The company was founded in 1979 – and this is the 32nd year since incorporation in 1983. The table below outlines some key aspects of our performance during that period. Since our flotation in 1992, earnings per share before exceptional items have grown by an average of 15.0% per annum and free cash flow per share by an average of 17.7%. Summary accounts for the years ended July 1984 to 2015 Financial year Total sales Profit/(loss) £000 818 1,890 2,197 3,357 3,709 5,584 7,047 13,192 21,380 30,800 46,600 68,536 100,480 139,444 188,515 269,699 369,628 483,968 601,295 730,913 787,126 809,861 847,516 888,473 907,500 955,119 996,327 1,072,014 1,197,129 1,280,929 1,409,333 1,513,923 before tax and exceptional items £000 (7) 185 219 382 248 789 603 1,098 2,020 4,171 6,477 9,713 15,200 17,566 20,165 26,214 36,052 44,317 53,568 56,139 54,074 47,177 58,388 62,024 58,228 66,155 71,015 66,781 72,363 76,943 79,362 77,798 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Earnings per share before exceptional items pence Free cash flow Free cash flow per share £000 pence 0.0 0.2 0.2 0.3 0.3 0.6 0.4 0.8 1.9 3.3 3.6 4.9 7.8 8.7 9.9 12.9 11.8 14.2 16.6 17.0 17.7 16.9 24.1 28.1 27.6 32.6 36.0 34.1 39.8 44.8 47.0 47.0 915 732 1,236 3,563 5,079 5,837 13,495 20,968 28,027 28,448 40,088 49,296 61,197 71,370 83,097 73,477 68,774 69,712 52,379 71,411 99,494 71,344 78,818 91,542 65,349 92,850 109,778 0.4 0.4 0.6 2.1 3.9 3.6 7.4 11.2 14.4 14.5 20.3 24.2 29.1 33.5 38.8 36.7 37.1 42.1 35.6 50.6 71.7 52.9 57.7 70.4 51.8 74.1 89.8 Notes Adjustments to statutory numbers 1. Where appropriate, the earnings per share (EPS), as disclosed in the statutory accounts, have been recalculated to take account of share splits, the issue of new shares and capitalisation issues. 2. Free cash flow per share excludes dividends paid which were included in the free cash flow calculations in the annual report and accounts for the years 1995–2000. 3. The weighted average number of shares, EPS and free cash flow per share include those shares held in trust for employee share schemes. 4. Before 2005, the accounts were prepared under UKGAAP. All accounts from 2005 to date have been prepared under IFRS. 2 J D WETHERSPOON PLC Like-for-like sales increased by 3.3% (2014: 5.5%), with total sales of £1,513.9m, an increase of 7.4% (2014: 10.0%). Like-for-like bar sales increased by 1.2% (2014: 2.7%), food sales by 7.3% (2014: 12.0%) and slot/fruit machine sales decreased by 2.8% (2014: decreased by 3.1%). Operating profit before exceptional items decreased by 3.8% to £112.5m (2014: £117.0m). The operating margin, before exceptional items, decreased to 7.4% (2014: 8.3%), mainly as a result of a lower gross margin and increases in staff costs, utilities and depreciation. Profit before tax and exceptional items decreased by 2.0% to £77.8m (2014: £79.4m). Earnings per share (including shares held in trust by the employee share scheme), before exceptional items, were 47.0p (2014: 47.0p). Net interest was covered 3.3 times by operating profit before exceptional items (2014: 3.2 times). Total capital investment was £173.3m in the period (2014: £177.5m), with £106.3m invested in new pubs and extensions to existing pubs (2014: £97.7m). In addition, there was expenditure of £44.8m on existing pubs and IT infrastructure (2014: £56.2m) and £21.6m on freehold reversions, where Wetherspoon was already a tenant, and investment properties (2014: £23.6m). Exceptional items totalled £12.6m (2014: £17.7m). An exceptional charge of £5.2m resulted from a change in our accounting policy regarding non-consumable inventories, including crockery, glassware and cutlery. These items were previously regarded as part of our year end stock-in-hand; we have now decided to expense these when received by the pubs. An impairment charge of £11.2m was realised in respect of underperforming pubs and a charge of £1.9m was incurred in relation to onerous leases. A charge of £0.8m resulted from a restructuring of our head office. The total cash effect of these exceptional items was £0.8m. These exceptional items led to an exceptional tax deduction of £1.6m. We have reviewed the treatment of deferred tax on “rolled-over” capital gains and found that we had overestimated the tax liability. This has resulted in a deferred tax credit of £4.8m. Free cash flow, after capital investment of £44.8m on existing pubs (2014: £56.2m), £6.8m in respect CHAIRMAN’S STATEMENT of share purchases for employees (2014: £7.3m) and payments of tax and interest, increased by £16.9m to £109.8m (2014: £92.9m). The working capital inflow was £27.3m in the year (2014: £29.6m). Free cash flow per share was 89.8p (2014: 74.1p). Dividends and return of capital The board proposes, subject to shareholders’ approval, to pay a final dividend of 8.0p per share (2014: 8.0p per share), on 26 November 2015, to those shareholders on the register on 23 October 2015, giving a total dividend for the year of 12.0p per share (2014: 12.0p per share). The dividend is covered 3.1 times (2014: 2.8 times). In view of high levels of capital expenditure in recent years and the potential for advantageous investments in the future, the board has decided to maintain the dividend at its current level for the time being. During the year, 3,618,827 shares (representing 2.9% of the issued share capital) were purchased by the company for cancellation, at a total cost of £26.9m, including stamp duty, representing an average cost per share of 743p. Financing As at 26 July 2015, the company’s total net debt, including bank borrowings and finance leases, but excluding derivatives, was £601.1m (2014: £556.6m), an increase of £44.5m. Factors which have led to the increase in debt are investment in new pubs and extensions of £106.3m, investment in existing pubs of £44.8m, the acquisition of freehold reversions of £21.6m, share buybacks of £12.7m and dividend payments of £14.6m. Year-end net-debt-to-EBITDA was 3.37 times (2014: 3.21 times). As at 26 July 2015, the company had £240.9m (2014: £138.1m) of unutilised banking facilities and cash balances, with total facilities of £840.0m (2014: £690.0m). The company’s existing interest-rate swap arrangements remain in place. Corporation tax The overall tax charge (including deferred tax) on pre-exceptional items is 26.1% (2014: 25.8%). The UK standard average tax rate for the period was 20.7% (2014: 22.3%). The difference between the rate of 26.1% and the standard average rate of UK corporation tax of 20.7% is 5.4% (2014: 3.5%) which is due primarily to the level of non-qualifying depreciation (depreciation does not qualify for tax relief). ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 3 CHAIRMAN’S STATEMENT The pre-exceptional current tax rate, which excludes deferred tax, has increased by 6.3% to 27.7% (2014: 21.4%), owing mainly to a reduced amount of expenditure which qualifies for capital allowances. The “living wage” Wetherspoon increased the minimum hourly rate for staff by 5% in October 2014 and by a further 8% at the end of July 2015. Both decisions were taken without the knowledge that the government was about to announce a new minimum wage, now called the “living wage”. In addition, as Wetherspoon shareholders are aware, we pay about 40% of our profits (£30.7m in the year under review) as a bonus or free shares, over 80% of which is paid to people who work in our pubs. We believe there to be two main economic issues with regard to the new living/minimum wage. The first is that pub wages are about 30% of sales. Therefore a pint purchased in a pub at the national average price of about £3.50 will represent about 85 pence in respect of wages. In contrast, a pint bought in a supermarket, at an estimated price of £1, will only represent about 10 pence of supermarket wages, since their wage percentage and selling prices are both far lower than those of pubs. By pushing up the cost of wages by a large factor, the government is inevitably putting financial pressure on pubs, many of which have already closed. This financial pressure will be felt most strongly in areas which are less affluent, since the price differential in those areas between pubs and supermarkets is far more important to customers. It is certain that high streets in less affluent areas, which already suffer from serious problems of empty shops and dereliction, will suffer further if pubs and other labour-intensive businesses close. The second issue is that investment is bound to be affected if businesses feel that important issues, such as the minimum wage, are to be decided by one or two senior politicians on a whim, for political reasons, rather than being subject to careful consideration by organisations such as the Low Pay Commission. Trade support for VAT equality Jacques Borel, who has campaigned successfully for lower VAT for bars and restaurants in many other countries, has also been campaigning in this country. A large number of companies have supported his campaign, including Heineken, Pizza Hut, Fuller’s and St Austell, among others. It is disappointing to note that some of the biggest pub companies, including Enterprise Inns, Mitchells and Butlers, Greene King and Marston’s have failed to support Jacques’ campaign and have not campaigned themselves in any meaningful way for VAT equality between pubs and supermarkets. Pubs have lost 50% of their beer sales to supermarkets in the last 35 years (including many pubs owned by these companies), as VAT has climbed from 8% to 20%. Of equal or greater concern to many thousands of individual publicans in Britain is that the main trade newspaper, the Publican Morning Advertiser (the PMA) has itself failed to support the VAT campaign in recent years, even though authoritative market research, as well as common sense, overwhelmingly indicates that publicans regard VAT equality as critical. In my view, the PMA, one of Britain’s oldest newspapers, has entirely lost its legitimacy as a mouthpiece for individual licensees. Contribution to the economy As we have previously stated, we believe that pubs are taxed excessively and that the government would create more jobs and receive higher levels of overall revenue, if it were to create tax equality among supermarkets, pubs and restaurants. Supermarkets pay virtually no VAT in respect of food sales, whereas pubs pay 20% – and this disparity enables supermarkets to subsidise their alcoholic drinks sales to the detriment of pubs and restaurants. Wetherspoon is happy to pay its share of tax and, in this respect, is a major contributor to the economy. In the year under review, we paid total taxes of £632.4m, an increase of £32.2m, compared with the previous year, which equates to approximately 41.8% of our sales. This equates to an average payment per pub of £673,000 per annum or £12,900 per week. 4 J D WETHERSPOON PLC 2015 £m 2014 £m VAT Alcohol duty PAYE and NIC Business rates Corporation tax Corporation tax credit Machine duty Climate change levies Carbon tax Fuel duty Landfill tax Stamp duty Premise licence TV licences Total tax Tax per pub (£000) Tax as % of sales Pre-exceptional profit after tax 57.5 3.8% Profit after tax as % of sales 275.1 157.0 78.4 44.9 18.1 – 11.3 6.3 2.7 2.1 1.5 2.1 0.7 – 600.2 662 41.8% 42.6% 58.9 4.2% 294.4 161.4 84.8 48.7 15.3 (2.0) 11.2 6.4 3.7 2.9 2.2 1.8 0.8 0.8 632.4 673 Corporate governance In last year’s statement, the view was advanced that many aspects of current corporate governance advice, as laid out in the Combined Code, were “deeply flawed”. The statement pointed out that “compliant pub companies had often fared disastrously in comparison with non-compliant ones. In particular, pub companies in which the CEO became chairman and which had a majority of executives……usually with previous experience of the pub trade, avoided making catastrophic errors to which compliant companies seem prone”. It was also pointed out that setting targets for bonuses had also often backfired, encouraging companies to take reckless decisions in order to enhance earnings. Last year’s statement was particularly critical of the Code itself, which placed a huge emphasis on meetings between directors and shareholders and placed almost no emphasis on directors taking account of the views of customers and employees which are far more important, in practice, to the future well-being of any company. It was pointed out that the average institutional shareholder turns over his portfolio twice annually, so it would be absurd for directors to take account of the views of “Mr Market” (in the words of Benjamin Graham), certainly in regard to short-term shareholders. CHAIRMAN’S STATEMENT Having presented our views in previous annual reports and press articles, without receiving any dissent from any shareholders or their representatives, I believe the following propositions represent the views of sensible shareholders: n Modern annual reports are far too long and are often almost unreadable. They are full of semi- literate business jargon, including accounting jargon, and are cluttered with badly written and incomprehensible governance reports. n The limitations of corporate governance systems should be recognised. Common sense, management skills and business savvy are more important to commercial success than board structures. All the major banks and many supermarket and pub companies have recently suffered colossal business and financial problems, in spite of, or perhaps because of, their adherence to governance guidelines. n There should be an approximately equal balance between executives and non-executives. A majority of executives is not necessarily harmful, provided non-executives are able to make their voices heard. n It is often better if a chairman has previously been the chief executive of the company. This encourages chief executives, who may wish to become chairmen in the future, to take a long-term view, avoiding problems of profit-maximisation policies in the years running up to the departure of a chief executive. n A maximum tenure of 9 years for non-executive directors is not advisable, since inexperienced boards, unfamiliar with the effects of the “last recession” on their companies, are likely to reduce financial stability. n An excessive focus on achieving financial or other targets for executives can be counter-productive. There’s no evidence that the type of targets preferred by corporate governance guidelines actually work and there is considerable evidence that attempting to reach ambitious financial targets is harmful. n It is far more important for directors to take account of the views of employees and customers than of the views of institutional shareholders. Shareholders should be listened to with respect, but caution should be exercised in implementing the views of short-term shareholders. It should also be understood that modern institutional shareholders may have a serious conflict of interest, as they are often concerned with their own quarterly portfolio performance, whereas corporate health often requires objectives which lie 5, 10 or 20 years in the future. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 5 CHAIRMAN’S STATEMENT Board of directors Further to the 18 December 2014 statement that Ben Whitley had been appointed interim finance director, the board is pleased to announce today that Ben is being appointed to the board with effect from the forthcoming AGM. Further progress As in previous years, the company has tried to improve as many areas of the business as possible. For example, our food hygiene ratings are at record levels. We have 858 pubs rated on the Food Standards Agency’s website. The average score is 4.93, with 94.1% of the pubs achieving a top rating of five stars and 5.1% receiving four stars. We believe this to be the highest average rating for any substantial pub company. In the separate Scottish scheme, which records either a “pass” or a “fail”, all of our 68 pubs have passed. In the 2016 Good Beer Guide, a CAMRA publication, 296 of our pubs have been recommended, more than any other pub company. In addition, over 937 of our pubs are Cask Marque approved – Cask Marque is a pub-industry scheme, run in conjunction with several brewers, which checks and approves the quality of real ale in pubs. We continue to source our traditional ales from a large number of microbreweries of varying sizes and believe that we are the biggest purchaser of microbrewery beer in the UK. We continue to run the world’s biggest real-ale festival, twice per annum, and have added a cider festival in recent times, featuring a wide variety of suppliers from the UK, Europe and elsewhere in the world. Wetherspoon sells far more beers and ciders from craft and microbrewers throughout the year than any other pub company. We paid £30.7m in respect of bonuses and free shares to employees in the year, slightly more than the previous year, of which 97.0% was paid to staff below board level and 81.5% was paid to staff working in our pubs. In the field of charity, thanks to the work of our dedicated pub and head-office teams, we continue to raise record amounts of money for CLIC Sargent, which supports young cancer patients and their families. In the last year, we raised approximately £1.7m, bringing the total raised to over £11.0m – more than any other corporate partner has raised for this charity. 6 J D WETHERSPOON PLC Property The company opened 30 pubs during the year, with 6 pubs sold or closed, resulting in a total estate of 951 pubs at the financial year end. The average development cost for a new pub (excluding the cost of freeholds) was £2.1m, compared with £1.6m a year ago; four of the pubs included hotel accommodation and the average size was around 20% bigger than the previous year, factors that contributed to increases in costs. The full-year depreciation charge was £66.7m (2014: £58.1m). We currently intend to open about 15 to 20 pubs in the year ending July 2016. Property litigation We have previously referred to important property litigation between Wetherspoon and a number of individuals and companies. As a result of the importance of this litigation and the large sums of money involved, we intend to reproduce this information for the benefit of shareholders and the public for the foreseeable future: As reported at the interim results in March 2013, Wetherspoon agreed on an out-of-court settlement with developer Anthony Lyons, formerly of property leisure agent Davis Coffer Lyons, and has received approximately £1.25m from Mr Lyons. The payment relates to litigation in which Wetherspoon claimed that Mr Lyons had been an accessory to frauds committed by Wetherspoon’s former retained agent Van de Berg and its directors Christian Braun, George Aldridge and Richard Harvey. Mr Lyons denied the claim – and the litigation was contested. The claim related to properties in Portsmouth, Leytonstone and Newbury. The Portsmouth property was involved in the 2008/9 Van de Berg case itself. In that case, Mr Justice Peter Smith found that Van de Berg, but not Mr Lyons (who was not a party to the case), fraudulently diverted the freehold from Wetherspoon to Moorstown Properties Limited, a company owned by Simon Conway. Moorstown leased the premises to Wetherspoon. Wetherspoon is still a leaseholder of this property – a pub called The Isambard Kingdom Brunel. The properties in Leytonstone and Newbury (the other properties in the case against Mr Lyons) were not pleaded in the 2008/9 Van de Berg case. Leytonstone was leased to Wetherspoon and trades today as The Walnut Tree public house. Newbury was leased to Pelican plc and became Café Rouge. As we have also reported, the company agreed to settle its final claim in this series of cases and accepted £400,000 from property investor Jason Harris, formerly of First London and now of First Urban Group. Wetherspoon alleged that Harris was an accessory to frauds committed by Van de Berg. Harris contested the claim and has not admitted liability. Before the conclusion of the above cases, Wetherspoon also agreed on a settlement with Paul Ferrari of London estate agent Ferrari Dewe & Co, in respect of properties referred to as the “Ferrari Five” by Mr Justice Peter Smith. Further shareholder information about these cases is available in a short article which I wrote for the trade publication Propel, which is disclosed later in my chairman’s statement. Current trading and outlook The biggest danger to the pub industry, as Wetherspoon has previously pointed out is the VAT disparity between supermarkets and pubs. In the six weeks to 6 September 2015, like-for-like sales increased by 1.4%, with total sales increasing by 5.2%. As previously stated on 15 July 2015, a number of factors likely to influence our trading performance this financial year are difficult to quantify at this early stage. Positive aspects include an increase in pub numbers, a better economy and slightly lower interest rates; less favourable aspects include heightened competition from supermarkets and restaurant groups and increased staff, repairs, bar and food costs. We continue to anticipate a trading performance similar to, or slightly above, that achieved in the last financial year. Newspaper article The newspaper article below first appeared in the pub trade publication Propel and relates to the section on property litigation referred to above: “Wed 22nd May 2013 – Propel Opinion Extra Lessons in the property market by Tim Martin J D Wetherspoon has always been a buyer of freeholds. Our second, third and fourth pubs were freehold and, by the time of our 1992 flotation, 20 of our 44 pubs were freehold. CHAIRMAN’S STATEMENT I negotiated our first 20 or so pubs myself, dealing directly with the owners’ agents, before employing Christian Braun, of Van de Berg & Co, in about 1990. Little did I realise that Braun was a double agent or “mole”, who was to burrow deep into our organisation, undermining the very property foundations that underpin any retailer. Following a tip-off in 2005, we terminated VDB’s contract and undertook a review of all our 600 or so property transactions, using a team of up to a dozen legal and paralegal staff. We discovered about 50 “back-to-back” transactions in which freeholds, which were available to buy, had been diverted by VDB to third parties, who had acquired them at the same time as JDW had taken a lease – the rent being set at a level which created an immediate uplift in the value of the reversion. Proceedings were issued against VDB and its directors, Braun, George Aldridge and Richard Harvey, in respect of about a dozen of these transactions. In a 136-page judgment, Mr Justice Peter Smith found that VDB had fraudulently diverted properties to number of third parties, but he made no findings against the third parties themselves. Following Mr Justice Smith’s judgment, JDW issued proceedings against several third parties: Paul Ferrari of Braun’s former employer Ferrari Dewe & Co; Anthony Lyons, formerly of Davis Coffer Lyons and Jason Harris, formerly of First London. Liability was denied by all. The cases were contested and were settled out of court. JDW received substantial payments in all three cases. A number of the pleaded properties in the VDB case, referred to by the judge as the “Ferrari Five”, involved Jersey companies with nominee owners that were connected to Ferrari. Each of the Jersey companies had a different name – and care was taken to use different lawyers and nominees. Profits from the purchasing companies were usually channelled to a Jersey holding company called Gecko and money was then transferred as loans or fees to companies controlled by VDB directors. In my opinion, the Lyons case is the most interesting for the property market and for prospective tenants and purchasers. Lyons stated in his defence that he was acting in his capacity as an employee and in accordance with his duties to Davis and Coffer (now Davis Coffer Lyons). ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 7 therefore, liable to us. The great risk that all agents and investors run, in these circumstances, is if the retained agent, VDB in this instance, is itself be dishonest. If so, this may open up the possibility of a claim by an aggrieved “end user”, such as Wetherspoon, that the introducing agent participated in the dishonesty of the retained agent. JDW has lost many tens of millions of pounds as a result of the VDB frauds. Rent reviews and “yield compression” have exacerbated the damage over the years. Our experience teaches a number of lessons. First, buyers and tenants should ask their agents to confirm in writing that they have no direct or indirect interest in any property they are acquiring and should ask their lawyers to take particular interest if a freehold is changing hands at the same time as they are acquiring a lease, or indeed the freehold. Professionals and investors should also get confirmation in writing from the “end user” in back-to-back deals that they have consented to the transaction. Take the retained agent’s word for it at your peril. Tim Martin is founder and chairman of J D Wetherspoon” Tim Martin Chairman 10 September 2015 CHAIRMAN’S STATEMENT The Lyons case concerned properties in Portsmouth, Leytonstone and Newbury, two of which became JDW pubs, with the third becoming a Café Rouge. The Portsmouth property belonged to British Gas – and Justice Smith found that VDB bid for the freehold, unbeknown to JDW, and, once the bid was accepted, agreed with Lyons for JDW to take a lease and for the freehold to be acquired by Moorstown Properties, owned by a friend, and subsequently a colleague, of Lyons – Simon Conway. No findings were made against Lyons, or indeed Conway, in the VDB case, and neither person was a party to the case. Portsmouth was subsequently sold by Moorstown to Scottish American Investment Company, a few months later, with the benefit of a lease to JDW for a substantial profit. Illustrating the Byzantine complexity of the transactions, Lyons’ defence stated that shares in Moorstown were “transferred”, before the sale was completed, to Northcreek which, Companies House shows, was owned by Roger Myers, then chairman of Café Rouge owner Pelican, and his family. The Newbury property was acquired by Riverside Stores, a company connected to Conway, and was leased at around the same time to Café Rouge. Newbury was sold shortly after completion for a substantial profit. JDW did not allege, and is not alleging, that the Portsmouth and Newbury transactions are connected and is not alleging that Davis Coffer Lyons, Myers or Conway are dishonest, but it is a matter of public importance, as well as of importance to JDW and its shareholders, for there to be an explanation as to the circumstances in which Moorstown, a company which clearly benefited from the Portsmouth fraud by VDB, ended up belonging to the family of Myers. A key legal and ethical question for the property market that emerges from these cases concerns the obligations of estate agents and investors, in circumstances in which a freehold property is first offered to a friend or colleague of an agent, who agrees to acquire it, and the property is then offered by the agent to a company like Wetherspoon on a “back-to-back” basis. What are the obligations of the introducing agent? In broad terms, the third parties in the Wetherspoon litigation argued that they owed no duties or obligations to Wetherspoon and were not, 8 J D WETHERSPOON PLC INCOME STATEMENT for the 52 weeks ended 26 July 2015 J D Wetherspoon plc, company number: 1709784 Notes 52 weeks ended 26 July 2015 Before exceptional items £000 52 weeks ended 26 July 2015 Exceptional items (note 4) £000 52 weeks ended 26 July 2015 After exceptional items £000 52 weeks ended 27 July 2014 Before exceptional items £000 52 weeks ended 27 July 2014 Exceptional items (note 4) £000 52 weeks ended 27 July 2014 After exceptional items £000 Revenue Operating costs Operating profit1 Property gains/(losses) Finance income Finance costs Profit/(loss) before taxation Income tax expense 1 2 3 6 6 7 1,513,923 (1,401,415) – (6,013) 1,513,923 (1,407,428) 1,409,333 (1,292,329) – – 1,409,333 (1,292,329) 112,508 (694) 180 (34,196) 77,798 (20,343) (6,013) (13,053) – – (19,066) 6,435 106,495 (13,747) 180 (34,196) 117,004 (1,429) 67 (36,280) – – – (997) 117,004 (1,429) 67 (37,277) 58,732 (13,908) 79,362 (20,499) (997) (16,744) 78,365 (37,243) Profit/(loss) for the year 57,455 (12,631) 44,824 58,863 (17,741) 41,122 Earnings per ordinary share (p) – Basic2 – Diluted3 8 8 48.6 47.0 (10.7) (10.3) 37.9 36.7 48.6 47.0 (14.7) (14.2) 33.9 32.8 Operating profit per share (p) – Diluted3 92.0 (4.9) 87.1 93.4 – 93.4 STATEMENT OF COMPREHENSIVE INCOME for the 52 weeks ended 26 July 2015 Items which may subsequently be reclassified to profit or loss Interest-rate swaps: gain/(loss) taken to other comprehensive income Tax on items taken directly to other comprehensive income Currency translation differences Net (loss)/gain recognised directly in other comprehensive income Profit for the year Notes 52 weeks ended 26 July 2015 £000 52 weeks ended 27 July 2014 £000 23 7 (9,807) 1,961 (2,189) (10,035) 44,824 13,879 (2,776) 7 11,110 41,122 Total comprehensive income for the year 34,789 52,232 1 The prior year’s operating profit of £115,575,000 has been restated to £117,004,000 to exclude property gains and losses to be in line with the company’s new definition of operating profit. The definition of operating profit has been amended to more clearly show the company’s underlying performance. 2 Calculated excluding shares held in trust. 3 Calculated using issued share capital which includes shares held in trust. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 9 CASH FLOW STATEMENT for the 52 weeks ended 26 July 2015 J D Wetherspoon plc, company number: 1709784 Cash flows from operating activities Cash generated from operations Interest received Interest paid Corporation tax paid Gaming machine settlement Notes 9 Free cash flow1 52 weeks ended 26 July 2015 £000 210,181 180 (31,931) (13,293) 52 weeks ended 26 July 2015 £000 210,181 180 (31,931) (13,293) – 52 weeks ended 27 July 2014 £000 212,505 78 (33,996) (18,070) (16,696) Free cash flow1 52 weeks ended 27 July 2014 £000 212,505 78 (33,996) (18,070) Net cash inflow from operating activities 165,137 165,137 143,821 160,517 Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangible assets Proceeds on sale of property, plant and equipment Investment in new pubs and pub extensions Freehold reversions Investment properties Lease premiums paid (46,300) (9,926) (37,577) (7,176) (37,577) (7,176) 723 (106,339) (21,612) – (635) (46,300) (9,926) 505 (97,694) (14,823) (8,754) (10) Net cash outflow from investing activities (172,616) (44,753) (177,002) (56,226) Cash flows from financing activities Equity dividends paid Purchase of own shares for cancellation Purchase of own shares for share-based payments Advances under bank loans Loan issue costs Finance lease principal payments 11 28 10 10 10 (14,591) (12,714) (6,831) 47,898 (3,775) (2,648) (6,831) (3,775) (14,949) (24,550) (7,338) 92,151 (4,103) (5,552) (7,338) (4,103) Net cash inflow/(outflow) from financing activities 7,339 (10,606) 35,659 (11,441) Net (decrease)/increase in cash and cash equivalents 10 (140) Opening cash and cash equivalents Closing cash and cash equivalents Free cash flow Free cash flow per ordinary share 32,315 32,175 19 19 8 8 2,478 29,837 32,315 109,778 89.8p 92,850 74.1p 1 Free cash flow is a measure not required by accounting standards; a definition is provided in our accounting policies. 10 J D WETHERSPOON PLC BALANCE SHEET as at 26 July 2015 J D Wetherspoon plc, company number: 1709784 Assets Non-current assets Property, plant and equipment Intangible assets Investment properties Other non-current assets Deferred tax assets Derivative financial instruments Total non-current assets Assets held for sale Current assets Inventories Receivables Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Borrowings Derivative financial instruments Trade and other payables Current income tax liabilities Provisions Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Deferred tax liabilities Provisions Other liabilities Total non-current liabilities Net assets Shareholders’ equity Share capital Share premium account Capital redemption reserve Hedging reserve Retained earnings Total shareholders’ equity Notes 26 July 2015 £000 27 July 2014 £000 12 13 14 15 7 23 18 16 17 19 21 23 20 22 21 23 7 22 24 28 1,153,756 29,997 8,651 10,028 7,994 – 1,068,067 26,838 8,713 9,766 6,033 1,723 1,210,426 1,121,140 1,220 – 19,451 26,838 32,175 22,312 23,901 32,315 78,464 78,528 1,290,110 1,199,668 (2,051) – (283,227) (10,053) (5,231) (2,636) (3,149) (243,160) (3,872) (4,442) (300,562) (257,259) (631,232) (39,973) (77,771) (4,012) (13,667) (586,230) (28,740) (83,686) (3,055) (13,530) (766,655) (715,241) 222,893 227,168 2,387 143,294 2,044 (31,979) 107,147 2,460 143,294 1,971 (24,133) 103,576 222,893 227,168 The financial statements, on pages 9 to 42, approved by the board of directors and authorised for issue on 10 September 2015, are signed on its behalf by: John Hutson Director Su Cacioppo Director ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 11 STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY J D Wetherspoon plc, company number: 1709784 Notes Share capital £000 Share premium account £000 Capital redemption reserve £000 Hedging reserve £000 Currency translation reserve £000 Retained earnings Total £000 £000 At 28 July 2013 2,521 143,294 1,910 (35,236) Total comprehensive income Profit for the year Interest-rate swaps: gain taken to equity Tax on items taken directly to equity Currency translation differences Repurchase of shares Tax on repurchase of shares Share-based payments Tax on share-based payments Purchase of shares held in trust Tax on purchase of shares held in trust Dividends At 27 July 2014 Total comprehensive income Profit for the year Interest-rate swaps: loss taken to equity Tax on items taken directly to equity Currency translation differences Repurchase of shares Tax on repurchase of shares Share-based payments Tax on share-based payments Purchase of shares held in trust Tax on purchase of shares held in trust Dividends 23 7 11 23 7 11 11,103 13,879 (2,776) (61) 61 – 7 7 102,426 214,915 41,122 41,122 (24,428) (122) 7,521 (663) (7,304) (34) (14,949) 52,232 41,122 13,879 (2,776) 7 (24,428) (122) 7,521 (663) (7,304) (34) (14,949) 2,460 143,294 1,971 (24,133) 7 103,569 227,168 (73) 73 (7,846) (2,189) 44,824 44,824 (9,807) 1,961 (2,189) (26,766) (134) 8,907 351 (6,799) (32) (14,591) 34,789 44,824 (9,807) 1,961 (2,189) (26,766) (134) 8,907 351 (6,799) (32) (14,591) At 26 July 2015 2,387 143,294 2,044 (31,979) (2,182) 109,329 222,893 The balance classified as share capital represents proceeds arising on issue of the company’s equity share capital, comprising 2p ordinary shares and the cancellation of shares repurchased by the company. The capital redemption reserve increased owing to the purchase of a number of shares in the period. Shares acquired in relation to the employee Share Incentive Plan and the 2005 Deferred Bonus Scheme are held in trust, until such time as the awards vest. At 26 July 2015, the number of shares held in trust was 4,063,604 (2014: 4,174,284), with a nominal value of £81,272 (2014: £83,486) and a market value of £28,993,815 (2014: 30,597,502) and are included in retained earnings. Hedging gain/loss arises from the movement of fair value in the company’s financial derivative instruments, in line with the accounting policy disclosed in section 2. As at 26 July 2015, the company had distributable reserves of £75.2m (2014: £79.4m). 12 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS at 26 July 2015 1 Revenue Revenue disclosed in the income statement is analysed as follows: 52 weeks ended 26 July 2015 £000 52 weeks ended 27 July 2014 £000 Sales of food, beverages, hotel rooms and machine income 1,513,923 1,409,333 2 Operating profit – analysis of costs by nature This is stated after charging/(crediting): Concession rental payments Minimum operating lease payments Repairs and maintenance Net rent receivable Depreciation of property, plant and equipment (note 12) Amortisation of intangible assets (note 13) Depreciation of investment properties (note 14) Amortisation of other non-current assets (note 15) Share-based payments (note 5) Auditors’ remuneration 52 weeks ended 26 July 2015 £000 52 weeks ended 27 July 2014 £000 19,300 52,658 53,354 (1,334) 61,458 4,775 62 373 8,907 17,166 52,538 56,603 (845) 54,459 3,254 41 321 7,521 52 weeks ended 26 July 2015 £000 52 weeks ended 27 July 2014 £000 Fees payable for the audit of the financial statements 177 161 Fees payable for other services: – assurance services – non-audit services Total auditors’ fees Analysis of continuing operations Revenue Cost of sales Gross profit Administration costs Operating profit before exceptional items Exceptional items (note 4) Operating profit after exceptional items 30 13 220 30 – 191 52 weeks ended 26 July 2015 £000 52 weeks ended 27 July 2014 £000 1,513,923 (1,347,361) 1,409,333 (1,241,584) 166,562 (54,054) 167,749 (50,745) 112,508 117,004 (6,013) – 106,495 117,004 Included within cost of sales is £578.0m (2014: £531.2m) related to cost of inventory recognised as expense. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 13 NOTES TO THE FINANCIAL STATEMENTS 3 Property gains and losses 52 weeks ended 26 July 2015 Before exceptional items £000 52 weeks ended 26 July 2015 Exceptional items (note 4) £000 52 weeks ended 26 July 2015 After exceptional items £000 52 weeks ended 27 July 2014 Before exceptional items £000 52 weeks ended 27 July 2014 Exceptional items (note 4) £000 52 weeks ended 27 July 2014 After exceptional items £000 Loss on disposal of fixed assets Impairment of property, plant and equipment (note 12) Impairment of other assets (note 15) Onerous lease provision/(reversals) (note 22) 694 – – – – 10,705 490 1,858 694 10,705 490 1,858 645 1,192 (180) (228) Total property (gains)/losses 694 13,053 13,747 1,429 – – – – – 645 1,192 (180) (228) 1,429 Impairment charges and onerous lease provisions were considered exceptional in the current year and not in the prior year, owing to the magnitude of the current year charge. Please refer to note 4 for further details on exceptional items. 4 Exceptional items Operating exceptional items Inventory valuation Restructuring costs Exceptional property losses Onerous lease provision Property impairment Other exceptional items Interest payable on gaming machine VAT repayment Income tax expense – current tax Exceptional tax items – deferred tax Tax effect on operating exceptional items Total exceptional items 52 weeks ended 26 July 2015 £000 52 weeks ended 27 July 2014 £000 5,231 782 6,013 1,858 11,195 13,053 – – – – – – – – (4,809) (1,626) 997 (4,375) 21,119 – (6,435) 17,741 12,631 17,741 During the year, the company changed the method used for calculating the consumption of non-consumable inventories. Non-consumable inventories comprise items like glassware, plates, cutlery and cleaning products used in the pubs and hotels. The company has taken a more prudent view on recognition of non-consumable inventories as expenses. The change in the accounting policy for the expected life of those inventories resulted in an exceptional charge of £5,231,000 (2014: £Nil). The effect of this change was not presented as a prior-year adjustment, as management did not believe that previously reported results were materially affected and the treatment adopted provides full information. In the table above, property impairment relates to the situation in which, owing to poor trading performance, pubs are unlikely to generate sufficient cash in the future to justify their current book value. The onerous lease provision relates to pubs for which future trading profits, or income from subleases, are not expected to cover the rent. The provision takes several factors into account, including the expected future profitability of the pub, but also the amount estimated as payable on surrender of the lease, where this is a possible outcome. In the year, £1,858,000 (2014: £Nil) was charged in respect of onerous leases. 14 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 4 Exceptional items continued In the year, an exceptional charge of £11,195,000 (2014: £Nil) was incurred in respect of the impairment of property, plant and equipment, as required under IAS 36. This comprises an impairment charge of £12,383,000 (2014: £Nil), offset by impairment reversals of £1,188,000 (2014: £Nil). A reduction in the deferred tax liability on rolled-over gains for differences between the tax-deductible cost and the residual value of the reinvestment assets has resulted in a credit of £4,809,000. Owing to the magnitude of the reduction and the fact that it relates to prior periods, it was considered exceptional. 5 Employee benefits expenses Wages and salaries Social Security costs Other pension costs Share-based payments Directors’ emoluments Aggregate emoluments Aggregate amount receivable under long-term incentive schemes Company contributions to money purchase pension scheme 52 weeks ended 26 July 2015 £000 52 weeks ended 27 July 2014 £000 406,821 25,291 3,500 8,907 368,335 24,008 3,213 7,521 444,519 403,077 2015 £000 1,438 971 97 2,506 2014 £000 1,623 346 113 2,082 For further details of directors’ emoluments, please see the directors’ remuneration report on pages 51 to 59. The totals below relate to the monthly average number of employees during the year, not the total number of employees at the end of the year (including directors on a service contract). Full-time equivalents Managerial/administration Hourly paid staff Total employees Managerial/administration Hourly paid staff 2015 Number 2014 Number 4,233 17,885 4,419 16,911 22,118 21,330 2015 Number 2014 Number 4,690 30,041 4,419 28,216 34,731 32,635 For details of the Share Incentive Plan and the 2005 Deferred Bonus Scheme, refer to the directors’ remuneration report on pages 51 to 59. The shares awarded as part of the above schemes are based on the cash value of the bonuses at the date of the awards. These awards vest over three years – with their cost spread equally over their three-year life. The share-based payment charge above represents the annual cost of bonuses awarded over the past three years. The company operates two share-based compensation plans. In both schemes, the fair values of the shares granted are determined by reference to the share price at the date of the award. The shares vest at a nil exercise price and there are no market-based conditions to the shares which affect their ability to vest. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 15 NOTES TO THE FINANCIAL STATEMENTS 6 Finance income and costs Finance costs Interest payable on bank loans and overdrafts Amortisation of bank loan issue costs Interest payable on swaps Interest payable on obligations under finance leases Total pre-exceptional finance costs Bank interest receivable Total pre-exceptional finance income Exceptional interest charge (note 4) Net finance costs Further details are provided in note 23. 52 weeks ended 26 July 2015 £000 52 weeks ended 27 July 2014 £000 17,202 2,942 13,812 240 14,290 2,320 19,300 370 34,196 36,280 (180) (180) – (67) (67) 997 34,016 37,210 The net finance costs during the year decreased from £37.2m to £34.0m. The finance costs in the income statement were covered 3.3 times (2014: 3.2 times), on a pre-exceptional basis. 16 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 7 Income tax expense (a) Tax on profit on ordinary activities The standard rate of corporation tax in the UK changed from 21.0% to 20.0%, with effect from 1 April 2015. Accordingly, the company’s profits for this accounting period are taxed at an effective rate of 20.7% (2014: 22.3%). 52 weeks ended 26 July 2015 Before exceptional items £000 52 weeks ended 26 July 2015 Exceptional items (note 4) £000 52 weeks ended 26 July 2015 After exceptional items £000 52 weeks ended 27 July 2014 Before exceptional items £000 52 weeks ended 27 July 2014 Exceptional items (note 4) £000 52 weeks ended 27 July 2014 After exceptional items £000 Current income tax: Current income tax charge Adjustment in respect of prior period 19,885 (1,626) 18,259 17,004 (4,375) 12,629 1,659 – 1,659 – – – Total current income tax 21,544 (1,626) 19,918 17,004 (4,375) 12,629 Deferred tax: Origination and reversal of temporary differences Adjustment in respect of prior period Impact of change in UK tax rate 113 – 113 3,495 21,119 24,614 (1,314) – (4,809) – (6,123) – – – – – – – Total deferred tax (1,201) (4,809) (6,010) 3,495 21,119 24,614 Tax charge in the income statement 20,343 (6,435) 13,908 20,499 16,744 37,243 52 weeks ended 26 July 2015 Before exceptional items £000 52 weeks ended 26 July 2015 Exceptional items (note 4) £000 52 weeks ended 26 July 2015 After exceptional items £000 52 weeks ended 27 July 2014 Before exceptional items £000 52 weeks ended 27 July 2014 Exceptional items (note 4) £000 52 weeks ended 27 July 2014 After exceptional items £000 Tax relating to items charged or credited through equity Tax on share-based payment Current tax Deferred tax Current tax charge on interest-rate swaps Tax charge taken through equity (446) 95 (351) (1,961) (2,312) – – – – – (446) 95 (351) – 663 663 (1,961) 2,776 (2,312) 3,439 – – – – – – 663 663 2,776 3,439 ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 17 NOTES TO THE FINANCIAL STATEMENTS 7 Income tax expense continued (b) Reconciliation of the total tax charge The tax expense after exceptional items in the income statement for the year is higher (2014: lower) than the standard rate of corporation tax in the UK of 20.7% (2014: 22.3%), owing largely to less expenditure qualifying for capital allowances. The differences are reconciled below: 52 weeks ended 26 July 2015 Before exceptional items £000 52 weeks ended 26 July 2015 After exceptional items £000 52 weeks ended 27 July 2014 Before exceptional items £000 52 weeks ended 27 July 2014 After exceptional items £000 Profit before income tax 77,798 58,732 79,362 78,365 Profit multiplied by the UK standard rate of corporation tax of 20.7% (2014: 22.3%) Abortive acquisition costs and disposals Other disallowables Other allowable deductions Non-qualifying depreciation Deduction for shares and SIPs Remeasurement of other balance sheet items Effect of different tax rates and unrecognised losses in overseas companies Adjust opening and closing deferred tax to average of 20.7% Prior period adjustment – current tax Prior period adjustment – deferred tax Adjustment to deferred tax in respect of change in tax rate 16,078 163 155 (33) 3,577 29 (342) 302 69 1,659 (1,314) – 12,138 163 2,469 (33) 3,577 29 (342) 302 69 1,659 (6,123) – 17,722 78 186 (334) 3,654 (69) (331) – – – – (407) 17,499 78 409 (334) 3,654 (69) (331) – – (4,375) 21,119 (407) Total tax expense reported in the income statement 20,343 13,908 20,499 37,243 18 J D WETHERSPOON PLC 7 Income tax expense continued (c) Deferred tax The deferred tax in the balance sheet is as follows: Deferred tax liabilities At 27 July 2014 Prior year movement posted to the income statement Movement during year posted to the income statement NOTES TO THE FINANCIAL STATEMENTS Accelerated tax depreciation £000 79,306 (1,515) 304 Other temporary differences £000 6,766 (4,813) (25) Total £000 86,072 (6,328) 279 At 26 July 2015 78,095 1,928 80,023 Deferred tax assets At 27 July 2014 Movement during year posted to the income statement Prior year movement posted to the income statement Taken through equity At 26 July 2015 Share- based payments £000 Capital losses carried forward £000 Interest-rate swaps Total £000 £000 928 166 – (95) 999 1,458 – (205) – 6,033 – – 1,961 8,419 166 (205) 1,866 1,253 7,994 10,246 The Finance Bill 2015 included legislation to reduce the main rate of corporation tax to 19% for the financial years beginning 1 April 2017, 1 April 2018 and 1 April 2019, and at 18% for the financial year beginning 1 April 2020. These changes had not been substantively enacted at the balance sheet date and consequently are not included in these financial statements. The effect of these proposed reductions would be to reduce the net deferred tax liability to £65.8m at 19% and £62.4m at 18%. Deferred tax assets and liabilities have been offset as follows: Deferred tax liabilities Offset against deferred tax assets Deferred tax liability Deferred tax assets Offset against deferred tax liabilities Deferred tax asset 2015 £000 2014 £000 80,023 (2,252) 86,072 (2,386) 77,771 83,686 10,246 (2,252) 8,419 (2,386) 7,994 6,033 ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 19 NOTES TO THE FINANCIAL STATEMENTS 8 Earnings and cash flow per share Earnings per share are based on the weighted average number of shares in issue of 122,269,948 (2014: 125,312,581), including those held in trust in respect of employee share schemes. Earnings per share, calculated on this basis, are usually referred to as ‘diluted’, since all of the shares in issue are included. Accounting standards refer to ‘basic earnings’ per share, these exclude those shares held in trust in respect of employee share schemes. Weighted average number of shares Shares in issue (used for diluted EPS) Shares held in trust 52 weeks ended 26 July 2015 52 weeks ended 27 July 2014 122,269,948 125,312,581 (4,174,284) (4,063,604) Shares in issue less shares held in trust (used for basic EPS) 118,206,344 121,138,297 The weighted average number of shares held in trust for employee share schemes has been adjusted to exclude those shares which have vested, but which remain in the trust. 52 weeks ended 26 July 2015 Earnings (profit after tax) Exclude effect of exceptional items after tax Adjusted earnings before exceptional items 52 weeks ended 27 July 2014 Earnings (profit after tax) Exclude effect of exceptional items after tax Adjusted earnings before exceptional items Profit £000 Basic EPS pence per ordinary share Diluted EPS pence per ordinary share 44,824 12,631 57,455 37.9 10.7 48.6 36.7 10.3 47.0 Profit £000 Basic EPS pence per ordinary share Diluted EPS pence per ordinary share 41,122 17,741 58,863 33.9 14.7 48.6 32.8 14.2 47.0 Free cash flow per share The calculation of free cash flow per share is based on the net cash generated by business activities and available for investment in new pub developments and extensions to current pubs, after funding interest, corporation tax, all other reinvestment in pubs open at the start of the period and the purchase of own shares under the employee Share Incentive Plan (‘free cash flow’). It is calculated before taking account of proceeds from property disposals, inflows and outflows of financing from outside sources and dividend payments and is based on the weighted average number of shares in issue, including those held in trust in respect of the employee share schemes. Free cash flow per share Free cash flow (£000) Free cash flow per share (p) 20 J D WETHERSPOON PLC 52 weeks ended 26 July 2015 52 weeks ended 27 July 2014 109,778 89.8 92,850 74.1 9 Cash generated from operations Profit for the year Adjusted for: Tax Net impairment charge Net onerous lease provision Loss on disposal of property, plant and equipment Depreciation of property, plant and equipment Amortisation of intangible assets Amortisation of other non-current assets Depreciation on investment properties Aborted properties costs Share-based charges Interest receivable Amortisation of bank loan issue costs Interest payable Exceptional interest Change in inventories Change in receivables Change in payables Cash flow from operating activities 10 Analysis of changes in net debt Borrowings Cash in hand Finance lease creditor – due in one year NOTES TO THE FINANCIAL STATEMENTS 52 weeks ended 26 July 2015 £000 52 weeks ended 27 July 2014 £000 44,824 41,122 13,908 11,195 1,858 694 61,458 4,775 373 62 787 8,907 (180) 2,942 31,254 – 37,243 1,012 (228) 645 54,459 3,254 321 41 339 7,521 (67) 2,320 33,960 997 182,857 2,861 (2,937) 27,400 182,939 (2,455) 39 31,982 210,181 212,505 At 27 July 2014 £000 Cash flows £000 Non-cash movement £000 At 26 July 2015 £000 32,315 (2,636) (140) 2,648 – (2,063) 32,175 (2,051) Current net borrowings 29,679 2,508 (2,063) 30,124 Bank loans – due after one year Finance lease creditor – due after one year (584,167) (2,063) (44,123) – (2,942) 2,063 (631,232) – Non-current net borrowings (586,230) (44,123) (879) (631,232) Net borrowings (556,551) (41,615) (2,942) (601,108) Derivatives Interest-rate swaps – due before one year Current derivatives Interest-rate swap asset – due after one year (note 23) Interest-rate swap liability – due after one year (note 23) Non-current derivatives Total derivatives Net debt (3,149) (3,149) 1,723 (28,740) (27,017) (30,166) – – – – – – 3,149 3,149 – – (1,723) (11,233) – (39,973) (12,956) (39,973) (9,807) (39,973) (586,717) (41,615) (12,749) (641,081) Non-cash movements The non-cash movement in bank loans due after one year relates to the amortisation of bank loan issue costs. The movement in interest-rate swaps of £9.8m relates to the change in the ‘mark to market’ valuations for the year. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 21 NOTES TO THE FINANCIAL STATEMENTS 11 Dividends paid and proposed Declared and paid during the year: Dividends on ordinary shares: – final for 2012/13: 8.0p (2011/12: 8.0p) – interim for 2013/14: 4.0p (2012/13: 4.0p) – final for 2013/14: 8.0p (2012/13: 8.0p) – interim for 2014/15: 4.0p (2013/14: 4.0p) Dividends paid Proposed for approval by shareholders at the AGM: – final dividend for 2014/15: 8.0p (2013/14: 8.0p) Dividend cover (times) 52 weeks ended 26 July 2015 52 weeks ended 27 July 2014 £000 £000 – – 9,761 4,830 9,987 4,962 – – 14,591 14,949 9,782 9,751 3.1 2.8 As detailed in the interim accounts, the board declared and paid an interim dividend of 4.0p for the financial year ended 26 July 2015. Dividend cover is calculated as profit after tax and exceptional items over dividend paid. 12 Property, plant and equipment Cost: At 28 July 2013 Additions Transfers Disposals Reclassification At 27 July 2014 Additions Transfers Exchange differences Transfer to held for sale Disposals Reclassification Freehold and long-leasehold property £000 Short- leasehold property £000 Equipment, fixtures and fittings £000 Assets under construction £000 Total £000 702,446 55,124 23,574 (1,316) 8,471 788,299 63,804 22,383 (6) (1,532) (43) 3,116 412,955 17,272 1,995 (2,692) (8,471) 421,059 11,366 663 (38) – (4,584) (3,116) 426,346 49,721 2,620 (4,429) – 474,258 46,054 7,054 (114) (482) (5,989) – 36,272 45,401 (28,189) – – 53,484 39,395 (30,100) – – – – 1,578,019 167,518 – (8,437) – 1,737,100 160,619 – (158) (2,014) (10,616) – At 26 July 2015 876,021 425,350 520,781 62,779 1,884,931 Accumulated depreciation and impairment: At 28 July 2013 Provided during the period Impairment loss Disposals Reclassification At 27 July 2014 Provided during the period Exchange differences Impairment loss (reversal) Transfer to held for sale Disposals Reclassification 141,044 12,196 2,234 (895) 2,434 157,013 13,335 (1) 3,589 (441) – 954 183,304 13,352 (1,179) (2,910) (2,434) 190,133 14,272 (6) 4,838 – (4,112) (413) 296,202 28,911 137 (3,904) – 321,346 33,851 (18) 2,278 (353) (5,090) – 541 – – – – 541 – – – – – (541) 621,091 54,459 1,192 (7,709) – 669,033 61,458 (25) 10,705 (794) (9,202) – At 26 July 2015 174,449 204,712 352,014 – 731,175 Net book amount at 26 July 2015 701,572 220,638 168,767 62,779 1,153,756 Net book amount at 27 July 2014 631,286 230,926 152,912 52,943 1,068,067 Net book amount at 28 July 2013 561,402 229,651 130,144 35,731 956,928 22 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 12 Property, plant and equipment continued Impairment of property, plant and equipment In assessing whether a pub has been impaired, the book value of the pub is compared with its anticipated future cash flows. Assumptions are used about sales, costs and profit, using a pre-tax discount rate for future years of 8% (2014: 9%). If the value, based on future anticipated cash flows, is lower than the book value, the difference is written off as property impairment. As a result of this exercise, a net impairment loss of £10,705,000 (2014: £1,192,000) was charged to property losses in the income statement, as described in note 3. Management believes that a reasonable change in any of the key assumptions, for example the discount rate applied to each pub, could cause the carrying value of the pub to exceed its recoverable amount, but that the change would be immaterial. Finance leases Certain items of IT equipment are subject to finance leases. The carrying value of these assets, held under finance leases at 26 July 2015, included in equipment, fixtures and fittings, was as follows: Net book value 2015 £000 2014 £000 5,862 8,580 ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 23 NOTES TO THE FINANCIAL STATEMENTS 13 Intangible assets Cost: At 28 July 2013 Additions At 27 July 2014 Additions At 26 July 2015 Accumulated amortisation: At 28 July 2013 Amortisation during the period At 27 July 2014 Amortisation during the period At 26 July 2015 Net book amount at 26 July 2015 Net book amount at 27 July 2014 Net book amount at 28 July 2013 £000 35,493 9,926 45,419 7,934 53,353 15,327 3,254 18,581 4,775 23,356 29,997 26,838 20,166 Amortisation of £4,775,000 (2014: £3,254,000) is included in operating costs in the income statement. The majority of intangible assets relates to computer software and software development. Examples include the development costs of our SAP accounting system and our ‘Wisdom’ property maintenance system. Included in the intangible assets is £5,046,000 of software in the course of development (2014: £9,298,000). Finance leases Certain intangible assets, for example EPOS and accounting systems, have been purchased using finance leases. The amounts below show the reduction in the net book value of assets held under finance leases which are released from security when the debt is repaid. Net book value 2015 £000 580 2014 £000 696 24 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 14 Investment properties The company owns three freehold properties with existing tenants and these assets have been classified as investment properties. Cost: At 28 July 2013 Additions At 27 July 2014 Additions At 26 July 2015 Accumulated depreciation: At 28 July 2013 Depreciation during the period At 27 July 2014 Depreciation during the period At 26 July 2015 Net book amount at 26 July 2015 Net book amount at 27 July 2014 Net book amount at 28 July 2013 £000 – 8,754 8,754 – 8,754 – 41 41 62 103 8,651 8,713 – Rental income received in the period from investment properties was £378,000 (2014: £328,000). Operating costs incurred in relation to these properties amounted to £58,000 (2014: £41,000). In the opinion of the directors, the cost as stated above is equivalent to the fair value of the properties. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 25 NOTES TO THE FINANCIAL STATEMENTS 15 Other non-current assets These assets relate to lease premiums whereby the company has paid a landlord a sum of money to take over the benefit of a lease. Cost: At 28 July 2013 Additions At 27 July 2014 Additions At 26 July 2015 Accumulated amortisation and impairment: At 28 July 2013 Amortisation during the period Impairment reversal At 27 July 2014 Amortisation during the period Impairment loss At 26 July 2015 Net book amount at 26 July 2015 Net book amount at 27 July 2014 Net book amount at 28 July 2013 16 Inventories Lease premiums £000 14,070 10 14,080 1,125 15,205 4,173 321 (180) 4,314 373 490 5,177 10,028 9,766 9,897 Bar, food and non-consumable stock held at our pubs and national distribution centre. Goods for resale at cost 2015 £000 2014 £000 19,451 22,312 The carrying value of inventories has reduced in the year, owing to a change in the accounting policy for non-consumable inventories, please see note 4. 26 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 17 Receivables Receivables relate to situations in which third parties owe the company money. Examples include rebates from suppliers and overpayments of certain taxes. Prepayments relate to payments which have been made in respect of liabilities after the period end. Other receivables Prepayments and accrued income 2015 £000 1,306 25,532 2014 £000 2,568 21,333 26,838 23,901 At the balance sheet date, the company was exposed to a maximum credit risk of £1.3m, of which £0.2m was overdue. The company holds no collateral for these receivables. Within accrued income is £2.0m (2014: £1.8m) of amounts due from suppliers for commercial agreements. 18 Assets held for resale This relates to situations in which the company has decided to sell a property, but the transaction is not yet under contract. As at 26 July 2015, one site was classified as held for sale (2014: none). The major classes of assets held, comprising the site classified as held for sale, was as follows: Property, plant and equipment 19 Cash and cash equivalents Cash at bank and in hand 2015 £000 1,220 2014 £000 – 2015 £000 2014 £000 32,175 32,315 Cash at bank earns interest at floating rates, based on daily bank deposit rates. 20 Trade and other payables This category relates to money owed by the company to suppliers and the government. Accruals refer to allowances made by the company for future anticipated payments to suppliers and other creditors. Trade payables Other payables Other tax and Social Security Accruals and deferred income 2015 £000 2014 £000 135,619 26,401 45,777 75,430 130,476 10,291 42,413 59,980 283,227 243,160 ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 27 NOTES TO THE FINANCIAL STATEMENTS 21 Borrowings Current (due within one year) Finance lease obligations Non-current (due after one year) Bank loans Variable-rate facility Unamortised bank loan issue costs Other Finance lease obligations Total non-current borrowings 2015 £000 2014 £000 2,051 2,636 638,245 (7,013) 590,347 (6,180) 631,232 584,167 – 2,063 631,232 586,230 The finance lease is secured against the company’s till system assets. 22 Provisions At 27 July 2014 Charged to the income statement: - Additional charges - Unused amounts reversed - Used during year Self-insurance £000 Onerous lease £000 Total £000 3,323 4,174 7,497 3,372 (395) (2,175) 2,699 (841) (914) 6,071 (1,236) (3,089) At 26 July 2015 4,125 5,118 9,243 Current Non-current Total provisions 2015 £000 5,231 4,012 2014 £000 4,442 3,055 9,243 7,497 Self-insurance The amounts represent a provision for ongoing legal claims brought against the company by customers and employees in the normal course of business. Owing to the nature of our business, we expect to have a provision for outstanding employee and public liability claims on an ongoing basis. Onerous lease The amount represents a provision for future rent payments on sites which are not expected to generate sufficient profits to cover rents. Also included are provisions on any sublet properties for which rent is not fully recovered. This provision is expected to be utilised over a period of up to 26 years. 28 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 23 Financial instruments The table below analyses the company’s financial liabilities which will be settled on a net basis into relevant maturity groupings, based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Maturity profile of financial liabilities At 26 July 2015 Bank loans Finance lease obligations Trade and other payables Derivatives At 27 July 2014 Bank loans Finance lease obligations Trade and other payables Derivatives Within 1 year £000 18,130 2,102 237,451 26,915 Within 1 year £000 14,543 2,801 200,749 13,887 1–2 years £000 2–3 years £000 3–4 years £000 4–5 years £000 18,130 – – 19,763 18,130 – – 19,657 18,130 – – 13,035 700,034 – – 12,924 1–2 years £000 2–3 years £000 3–4 years £000 4–5 years £000 14,543 2,101 – 12,098 14,543 – – 4,949 609,881 – – 4,830 – – – 12,819 More than 5 years £000 – – – 23,106 More than 5 years £000 – – – 35,937 Total £000 772,554 2,102 237,451 115,400 Total £000 653,510 4,902 200,749 84,520 At the balance sheet date, the company had loan facilities of £840m (2014: £690m) as detailed below: n Unsecured revolving-loan facility of £820m n Matures February 2020 n 11 participating lenders n Overdraft facility of £20m The company has hedged its interest-rate liabilities to its banks by swapping the floating-rate debt into fixed-rate debt which fixed £400m of these borrowings at rates of between 2.43% and 5.52%. The effective weighted average interest rate of the swap agreements is 4.03% (2014: 5.33%), fixed for a weighted average period of 2.3 years (2014: 0.9 years). In addition, the company has entered into forward-starting interest-rate swaps as detailed in the table below. Weighted average by swap period: Total swap value £m From To Weighted average interest % 400 400 400 150 12/11/2014 31/07/2016 31/07/2018 31/07/2021 30/07/2016 30/07/2018 30/07/2021 30/07/2023 3.53 2.19 3.74 3.82 At the balance sheet date, £690m (2014: £600m) was drawn down under the £820m unsecured-term revolving-loan facility. The amounts drawn under this agreement can be varied, depending on the requirements of the business. It is expected that the draw-down required by the company will not drop below £400m for the duration of the interest-rate swaps detailed above. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 29 NOTES TO THE FINANCIAL STATEMENTS 23 Financial instruments continued Interest-rate and currency risks of financial liabilities An analysis of the interest-rate profile of the financial liabilities, after taking account of all interest-rate swaps, is set out in the following table. Analysis of interest-rate profile of the financial liabilities Bank loans Floating-rate due after one year Fixed-rate due after one year Finance lease obligation Fixed-rate due in one year Fixed-rate due after one year 2015 £000 2014 £000 231,232 400,000 184,167 400,000 631,232 584,167 (2,051) – (2,636) (2,063) (2,051) (4,699) The floating-rate borrowings are interest-bearing borrowings at rates based on LIBOR, fixed for periods of up to six months. Capital risk management The company’s capital structure comprises shareholders’ equity and loans. The objective of capital management is to ensure that the company is able to continue as a going concern and provide shareholders with returns on their investment, while managing risk. The company does not have a specific measure for managing capital structure; instead, the company plans its capital requirements and manages its loans, dividends and share buybacks accordingly. The company measures loans using a ratio of net debt to EBITDA which was 3.37 times (2014: 3.21 times) at the year end. Section 2 on page 42 discusses the financial risks associated with financial instruments, including credit risk and liquidity risk. Obligations under finance leases The minimum lease payments under finance leases fall due as follows: Within one year In the second to fifth year, inclusive Less future finance charges Present value of lease obligations Less amount due for settlement within one year 2015 £000 2,101 – 2014 £000 2,801 2,101 2,101 4,902 (50) (203) 2,051 4,699 (2,051) (2,801) Amount due for settlement during the second to fifth year, inclusive – 1,898 All finance lease obligations are in respect of various equipment and software used in the business. No escalation clauses are included in the agreements. 30 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 23 Financial instruments continued Fair values In some cases, payments which are due to be made in the future by the company or due to be received by the company have to be given a fair value. The table below highlights any differences between book value and fair value of financial instruments. Loans and receivables Cash and cash equivalents Receivables Financial liabilities at amortised cost Trade and other payables Finance lease obligations Long-term borrowings Derivatives used for hedging Interest-rate swap liabilities: cash flow hedges Interest-rate swap assets: cash flow hedges 2015 Book value £000 2015 Fair value £000 2014 Book value £000 2014 Fair value £000 32,175 1,306 32,175 1,306 32,315 2,568 32,315 2,568 33,481 33,481 34,883 34,883 (237,451) (2,051) (631,232) (237,451) (2,051) (644,736) (200,749) (4,699) (584,167) (200,749) (4,751) (616,384) (870,734) (884,238) (789,615) (821,884) (39,973) – (39,973) – (31,889) 1,723 (31,889) 1,723 (39,973) (39,973) (30,166) (30,166) The fair value of finance leases has been calculated by discounting the expected cash flows at the year end’s prevailing interest rates. The fair value of derivatives has been calculated by discounting all future cash flows by the market yield curve at the balance sheet date. The fair value of borrowings has been calculated by discounting the expected future cash flows at the year end’s prevailing interest rates. Interest-rate swaps At 26 July 2015, the company had fixed-rate swaps designated as hedges of floating-rate borrowings. The floating-rate borrowings are interest-bearing borrowings at rates based on LIBOR, fixed for periods of up to six months. The interest-rate swaps of the floating-rate borrowings were assessed to be effective; a cumulative net loss of £39,973,000 (2014: a loss of £30,166,000), with a deferred tax credit of £7,994,000 (2014: a credit of £6,033,000), relating to the hedging instrument, is included in equity. A debit of £9,807,000 (2014: credit of £13,879,000) before deferred tax for the year is reflected in equity. Fair value of financial assets and liabilities IFRS 7 requires disclosure of fair value measurements by level, using the following fair value measurement hierarchy: – Quoted prices in active markets for identical assets or liabilities (level 1) – Inputs other than quoted prices included in level 1 which are observable for the asset or liability, either directly or indirectly (level 2) – Inputs for the asset or liability which are not based on observable market data (level 3) The fair value of the interest-rate swaps of £40.0m is considered to be level 2. All other financial assets and liabilities are measured in the balance sheet at amortised cost, and their valuation is also considered to be level 2. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 31 NOTES TO THE FINANCIAL STATEMENTS 23 Financial instruments continued Offsetting financial assets and financial liabilities Gross amounts of recognised financial liabilities £000 Gross amounts of recognised financial assets set off in the balance sheet £000 Net amounts of financial liabilities presented in the balance sheet £000 Related amounts not set off in the balance sheet Financial instruments £000 Net amount £000 As at 26 July 2015 Interest-rate swap Long-term borrowings Trade payables 39,973 690,266 135,619 – (59,034) – 39,973 631,232 135,619 Total 865,858 (59,034) 806,824 – – – – 39,973 631,232 135,619 806,824 As at 27 July 2014 Interest-rate swap Long-term borrowings Trade payables 31,889 603,185 130,476 – (19,018) – 31,889 584,167 130,476 (284) – – 31,605 584,167 130,476 Total 765,550 (19,018) 746,532 (284) 746,248 Gross amounts of recognised financial assets £000 Gross amounts of recognised financial liabilities set off in the balance sheet £000 Net amounts of financial assets presented in the balance sheet £000 Related amounts not set off in the balance sheet Financial instruments £000 – – – (284) – Net amount £000 – 1,306 1,306 1,439 2,568 – (65) (65) – (135) – 1,306 1,306 1,723 2,568 (135) 4,291 (284) 4,007 As at 26 July 2015 Interest-rate swap Other receivables Total As at 27 July 2014 Interest-rate swap Other receivables Total – 1,371 1,371 1,723 2,703 4,426 32 J D WETHERSPOON PLC 24 Other liabilities Operating lease incentives NOTES TO THE FINANCIAL STATEMENTS 2015 £000 2014 £000 13,667 13,530 Included in other liabilities are lease incentives on leases where the lessor retains substantially all of the risks and benefits of ownership of the asset. The lease incentives are recognised as a reduction in rent over the lease term and shown as a liability on the balance sheet. The weighted average period to maturity of operating lease incentives is 6.5 years (2014: 6.8 years). 25 Financial commitments About 51% of the company’s pubs are leasehold. New leases are normally for 30 years, with a break clause after 15 years. Most leases have upwards-only rent reviews, based on open-market rental at the time of review, but most new pub leases have an uplift in rent which is fixed at the start of the lease. The minimum aggregate contractual operating lease commitments fall due as follows: Land and buildings Within one year Between two and five years After five years 2015 £000 2014 £000 64,603 239,783 829,201 67,083 252,484 841,857 1,133,587 1,161,424 The company has some lease commitments, with rentals determined in relation to sales. An estimate of the future minimum rental payments under such leases of £64.6m (2014: £67.1m) is included above. The company has sublet certain units or receives a rental income with respect to properties with space ancillary to that of the pub. The minimum aggregate contractual operating lease rentals due to the company are as follows: Land and buildings Within one year Between two and five years After five years 26 Capital commitments 2015 £000 2,010 6,455 10,161 2014 £000 1,773 6,234 9,566 18,626 17,573 The company had £8.2m of capital commitments, relating to the purchase of three sites, for which no provision had been made, in respect of property, plant and equipment, at 26 July 2015 (2014: £3.0m). The company had some other sites in the property pipeline; however, any legal commitment is contingent on planning and licensing. Therefore, there are no commitments at the balance sheet date. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 33 NOTES TO THE FINANCIAL STATEMENTS 27 Related-party disclosures No transactions have been entered into with related parties during the year. J D Wetherspoon is the owner of the share capital of the following companies: Company name Country of incorporation J D Wetherspoon (Scot) Limited J D Wetherspoon Property Holdings Limited Moon and Spoon Limited Moon and Stars Limited Moon on the Hill Limited Moorsom & Co Limited Sylvan Moon Limited Scotland England England England England England England Ownership Wholly owned Wholly owned Wholly owned Wholly owned Wholly owned Wholly owned Wholly owned All of these companies are dormant and contain no assets or liabilities and are, therefore, immaterial. As a result, consolidated accounts have not been produced. The company has an overseas branch located in the Republic of Ireland. As required by IAS 24, the following information is disclosed about key management compensation. Key management compensation Short-term employee benefits Post-employment pension benefits Other long-term benefits 2015 £000 2,370 194 1,859 2014 £000 2,763 193 765 4,423 3,721 Key management comprises the executive directors and management board, as on page 48. For additional information about directors’ emoluments, please refer to the directors’ remuneration report on pages 51 to 59. Directors’ interests in employee share plans Details of the shares held by executive members of the board of directors are included in the remuneration report on pages 51 to 59 which forms part of these financial statements. 34 J D WETHERSPOON PLC 28 Share capital At 28 July 2013 Repurchase of shares At 27 July 2014 Repurchase of shares At 26 July 2015 NOTES TO THE FINANCIAL STATEMENTS Number of shares 000 126,036 (3,068) 122,968 (3,619) Share capital £000 2,521 (61) 2,460 (73) 119,349 2,387 The total authorised number of 2p ordinary shares is 500 million (2014: 500 million). All issued shares are fully paid. In the year, there were no proceeds from the issue of shares (2014: £Nil). During the year, 3,618,827 shares were repurchased by the company for cancellation, representing approximately 2.9% of the issued share capital, at a cost of £26.9m, including stamp duty, representing an average cost per share of 743p. At the year end, the company had a liability for share purchases of £14.2m which was settled post year end. While the memorandum and articles of association allow for preferred, deferred or special rights to attach to ordinary shares, no shares carried such rights at the balance sheet date. 29 Events after the balance sheet date There were no significant events after the balance sheet date. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 35 AUTHORISATION OF FINANCIAL STATEMENTS AND STATEMENT OF COMPLIANCE WITH IFRSs SECTION 2 The financial statements of J D Wetherspoon plc (the ‘Company’) for the year ended 26 July 2015 were authorised for issue by the board of directors on 10 September 2015, and the balance sheet was signed on the board’s behalf by J Hutson and S Cacioppo. J D Wetherspoon plc is a public limited company, incorporated and domiciled in England and Wales. The Company’s ordinary shares are traded on the London Stock Exchange. The Company’s financial statements have been prepared in accordance with the EU-endorsed IFRSs and IFRSIC (IFRS Interpretations Committee) interpretations as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006 as applicable to companies reporting under IFRS. The principal accounting policies adopted by the Company are set out on pages 37 to 40. 36 J D WETHERSPOON PLC ACCOUNTING POLICIES Basis of preparation The financial statements of the Company have been prepared in accordance with IFRSs as adopted by the EU, IFRSIC interpretations and the Companies Act 2006, applicable to companies reporting under IFRS. The financial statements have been prepared on the going-concern basis, using historical cost convention, except for the revaluation of financial instruments. The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 26 July 2015. These policies have been consistently applied to all of the years presented, unless otherwise stated. Important estimates and judgements Estimates and judgements are based on historical experience and other factors, including expectations of future events which are believed to be reasonable and constitute management’s best judgement at the date of the financial statements. Actual experience may differ from these estimates. Complex areas on judgement or estimates involving sums which are significant to the accounts are disclosed below. Impairment of property, plant and equipment The Company determines whether a trading pub should be impaired by comparing its net book value with future cash flows (‘value in use’), having made certain assumptions about sales, costs and profit and applying a pre-tax discount rate for future years of 8%. Pubs and pub sites which the Company intends to sell, or might sell, are impaired if the expected net sale proceeds (‘fair value’) are less than the book value. Fair value (less the costs of selling the assets) is determined using external and internal estimates of the value of the Company’s pubs. The value in use is calculated using the estimated earnings and cash flows derived by management estimates and applying a suitable pre-tax discount rate to these cash flows. At each reporting date, the Company assesses whether an asset may be impaired. Any changes in the level of forecast earnings or cash flows, the discount rate applied to those or the estimate in sale proceeds/fair value could give rise to an additional or reduced impairment provision. If a previously recognised impairment loss is reversed, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount which would have been determined, net of depreciation, had no impairment loss been recognised for the asset in previous years. After such a reversal, the depreciation charge is adjusted in future periods, to allocate the asset’s revised carrying amount, less any residual value, over its remaining useful life. Onerous leases A provision for onerous leases is made for pubs for which future trading profits, or income from subleases, are not expected to cover rent. The provision takes several factors into account, including the expected future profitability of the pub and the amount estimated as payable on surrender of the lease, where this is a possible outcome. Hedging The Company adopts hedge accounting, meaning that the effective portion of the changes in the fair value of the derivatives is dealt with in other comprehensive income. Any gain or loss relating to the ineffective portion would be recognised immediately in the income statement. The Company makes assumptions on the requirements for future borrowings, as well as future interest rates, when assessing the effectiveness of interest-rate swaps. Changes in the forecast amount of future borrowings or interest rates may result in all or part of the gain or loss, which was originally reported in equity, being transferred to the income statement. Exceptional items A degree of judgement is required in determining whether certain transactions merit separate presentation to allow shareholders to better understand financial performance in the year, when compared with previous years and trends. Taxation Significant judgement is required to determine the provision for taxes, as the tax treatment for some transactions cannot be fully determined until a formal resolution has been reached with the tax authorities. Tax benefits are not recognised until it is probable that the benefit will be obtained. Segmental reporting The Company operates predominantly one type of business (pubs) in the United Kingdom and the Republic of Ireland. Given the immaterial size of the Company’s hotel business and trading presence in the Republic of Ireland, these have not been separately disclosed as a business segment. Exceptional items The Company presents, on the face of the income statement, those material items of income and expense which, because of the nature and magnitude of the event giving rise to them, merit separate presentation to allow shareholders to better understand the elements of financial performance in the year. This helps to facilitate comparison with previous years and to better assess trends in financial performance. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 37 ACCOUNTING POLICIES Property gains and losses The Company defines property gains and losses as those items of income and expenditure which are the result of owning and leasing assets which are non-recurring in nature. These include the impairment of fixed assets, movements in the onerous lease provision and proceeds and costs from the disposal of assets. These items are presented on the face of the income statement to more clearly show the Company’s underlying performance. Property, plant and equipment Property, plant and equipment is stated at cost or deemed cost, less accumulated depreciation and any impairment in value. Cost of assets includes acquisition costs, as well as other directly attributable costs in bringing the asset into use. Depreciation is charged on a straight-line basis, over the estimated useful life of the asset as follows: Freehold land is not depreciated. Freehold and long-leasehold buildings are depreciated to their estimated residual values over 50 years. Short-leasehold buildings are depreciated over the lease period. Equipment, fixtures and fittings are depreciated over 3 to 10 years. Unopened properties are not depreciated until such time as economic benefits are derived. Residual values and useful economic lives are reviewed and adjusted, if appropriate, at each balance sheet date. Profits and losses on disposal of property, plant and equipment reflect the difference between the net selling price and the carrying amount at the date of disposal and are recognised in the income statement. Impairment losses are recognised in the income statement in those expense categories consistent with the function of the impaired asset. Intangible assets Intangible assets are carried at cost, less accumulated amortisation and accumulated impairment losses. Intangible assets with a finite life are amortised on a straight-line basis over their expected useful life, as follows: Computer software, including related development and implementation costs – 3 to 10 years. The carrying value of intangible assets is reviewed annually for impairment, in case there has been an event 38 J D WETHERSPOON PLC or change in circumstances indicating that the carrying value may not be recoverable. Investment property Freehold properties which are held primarily to derive a rental income and for which there is no immediate intention to develop into Wetherspoon pubs are classified as investment properties. These properties are stated at cost, less accumulated depreciation and any impairment in value and depreciated in line with the accounting policy for freehold land and buildings. Lease premiums Payments made on entering into or acquiring leaseholds which are accounted for as operating leases represent prepaid lease payments. These are amortised on a straight- line basis, over the lease term to the next break clause. Lease premiums are disclosed as other non-current assets. Assets held for sale Where the value of an asset will be recovered through a sale transaction, rather than continuing use, the asset is classified as held for sale. Assets held for sale are valued at the lower of book value and fair value, less any costs of disposal, and are no longer depreciated. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated on a weighted average basis, with net realisable value being the estimated selling price, less any costs of disposal. Provision is made for obsolete, slow-moving or damaged inventory, where appropriate. Bar and food inventory is recognised as an expense when sold. Non-consumable inventory is recognised as an expense immediately on receipt at a pub or hotel. The policy on non-consumable inventory was introduced in the current financial period. Provisions Provisions are recognised when the Company has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the obligation’s amount. Revenue recognition Revenue recognised at the time of sale is the fair value of bar, food, slot machine and hotel room sales, after deducting discounts and sales-based taxes. Revenue from hotel rooms is recognised when rooms are occupied and as services are provided, after deduction of discounts and sales-based taxes. Leases Leases where the Company assumes substantially all of the risks and rewards of ownership are classified as ACCOUNTING POLICIES finance leases. Assets acquired under finance leases are capitalised at the lower of their fair value and the present value of future lease payments. The corresponding liability is included in the balance sheet as a finance lease payable. Finance charges included in lease payments are charged as an expense to the income statement, while the asset is depreciated in line with the accounting policy for property, plant and equipment. Leases where the lessor retains substantially all of the asset’s risks and benefits of ownership are classified as operating leases. If the operating lease is subject to fixed uplifts over the term of the lease, rental payments are charged to the income statement on a straight-line basis, over the period of the lease, in line with adopted accounting standards. If the operating lease is subject to open-market rents, rental payments are charged at the prevailing rates. Income tax is charged or credited directly to equity, if it relates to items which are credited or charged to equity. Otherwise, income tax is recognised in the income statement. Free cash flow The calculation of free cash flow is based on the net cash generated by business activities after funding interest, corporation tax, loan issue cost, all reinvestment in information technology, head office and pubs trading at the start of the period (excluding extensions) and the purchase of own shares under the employee share-based plan. Financial instruments Financial assets and liabilities are recognised on the date on which the Company becomes party to the contractual provisions of the instrument giving rise to the asset or liability. The Company also has concession rentals payable, based on turnover. These are charged to operating profit at the higher of minimum contractual obligations under the agreements or based as a percentage of turnover. Financial assets The Company classifies its financial assets as loans and receivables. The Company has no assets which would fall into a category outside of loans and receivables. Lease incentives Lease incentives are recognised as a reduction of rental expense to the break clause. These are amortised on a straight-line basis. Borrowing costs Borrowing costs are recognised as an expense in the period in which they are incurred, unless the requirements by the adopted accounting standards for the capitalisation of borrowing costs relating to assets are met. Income taxes Current tax assets and liabilities are measured at the amount expected to be recovered from, or paid to, the taxation authorities, based on tax rates and laws which are enacted or substantively enacted by the balance sheet date. Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions: n Where the temporary difference arises from an asset or liability in a transaction which, at the time of the transaction, affects neither accounting nor taxable profit or loss. n Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried-forward tax credits or tax losses can be utilised. Deferred income tax assets and liabilities are measured at the tax rates which are expected to apply when the related asset is realised or liability settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments which are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables comprise ‘other receivables’ and ‘cash and cash equivalents’ on the balance sheet. Receivables Other receivables are recognised initially at fair value and carried at amortised cost less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified. Cash and cash equivalents Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits. For the purpose of the cash flow statement, cash and cash equivalents comprise cash and short-term deposits as defined above. Bank overdrafts are shown within current financial liabilities on the balance sheet. Financial liabilities The Company classifies its financial liabilities as other financial liabilities. The Company currently has no liabilities which would fall outside of this category, with the exception of interest-rate swaps which are described below in the section dealing with hedging and are classified as fair value through profit and loss. Other financial liabilities are measured at fair value on initial recognition and subsequently measured at amortised cost, using the effective-interest method. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 39 ACCOUNTING POLICIES Trade and other payables Trade and other payables are recognised initially at fair value and subsequently at amortised cost, using the effective-interest method. Bank loans and borrowings Interest-bearing bank loans and other borrowings are recorded initially at fair value of consideration received, net of direct issue costs. Borrowings are subsequently recorded at amortised cost, with any difference between the amount recorded initially and the redemption value recognised in the income statement over the period of the bank loans, using the effective-interest method. Bank loans and loan notes are classified as current liabilities, unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Derivative financial instruments and hedging activities Derivative financial instruments used by the Company are stated at fair value on initial recognition and at subsequent balance sheet dates. Hedge accounting is used only where, at the inception of the hedge, there is formal designation and documentation of the hedging relationship, it meets the Company’s risk-management objective for undertaking the hedge and it is expected to be highly effective. Interest-rate swaps Interest-rate swaps are classified as hedges where they hedge exposure to cash flow variability in interest rates. For interest-rate swaps, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in the income statement within ‘fair value gain/loss on financial derivatives’. Amounts taken to equity are transferred to the income statement only when the hedged transaction is assessed to be ineffective, when considering the Company’s forecast debt levels for the period of time for which the swaps are in place. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Foreign currencies Transactions denominated in foreign currencies are recorded at the rates of exchange prevailing at the date of transaction. Monetary assets and liabilities are translated at the year-end exchange rates, with the resulting exchange differences taken to the income statement. 40 J D WETHERSPOON PLC Retirement benefits Contributions to personal pension schemes are recognised in the income statement in the period in which they fall due. All contributions are in respect of a defined contribution scheme. The Company has no future payment obligations, once the contributions have been paid. Dividends Dividends recommended by the board, but unpaid at each period end, are not recognised in the financial statements until they are paid (in the case of the interim dividend) or approved by shareholders at the annual general meeting (in the case of the final dividend). Changes in net debt Changes in net debt are both the cash and non-cash movements of the year, including movements in derivative financial instruments, of finance leases, borrowings, cash and cash equivalents. Share-based charges The Company has an employee share incentive plan which awards shares to qualifying employees; there is also a deferred bonus scheme which awards shares to directors and senior managers, subject to specific performance criteria. The cost of the awards in respect of these plans is measured by reference to the fair value at the date at which they are granted and is amortised as an expense over the vesting period. In valuing these transactions, no account is taken of any vesting conditions, other than market conditions linked to the price of the shares of the Company. The Company currently has no other share-based transactions. Changes in standards The following new standards, amendments to standards or interpretations were mandatory for the first time for the financial year beginning 28 July 2014 and have a minimal impact on the financial statements: n IFRS 10, ‘Consolidated financial statements’ n Amendments to IAS 32, ‘Financial instruments: Presentation’ n Amendments to IAS 36, ‘Impairment to assets’ n Amendments to IAS 39, ‘Financial instruments: Recognition and measurement’ The following amendments were mandatory for the first time for the financial year beginning 28 July 2014, but are not relevant for the Company: n IFRS 11, ‘Joint arrangements’ n IFRS 12, ‘Disclosure of interests in other entities’ n Amendments to IFRS 10, 12 and IAS 27, on consolidation for investment entities n Amendments to IAS 39, ‘Novation of derivatives and hedge accounting’ n IFRIC 21, ‘Levies’ STRATEGIC REPORT Strategy The Company’s strategy is to acquire freehold and leasehold buildings and to obtain the necessary permissions to convert them into Wetherspoon pubs. The buildings are normally in or near town centres or in suburban locations. Our aim is to increase like-for-like sales, profits and earnings per share. Our strategy is to seek a return on capital in excess of the cost of the capital which will provide profit for new pub developments, dividends and funds for reinvestment in the existing business. Business model Wetherspoon owns and operates pubs throughout the UK and aims to sell high-quality products, at reasonable prices, in attractive and well-maintained premises. The Company aims to make lots of small improvements to its pubs, once they are open, so that sales and profit are maintained or improved. The Company aims to recruit and retain a high standard of employee, partly by allocating a considerable percentage of profit as bonuses to pub employees and partly through a number of training programmes which help to achieve these objectives. Business review and future trends A review of the Company’s business and the key measures of its performance, sometimes called key performance indicators (KPIs), can be found in the chairman’s statement under the financial performance section. The chairman’s statement also discusses trends and factors likely to affect the future development, performance and position of the Company. Environment and human rights As regards human rights, our policy is to observe a wide range of legislation, designed to encourage and promote equal opportunities and protect human rights. Wetherspoon’s main contribution in this area relates to creating jobs for large numbers of people, paying a reasonable percentage of its profits as bonus for those working in our pubs and head office, training large numbers of staff and paying a significant percentage of our sales as taxes to the government. All of these factors help to create income for employees and the government, contributing directly and indirectly to the promotion of human rights. Further information about the Company’s environmental, employee and social policies is published on the Company’s website: www.jdwetherspoon.co.uk Employee diversity The table below shows the breakdown of directors, senior managers and employees. Directors Senior managers All employees Male Female 5 809 3 527 17,865 18,621 Principal risks and uncertainties facing the Company In the course of normal business, the Company continually assesses significant risks faced and takes action to mitigate their potential impact. The following risks, while not intended to be a comprehensive analysis, constitute (in the opinion of the board) the principal risks and uncertainties currently facing the Company: Strategic risks Economic outlook The Company aims to improve its customer offering continually, so that it remains competitively placed in the market in which it operates. Adverse economic conditions can theoretically have an effect on the Company’s performance, although, historically, these effects have been muted. Regulation of the sale of alcohol The pub business is highly regulated, with frequent increases in alcohol duty and other taxes – a feature of the industry for many decades. Commercial risks Cost increases Inflationary pressures on the Company’s costs pose a risk to profits, although the Company has been able to achieve satisfactory arrangements with its suppliers, up until now, in both good and difficult economic conditions. Operational risks Health and safety The Company endeavours to ensure that all reasonable standards of health and safety are met, by trying to identify risks and taking action to avert problems. Supply chain risks It is fundamental to our operations that we should be able to supply our pubs with the required goods and services. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 41 valuation of the interest-rate swaps into which the Company has entered, calculated by a 1% shift of the market yield curve. The Company considers that a 1% movement in interest rates represents a reasonable sensitivity to potential changes. However, this analysis is for illustrative purposes only. Credit risk The Company does not have a significant concentration of credit risk, as the majority of its revenue is in cash. At the balance sheet date, the Company was exposed to a maximum credit risk of £1.3m, of which £0.2m was overdue. Cash deposits with financial institutions and derivative transactions are permitted with investment-grade financial institutions only. The Company receives a small amount of income from properties which it has sublet to third parties, but the sums involved from any one letting are immaterial. Liquidity risk The Company regularly monitors cash flow forecasts and endeavours to ensure that there are enough funds, including committed bank and finance lease facilities, to meet its business requirements and comply with banking covenants. The risks in this area relate to miscalculating cash flow requirements, being unable to renew credit facilities or a substantial fall in sales and profits. Foreign currency Foreign exchange exposure is currently not significant to the Company. The Company monitors the growth and risks associated with its overseas operations and will undertake hedging activities as and when they are required. By order of the board Nigel Connor Company Secretary 10 September 2015 STRATEGIC REPORT We work closely with our suppliers and central distribution partners, in order to maintain availability of products, at all times. Head office and national distribution centre Any disasters at the Company’s head office (in Watford) or its national distribution centre (in Daventry) could seriously disrupt its daily operations. Various measures have been undertaken by the Company, including a comprehensive disaster-recovery plan, seeking to minimise the impact of any such incidents. Information technology The Company’s daily operations are increasingly reliant on its information technology systems. Any prolonged or significant failure of these systems could pose a risk to trading. The Company seeks to minimise this risk by ensuring that there are policies and procedures to ensure protection of hardware, software and information (by various means), including a disaster-recovery plan, a system of backups and external hardware and software. Reputational risk The Company is aware that, in operating in a consumer- facing business, its business reputation, built over many years, can be damaged in a significantly shorter timeframe. The Company, therefore, in its daily business, maintains substantial efforts in this area to improve operational controls. Financial risks Capital risk management The Company aims to maintain reasonable levels of capital and debt. Debt always involves risk, although the Company has always been able to fulfil its obligations under its loan agreements. Sales, profitability, debt requirements and cash flow are reviewed weekly by a team which includes the chairman, chief executive, finance director and senior finance managers. Interest-rate risk The Company has dealt with the risks of an increase in interest rates by swapping the majority of its floating-rate borrowings into fixed rates which expire in 2023 (see note 23). During the 52 weeks ended 26 July 2015, if the interest rates on UK-denominated borrowings had been 1% higher, with all other variables constant, pre-tax profit for the year would have been reduced by £2,471,000 and equity increased by £27,039,000. The movement in equity arises from a change in the ‘mark to market’ 42 J D WETHERSPOON PLC INDEPENDENT AUDITORS’ REPORT to the members of J D Wetherspoon plc Report on the financial statements Our audit approach Overview Materiality n Overall materiality: £3.89m which represents 5% of profit before tax and before exceptional items. Audit scope n The Company comprises one legal entity in the UK with an immaterial branch in the Republic of Ireland and, accordingly, our audit is focused on J D Wetherspoon plc in the UK. No significant work is performed on the Republic of Ireland branch as a standalone entity, owing to its immateriality. Areas of focus n Impairment of property, plant and equipment. n Provisions for onerous leases. n Exceptional items. The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as “areas of focus” in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit. Our opinion In our opinion, J D Wetherspoon plc’s financial statements (the “financial statements”): n give a true and fair view of the state of the Company’s affairs as at 26 July 2015 and of its profit and cash flows for the 52 week period (the “period”) then ended; n have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; and n have been prepared in accordance with the requirements of the Companies Act 2006. What we have audited The financial statements comprise: n the balance sheet as at 26 July 2015; n the income statement and statement of comprehensive income for the period then ended; n the cash flow statement for the period then ended; n the statement of changes in shareholders' equity for the period then ended; n the accounting policies; and n the notes to the financial statements, which include other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report and Financial Statements (the “Annual Report”), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and IFRSs as adopted by the European Union. Our audit approach Overview The context to our audit Our 2015 audit was planned and executed having regard to the fact that J D Wetherspoon’s operations were largely unchanged in nature from the previous year and the UK economy had a level of underlying low growth with no significant regulatory changes impacting the pub sector. In light of this, our approach to the audit in terms of scoping and areas of focus was largely unchanged, albeit we no longer had the determination of deferred tax liabilities as a heightened risk following the agreement reached by J D Wetherspoon in the prior year with HMRC as to items that would be deemed as qualifying capital expenditure for capital allowance purposes. We also had regard to the heightened regulatory focus on commercial income, but whilst we increased our work on this area, it was not a significant area of focus given the size of the amounts involved and the relative lack of complexity. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 43 INDEPENDENT AUDITORS’ REPORT Area of focus How our audit addressed the area of focus Impairment of property, plant and equipment As set out in note 12 to the financial statements the Company has a large portfolio of pubs with a net book value of £1.2 billion. Given the size of the amounts capitalised and the risk attendant with any sizeable retail business that some units may prove to be unprofitable, we focused on the assessment made by management of any impairment of property, plant and equipment required at an individual pub level. We assessed management’s impairment paper and underlying analysis and challenged the assumptions adopted by management in performing its review. These included discount rates and individual pub profitability forecasts. We tested the profitability forecast on an individual pub basis and focused our detailed work on those pubs which had either previously been impaired or where anticipated future cash flows suggested that a potential impairment may be required. We used our valuation specialists and external market data to assess the appropriateness of the discount rate used. We considered that the discount rate applied was appropriate. We tested management’s budgeting accuracy by comparing a sample of individual pub’s budgeted profit against forecast profits for the 2015 year end for evidence of the reliability of the Company’s budgeting process. We factored the results of this work into our broader impairment assessment. We tested, with reference to the entire pub estate, that all pubs which initial assessments identified as potentially not generating sufficient cash to cover the capital base, were subject to more detailed scrutiny. No issues arose from this work. We discussed the action plans in place and evaluated the reasonableness of those plans, where possible, for underperforming pubs where no impairment had been booked. We further tested whether the required pub profitability improvement had been attained by the relevant pub historically. We then scrutinised detailed analyses of individual pub’s performance and action plans in place to enhance profitability to corroborate explanations provided to us by management as to the decision to impair or not or to reverse a previous impairment. In addition we challenged management in relation to certain pubs where impairments were booked as to whether their decision to impair was appropriate. Our view was that whilst the process that management followed to determine any impairment/reversal involved significant judgements it was robust and that impairments and reversals booked were reasonable. Furthermore we found no obvious indication of bias in the adjustments booked. In instances where pubs had been sold, or surrender premiums agreed, we agreed this back to third-party documentation. 44 J D WETHERSPOON PLC INDEPENDENT AUDITORS’ REPORT Area of focus How our audit addressed the area of focus Provisions for onerous leases Of the portfolio of pubs noted in the area of focus above, a large number are leasehold and, as a result, the company is committed to significant future lease payments as set out in note 24 to the financial statements. In the case of the Company’s leasehold pubs, there is a risk that underperforming pubs may not be able to generate sufficient profit to cover their lease obligations and, as a result, require an onerous lease provision. As set out in note 22 the company holds a provision of £5.1m for future lease obligations where the cost of those obligations exceeds the economic benefits expected to be received under the lease. We focused on this area because of the size of the leasehold portfolio, the significant judgements involved in identifying which pubs require a provision and the estimates involved in the calculation of the provision, including estimation of future cash flows at each pub and appropriate discount rates. Exceptional items As set out in note 4 the financial statements include a net charge of £12.6m in respect of exceptional items. We focused on this area because exceptional items are not defined by IFRSs as adopted by the European Union and it therefore requires judgment by the directors to identify such items. Consistency in identifying and disclosing items as exceptional is important to maintain comparability of the results year on year. We checked and validated that all pubs in the portfolio were considered in the process which management used to identify pubs which were potentially subject to onerous leases. We tested details of rental obligations to rental agreements for a sample of pubs in order to assess whether the rental commitments used by management in its calculations were appropriate with no issues arising from this work. We checked the calculations used by management to identify pubs where indications existed, for individual pubs, that future profits were not expected to cover future lease commitments associated with the related pub. We discussed the action plans in place and evaluated the reasonableness of those plans, where possible, for underperforming pubs where no provision had been booked. No issues arose to suggest that any pubs had been inappropriately excluded from the provision calculation. For all pubs identified as potentially having onerous leases we tested the calculation of the net present value of future cash flows used to determine the provisions recorded. Additionally we assessed the discount rate used for appropriateness by comparing it with the Company’s marginal borrowing rate satisfying ourselves that the provisions booked were appropriate. We further checked that the disclosures in the financial statements, in relation to onerous lease provisions fairly reflected the results of the calculations undertaken. We tested the presentation of the exceptional items in the financial statements by assessing whether the classification was in line with the Company’s accounting policy on exceptional items set out on page 37 of the financial statements. We found that the classifications determined by management complied with the Company’s definition of exceptional items. We also assessed the appropriateness of this policy and whether separating out the items included within exceptional items enhanced the understanding of the financial statements. Our view was that it did. There were five exceptional items in the year: a net impairment charge against property, a charge in respect of onerous leases, a one-off write-off of non-consumable inventory, a charge for redundancy costs incurred in the period and a tax credit arising from a change in the calculation of deferred tax in relation to rolled-over gains. In relation to the change in policy to write off non consumable inventory of £5.2m we specifically considered whether it would have been more appropriate to restate comparatives as if this policy had been in force previously but agreed with management’s view that no previously reported period would be materially impacted by the change and that the inclusion as an exceptional item with suitable description provided the information necessary to understand the amounts involved and the impact on the financial statements. We also debated with management whether the redundancy costs of £0.8m were of a sufficient scale to reflect as exceptional costs. Our view was that this treatment provided more insight into this cost and did not significantly distort the reported results. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 45 INDEPENDENT AUDITORS’ REPORT How we tailored the audit scope As noted above, other than an immaterial branch in Ireland, J D Wetherspoon’s operations are all in the UK through one legal entity. We therefore subjected this entity to a full scope audit. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Other required reporting Consistency of other information Companies Act 2006 opinions In our opinion: n the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and n the information given in the Corporate Governance Statement set out on pages 60 to 65 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements. ISAs (UK & Ireland) reporting Overall materiality £3.89m (2014: £3.95m). Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: n information in the Annual Report is: n materially inconsistent with the information in the audited financial statements; or n apparently materially incorrect based on, or materially inconsistent with, our knowledge of the company acquired in the course of performing our audit; or n otherwise misleading. We have no exceptions to report arising from this responsibility. n the statement given by the directors on page 50, in accordance with provision C.1.1 of the UK Corporate Governance Code (“the Code”), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the company’s performance, business model and strategy is materially inconsistent with our knowledge of the company acquired in the course of performing our audit. We have no exceptions to report arising from this responsibility. n the section of the Annual Report on page 63, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report arising from this responsibility. How we determined it 5% of profit before tax and before exceptional items (unchanged from 2014). Rationale for benchmark applied Given the company is a profit orientated business, we believe that profit before tax, adjusted for exceptional items, provides us with a consistent year on year basis for determining materiality, by eliminating the non-recurring disproportionate impact of these items. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £194,000 (2014: £200,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Going concern Under the Listing Rules we are required to review the directors’ statement, set out on page 50, in relation to going concern. We have nothing to report having performed our review. As noted in the directors’ statement, the directors have concluded that it is appropriate to prepare the company’s financial statements using the going concern basis of accounting. The going concern basis presumes that the company has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the company’s ability to continue as a going concern. 46 J D WETHERSPOON PLC Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: n we have not received all the information and explanations we require for our audit; or n adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or n the financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Directors’ remuneration Directors’ remuneration report – Companies Act 2006 opinion In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Other Companies Act 2006 reporting Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from these responsibilities. Corporate governance statement Under the Companies Act 2006 we are required to report to you if, in our opinion, a corporate governance statement has not been prepared by the company. We have no exceptions to report arising from this responsibility. Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the company’s compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report having performed our review. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors’ Responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. INDEPENDENT AUDITORS’ REPORT This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: n whether the accounting policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed; n the reasonableness of significant accounting estimates made by the directors; and n the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Andrew Latham (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 10 September 2015 (a) The maintenance and integrity of the J D Wetherspoon plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 47 DIRECTORS, OFFICERS AND ADVISERS Registered office Wetherspoon House Central Park Reeds Crescent Watford WD24 4QL Company number 1709784 Registrars Computershare Investor Services plc PO Box 82 The Pavilions Bridgwater Road Bristol BS99 6ZY Independent auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 1 Embankment Place London WC2N 6RH Solicitors Macfarlanes LLP 20 Cursitor Street London EC4A 1LT Bankers Abbey National Treasury Services plc Allied Irish Banks Bank of Tokyo-Mitsubishi UFJ Barclays Bank plc BNP Paribas Crédit Industriel et Commercial HSBC Bank plc Lloyds Bank plc Mediobanca International (Luxembourg) SA Svenska Handelsbanken AB The Royal Bank of Scotland plc Financial advisers Investec Bank plc Stockbrokers Investec Bank plc Tim Martin Chairman, aged 60 Founded the business in 1979, having previously studied law at Nottingham University and qualified as a barrister. He became chairman in 1983. John Hutson Chief Executive Officer, aged 50 Joined in 1991 and was appointed to the board in 1996. He is a graduate of Exeter University and previously worked with Allied Domecq. Ben Whitley Interim Finance Director, aged 37 Joined in 1999 after graduating from the University of Durham. Appointed as interim finance director in December 2014. Previous roles for Wetherspoon include retail auditor, cash control manager and financial controller. Qualified as a chartered management accountant in 2012. Su Cacioppo Personnel and Legal Director, aged 48 Joined in 1991 and was appointed to the board in 2008. She is a graduate of South Bank University and London Guildhall University and previously worked for Courage Limited and Allied Leisure. She worked in several operational roles in the Company, before being appointed as personnel director in 1999 and personnel and legal director in 2006. Nigel Connor Company Secretary and Head of Legal, aged 46 Joined the Company in June 2009 as head of licensing and was subsequently appointed head of legal. He previously acted on the Company’s behalf for several years while working in private practice for McLellans Solicitors and latterly Jeffrey Green Russell Solicitors, in London. Nigel is a graduate of Newcastle University and qualified as a solicitor in 1997. Elizabeth McMeikan Senior Independent Director, aged 53 Appointed to the board in 2005 and is a member of the audit, remuneration and nomination committees. She is a graduate of Cambridge University. She is a non-executive director of UNITE plc, Flybe plc and chairs the Moat Housing Association. She also sits on the board of two privately owned companies. Elizabeth previously worked for Tesco plc for 12 years, in a wide variety of commercial and operational roles, both in the UK and overseas. Debra van Gene Non-Executive Director, aged 60 Appointed to the board in 2006 and is the remuneration committee chair and a member of the audit and nomination committees. Debra is also a Lay Commissioner with the Judicial Appointments Commission. She previously held senior board positions in privately held communications companies, before joining the executive search industry. She was a partner at Heidrick and Struggles Inc and ran her own executive search firm. She is a graduate of Oxford University. Sir Richard Beckett Non-Executive Director, aged 71 Appointed to the board in 2009 and is the nomination committee’s chair and a member of the audit and remuneration committees. He was called to the bar in 1965 and took silk in 1987. He was one of the pre-eminent practitioners in regulatory and licensing matters. Mark Reckitt Non-Executive Director, aged 57 Appointed to the board in May 2012 and is the audit committee’s chair and a member of the remuneration and nomination committees. He is a non-executive director of Cranswick plc and Mitie Group plc. He was group strategy director at Smiths Group plc from February 2011 to April 2014. Before joining Smiths, he was chief strategy officer at Cadbury plc, during 2004–2010, and held a range of strategy and finance roles at Cadbury since joining in 1989, including UK finance director. Before joining Cadbury, he spent six years in investment banking and retailing, after qualifying as a chartered accountant in 1983. Management board The management board comprises John Hutson, Su Cacioppo, Ben Whitley and the following: David Capstick IT and Property Director, aged 54 Joined in 1998 and is a graduate of the University of Surrey. He previously worked for Allied Domecq, as well as working in other areas of the hospitality industry, such as hotels and outside catering companies. He was appointed to the management board in 2003. Martin Geoghegan Operations Director, aged 46 Joined in May 1994, having previously worked for Safeway plc. He worked in several operational roles, before being appointed as operations director in 2004. Miles Slade Deputy Operations Director, aged 34 Joined in December 2000 as a bar associate. He worked in several pub and operational roles, before being appointed as deputy operations director in January 2012. 48 J D WETHERSPOON PLC DIRECTORS’ REPORT for the 52 weeks ended 26 July 2015 Directors The directors of the Company who were in office during the year and up to the date of signing the financial statements are listed on page 48. Dividends The board proposes, subject to shareholders’ consent, to pay a final dividend of 8.0p (2014: 8.0p) per share, on 26 November 2015, to those shareholders on the register on 23 October 2015, giving a total dividend for the year of 12.0p per share. Return of capital At the annual general meeting of the Company, held on 13 November 2014, the Company was given authority to make market purchases of up to 18,432,934 of its own shares. During the year to 26 July 2015, 3,618,827 shares were purchased, with a nominal value of £72,377 for a total consideration of £26.9m, including stamp duty. This represented 2.9% of the called-up share capital. meeting in 2014. It is the Company’s intention to renew these powers; the resolutions approving them are found in the notice of the annual general meeting for 2015. In the event of a change of control, the Company is obliged to notify its main bank lenders. The lenders shall not be obliged to fund any new borrowing requests; facilities will lapse 10 days after the change of control, if the terms on which they can continue have not been agreed on. Any borrowings, including accrued interest, will become immediately repayable on such lapse. There are no other significant agreements to which the Company is party which may be subject to change-of-control provisions. There are no agreements with the Company’s directors or employees which provide for compensation for loss of office or employment which occurs because of a takeover bid. Directors’ interest in contracts No director has any material interest in any contractual agreement, other than an employment contract, subsisting during or at the end of the year, which is or may be significant to the Company. Statement of directors’ responsibilities The directors are responsible for preparing the annual report, the directors’ remuneration report and the financial statements, in accordance with applicable law and regulations. Takeover directive disclosures The Company has an authorised share capital comprising 500 million ordinary shares of 2p each. As at 26 July 2015, the total issued share capital comprised 122,269,948 fully paid-up shares of 2p each. The rights to these shares are set out in the Company’s articles of association. There are no restrictions on the transfer of these shares or their attached voting rights. Details of significant shareholdings at year end and as at 12 August 2015 are given on page 66. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have prepared the Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law, the directors must not approve the financial statements, unless they are satisfied that they give a true, fair and balanced view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the directors are required to: No person holds shares with specific rights regarding control of the Company. The Company operates an employee share incentive plan. However, no specific rights with respect to the control of the Company are attached to these shares. In addition, the Company operates a deferred bonus scheme, whereby, should a takeover occur, all shares held in trust would be transferred to the employee immediately. The Company is not aware of any agreements among holders of securities known to the Company which may result in restrictions on the transfer of securities or voting rights. The Company has the power to issue and buy back shares as a result of resolutions passed at the annual general n select suitable accounting policies and then apply them consistently. n make judgements and accounting estimates which are reasonable and prudent. n state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements. n prepare the financial statements on the going-concern basis, unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping adequate accounting records, sufficient to show and explain the Company’s transactions and which disclose, with reasonable accuracy, the financial position of the Company, at any time. The accounting records enable the ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 49 DIRECTORS’ REPORT directors to ensure that the financial statements and the directors’ remuneration report comply with the Companies Act 2006 and that the Company’s financial statements comply with article 4 of the IAS regulation. The directors are also responsible for safeguarding the assets of the Company and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The directors consider that the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide that information necessary for shareholders to assess the Company’s performance, business model and strategy. Each of the directors, whose names and functions are listed in the section headed ‘directors, officers and advisers’, confirms, to the best of his or her knowledge, that: n the Company’s financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company. n the strategic report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties which it faces. n so far as he or she is aware, there is no relevant audit information of which the Company’s auditors are unaware. n he or she has taken all steps which he or she ought to have taken as a director, in order to make himself or herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Directors’ indemnities As permitted by the Articles of Association, the directors have the benefit of an indemnity which is a qualifying third-party indemnity provision, as defined by section 234 of the Companies Act 2006. The indemnity was in force throughout the last financial year and is currently in force. The Company also purchased and maintained, throughout the financial year, directors’ and officers’ liability insurance, in respect of itself and its directors. 50 J D WETHERSPOON PLC Going concern The directors have made enquiries into the adequacy of the Company’s financial resources, through a review of the Company’s budget and medium-term financial plan, including capital expenditure plans and cash flow forecasts; they have satisfied themselves that the Company will continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going-concern basis, in preparing the Company’s financial statements. Greenhouse gas (GHG) emissions The table below shows the Company’s annual CO2 emissions GHG Emissions Unit Scope 1 Scope 2 Intensity Tonnes CO2e Tonnes CO2e Tonnes CO2e / £m revenue Quantity 2015 2014 52,510 49,251 170,048 163,930 147.0 151.3 n Conversion factors for electricity and gas are those published by the Department for Environment, Food and Rural Affairs. n Reported data is in respect of the year ended 31 March 2015, to align with the period under which carbon emissions are reported. n Scope 1 emissions result from the combustion of gas; scope 2 emissions result from the purchase of electricity. n Refrigerant emissions from our pubs are not reported, as they are immaterial. Overseas branches The Company has an overseas branch in the Republic of Ireland. Events after the reporting period The details of events after the reporting period can be found in note 29 on page 35. By order of the board Nigel Connor Company Secretary 10 September 2015 DIRECTORS’ REMUNERATION REPORT for the 52 weeks ended 26 July 2015 Annual statement Dear shareholder This report complies with the changes to the Companies Act which came into force on 1 October 2013. The remuneration committee does not propose any changes to the remuneration policy this year. Early in this financial year, the finance director, Kirk Davis, left the Company. Ben Whitley assumed his responsibilities for financial matters for the remainder of the financial year. The committee decided to increase the salaries of the CEO and the personnel and legal director by 10%, in recognition of their continued high performance and commitment to the Company. The annual cash bonus scheme will pay out 5% of basic salary this year. Directors will receive an amount equivalent to 25% of their salary in shares under the SIP scheme, which is a share incentive scheme open to all Company employees after an 18-month qualifying period. Directors will also receive 100% of their basic salary in shares under the deferred bonus scheme. Looking forward, the committee proposes a 10-year renewal of the current deferred bonus scheme which expires at the AGM on 12 November 2015. Approval for this proposal will be sought from shareholders at the 2015 AGM. No further changes to the remuneration policy are intended in the coming year. We believe that our remuneration policy continues to be fair and reasonable and aligns both the short and long-term interests of directors with those of the company and its shareholders. Further details are set out below, with shareholders invited to approve this report and proposals at the AGM on 12 November 2015. By order of the board Debra van Gene Chair of the Remuneration Committee 10 September 2015 ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 51 DIRECTORS’ REMUNERATION REPORT Remuneration policy The committee reviews the executive directors’ remuneration packages at least annually. The aim of the remuneration policy is to: n provide attractive and fair remuneration for directors. n align directors’ long-term interests with those of shareholders, employees and the wider community. n incentivise directors to perform to a high level. In agreeing on remuneration, account is taken of the pay levels at Wetherspoon, as well as those in the leisure industry in general, along with other comparisons and reports. The committee aims to take a fair and commonsense approach. This policy came into force on the date of the AGM – 13 November 2014. The elements of the remuneration package of each executive director are as follows: Component Reason Operation, maximum achievable and performance criteria Base salary Provide attractive and fair remuneration for directors. Benefits Pension Provide attractive and fair remuneration for directors. Provide attractive and fair remuneration for directors. Salaries are reviewed at least annually, with any changes normally taking effect from 1 October each year. Salary increases are awarded at the discretion of the remuneration committee. When considering salary levels and whether an increase should be offered, the committee takes account of a variety of factors, including Company performance, individual performance, experience and responsibilities, market information and the level of increase being offered to other employees. A range of taxable benefits is available to executive directors. These benefits comprise principally the provision of a car allowance, life assurance, private medical insurance and fuel expenses. The cost of benefits provided changes in accordance with market conditions. The committee monitors the overall cost of the package periodically. The Company does not operate any defined benefit pension schemes. Contributions of 12% of executive directors’ base salary are made by the Company to the Company stakeholder pension scheme. If directors expect to reach their lifetime allowance under HMRC rules, they are able to opt out of the stakeholder pension scheme and receive an equivalent salary supplement instead. In addition, any contributions above the annual HMRC-approved threshold are paid as a salary supplement. This is reviewed annually by the remuneration committee. Annual bonus plan Incentivise directors to perform to a high level. Annual bonus payments are paid in cash, at the discretion of the remuneration committee. The maximum bonus potential is 50% of salary. The major part of the bonus is based on profit growth, multiplied by a factor of 1.5 and paid to a maximum of 45% of salary. Profit growth is calculated on profit before tax and exceptional items. In addition, a further 5% is awarded for carrying out a set number of calls on our pubs per month, in order to monitor service and other standards. 52 J D WETHERSPOON PLC Component Reason Operation, maximum achievable and performance criteria DIRECTORS’ REMUNERATION REPORT Share Incentive Plan (SIP) Align directors’ long-term interests with those of shareholders, employees and the wider community. The SIP (an HMRC-approved scheme) allocates shares equivalent to 5% of salary to all Company employees after an 18-month qualifying period. Shares do not vest for at least three years under this plan – and tax-free returns are possible, if the shares are held for five years or more. The Company offers extra SIPs under this scheme to some employees: pub managers receive an extra 5% annual award; head-office staff 10–15%; senior managers and directors, including executive board directors, 20%. In addition, an executive director may purchase partnership shares up to the government cap, at present £1,800 per annum. Awards under this scheme are not based on financial or other targets. The Company believes that excessive use of financial targets can lead to distortions in companies’ behaviour and that it is important for there to be some share awards which can be accumulated gradually, the value of which depends on the overall success of the Company. Directors must be in office when the shares vest. 2005 Deferred Bonus Scheme Align directors’ long-term interests with those of shareholders, employees and the wider community. Bonus awards are made under the scheme, annually, at the discretion of the remuneration committee. Bonus awards are satisfied in shares. One-third of a participant’s shares will vest to the participant on calculation of the amount of the award, one-third will vest after one year and the remaining third will vest to the participant after two years (in each case subject to the participant being employed at the release date). The shares required under the scheme are purchased in the market by an employee benefit trust, funded by the Company. Bonus is awarded at a rate of 2.5% of salary for each 1% increase in owners’ earnings per share and 2.5% of salary for each 1% increase in diluted adjusted earnings per share, based on the weighted average number of shares in issue during the period. An element of adjusted earnings per share growth (including shares held in trust) is included in this scheme, to reduce the potential volatility which may be inherent in relying purely on the owners’ earnings calculation, which is heavily influenced by maintenance capital expenditure. Owners’ earnings are calculated as follows: Profit before tax: (excluding unrealised exceptional items) Add: Less: Less: Equals: Depreciation and amortisation Cash reinvestment in current properties Cash tax Owners’ earnings The maximum bonus to be earned under the scheme is 100% of annual salary. Provisions are in place which permit the Company to reclaim awards under this scheme in exceptional circumstances of misstatement or misconduct. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 53 DIRECTORS’ REMUNERATION REPORT Component Reason Operation, maximum achievable and performance criteria Non-executive directors’ fees Provide attractive and fair remuneration for directors. The fees paid to non-executive directors are determined by the executive board, taking into account the level of fees for similar positions in the market and the time commitment which each non-executive director makes. The non-executive directors receive no other remuneration or benefits from the Company. Difference between the policy for directors and employees Members of the wider management team may receive each of the components of remuneration awarded to the executive directors, although the amounts due for each component may vary, depending on their level of seniority. Non-executive directors are not entitled to any component other than fees. The wider employee population of the Company will receive remuneration which is considered to be appropriate to their level of responsibility and performance. Approach to recruitment remuneration The aim, when agreeing on components of a remuneration package, including any variable pay for incoming directors, would be in accordance with the table above. executive directors’ service contracts provide for the payment of a sum equivalent to the net value of salary and benefits to which the executive would have been entitled during the notice period. The executive is required to mitigate his or her loss and such mitigation may be taken into account in any payment made. The Company’s policies on the duration of directors’ service contracts, notice periods and termination payments are all in accordance with best industry practice. The commencement dates for the executive directors’ service contracts were as follows: Tim Martin John Hutson Su Cacioppo – – – 20 October 1992 2 February 1998 10 March 2008 All directors will be standing for re-election at the AGM. Their current service contracts do not have an explicit expiry date. Account is taken of the individual’s experience, the nature of the role being offered and his or her existing remuneration package. Relocation expenses or allowances may be paid, as appropriate. Non-executive directors The non-executive directors hold their positions, pursuant to letters of appointment dated 1 November 2014, with a term of 12 months. The committee may, at its discretion, offer cash or share-based elements, as necessary, to secure an appointment, although it does not normally do so. Shareholders will be informed of any such payments at the time of appointment. Our main principle is that payments made to prospective directors as compensation for loss of benefits at a previous company are inherently unfair, since it would be extremely rare for anyone below board level to receive this sort of compensation. Chairman and directors’ service contracts The executive directors are employed on rolling contracts, requiring the Company to give up to one year’s notice of termination, while the director may give six months’ notice. In the event of termination of employment with the Company, without the requisite period of notice, If their appointment is terminated early, the non-executive directors are entitled to the fees to which they would have been entitled up to the end of their term. They do not participate in the Company’s bonus or share schemes. Their fees are determined by the executive directors, following consultation with professional advisers, as appropriate. External appointments Executive directors are not allowed to take external appointments without the prior consent of the Company. The Company has not released any executive directors to serve as a non-executive director elsewhere. 54 J D WETHERSPOON PLC Illustration of the application of the remuneration policy The charts below set out the composition of the executive directors’ remuneration packages in £000, at a minimum, a reasonable expectation target and as a possible maximum: Tim Martin Maximum Expected Minimum 100% 100% 100% £324 £324 £324 £0 £100 £200 £300 John Hutson Maximum 37% 18% 45% £1,360 Expected 54% 6% 40% £938 Minimum 81% 19% £631 £0 £500 £1,000 Su Cacioppo Maximum Expected Minimum 37% 54% 81% 18% 45% £776 6% 40% £539 19% £366 £0 £200 £400 £600 Fixed Annual variable Long-term incentive The fixed annual values include: n Fixed annual salary, benefits and allowances, in line with those outlined in the policy section, and based on the payments made in the year ending 26 July 2015. The annual variable values include the cash bonus which may be achievable. In the case of the ‘expected’, an average percentage achieved over the last five years has been used as a basis. DIRECTORS’ REMUNERATION REPORT The long-term incentive plan values include: n the fixed 25% awarded under the Company’s Share Incentive Plan. n an average achieved in respect of the deferred bonus scheme over the last five years. Payments for loss of office The Company’s policy is that the period of notice for executive directors will not exceed 12 months; accordingly, the employment contracts of the executive directors are terminable on 12 months’ notice by the Company or six months’ notice by a director. The Company may terminate a director’s employment without notice or compensation, in the event of gross misconduct. In the event of a director’s departure, the Company’s policy on termination payments is as follows: n The Company will seek to ensure that no more is paid than is warranted in each individual case. n Salary payments will be limited to notice periods. n There is no entitlement to bonus paid (or associated deferred shares or SIPs) following notice of termination. The committee’s normal policy is that, where the individual is considered a ‘good leaver’, a pro-rated bonus may be paid. n The Company may enable the provision of outplacement services to a departing director. Consideration of employment conditions elsewhere in the Company The committee receives information on salary increases, bonus payments and other benefits available at Wetherspoon. These are taken into consideration when conducting the review of executive remuneration, although no formal consultation with employees is undertaken in this regard. Consideration of shareholders’ views Any views in respect of directors’ remuneration expressed to the Company by shareholders have been, and will be, taken into account in the formulation of the directors’ remuneration policy. Details of votes cast for and against the resolution to approve last year’s remuneration report and any matters discussed with shareholders during the year are provided in the annual report on remuneration. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 55 DIRECTORS’ REMUNERATION REPORT Annual report on remuneration The table below sets out in a single figure the total amount of remuneration, including each element, received by each director for the year ended 26 July 2015. Single-figure table – audited Salary/fees Taxable benefits1 Performance bonus2 Long-term incentives Pension contributions3 Total 2015 £000 2014 £000 2015 £000 2014 £000 2015 £000 2014 £000 2015 £000 2014 £000 2015 £000 2014 £000 2015 £000 2014 £000 Executive directors J Hutson K Davis S Cacioppo Non-executive directors and chairman T R Martin E McMeikan D van Gene R Beckett M Reckitt 486 48 273 453 241 252 807 946 324 46 46 46 46 324 44 44 44 44 508 500 Total 1,315 1,446 24 3 25 52 31 – – – – 31 83 22 15 20 57 29 – – – – 29 86 24 2 14 40 – – – – – – 44 23 24 602 31 338 168 87 91 58 6 33 54 1,194 90 29 683 30 741 395 417 91 971 346 97 113 1,967 1,553 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 355 46 46 46 46 353 44 44 44 44 539 529 40 91 971 346 97 113 2,506 2,082 1) Taxable benefits include car allowances and the provision of rail travel for Tim Martin, as well as private health and fuel expenses for executive directors. 2) No bonus was awarded under the profit growth element of the bonus scheme, in line with policy. A 5% of base salary was awarded in respect of the element for pub calls made to monitor standards, in line with the policy. 3) Executive directors receive either pension contributions equivalent to 12% of salary to the stakeholder pension plan or salary in lieu of pension contributions. 4) There have been no payments to past directors and no payments for loss of office. Details of targets applicable during the year are disclosed in the directors’ remuneration policy statement. The resultant percentages against each of the bonus measures achieved are shown below, the percentage awards for each director are the same: Maximum Awarded J Hutson £000 K Davis £000 S Cacioppo £000 Pub calls Profit growth 5.0% 45.0% 5.0% 0.0% Total performance bonus 50.0% 5.0% Employee share scheme Deferred bonus scheme 25.0% 100.0% 25.0% 100.0% Total long-term incentives 125.0% 125.0% Total 175.0% 130.0% 24 – 24 116 486 602 626 2 – 2 31 – 31 33 14 – 14 65 273 338 352 56 J D WETHERSPOON PLC DIRECTORS’ REMUNERATION REPORT Long-term incentive awards – audited J Hutson K Davis S Cacioppo Number of shares Face value in £ Share Incentive Plan 14,881 3,836 8,367 Deferred Bonus Scheme 7,005 3,732 3,894 Total 21,886 7,568 12,261 Share Incentive Plan 115,983 30,669 65,214 Deferred Bonus Scheme 55,501 29,568 30,841 Total 171,484 60,237 96,055 27,084 14,631 41,715 211,866 115,910 327,776 During the year under review, 27,084 shares were issued to the executive directors under the Share Incentive Plan. This represents 25% of the applicable salary, in line with the policy applicable in respect of this share scheme, at an average share price of £7.82. These shares vest after a three-year period from their award and have no further performance conditions attached to them, other than for the shareholders to be employed by the Company at the vesting date. In addition, executive directors were entitled to an award of 14,631 shares, in respect of the 2014 deferred bonus scheme. The share price on grant date was £7.92. All directors received cash in respect of the first tranche which was due on 27 September 2014, except for John Hutson who received shares. The remaining 7,266 shares (9,754 shares less 2,488 shares forfeited by K Davis on his resignation as a director) vest in equal amounts on 27 September 2015 and 27 September 2016. These shares have no further performance conditions, other than for the shareholders to be employed by the Company until the vesting period ends. Directors and connected persons’ interests in shares: audited The interests of the directors in the shares of the Company, as at 26 July 2015, were as follows: Ordinary shares of 2p each, held beneficially T R Martin J Hutson J Hutson – Share Incentive Plan J Hutson – 2005 Deferred Bonus Scheme J Hutson total K Davis K Davis – Share Incentive Plan K Davis – 2005 Deferred Bonus Scheme K Davis total S Cacioppo S Cacioppo – Share Incentive Plan S Cacioppo – 2005 Deferred Bonus Scheme S Cacioppo total E McMeikan D van Gene R Beckett M Reckitt 2015 2014 33,466,934 33,466,934 72,548 50,677 20,837 55,915 61,295 44,249 144,062 161,459 – – – – 52,778 27,378 10,996 2,568 28,780 21,459 52,807 51,082 31,532 22,991 91,152 105,605 1,000 1,000 2,000 2,000 1,000 1,000 2,000 2,000 There have been no changes to these interests since 26 July 2015. The Company does not enforce any specific requirements as to directors’ shareholdings. Partnership shares John Hutson is a participant in the partnership share scheme and acquired 230 shares between August 2014 and July 2015. Su Cacioppo is a participant in the partnership share scheme and acquired 192 shares between August 2014 and July 2015. The market price of the shares purchased ranged from 698.0p to 819.8p. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 57 DIRECTORS’ REMUNERATION REPORT Performance graph – non-audited information This graph shows the total shareholder return (with dividends reinvested) of a holding of the Company’s shares against a hypothetical holding of shares in the FTSE All-Share Travel & Leisure sector index for each of the last seven financial years. The directors selected this index, as it contains most of the Company’s competitors and is considered to be the most appropriate index for the Company. Growth in the value of a hypothetical £100 holding since July 2008, based on 30-trading-day average values ) £ ( g n d o h l i 0 0 1 £ l a c i t e h t o p y h f o e u l a V 380.0 340.0 300.0 260.0 220.0 180.0 140.0 100.0 60.0 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 J D Wetherspoon plc FTSE All-Share Travel & Leisure 58 J D WETHERSPOON PLC DIRECTORS’ REMUNERATION REPORT Chief executive officer’s remuneration of total remuneration Single figure Performance bonus payment achieved against maximum possible £000 1,194 741 1,079 847 628 656 % 10 19 43 34 24 44 Long-term incentives scheme shares vesting against maximum possible* % 100 100 100 100 100 100 John Hutson 2015 2014 2013 2012 2011 2010 * As long-term incentive scheme shares issued have no further performance criteria attached, all shares previously awarded vest in full when the vesting date is reached. Implementation of remuneration policy 2015/2016 The committee proposes a 10-year renewal of the current deferred bonus scheme which expires at the AGM on 12 November 2015. Approval for this proposal will be sought from shareholders at the 2015 AGM. The committee does not intend to make any changes to the remuneration policy in the coming year. Remuneration committee The remuneration committee comprises the following independent directors: Debra van Gene (chair), Elizabeth McMeikan, Sir Richard Beckett and Mark Reckitt. The committee meets regularly and considers executive directors’ remuneration annually. It approves all contractual and compensation arrangements for the executive directors, including performance-related payments. The following table compares the change in remuneration of the chief executive with that of all employees. The committee did not receive external advice or services which materially affected its considerations. Shareholders’ vote on 2014 directors’ remuneration report The table below shows the voting outcomes at the 13 November 2014 AGM for the directors’ remuneration report. For Against Abstentions Total cast Number of votes % of votes 96,284,438 271,568 32,661 99.69 0.28 0.03 96,588,667 100.00 John Hutson 2015 £000 2014 Change £000 % Total employees % Salary/fees Taxable benefits Performance bonus 486 24 24 453 22 44 7.3 9.1 (45.5) 4.9 1.1 (4.3) 534 519 2.9 4.2 Comparison of increases in remuneration, dividends and share buy-backs 2015 £000 2014 £000 Change % Dividends Share buy-backs 14,591 26,900 14,949 24,550 –2.4 9.6 Total employee remuneration 444,519 403,077 10.3 ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 59 CORPORATE GOVERNANCE Statement of compliance The Company is committed to high standards of corporate governance. The board believes that the Company has been compliant with the Code throughout the 52 weeks ended 26 July 2015, except as described below. B.1.1 – Non-executive director independence chairman has had many discussions with shareholders since the company’s flotation in 1992, although corporate governance has rarely been raised. The majority of discussions with major shareholders now takes place among the CEO, finance director and shareholders. The chairman is available for discussion with major shareholders, when requested. Elizabeth McMeikan has served more than 10 years on the board and so may not be considered independent under the Code. The board considers that her performance as a non-executive director continues to be effective. She contributes significantly as a director through her individual skills, considerable knowledge and experience of the Company. She also continues to demonstrate strong independence in the manner in which she discharges her responsibilities as a director. Consequently, the board has concluded that, despite her length of tenure, there is no association with management which could compromise her independence. B.4.2 – Development The chairman does not formally sit down with individual directors and identify specific training and development needs for them. The chairman and executive directors hold a series of weekly meetings, with head-office and pub managers, to try to identify areas of improvement for the business. Minutes are taken of these meetings and action points identified for a range of participants. In the opinion of the board, this process is effective in identifying problems and solutions and assists in training and developing directors on an informal, yet effective, basis. B.6.2 – External board evaluation A recent requirement of corporate governance is a recommendation for a third party to evaluate the functioning of the board. Delegation of a key task of the chairman and of the directors of the board itself to a third party, often with little or no connection with the Company’s business and with a very limited knowledge of the directors, may be a dangerous step for a board to take. It is the function of the board itself to evaluate its own performance – and the performance is most evident from the results of the underlying business. For this reason, it is believed to be best for the Company to continue with its current system of ‘self-evaluation’. E.1.1 – Dialogue with shareholders The Code indicates that the chairman should discuss governance and strategy with major shareholders. The A full version of the Code is available on the official website of the Financial Reporting Council: www.frc.org.uk Directors’ conflicts of interest The board expects the directors to declare any conflicts of interest and does not believe that any material conflicts of interest exist. The board of directors The board comprises the following members: n Tim Martin, chairman n John Hutson, chief executive officer n Ben Whitley, interim finance director n Su Cacioppo, personnel and legal director n Elizabeth McMeikan, non-executive director n Debra van Gene, non-executive director n Sir Richard Beckett, non-executive director n Mark Reckitt, non-executive director Ben Whitley has fulfilled the role of interim finance director further to the departure of Kirk Davis, and approval for his appointment to the board as finance director will be sought at the Company’s AGM. Nigel Connor was appointed company secretary on 18 December 2014. The board considers each of Elizabeth McMeikan, Debra van Gene, Sir Richard Beckett and Mark Reckitt to be independent. Biographies of all non-executive and executive directors are provided on page 48 and can be viewed on the Company’s website: www.jdwetherspoon.co.uk The chairman regularly meets the non-executive directors and evaluates the performance of the board, its committees and its individual directors. It is not advantageous, in a company like Wetherspoon, for there to be high barriers or exaggerated distinctions between the role of chairman and that of chief executive officer. However, some general distinctions are outlined overleaf. 60 J D WETHERSPOON PLC CORPORATE GOVERNANCE Chairman’s responsibility Chief executive officer’s responsibility The chairman is responsible for the smooth running of the board and ensuring that all directors are fully informed of matters relevant to their roles Delegated responsibility of authority from the Company to exchange contracts for new pubs and to sign all contracts with suppliers The chief executive officer is responsible for the smooth daily running of the business Developing and maintaining effective management controls, planning and performance measurements Providing support, advice and feedback to the chief executive officer Maintaining and developing an effective organisational structure Supporting the Company’s strategy and encouraging the chief executive officer with development of that strategy External and internal communications, in conjunction with the chairman, on any issues facing the Company Chairing general meetings, board meetings, operational meetings and agreeing on board agendas and ensuring that adequate time is available for discussion of agenda items Management of the chief executive officer’s contract, appraisal and remuneration, by way of making recommendations to the remuneration committee Implementing and monitoring compliance with board policies Timely and accurate reporting of the above to the board Providing support to executive directors and senior managers of the Company Recruiting and managing senior managers in the business Helping to provide the ‘ethos’ and ‘vision’ of the Company, after discussions and debates with employees of all levels, customers, shareholders and including organisations such as CAMRA Developing and maintaining effective risk-management and regulatory controls Helping to provide information on customers and employees’ views by calling on pubs Maintaining primary relationships with shareholders and investors Helping to make directors aware of shareholders’ concerns Chairing the management board responsible for implementing the Company’s strategy Helping to ensure that a culture of openness and debate exists in the Company Ensuring compliance with the London Stock Exchange and legal and regulatory requirements, in consultation with the board and the Company’s external advisers The board has several established committees as set out below. The board met eight times during the year ending 26 July 2015; attendance of the directors and non-executives, where appropriate, is shown below. Number of meetings held in the year Board 8 Audit 4 Remuneration Nomination 5 1 Tim Martin John Hutson Su Cacioppo Elizabeth McMeikan Debra van Gene Sir Richard Beckett Mark Reckitt Nigel Connor Ben Whitley Kirk Davis 8 8 8 8 8 8 8 6 5 1 N/A N/A 3 4 4 4 4 3 3 1 3 N/A N/A 5 5 5 5 N/A N/A N/A N/A N/A N/A 1 1 1 1 N/A N/A N/A ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 61 CORPORATE GOVERNANCE Matters reserved for the board The following matters are reserved for the board: n Board and management n Structure and senior management responsibilities n Nomination of directors n Appointment and removal of chairman and company secretary n Strategic matters n Strategic, financing or adoption of new business plans, in respect of any material aspect of the Company n Business control n Agreement of code of ethics and business practice n Internal audit n Authority limits for heads of department n Operating budgets n Approval of a budget for investments and capital projects n Changes in major supply contracts n Finance n Raising new capital and confirmation of major facilities n The entry into finance leases n Specific risk-management policies, including insurance, hedging and borrowing limits n Final approval of annual and interim accounts and accounting policies n Appointment of external auditors n Legal matters n Consideration of regular reports on material issues relating to any litigation affecting the Company n Institution of legal proceedings, where costs exceed certain values n Secretarial n Call of all shareholders’ meetings n Delegation of board powers n Disclosure of directors’ interests n General n Board framework of executive remuneration and costs n Any other matters not within the terms of reference of any committee of the board n Any other matter as determined from time to time by the board Board committees Audit committee The committee is chaired by Mark Reckitt and comprises Elizabeth McMeikan, Debra van Gene and Sir Richard Beckett. Representatives of the Company’s external auditors, PricewaterhouseCoopers LLP, and the Company’s internal audit manager, finance director and personnel and legal director are invited to attend each audit committee meeting. The committee’s primary role is to assist the board in the provision of effective governance over the Company’s financial reporting, risk management and internal control and, in particular, it performs the following activities: n Assumes direct responsibility for the appointment, compensation, resignation and dismissal of the external auditors, including review of the external audit, its cost and effectiveness n Reviews the independence of the external auditors, including consideration of the level of non-audit work carried out by them n Reviews the scope and nature of the work to be performed by the external auditors, before audit commences n Reviews the half-year and annual financial statements n Ensures compliance with accounting standards and monitors the integrity of the financial statements and formal announcements relating to the financial performance of the Company and supports the board in its responsibility to ensure that the annual financial statements are fair, balanced and understandable n Reviews the internal audit plan, which is updated to reflect the changing needs of the business and the concerns of management and the audit committee n Reviews and raises questions on all internal audit reports and requests management to adjust the prioritisation of mitigating actions, as needed. Areas reviewed this year included processes supporting the operation of the distribution centres, management of cash flow, supplier discounts, point-of-sale materials, communication to pub management, payroll and expense processes, property acquisition and related cost control, accounts payable, inventory and fraud-prevention systems n Reviews, with the support of specialists as required, controls over access to the IT systems used around the business and agrees with management on the timing of any mitigating actions to be carried out n Reviews and monitors procedures in relation to the Company’s whistle-blowing policy n Reviews and questions the effectiveness of all risk-management and internal control systems n Reviews the Company’s statement on internal control systems, before endorsement by the board n Considers the overall impact on the business of the various matters arisen from the various reviews described above and any other matters which the auditors, internal or external, may bring to the attention of the committee n Ensures that all matters, where appropriate, are raised and brought to the attention of the board 62 J D WETHERSPOON PLC Significant financial reporting items The accounting policies of the Company and the estimates and judgements made by management are assessed by the committee for their suitability. The following areas are those considered to be the most significant by the committee: n The provision for the impairment of fixed assets and the onerous leases – several judgements are used in making this calculation, primarily on expected future sales and profits. The committee received reports and questioned management on the calculations made and the assumptions used n Significant one-off items of expense or income are reported as exceptional on the face of the income statement. All exceptional items are reviewed by the committee n The committee reviewed and raised questions on the calculations made by the Company in relation to the effectiveness and hedge accounting for interest-rate swaps n During the year, the committee also discussed the level and complexity of supplier income arrangements and satisfied itself that they were not complex and no significant judgements existed related to income recognition The committee is satisfied that the judgements made by management are reasonable and that appropriate disclosures have been included in the accounts. Non-audit services During the year, the Company made limited use of specialist teams from PricewaterhouseCoopers LLP, relating to accounting and tax services. The fees paid to PricewaterhouseCoopers LLP for non-audit services were £13,000 (2014: £Nil). The use of PricewaterhouseCoopers LLP for non-audit work is monitored regularly, to achieve the necessary independence and objectivity of the auditors. In addition, the chair of the audit committee is consulted before awarding to the external auditors any non-audit services in excess of £20,000. Where the auditors provide non-audit services, their objectivity and independence are safeguarded by the use of different teams. See note 2 on page 13 for a breakdown of auditors’ remuneration for audit and non-audit services. External auditors The audit committee is responsible for making recommendations to appoint, reappoint or remove external auditors. Following a review by the audit committee, the board agreed, in September 2015, to recommend to shareholders, at the annual general meeting, the reappointment of the external auditors for a period of one year. CORPORATE GOVERNANCE Audit-tendering and rotation The audit committee keeps under review the requirements on audit-tendering and rotation from the EU and the Competition and Markets Authority and will implement them when they become applicable. The EU requirements are still subject to an ongoing UK implementation process, but would require the Company to change its audit firm for the year ending 31 July 2021 at the latest. PricewaterhouseCoopers LLP has been the auditor of J D Wetherspoon plc since 1984 – and no audit-tendering process has been carried out subsequently. In line with the Ethical Standards for auditors, the audit partner has been rotated every five years, with Andrew Latham completing his second year as audit partner this year end. The audit committee currently expects to put the audit out to tender in time for the audit of the year ending 31 July 2019, in line with the end of the current audit partner rotation cycle, believing that this represents an appropriate balance between operational efficiency and best practice. The committee also continues to consider annually the need to go to tender for audit quality or independence reasons. Subject to the outcome of this process for 2015, it is currently expected that PricewaterhouseCoopers LLP will remain in office and that a resolution to appoint them for the 2016 audit will be proposed at the AGM. Effectiveness of external auditors The audit committee assesses the ongoing effectiveness of the external auditors and audit process, on the basis of meetings and internal reviews with finance and other senior executives. In reviewing the independence of the external auditors, the audit committee considers several factors. These include the standing, experience and tenure of the external auditors, the nature and level of services provided and confirmation from the external auditors that they have complied with relevant UK independence standards. The terms of reference of the audit committee are available on the Company’s website. Remuneration committee The committee is chaired by Debra van Gene and comprises Elizabeth McMeikan, Sir Richard Beckett and Mark Reckitt. The directors’ report on remuneration is set out on pages 51 to 59. The terms of reference of the remuneration committee are available on the Company’s website. ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 63 CORPORATE GOVERNANCE Nomination committee The committee is chaired by Sir Richard Beckett and comprises Elizabeth McMeikan, Debra van Gene and Mark Reckitt. The committee meets at least annually and considers, among other matters, board appointments and the re-election of directors. No director is involved in any decision about his or her own reappointment. In carrying out these activities, the non-executive directors follow the guidelines of the Institute of Chartered Secretaries and Administrators (ICSA) and comply with the Code. n Regular feedback from the Company’s stockbrokers n Interim, full and ongoing announcements circulated to shareholders n Any significant changes in shareholder movement being notified to the board by the company secretary, when necessary n The company secretary maintaining procedures and agreements for all announcements to the Stock Market n A programme of regular meetings between investors and directors of the Company The terms of reference of the nomination committee are available on the Company’s website. Employment policies Staff are encouraged to make a commitment to the Company’s success and to progress to more senior roles as they develop. Risk management The board is responsible for the Company’s risk-management process. The internal audit department, in conjunction with feedback from senior management of the business functions, produces a risk register annually. In selecting, training and promoting staff, the Company has to take account of the physically demanding nature of much of its work. The Company is committed to equality of opportunity and to the elimination of discrimination in employment. The Company aims to create and maintain a working environment, terms and conditions of employment and personnel and management practices which ensure that no individual receives less favourable treatment on the grounds of his or her race, religion or belief, nationality, ethnic origin, age, disability, gender (including gender reassignment), sexual orientation, part-time status or marital status. Employees who become disabled will be retained, where possible, and retrained, where necessary. The Company has established a range of policies, covering issues such as diversity, employees’ well-being and equal opportunities, aimed at ensuring that all employees are treated fairly and consistently. Internal communications seek to ensure that staff are well informed about the Company’s progress, through the use of regular newsletters, the Company’s intranet and discussions at staff liaison, at which employees’ views are discussed and taken into account. All pub staff participate in bonus schemes related to sales, profits, stocks and service standards. Relations with shareholders The board takes measures to ensure that all board members are kept aware of both the views of major shareholders and changes in the major shareholdings of the Company. Efforts made to accomplish effective communication include: n Annual general meeting, considered to be an important forum for shareholders to raise questions with the board The identified risks are assessed, based on the likelihood of a risk occurring and the potential impact to the business, should the risk materialise. The head of internal audit determines and reviews the risk-assessment process and will communicate the timetable annually. The risk register is presented to the audit committee and management board annually, with a schedule of audit work agreed on, on a rolling basis. The purpose of this work is to review, on behalf of the Company and the board, those key risks and the systems of control necessary to manage such risks. Where recommendations are made for changes in systems or processes to reduce risk, internal audit will follow up regularly to ensure that the recommendations are implemented. A summary of the financial risks and treasury policies can be found on page 42, together with other risks and uncertainties. Internal control During the year, the Company provided an internal audit and risk-management function. The attempt to create a system of internal control and risk mitigation is a key part of the Company’s operations and culture. The board is responsible for maintaining a sound system of internal control and reviewing its effectiveness. The function can only manage, rather than entirely eliminate, the risk of failure to achieve business objectives. It can provide only reasonable, and not absolute, assurance against material misstatement or loss. Ongoing reviews, assessments and management of significant risks took place throughout the year under review and up to the date of the approval of the annual report and accord with the Turnbull Guidance (Guidance on Internal Control). 64 J D WETHERSPOON PLC The Company has an internal audit function which is discharged as follows: n Regular audits of the Company’s stock n Unannounced visits to pub sites n Monitoring systems which control the Company’s cash n Health & safety visits, ensuring compliance with Company procedures n Reviewing and assessing the impact of legislative and regulatory change n Risk-management process, identifying key risks facing the business The Company has key controls, as follows: n Authority limits and controls over cash-handling, purchasing commitments and capital expenditure n A budgeting process, with a detailed 12-month operating plan and a mid-term financial plan, both approved by the board n Business results reported weekly, with a report compared with budget and the previous year n Forecasts prepared regularly throughout the year, for review by the board n Complex treasury instruments are not used. The Company, from time to time, as stated in our report and accounts, enters into swap arrangements which fix interest rates at certain levels for a number of years and enters into supply arrangements with fixed prices for electricity and gas, for example, which run for between one and three years n An annual review of the amount of external insurance which it obtains, bearing in mind the availability of such cover, its costs and the likelihood of the risks involved n Regular evaluation of processes and controls, in relation to the Company’s financial reporting requirements The directors confirm that they have reviewed the effectiveness of the system of internal control. Nigel Connor Company Secretary 10 September 2015 CORPORATE GOVERNANCE ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 65 INFORMATION FOR SHAREHOLDERS Ordinary shareholdings at 26 July 2015 Shares of 2p each Up to 2,500 2,501–10,000 10,001–250,000 250,001–500,000 500,001–1,000,000 Over 1,000,000 Number of shareholders % of total shareholders Number % of total shares held 4,237 295 178 19 9 19 89.1 6.2 3.7 0.4 0.2 0.4 2,048,353 1,370,717 9,693,851 6,807,246 6,091,907 93,337,307 1.7 1.2 8.1 5.7 5.1 78.2 4,757 100.0 119,349,381 100.0 Source: Computershare Investor Services plc Substantial shareholdings The Company has been notified of the following substantial holdings in its share capital at 12 August 2015: Tim Martin Columbia Threadneedle Investments Sanderson Asset Management Invesco Perpetual Rothschild Wealth Management J D Wetherspoon plc Company Share Plan* Investec Asset Management BlackRock Investment Management Norges Bank Investment Management Legal & General Investment Management Phoenix Asset Management Partners Number of ordinary shares % of share capital 33,466,934 14,809,700 12,368,731 7,262,281 6,483,065 4,234,581 4,007,032 3,058,520 2,611,990 2,501,920 2,479,443 28.0 12.4 10.4 6.1 5.4 3.5 3.4 2.6 2.2 2.1 2.1 Source: Investec Bank plc. This schedule shows the consolidated shareholdings of individuals and companies, whereas the first table shows shareholdings by individual holding. * This represents shares which have been purchased by the Company for the benefit of employees under the SIP. Please see page 53. 66 J D WETHERSPOON PLC CHAIRMAN’S STATEMENT AND OPERATING REVIEW Listing Rule 9.8.4 R cross-reference table Information required to be disclosed by LR 9.8.4 R (starting on page indicated): n Interest capitalised n Publication of unaudited financial information n Details of long-term incentive schemes n Waiver of emoluments by a director n Waiver of future emoluments by a director n Non pre-emptive issues of equity for cash n Item (7) in relation to major subsidiary undertakings n Parent participation in a placing by a listed subsidiary n Contracts of significance n Provision of services by a controlling shareholder n Shareholder waivers of dividends n Shareholder waivers of future dividends n Agreements with controlling shareholders Share prices 27 July 2014 Low High 26 July 2015 Not applicable Not applicable Page 15 Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Pages 51 to 59 Not applicable Not applicable Pages 51 to 59 733.0p 692.0p 842.5p 713.5p Shareholders’ enquiries If you have a query about your shareholding, please contact the Company’s registrars directly: Computershare Investor Services plc: www.uk.computershare.com/investor 0370 707 1091 Annual report Paper copies of this annual report are available from the company secretary, at the registered office. E-mail: investorqueries@jdwetherspoon.co.uk This annual report is available on the Company’s website: www.jdwetherspoon.co.uk/investors ANNUAL REPORT AND FINANCIAL STATEMENTS 2015 67 PUBS OPENED DURING THE FINANCIAL YEAR The Ivy House Draymans Way Alton GU34 1SS The Velvet Coaster 501–507 Promenade Blackpool FY4 1BA The Bloxwich Showman 156A High Street Bloxwich WS3 3JT The Dairyman 16–18 High Street Brentwood CM14 4AB The White Horse Wrawby Street Brigg DN20 8JR The John Fairweather 52–58 Main Street Cambuslang G72 7EP The Saxon Crown 100 Elizabeth Street Corby NN17 1FN The Crowborough Cross Beacon Road Crowborough TN6 1AF The Great Wood Westend Shopping Park, Blanchardstown Dublin The Forty Foot The Saltoun Inn The Pavilion Centre, Marine Road Dún Laoghaire Saltoun Square Fraserburgh AB43 9DA The Lord High Constable of England Llanthony Road, Gloucester Docks Gloucester GL1 2EH Hedgeford Lodge Anglesey Street Hednesford WS12 1DL The Angel Vaults Inn 5 Sun Street Hitchin SG5 1AE The Star 105 High Street Hoddesdon EN11 8TN The Chief Justice of the Common Pleas 2 Bank Street Keswick CA12 5JY The Old Unicorn 165 Town Street, Bramley The Picture House 117/117a Queen Street Leeds Leeds LS13 3NA LS27 8HE The North Western 7 Lime Street, Liverpool Station Liverpool L1 1RJ The Sir John Hawkshaw Cannon Street Station, Cannon Street London EC4N 6AP The Sawyer’s Arms 3–4 Commercial Street Maesteg CF34 9DF The Twelve Tellers 14–15 Church Street Preston PR1 3BQ The Steel Foundry Unit 12 The Oasis, Meadowhall Centre Meadowhall Sheffield S9 1EP The Golden Hope 1 Park Road Sittingbourne ME10 1DR The Pump House Unit 1, Parkgate Development Stratford Road, Shirley Solihull B90 3AQ The Windmill After Security, Stansted Airport Stansted CM24 1QN The Old Borough 72 Main Street Swords The Queen’s Head Hotel 79–80 West Street Tavistock PL19 8AQ The Jolie Brise The Ritz 9–15 Station Road Teignmouth TQ14 8PE 87–93 High Street Wallsend NE28 8JD 68 J D WETHERSPOON PLC J D Wetherspoon plc Wetherspoon House, Central Park Reeds Crescent, Watford, WD24 4QL 01923 477777 www.jdwetherspoon.co.uk Designed by WLG Design Printed by Banner Managed Communication English language advice by www.future-perfect.co.uk