J Sainsbury PLC Annual Report 2016

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FY2016 Annual Report · J Sainsbury PLC

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Annual Report
and Financial
Statements 2016

Our values
make us
different

There for
our customers

Colleagues
making the difference

Great
products
and services
at fair prices

We know
our customers
better than
anyone else

J Sainsbury plc
Annual Report
and Financial
Statements
2015

Our vision
To be the most trusted retailer
where people love to work and shop.

Our goal
To make all our customers’ lives easier
every day by offering great quality and
service at fair prices.

How we do it
Our strategy is designed to address
a changing marketplace and the
continuing shifts in customer
shopping patterns.

It is based on five key pillars:
— We know our customers better than

anyone else

— Great products and services at fair prices
— There for our customers
— Colleagues making the difference
— Our values make us different

Read more on p26

Strategic Report

Financial
KPIs

Financial key performance
indicators are critical to understanding
and measuring our financial health.

Group measures

Underlying profit before tax
Definition: Profit before tax before any profit or
loss on the disposal of properties, investment
property fair value movements, retail financing
fair value movements, impairment of goodwill,
IAS 19 pension financing element and defined
benefit pension scheme expenses, acquisition
adjustments and one-off items that are
material and infrequent in nature, but after
the coupons on perpetual securities

Underlying profit before tax (£m)

2011/12

2012/13

2013/14

2014/15

2015/16

712

758

798

681

587

2012/13 restated for changes to IAS 19, prior years not restated

Underlying basic earnings per share
Definition: Underlying profit net of
attributable taxation divided by the
weighted average number of ordinary
shares in issue during the year, excluding
those held by the Employee Share
Ownership Plan trusts, which are treated as
cancelled

Cost savings
Definition: Excludes Sainsbury’s Bank and
represents cost reductions as a result of
identified initiatives

Underlying basic earnings per share
(pence)
2011/12

28.1

2012/13

2013/14

2014/15

2015/16

30.8

32.8

26.4

24.2

Cost savings (£m)

2011/12

2012/13

2013/14

2014/15

2015/16

105

104

120

140

225

Retail operating cash flow
Definition: Retail cash generated from
operations after changes in working capital

Dividend per share
Definition: Total proposed dividend per
share in relation to the financial year

Retail operating cash flow (£m)

Dividend per share (pence)

1,291

1,268

1,256

2011/12

2012/13

2013/14

1,398

2014/15

1,149

2015/16

16.1

16.7

17.3

13.2

12.1

2011/12

2012/13

2013/14

2014/15

2015/16

Strategic Report

Maintaining balance sheet strength

Pre-tax return on capital employed
Definition: Underlying profit before interest,
and tax, divided by the average of opening
and closing capital employed (net assets
before net debt)

Gearing
Definition: Net debt divided by net assets

Pre-tax return on capital employed (%)

Gearing (%)

Lease adjusted net debt/underlying
EBITDAR
Definition: Net debt plus capitalised lease
obligations (5.5 per cent discount rate)
divided by Group underlying EBITDAR

Lease adjusted net debt/underlying
EBITDAR

2011/12

2012/13

2013/14

2014/15

2015/16

11.1

11.3

9.7

8.8

2011/12

2012/13

2013/14

2014/15

2015/16

35.2

37.0

39.7

42.3

28.7

2011/12

2012/13

2013/14

2014/15

2015/16

4.1

3.8

3.9

4.1

4.0

2013/14 closing capital employed has been adjusted to remove
50 per cent of Sainsbury’s Bank net assets

2015/16 has been displayed with the perpetual securities
accounted for as equity. If treated as debt, gearing is
39.5 per cent

Retail

Like-for-like sales
Definition: Year-on-year growth in sales
including VAT, excluding fuel, excluding
Sainsbury’s Bank, for stores that have been
open for more than one year

Retail sales growth
Definition: Year-on-year growth in sales
including VAT, excluding fuel, excluding
Sainsbury’s Bank

2011/12 not restated for effects of IAS 19 or to reflect changes
in disclosure of lease lengths beyond five years2015/16 has
been displayed with the perpetual securities accounted for as
equity. If treated as debt, lease adjusted net debt/underlying
EBITDAR is 4.3 times

Retail underlying EBITDAR margin
Definition: Underlying profit before tax
before underlying net finance costs,
underlying share of post-tax results from
joint ventures, depreciation, amortisation
and rent, divided by sales excluding VAT,
including fuel, excluding Sainsbury’s Bank

Like-for-like sales 2015/16 (%)

Retail sales growth 2015/16 (%)

Retail underlying EBITDAR margin (%)

1-year LFL

2-year LFL

3-year LFL

4-year LFL

5-year LFL

(0.9)

(2.8)

(2.6)

(0.8)

1-year

0.4

2-year

0.2

3-year

4-year

2.9

7.3

1.2

5-year

12.2

2011/12

2012/13

2013/14

2014/15

2015/16

7.80

7.84

8.05

7.76

7.58

2012/13 restated for changes to IAS 19, prior years not restated

Trading intensity per square foot
Definition: Sales per week (including VAT,
excluding fuel, excluding Sainsbury’s Bank)
divided by sales area

Retail underlying operating margin
Definition: Underlying profit before tax,
underlying net finance costs and underlying
share of post-tax results from joint ventures,
divided by retail sales excluding VAT,
including fuel, excluding Sainsbury’s Bank

Core retail capital expenditure
Definition: Capital expenditure excluding
Sainsbury’s Bank and before proceeds
from sale and leasebacks and capital
relating to the acquisition of freehold and
trading properties

Trading intensity per sq ft (£ per week)

Retail underlying operating margin (%)

Core retail capital expenditure (£m)

2011/12

2012/13

2013/14

2014/15

2015/16

19.47

19.27

18.93

18.24

17.88

2011/12

2012/13

2013/14

2014/15

2015/16

3.54

3.57

3.65

3.07

2.74

2011/12

2012/13

2013/14

2014/15

2015/16

1,240

1,040

888

947

542

2012/13 restated for changes to IAS 19, prior years not restated

Strategic Report

Market context

The UK food retail market is changing rapidly.
We will continue to adapt to reflect evolving
customer needs.

The Market

Shopping habits

Future retail trends

The market
Over the last two years, UK household
disposable incomes have continued to
rise thanks to wage growth coupled with
falling fuel and food prices. The food retail
sector has yet to benefit from this growth,
as consumers are choosing to spend their
discretionary income on items that they
gave up during the recession such as
holidays and eating out. In recent months,
as deflation gradually eases and pay growth
stabilises, there have been signs that
household income growth is slowing.

The grocery sector has experiencied
sustained food price deflation for nearly
two years, driven in part by lower commodity
prices, and in part by the competitive
pricing environment. The continued
expansion of the discount retailers, offering
a limited number of products at low prices,
has forced the established grocery retailers
to cut their prices and tailor their offer.
Food price deflation has eased slightly in
recent months and we anticipate macro-
economic factors will eventually lead
to the return of food inflation. There are
also encouraging signs in volume growth
with customers buying more items than
previously, albeit not enough to offset the
deflationary effects.

Customer conﬁdence
Index score

2012

2013

2014

2015

2016

Source: GfK Consumer Conﬁdence Index

Average UK household discretionary income
£ per week

200

195

190

185

180

175

170

165

160

155

2012

Source: CEBR

2013

2014

2015

2016

Strategic Report

Grocery market channel share 2007–22F
(% of market)

2007

2015

2018F

2022F

Supermarket

Discount

Convenience

Online

100

Source: Company estimates

The transaction may then take place either
in store or online, with a range of delivery
options: in store, to home, or Click &
Collect. Grocery retailers are again uniquely
positioned to serve customers in all of these
ways. As customer shopping habits evolve
as a result of these new retail capabilities
so too will their expectations. Those food
retailers that will be successful in the future
will need to develop new technologies
increasing the speed, flexibility and
convenience of their offer.

The market is
competitive and it
will remain so for the
forseeable future

MIKE COUPE
SAINSBURY’S CEO

Shopping habits
Shopping habits are evolving with
customers choosing to buy their groceries
more frequently and from the broader
range of channels now available to them.
We expect volumes will continue to reduce
in the supermarket channel as consumers
shop more often in convenience stores,
online and with discount retailers. However,
we anticipate the supermarket will remain
the most popular destination for customers.
It is therefore important that this channel
adapts to reflect and meet changing
customer needs. With conflicting demands
and increasingly busy lifestyles, consumers
are seeking greater convenience in their
shopping missions. Grocery retailers need
to respond to this by offering them greater
flexibility in how they shop and making it
easier for them to buy the products they
need whenever and wherever they want,
whilst enjoying great value.

Future retail trends
The UK food retail landscape is changing
rapidly. The disruptive impact of technology
is empowering customers and heightening
their expectations of how retailers will
serve them in the future. Customers are
increasingly developing deeper relationships
with retailers, sharing a greater amount
of data and insight about their purchases
as part of more sophisticated loyalty
programmes. The grocery retailers in
particular have an unrivalled insight into
the weekly shopping habits of customers
and will need to invest in customer insight
tools to anticipate and better serve changing
customer needs. In addition, the rise of
the smart phone and increased levels of
connectivity are enabling customers to
research easily any planned purchase online.

The broad range
of channels now
on offer enables
customers to
shop whenever
and wherever
they want

Strategic Report

We know our
customers better
than anyone else

Understanding our customers is essential to
achieving our goal to be the most trusted retailer
where people love to work and shop. Our customer
insights inform the decisions we make each day.

A key source of customer
insight is our Nectar loyalty
scheme. This not only helps
us to know our customers
better than anyone else, but
also enables us to tell our
customers about products
and services that are most
relevant to them.

During the year we introduced a new
customer database system that gives us a
more holistic view of our customers, resulting
in an even better understanding of our
customers, allowing us to meet their needs
in a personalised and more effective way.
We consult with our customers regularly in
a number of different ways. We launched
our online consumer panel, Trolley Talk, 18
months ago through which we talk to 4,000
customers every week on a range of issues.
The insight we gain from these conversations
helps us to make the right strategic decisions.

We conducted considerable research with
our customers on pricing. They told us that
multi-buy promotions do not meet their
shopping needs today and that they were
confusing, creating storage challenges in the
home and unnecessary waste. This led us
to simplify our pricing, reducing prices on
hundreds of lines across our grocery ranges
in favour of lower regular prices. We will be
the first major retailer in the UK to remove
multi-buy promotions across the vast majority
of our grocery business by August 2016.

This year we are replacing our Brand Match
scheme with lower regular prices. All the
money from the scheme will be reinvested
into lowering the price of popular products.
We will continue to monitor the prices of
branded products to ensure we remain
competitive, and offer customers great value.

Since we introduced this simpler pricing
strategy our price satisfaction scores have
increased1 and we have seen growth in
volumes and transactions.

Similarly, we asked thousands of
customers what was important to them
about Christmas, and we developed our
award-winning ‘Christmas is for Sharing’
campaign, featuring Mog the Cat. It was
deemed the most popular Christmas
advertising campaign in terms of online
views and by industry experts. Mog’s
Christmas Calamity book topped the UK
book charts for four weeks and, together
with author Judith Kerr and publisher
Harper Collins, we donated more than
£1.5 million to Save the Children to support
their literacy campaign in the UK.

Our Nectar loyalty scheme is another key
source of customer insight. Over 15 million
Nectar card holders shop with us in stores,
online and with Sainsbury’s Bank. We can
reward them for their loyalty across our
different products and services. Bonus point
events, such as Nectar Double-Up, Swipe
and Win and 10x Nectar points on fuel, are
extremely popular with more customers
participating every year.

Our Little Twists campaign inspired many
of our customers to break from their routine
and give everyday dishes a delicious
new twist, such as adding horseradish
to macaroni cheese and ginger beer to a
traditional roast lamb.

1. CSI – Customer Satisfaction Tracking for superstores 2015/16

Knowing our customers helps
us to serve them better

&
Reward
loyalty

My local store
stocks a wide
variety of products
and I can usually
get everything
I want
SAINSBURY’S CUSTOMER
WEST MIDLANDS

Leading
customer
insights

Effective
campaigns

#LittleTwists - Add
ginger beer to your
lamb for a twist on
your favourite roast

Strategic Report

Great products
and services at
fair prices

Our customers trust us to deliver great quality
at fair prices across all of our products and
services. Our commitment to deliver on this
is at the heart of our strategy.

Sales growth by area
Food is our core business but growing non-
food is an important part of our strategy.
Our customers value greater choice and
there is a firm correlation between increased
loyalty and spend across our whole offer
when customers buy into non-food.

Definition: Year-on-year growth of total
sales, including VAT.

Sales growth by area

General merchandise (%)

Food (%)

2013/14

2014/15

2015/16

Clothing (%)

2013/14

2014/15

2015/16

2013/14

2014/15

2015/16

Bank (%)

2013/14

2014/15

2015/16

2.4

(1.0)

(0.5)

9.6

11.9

8.5

8.1

7.3

3.5

(4.2)

13.5

5.4

The provenance of our ingredients is
important to our customers, and the vast
majority of wheat we use is sourced from
the UK.

We are focused on offering our customers
nutritious, tasty food with a wide choice
of healthy meal options. This year we
launched 19 new lines in our My Goodness!
range including four innovative raw fish
products that are steam-cooked in the pack
when microwaved, ensuring a fresh, tasty
result. We continue to reformulate the sugar,
salt and saturated fat content of our own-
brand products to make them healthier,
and in each of the past two years we have
removed more than 2,370 tonnes of sugar
from our own-brand soft drinks.

Our own-brand ranges account for around
half of our food sales. Our premium Taste
the Difference range grew volumes by nearly
two per cent and continues to gain industry
recognition, voted the Best Supermarket
Range by the Good Housekeeping Institute
for the third year running.

1. HPI Brand & Communications Tracker – National sample data

of Sainsbury’s customers between 2014 and 2016

Leading on quality
The quality, range and provenance of our
food differentiates us from our competitors
and we continue to lead on quality
perception1. This year we have tailored many
of our ranges, focusing on the products that
we know are loved by customers. The depth
and variety of the product ranges we offer
is a point of difference for us and we will
continue to make sure customers have
choice across all price tiers.

We are investing in further improving the
quality of 3,000 own-brand products. During
the year we improved the quality of around
70 of our own-brand fish lines, pairing our
fish with delicious new sauces and butters
and introducing innovative vacuum pack
technology that helps to improve freshness
and reduce waste. Our commitment to
responsible sourcing remains of critical
importance to us; we are the UK’s biggest
retailer of Marine Stewardship Council (MSC)
certified seafood for the sixth consecutive
year. We have over 180 MSC-labelled
products, more than twice as many as any
other UK retailer.

We also improved our in-store bakery
products, and expanded our core by
Sainsbury’s bread range. Our new Taste the
Difference loaves are freshly baked in-store
every day and we have added artisan
breads made from grains such as spelt,
rye and quinoa to the range.

Investing in the quality of our products

Innovative
new options

Investing
in the quality of
3,000
own-brand
products

Commitment
to responsible
sourcing

Sainsbury’s offers
a lot of low sugar
alternatives and they
advertise clearly how
much sugar is in each
product per serving
which is very helpful.
It helps me to make
better food choices
SAINSBURY’S CUSTOMER
SOUTH EAST

Strategic Report

Great products and
services at fair prices

Like-for-like transactions
The structural change in the market
means that customers have more choice
than ever when it comes to doing their
grocery shopping. This means that
like-for-like transactions are at risk and
we need to ensure that we execute our
strategy effectively. Customers will
then continue to see that we offer great
products at great prices.

Definition: Year-on-year growth in
transactions from stores that have been
open for at least a year.

Like-for-like transactions (%)

2013/14

2014/15

2015/16

(0.1)

0.3

Product quality
We know customers value quality when
deciding where to shop and it is therefore
important for us to be ranked above our
peers in relation to the quality perception
of our brand.

Definition: Our rank based on a sample
of approximately 1,000 consumers who
rated product quality of each of the
following brands: Sainsbury’s, Tesco,
Morrisons and Asda.

2013/14

2014/15

2015/16

1st

HPI Brand & Communications Tracker

Price perception
Our new pricing strategy of lower regular
prices reassures customers that they
can always get a good price on and off
promotion.

Definition: Our rank based on a sample of
approximately 1,000 consumers who rated
value of each of the following brands:
Sainsbury’s, Tesco, Morrisons and Asda.

2013/14

2014/15

4th

HPI Brand & Communications Tracker

2015/16

4th

Strong value
proposition
We offer customers
lower regular prices
helping them to
Live Well for Less

Strong value proposition
At Sainsbury’s we offer customers a strong
value proposition that helps them to Live
Well for Less. As well as improving the
quality of our food we have also invested
in our prices. Our price satisfaction scores
have increased again this year2 and our
investment in lower regular prices is driving
volume and transaction growth, making us
the only one of our main supermarket peers
to maintain market share this year.

We have simplified our trading strategy in
favour of lower regular prices, and reduced
the number of promotions. By the summer
we will have phased out the vast majority of
multi-buy promotions.

Growth opportunities in
clothing, general merchandise
and financial services
We have seen strong growth in our clothing
and general merchandise businesses
this year, both in stores and online as we
continue to invest in our ranges to give our
customers high street style at supermarket
prices. Our strategy for growth focuses on
increasing our non-food ranges in stores,
and growing our Tu online business,
alongside changing visual merchandising
more frequently and emphasising our
quality and design-led approach.

Clothing
Our clothing business is well-established
and we continue to increase sales and
market share across womenswear,
menswear, childrenswear and lingerie.
Our Tu clothing brand is now the UK’s sixth
largest clothing retailer by volume and
tenth largest by value3. Our talented in-
house design teams source good quality,
fashionable clothing, and our long-standing
partnership with Gok Wan and the more
recent collaboration with the Admiral men’s
sportswear brand are proving popular
with our customers. We are one of the UK’s
biggest retailers of dressing-up outfits for
children, and we had great success in the
run-up to Halloween, Christmas and World
Book Day with strong growth across all these
events. We launched Tu online nationwide
in August 2015, giving our customers
access to our full clothing offer. This channel
is proving popular, and the majority of
customers collect their orders from more
than 700 in-store collection points.

2. CSI – Customer Satisfaction Tracking for superstores 2015/16
3. Kantar Worldpanel for the 52 weeks to 28th February 2016

General merchandise
We have a general merchandise business
of scale, comprising homeware, cookware,
small domestic appliances, toys, books,
stationery and entertainment ranges.
This is a strong area of growth for us and we
have increased our market share across all
categories. We now design more than half
our ranges in-house and offer customers
new products more often. Events including
Halloween and Christmas enabled us to grow
sales this year as we invested in our ranges
and the presence given to these occasions
in store.

Sainsbury’s Entertainment
Our on demand online music site was re-
launched in January 2016, giving customers
a one stop shop for eBooks, magazines and
now music. The site offers customers more
music choice than ever before, with over
20 million tracks and 2.5 million albums
available for download as high quality MP3s.

Financial Services
Sainsbury’s Bank offers customers
innovative, good value products and services.
Underlying profit this year was up nearly five
per cent to £65 million. Total income was up
over five per cent to £274 million.

Total accounts held by customers now
stand at nearly 1.7 million. We performed
strongly in the competitive personal loans
market, with 15 per cent year-on-year
growth in the number of advances to new
customers. The Bank’s portfolio of insurance
products continued to perform well
resulting in new business growth of over ten
per cent year-on-year. This year we saw a
particularly strong performance in home
insurance where sales of new policies
increased by more than 25 per cent
year-on-year. The Bank also introduced a
double Nectar points offer to new Travel
Insurance customers taking out an Annual
Trip policy which, in its first month, resulted
in a ten per cent uplift in sales year-on-year.
We now have 207 Travel Money bureaux
and have enjoyed a strong performance in
this area, with a 30 per cent increase in
transactions year-on-year.

The Bank’s free-to-use ATM estate grew by
over four per cent to 1,646, ATM transactions
grew by nearly two per cent year-on-year
to nearly 240 million and £1 of every £11
dispensed from a LINK ATM transaction is
from Sainsbury’s Bank.

Given the Bank’s strong trading performance
and the trust people have in the Sainsbury’s
brand, we have decided to launch new
mortgage products in 2017. We believe
these products will complement our existing
financial services portfolio and we expect
customers to respond well.

Growth
opportunities
in clothing, general
merchandise and
financial services

Strategic Report

Against a backdrop of other credit card
providers reducing or removing rewards
from their products, Sainsbury’s Bank has
maintained its Nectar loyalty reward as well
as increasing points offers (for a limited
period) to new card customers.

The Bank Transition Programme to move
to a new, more flexible banking platform
continues to progress and this year we took
delivery of the new technology platform,
which is a key milestone in building a
standalone bank and creating long-term
shareholder value. Although the build of
the platform is materially complete, testing
continues and we plan to migrate savings
customers by late summer 2016. The
migration of cards and loans customers is
currently being re-planned, particularly in
the light of the Group’s potential acquisition
of Home Retail Group plc. We expect
transition costs to remain at the top of
the £340 million to £380 million range.

Pharmacy
In July 2015, we announced a strategic
partnership that will see LloydsPharmacy
acquire Sainsbury’s pharmacy business
for £125 million. In addition, we will receive
commercial annual rent payments from
LloydsPharmacy for each of the 277 in-store
pharmacies. The Competition and Markets
Authority is currently undergoing the final
stages of a phase two regulatory review.
Provisional findings announced in April
2016 found that Celesio may have to sell
pharmacies in 13 areas of England and
Wales. The final outcome and completion of
the deal are expected in the summer of 2016.

Mobile by Sainsbury’s
Our joint venture with Vodafone ceased to
operate in January. We know that mobile
is important to our customers and we are
looking at other network options. Customers
can still buy phones and accessories and
access other mobile operator contracts and
pay as you go options online and in our 38
Phone Shops.

Alibaba
In September 2015 we began a partnership
with the Alibaba Group, becoming the first
UK grocer to export goods to China through
Tmall Global, Alibaba’s online store.

Strategic Report

There for our
customers

Shopping behaviour is changing and our
customers have responded well to the choice
and flexibility we offer across our supermarket,
convenience and online businesses.

People increasingly want
the flexibility to shop in a
number of different ways
and we have developed our
multi-channel strategy to
make it easier for them to
shop with us whenever
and wherever they want.

601

We have 601
supermarkets and
773 convenience
stores

Customer shopping behaviour is changing,
driven by competitive dynamics and the
growth of technology. People increasingly
want the flexibility to shop in a number
of different ways and we have developed
our multi-channel strategy to make it easy
for them to shop with us whenever and
wherever they want.

Supermarkets
Supermarkets represent our biggest
source of turnover and we now trade in 601
supermarkets across the UK. In the financial
year we opened six stores including two
replacements, and also refurbished seven
supermarkets.

Given the size and locations of our stores,
we have a structurally advantaged estate
which enables us to meet our customers’
varied and changing shopping needs.
Around a quarter of our stores will have
some under-utilised space over the next five
years. This space is being used to extend
our clothing and general merchandise offer
to more of our stores, as well as widening
the existing selection in stores that already
sell non-food ranges. A comprehensive
non-food range is now available in 439 of
our supermarkets so there are significant
opportunities to expand into more stores to
reach more customers.

The remaining excess space is being used to
enhance customer choice and convenience
with carefully selected concession partners

such as Argos, Timpsons, Centre for
Dentistry and Explore Learning. In this way
we are giving customers increased choice,
achieving the best use of our supermarket
space, and making our stores destination
shopping locations.

With customer shopping patterns continuing
to change, we believe there is great potential
in tailoring our store formats and product
ranges to meet evolving needs. We have been
trialling new formats in our supermarkets,
testing different store layouts to cater for a
wider range of shopping missions. As part of
this trial we are reviewing how we can offer
customers easier and quicker ways to shop,
checkout and pay in our stores.

The estimated market value of properties,
including our 50 per cent share of properties
held within property joint ventures, is
£10.6 billion. The £0.5 billion decrease during
the year was mainly due to a reduction in
market rental values and a yield movement.
We are maximising the value of our property
assets by working with joint venture
partners to develop new leisure, residential
and commercial opportunities while also
adding trading space to our estate. Our
£500 million development at Nine Elms will
launch in 2016/17 with a new Sainsbury’s
supermarket, 730 homes and shops and
offices. We are also developing plans for
replacement stores at Whitechapel and Ilford
which will provide 1,240 homes and new jobs.

Our supermarket stores are the
right size and in the right locations

Making the
best use
space

of our supermarket

Trials of new

formats in
selected stores

Concessions give
customers even
more choice
and convenience

I can shop online and,
where I live, there is a
superstore and brilliantly
sized convenience store.
This gives me all the
options I need to make
my life easier
SAINSBURY’S CUSTOMER
SOUTH EAST

Strategic Report

There for
our customers

We are investing in the right infrastructure
to support the growth of our business and
to help us serve our customers better. We
operate 23 distribution centres to service
our supermarkets, convenience stores and
online businesses. We opened a new one
million sq ft general merchandise depot at
Daventry International Rail Freight Terminal,
potentially creating 900 jobs and upgraded
our Basingstoke distribution centre.

Convenience
Customers increasingly top up their shopping
locally and our convenience store business
generates sales of over £2.3 billion. Our
convenience business delivered over nine
per cent sales growth during the year
despite the business being impacted by
a higher proportion of categories that are

experiencing food price deflation. We have
taken a disciplined approach to new space
this year, opening 69 convenience stores and
by the end of the year we traded out of 773
convenience stores.

We are trialling new convenience formats,
both smaller and larger than our standard
convenience stores. Our new ‘micro’
753 sq ft store in Richmond is the smallest
Sainsbury’s Local to date, and it is designed
to meet the needs of people working in the
area who want to buy ‘food for now’.

We were delighted to be named
Convenience Retailer of the Year for
the sixth consecutive year at the Retail
Industry Awards.

Sainsbury’s has good
opening hours, lots of
conveniently located
stores, plenty of
self-checkouts and
a good online
shopping service
SAINSBURY’S CUSTOMER
LONDON

New Local stores
opened this year

Convenience
stores
Convenience now
generates sales of
over £2.3 billion.
Sales grew over 9%

Our new Micro
Convenience
store opened in
Richmond in March

Strategic Report

Sales growth by area
Customers are choosing to shop across
channels and are using convenience
and online more frequently, leading
to a decline in supermarket sales.
It is therefore important that we invest
strategically so that we can serve our
customers whenever and wherever
they want.

Definition: Year-on-year growth of total
sales, including VAT, excluding fuel.

Sales growth by channel

Supermarkets (%)

2013/14

2014/15

2015/16

Convenience (%)

2013/14

2014/15

2015/16

Online (%)

2013/14

2014/15

2015/16

1.0

(2.2)

(1.6)

19.0

16.3

9.3

12.3

7.1

8.8

Multi-channel
We have developed
our multi-channel
strategy to make it
easy for customers
to shop with us

Online, Click
& Collect
Online orders grew by
nearly 15% and we will
double our Click &
Collect sites
next year

Online
Our online business continues to grow,
across both food and clothing. Groceries
Online grew by nearly nine per cent with
orders increasing by nearly 15 per cent.
We had a record week in the run up to
Christmas, delivering over 289,000 orders,
both to customers’ homes and to the 101
grocery Click & Collect sites we have opened
at our stores across the country. These
sites have proved to be popular with our
customers and we are aiming to double
the number of Click & Collect sites by the
end of the financial year.

We pick our grocery online orders from
stores; this makes good commercial,
logistical and operational sense as we are
using existing resources that are within easy
reach of where our customers live. As Click
& Collect gains in popularity, picking orders
in-store saves time and minimises additional
transport and handling costs. However,
demand for Groceries Online in the densely
populated and fast-growing London area is
so great that we will open a purpose-built
online fulfillment centre in Bromley-by-Bow,

East London, this year. This will provide us
with the additional capacity we need to
meet the increasing customer demand.

Netto
Working with our partner Dansk
Supermarked we have opened 15 stores.
We have trialled a variety of location types
to help build our insight and continue to
benefit from operational insights in our
core business. We will now review the
performance of the business in light of the
overall market and we will communicate our
next steps for the business at our Interim
Results in November 2016.

Strategic Report

Colleagues making
the difference

Our colleagues provide industry-leading customer
service. We support them with extensive skills
training and apprenticeship opportunities, which
helps them to exceed our customers’ expectations.

Availability
Offering our customers the products they
want ensures they have a good shopping
experience. This makes availability very
important. We measure availability
daily and have a minimum standard we
expect to achieve.

Definition: Minimum standards have
been exceeded.

Supermarket Convenience

Online

Customer service
Our colleagues make the difference
by delivering great customer service.
We monitor this every fortnight with
a Mystery Shopper programme which
measures the service level of the three
main components of the customer
shopping experience.

Definition: Minimum standards have
been exceeded in all three of the
main components of the customer
shopping experience.

Supermarket

Convenience

Gold

Committed, well-trained colleagues provide
our customers with great service day in, day
out, creating a major point of differentiation
from our competitors. In stores, online or
over the phone, colleagues work hard to
help customers and to meet their changing
shopping needs. We have exceeded all our
customer service targets again this year.

Our colleagues deliver industry leading
customer service and we are committed
to rewarding them well for their hard work.
In August, we announced a four per cent
pay increase for 137,000 colleagues who
work in our stores across the country. Our
new standard hourly rate is well above the
Government’s National Living Wage and
will also apply to around 40,000 colleagues
under the age of 25.

It is important that colleagues are fully
engaged with business activities that
directly relate to them, and that they have
the opportunity to communicate their views
to management. Every location has a ‘Great
Place to Work’ forum comprising colleagues
nominated by their peers to represent
them. These have been designed to give
colleagues a voice and an opportunity to
get involved in helping to shape and guide
change in the business. They are supported
by a number of other initiatives used to
understand and respond to the needs of our
colleagues, such as our ‘Talkback’ survey,
performance reviews, listening groups and a
colleague suggestion scheme.

We were named Grocer magazine’s Grocer 33
Store of the Week 19 times during the year1,
the highest of any grocery retailer, and we
also won the Grocer Gold Customer Service
and Availability Awards for the third year
running. We offer colleagues job satisfaction,
a wide range of job roles, career progression
and flexibility. This helps to generate strong
loyalty within our workforce, and nearly
28,000 of our colleagues have worked
with Sainsbury’s for 15 years or more. Over
Christmas and New Year we recruited nearly
12,000 temporary colleagues to serve our
customers at the busiest time of year, giving
them valuable experience and a stepping
stone into the workplace.

We provide extensive skills training, which
helps colleagues serve our customers better.
We have seven Food Colleges for colleagues
who work on our fresh food counters and
in our store cafés. The courses on offer
enhance craft and customer service skills,
and can lead to apprenticeship diplomas.
We are also growing our digital capability
to prepare us for the future, hiring 480 new
digital-focused colleagues.

We support colleagues who want to develop
and progress their career within our business
and have a robust process in place to identify
and nurture talent. There is further opportunity
within our business for women and minority
groups at senior levels of management
and we have established a business-wide
mentoring scheme to help colleagues
overcome barriers to career progression.

1. The Grocer 33 Service & Availability was year-to-date 2015/16

Our colleagues deliver industry-leading
customer service each and every day

Training &
apprenticeship
opportunities

Award-
winning
customer
service

Colleagues are
cheerful, proactively
look to help, provide
product information
when asked and
seem to value us as
customers
SAINSBURY’S CUSTOMER
EAST MIDLANDS

Commitment to

diversity & inclusion

Strategic Report

Our values
make us
different

Our values remain at the core of
our business and are part of our
long-term strategy for growth.

The scale of our business
means we have an important
role in contributing to
sustainable development.
Our Sustainability Plan shows
our journey to address the
opportunities and challenges
that are relevant to our
business and the wider world.

Band A

One of only 37
companies awarded a
position on the FTSE
350 Climate Disclosure
Leadership Index (CDLI)

The market context we operate in has
changed significantly since we launched
our original Sustainability Plan in 2011.
Consequently, we have updated the plan
to focus on the issues that are most
important to our customers, colleagues and
stakeholders now, and on the areas in which
we can make the most positive impact.
Our five values, outlined below, underpin
our strategy, make good business sense
and give us real competitive advantage.

Respect for our environment
In 2015 we launched Waste less, Save more,
an ambitious initiative to tackle high levels
of food waste across the UK. Food waste is
an important issue for our customers, with
the average household throwing away £700
worth of food each year. We are investing
£10 million over five years to identify
practical, easy ways to help people across
the UK reduce their household waste. From
the 189 towns that applied, Swadlincote in
South Derbyshire won the opportunity to be
our innovation test-bed town, and to receive
our initial £1 million investment.

In 2015 we were one of only 37 companies
on the FTSE 350 Climate Disclosure
Leadership Index (‘CDLI’), and the only UK
retailer on the CDLI to achieve a Band A
rating. We were identified as a UK leader in
environmental performance and recognised
for the quality and transparency of
information disclosed to investors through
the Carbon Disclosure Project.

Our 355,000 sq ft distribution centre in
Tamworth was fitted with over 4,000 solar
panels as well as the infrastructure to
export surplus power back to the National
Grid at times of peak national demand. In
some stores we have started to trial aerofoil
technology on our fridge systems to reduce
the amount of cool air that escapes from
fridge units, thereby using less energy
to keep the fridge units cool and to keep
shopping aisles warm. These innovations
have contributed to a 1.07 per cent
reduction in energy used in 2015/16.

We reduced our energy usage by
1.07 per cent during 2015/16 and
our greenhouse gas emissions
reduced by 3.11 per cent

Tackling food waste

Innovation
test-bed town,
Swadlincote

Food waste is one
of the biggest issues
facing us all today,
with households
unaware of just
how much food
they are binning
PAUL CREWE
HEAD OF SUSTAINABILITY
AT SAINSBURY’S

111
Discovery
Communities

£10 million
investment

Strategic Report

Our values make
us different

Living healthier lives
The sugar content of food has received
significant media coverage, and a ‘sugar
tax’ was announced in the Government’s
2016 Budget. During the year we removed
sugar from our chilled juice drinks, Oriental
ready meals and 16 by Sainsbury’s yoghurts.
Taking our combined previous sales of these
products, we anticipate that this will remove
a total of 80.3 tonnes of sugar from our
customers’ baskets per year, equivalent to
321 million calories.

We launched new prepared produce lines in
January, demonstrating that we can help
our customers achieve their 5-a-day through
product innovation and inspiration. Sales
of by Sainsbury’s ‘courgetti’ have exceeded
sales forecasts and fresh courgette sales are
also 15 per cent higher than last year.

We have increased the number of healthier
products we carry, particularly in our
‘better for you’ ranges such as Be Good
to Yourself and My Goodness!, where we
have introduced new and inspirational
meal solutions. Our My Goodness! range
currently has 33 ready meals for customers
to choose from.

Now in its 12th year, we have continued
to develop our Active Kids programme,
encouraging children to lead healthier, active
lives. We will continue to develop Active
Kids, with emphasis on both calories in and
calories out, helping children to understand
the importance of both diet and exercise.

100%

of farmed seafood
is independently
certified as sustainable

15%

uplift in courgette
sales this year and new
‘courgetti’ exceeding
sales forecast

With nearly
7,000 Sainsbury’s
own-brand food and
drink products
available, we make
a considerable
investment in our
programme to improve
nutrition quality. Even
small changes can
make a significant
impact on the healthy
balance of our
customers’ baskets

DR DANIELLE MCCARTHY
COMPANY NUTRITIONIST
AT SAINSBURY’S

Sourcing with integrity
Customers care about where the products
they buy come from and they put their trust
in us to do the right thing on their behalf.
This is why sourcing with integrity is key to
our work with farmers, growers and suppliers
in the UK and around the world.

We continue to invest in the future of British
farming and work closely with our farmers
and growers across the UK. Initiatives include
supporting five agriculture apprentices
within our poultry and livestock supply
chains, to help them develop knowledge
and expertise in the industry. In addition,
seven British farmers and growers completed
our first Sainsbury’s farming scholarship
programme in partnership with Imperial
College London supported by Alastair Leake
from the Allerton Trust.

By working closely with our 822 sheep
farmers we were able to extend our British
lamb season by five weeks compared to
the 2014 season. This ensured great quality
and availability for our customers, and
gave confidence to our sheep farmers at a
time of low market prices. We have shown
similar support to our Sainsbury’s Dairy
Development Group (‘SDDG’) farmers at
a time when sections of the British dairy
industry were facing issues with volatile
pricing. Since 2012, we have paid the 280
SDDG farmers who supply our own-brand
milk on a Cost of Production model which
directly reflects their costs, builds in a profit
for them, and rewards outstanding animal
welfare and environmental standards.

Strategic Report

A great place to work
We know we can do more to ensure that
the make-up of our workforce reflects
the diversity of the customers we serve,
particularly at a managerial level. Over 55
per cent of our colleagues are female and
we want to help them develop their careers
with us. External and internal research shows
that mentoring is a great way to support
women with their career development, so we
have launched a new initiative that makes
mentoring available to up-and-coming
female colleagues who have the potential
and desire to progress their careers. So far
over 1,400 colleagues have signed up to be
mentored through the scheme. We are also
proud to be co-sponsors of the largest ever
survey of race at work in the UK. The survey,
run by Business in the Community, was
completed by 24,000 working people (over
4,000 of whom were Sainsbury’s colleagues)
to better understand the experience of ethnic
minorities at work in the UK. We want to help
all our colleagues fulfil their potential, so we
are using the results of this survey to build
on our own action plans and understand how
we can help colleagues from all backgrounds
progress in their careers with us.

Making a positive difference
to our community
During the year, we donated nearly
£46 million to charities, including over
£7 million raised for charities which are
local to our stores and distribution centres,
and which are selected by colleagues
and customers. 343 charities received an
additional £69,000 through our Local Heroes
scheme, which provides financial support to
charities where our colleagues volunteer in
their free time. We also supported flooded
communities located near our stores in the
north west of England and Yorkshire, donating
over £100,000 worth of emergency supplies.

Nationally, it was a milestone year for our
partnership with Carers UK, as the charity
celebrated its 50th anniversary and we
marked our fifth year of support. We also
raised over £7 million for this year’s Sport
Relief campaign, and have now raised over
£100 million for Comic and Sport Relief since
our partnership began in 1999. We continue
to support the Royal British Legion, raising
over £2 million, and our colleagues went
the extra mile to ensure the safety of Poppy
Appeal collectors by banking funds raised
in store on their behalf. Our 2015 Mog’s
Christmas Calamity campaign raised more
than £1.5 million for Save the Children’s
literacy campaign Read on, Get on and we
also signed the Vision for Literacy Business
Pledge 2016, to support the National Literacy
Forum and help close the literacy gap.

As Operating Board
Sponsor for the Lesbian,
Gay, Bisexual and
Transgender (LGBT)
community, I work with
our LGBT Network to
create an environment
of equal opportunities
in which we can all be
the best we can be,
confident that diverse
views are listened to
SARAH WARBY
MARKETING DIRECTOR
AT SAINSBURY’S

£100m

raised for Comic Relief
and Sport Relief since
our partnership
began in 1999

33,500 colleagues trained at
our Food Colleges since 2010

Strategic Report

KPIs: Our values
make us different

Living healthier lives
Our customers can trust that they can always
choose nutritious and healthy food when they
shop with us.

One way we are delivering this is by reformulating our own-brand
products to reduce salt, sugar and saturated fat with the overarching
aim of making our customers’ baskets healthier.

How we are measuring
our progress
Healthy products sold as a
proportion of total sales volume*

Status at
2015/16
year end

Target for
2016/17
year end

Our 2020
target

41%

42%

45%

* We measure this through the proportion of products in our customers’ baskets that are defined as
healthy based on the product’s multiple traffic light (MTL) ratings around salt, sugar, fat and saturates.

With obesity and diabetes on the rise, and as one of Britain’s leading
supermarkets, it is important that health is a core part of our
customer offer. We want to help our customers to lead healthier lives
while still offering them an exciting range of delicious, well-made
food. We also recognise the importance of instilling the principles of
a healthily balanced lifestyle in children, to help them make healthy
choices as adults.

We are committed to improving the healthy balance of our
customers’ food baskets. We are on target to achieve an increase of
four percentage points by 2020. We have also increased the number
of healthier products we carry across our ranges, including within
our ‘better for you’ ranges, Be Good to Yourself and My Goodness!,
where we have introduced new and inspirational meal solutions.
Our My Goodness! range now has a total of 33 ready meals to
choose from. Likewise, we have added inspiration and innovation
to our produce category and our customers can now add fresh
courgetti (spiralized courgette), boodles (butternut squash noodles),
sweet potato fries and cauliflower rice to their baskets, helping them
to create delicious vegetable rich dishes at home.

We will encourage kids to live a healthy,
balanced lifestyle.

We are delivering this by continuing to develop our Active Kids
scheme, investing £200 million in activities for kids of all abilities.

How we are measuring
our progress
Total investment in
our Active Kids scheme

Status at
2015/16
year end

Target for
2016/17
year end

Our 2020
target

£160m

£170m

£200m

Our Active Kids scheme is now in its 12th year and continues to help
children all over the UK to lead an active lifestyle, regardless of ability
or impairment. Since the scheme began, we have donated over
£160 million of equipment, activities and experiences and in 2015
alone, over 34,000 organisations benefitted from Active Kids voucher
collection. We focus on healthy eating as well as activity, supporting
the introduction of a nutrition curriculum into the education system

including increasing the amount of cookery equipment available
by redemption of Active Kids vouchers. We want to support the
continued development of the nutrition elements of the programme,
doubling the amount of vouchers redeemed against cookery
equipment and creating inspirational programmes like the Taste
Buddies Challenge to encourage children to think more about the
food they eat and how it can help them lead healthy, active lives.

Sourcing with integrity
We will source our key raw materials
sustainably to an independent standard.

As part of our commitment to sourcing with integrity, we have
identified our key raw materials which we will source sustainably to
an independent standard.

How we are measuring
our progress
Number of key
raw materials with
sustainability standards

Status at
2015/16
year end

Target for
2016/17
year end

Sustainability
standards are
currently being
developed for 20
of our key raw
materials

Sustainability
standards
developed for 21
of our key raw
materials

Six standards in
pilot phase

Quantity of raw materials
sourced from supply
chains working within
our independent
sustainability standards

To date 13
have been
peer reviewed
by external
organisations and
one is currently
being piloted

Our 2020
target

Independent
sustainability
standards for all
of our key raw
materials

Significant
quantities of raw
materials sourced
from supply chains
working within
our independent
sustainability
standards

In addition to our investment in the sustainable sourcing of
raw materials, we have set out to create our own independent
sustainability standards to address the gaps in the existing
standards that are available. We have our first standard being
piloted, our Farmed Prawn standard, that works across our prawn
farmers in Thailand. It spans environmental, social and economic
factors including water quality, social impact, worker welfare and
the productivity levels of the business.

Progress continues to be made on a number of key raw materials.
98 per cent of the palm oil used to manufacture our own-brand
products is now certified sustainable and 93 per cent of the wood
used in our products (excluding nappies) was from recycled, Forest
Stewardship Council (FSC) or PEFC (Programme for the Endorsement
of Forest Certification) sources.

98%

of the palm oil we use to
manufacture our own-brand
products is certified as sustainable

Strategic Report

Our own-brand fish will be independently
certified as sustainable.

Healthy marine ecosystems are vital for the health of our
planet and millions of livelihoods around the world.

How we are measuring
our progress
Proportion of wild caught seafood
sales which is independently certified
as sustainable

Proportion of farmed seafood sales
which is independently certified
as sustainable

Status at
2015/16
year end

Target for
2016/17
year end

Our 2020
target

70%

85%

100%

We are the UK’s biggest retailer of Marine Stewardship Council
(MSC) certified seafood for the sixth consecutive year. We have
over 180 MSC labelled products, more than twice as many as any
other UK retailer. By the end of 2015/16 all of the farmed fish
and seafood we sell was certified against one of our recognised
independent sustainability standards. We also supported the ongoing
development of the Aquaculture Stewardship Council Responsible
Feed Standard and developed and launched the pilot of our own
Farmed Prawn Sustainability Standard. We continue to progress
towards our target of 100 per cent MSC certification for wild caught
seafood through supplier engagement and a programme of fishery
improvement projects in non-certified fisheries.

We are committed to selling products that are
fairly traded, investing in the sustainability
of our suppliers, farmers, growers and workers
within our supply chains internationally.

We are the world’s biggest retailer of Fairtrade products* and we
will continue to grow the sales of fairly traded products in line with
our business.

How we are measuring
our progress
Sales of Fairtrade
products

Status at
2015/16
year end

>£290m*
(14/15)

Target for
2016/17
year end
In line with
business sales

Our 2020
target
To be
defined

* Figure as of 2014/15. 2015/16 figure to be released by Fairtrade in August 2016.

We are particularly proud of the contribution our Fair Development
Fund has made to supporting farmers and workers involved in
the global supply chains of products such as tea, coffee and nuts.
Since 2013, with our partners Comic Relief, we have invested
over £1 million and impacted more than 12,000 people. A great
example of this is a project working with smallholder cashew nut
farmers in Madagascar. The production area is based in the north
west of Madagascar in three villages around the town of Ambilobe.
With the Centre Technique Horticle de Tamatave, we have been
running a series of farmer training sessions in each of the three
villages and are in the process of building nurseries in each village

to provide young trees for replanting. Farmer training sessions
include good agricultural practice, product quality improvement
and farm management. Another part of the project concerns the
issue of land ownership. Farmers have signed up for their fields to be
identified on the land register. Following this stage we can begin the
administrative procedures for them to receive the deed of property.
By the end of 2015 we had collaborated with over 450 farmers,
around 100 farmers more than expected. Finally, a factory is being
set up with the help of the local Ministry of Health officials to provide
good working conditions and ensure it is designed in such a way as
to move toward British Retail Consortium (BRC) certification.

We will invest in the future of British farming
and be the leading retailer for British produce.

We will continue to focus on research and development (R&D) and
innovation to test the impact of new growing systems on different
varieties and to increase yields and season length through new
growing practices.

How we are measuring
our progress
Number of R&D projects
(participation either as a
project lead or partner)

Value of investment
for projects involving
Sainsbury’s in British
farming

Status at
2015/16
year end

Target for
2016/17
year end

Supporting the
launch of the Centre
for Information
Excellence in
Livestock

>£10 million

Our 2020
target

A fully developed
portfolio of British
Farming R&D which
delivers against
strategic priorities,
informed by the
Food & Farming
Strategy, and fully
integrated into the
total supply chain

We know that British sourcing matters to our customers. Through our
farmer and grower Development Groups, our R&D programme and
our Apprenticeship Scheme, we are supporting the British agricultural
sector, building a more resilient industry and bringing young talent
into British farming.

For the 2015/16 season, we extended the British lamb season for our
822 sheep farmers until January 2016, making it five weeks longer
than the 2014 season. We work closely with our 822 sheep farmers,
giving us the confidence to be able to extend our British offer
whilst ensuring great quality and availability for our customers. We
announced our intention to extend the range in October 2015 to give
our sheep farmers confidence during a time of low market prices.

We have shown similar support to our Sainsbury’s Dairy Development
Group (SDDG) as the British dairy industry has faced volatile pricing
in recent months. Since 2012 our 280 SDDG farmers, that supply our
own-brand milk, have been paid on a Cost of Production model which
directly reflects our farmers’ costs, building in a profit for them and
rewarding outstanding animal welfare and environmental standards.

We have continued to invest in a portfolio of R&D projects through
multiple channels including government funded initiatives, direct
relationships with our suppliers and farmers, academic institutions
and industry experts, and also through the continued support and
engagement of the Government’s Centres of Excellence.

Strategic Report

KPIs: Our values
make us different

Through this strategy we now contribute to an extensive portfolio
of 48 projects covering beef, pork, lamb, chicken, egg, top fruit,
stone fruit, salmon, wheat, potatoes, salad crops and brassicas.
Cumulatively, these projects, involving Sainsbury’s and other
partners, have an investment in agriculture of over £10 million
including government funding.

Our meat, poultry, eggs and dairy products
will be sourced from suppliers who adhere
to independently verified higher animal health
and welfare outcomes.

Sourcing our eggs, some of our meat offer such as veal and some of
our poultry to the RSPCA Assured standard, is one of the ways we
source from independently verified higher welfare standards.

How we are measuring
our progress
Proportion of sales from
independently verified
higher animal health &
welfare outcome sources

Status at
2015/16
year end

Poultry – 13%
Egg – 100%
Veal – 100%

Target for
2016/17
year end

Our 2020
target

Poultry – 20%
Egg – 100%
Veal – 100%

Poultry – 100%
Egg – 100%
Veal – 100%

We believe that good standards of animal health and welfare are
important first and foremost for the wellbeing of the animals
themselves whilst also recognising that improved standards of
animal husbandry and management are linked to improved
productivity and food quality. We continue to be the UK’s biggest
retailer of RSPCA Assured products with sales of £441.4 million
(2015/16). 100 per cent of our eggs, farmed salmon and veal is
RSPCA Assured as is all of our Taste the Difference turkey, chicken
and pork.

We have been participating in the Business Benchmark on Farm
Animal Welfare (BBFAW) since its introduction in 2012 (the first global
measure for animal welfare, supported by Compassion in World
Farming, World Animal Protection and Coller Capital). We are proud
to be one of only 11 global companies listed in the top two tiers of
this benchmark in 2015 (90 companies assessed). During 2015 we
have continued to invest in a number of research and development
projects targeted at improving the health and welfare of livestock in
our value chains. We have also continued to work with our farmers
to keep them at the forefront of knowledge and good practice,
through sharing welfare outcome datasets and by running practical
workshops. Our workshops have included water use for poultry
farmers, optimum housing design for veal calves and technical
groups on cattle health and welfare.

We will reduce and optimise our
own-brand packaging.

We will reduce our own-brand packaging by 50 per cent
compared to 2005.

How we are measuring
our progress
Reduction in own-brand
packaging since 2005

Status at
2015/16
year end
31.5%*
(14/15)

Target for
2016/17
year end
35%

Our 2020
target
50%

* Our 2015/16 packaging reduction update will be calculated as part of our annual producer
responsibility tax calculations and Courtauld Commitment reporting requirements, which will be
available online from June 2016.

The right packaging plays an important role in helping us deliver the
best quality products to our customers every time they shop with us.
We are always looking at innovations to improve further and optimise
the packaging we use. One example is our ongoing work with our
dairy and packaging suppliers to reduce the weight of our fresh
milk bottles. Our latest two-pint milk bottles are now 14.6 per cent
lighter which, based on current sales, will save 580 tonnes of plastic
a year.

Other key areas of focus for us are how much recycled material
we use in our own-brand packaging and how easy it is for our
customers to recycle our packaging. We have been part of the UK
On Pack Recycling Labelling system since its outset and over 88 per
cent of our primary and secondary packaging is labelled ‘widely
recycled’ or ‘check local recycling’. Furthermore, over 38 per cent of
the material we use in our primary packaging already comes from
post-consumer recycled material sources. We work on thousands
of pieces of packaging a year and continually strive to optimise
further performance in helping protect products and make it easy
for customers to shop and enjoy them at their best. Over the coming
year we anticipate gradual further reductions towards our 2020
target of a 50 per cent reduction versus our 2005/06 baseline.

We are signatories
of Courtauld III, an
industry commitment
to waste reduction

20%

waste reduction
target by 2025 in
the UK food and
drink sector

Strategic Report

We will work with our key own-brand suppliers,
farmers and growers to address the impact of
our products.

Our scale means that it is important that we focus on reducing
our impact on the environment but also that we are engaging our
suppliers to do the same.

How we are measuring
our progress
Courtauld 2025

Status at
2015/16
year end

Target for
2016/17
year end

Our 2020
target

Signatory
at launch

To be confirmed with
Courtauld partners

We are actively trying to grow the number of Food Donation Partners
we have and by 2020 aim to have all of our stores matched with
a suitable local partner. We have also shared our journey with our
suppliers to encourage our suppliers to establish a similar network
of Food Donation Partners to redistribute their surplus food.

We will invest £10 million to help our customers
reduce their waste through our Waste less, Save
more initiative.

This is a new campaign for us and represents the first time we have set
a target against involving our customers in a sustainability initiative.

Resource efficiency, water stewardship and waste are global issues
that we will be addressing through our updated commitment to
sustainable sourcing. We have already built strong relationships with
over 2,000 farmers and growers that belong to our Development
Groups and we work with them to reduce their impact on the
environment.

We have been working with the Waste & Resources Action
Programme (WRAP) as a signatory to the Courtauld commitment
since its inception in 2004 – reducing packaging and food waste
across food grocery retail supply chains. We are now a signatory to
Courtauld 2025, launched in March 2016, which includes targets
to reduce UK food and drink waste by 20 per cent, to reduce the
greenhouse gas intensity of food and drink consumed in the UK by
20 per cent and to reduce the impact associated with water use in
food and drink supply chains.

Respect for our environment
We will work with our colleagues to reduce
waste and put it to positive use.

One way we are delivering this is by the redistribution of surplus
food to food charities, thereby reducing food waste and addressing
food poverty.

How we are measuring
our progress
Number of stores with
Food Donation Partners for
surplus food

Status at
2015/16
year end
638

Target for
2016/17
year end
800

Our 2020
target
All stores

Figures published by The Trussell Trust show that foodbank use
in the UK remains at record levels, rising two per cent on last
year. In 2015/16 a total of 1,109,309 three day emergency food
supplies were provided to people in crisis by the charity’s network
of foodbanks. To address food poverty, 638 of our stores have Food
Donation Partnerships, where unsold, edible food is donated to
charity. We also have 714 collection points where customers can
donate food they have purchased in store.

How we are measuring
our progress
Investment in Waste less,
Save more

Reduction in household
food waste in our trial town
of Swadlincote

Status at
2015/16
year end

Launch

Target for
2016/17
year end

£1m

Our 2020
target

£10m

50% reduction
in Swadlincote

We have
assessed
the average
food waste of
households in
Swadlincote

Once we have
completed our
one year trial in
Swadlincote we
will set ourselves
targets for a
national roll-out

Our Closer to Customers research carried out in 2015 revealed a
compelling opportunity to help customers reduce their household
waste. We launched an ambitious, industry leading initiative to help
customers waste less and save more. We are investing £10 million
over five years to find out the best ways of helping our customers
reduce their household waste and share our findings with the nation.
The initiative kicked off with a search to find a test town to work
with throughout the first year, and after a competitive pitch process,
Swadlincote in South Derbyshire was selected. We have set ourselves
the ambitious target of reducing household waste by 50 per cent over
the year, which would make Swadlincote the first town to achieve the
UN’s Global Sustainability Goal set for 2030.

2016 is about trying, testing and sharing with a longer-term ambition
of rolling out what works to other communities. We hope to reduce
food waste by half in Swadlincote, which could save families up to
£350 a year. By sharing what we learn in Swadlincote and making
this accessible to the UK at large, we are confident we will become
the go-to brand for customers looking for help with food waste and
we will continue to innovate in this area.

We will reduce our operational carbon emissions
by 30% absolute and 65% relative (to 2005).

How we are measuring
our progress
Change in carbon
emissions

Status at
2015/16
year end

3.4% Absolute
reduction versus
2005/06
4.7% Relative
reduction versus
2005/06

Target for
2016/17
year end

10% Absolute
reduction versus
2005/06
13.3% Relative
reduction versus
2005/06

Our
2020
target

30% Absolute
reduction versus
2005/06
65% Relative
reduction versus
2005/06

Strategic Report

KPIs: Our values
make us different

In December 2015, at the United Nations Climate Change Conference,
world leaders agreed a legally binding global action plan to avoid
dangerous climate change. They committed to keep the increase in
global average temperature to well below two degrees Celsius above
pre-industrial levels. We remain committed to reducing our operational
carbon by 30 per cent absolute, and 65 per cent relative, and are on
track to achieve this and support the Government’s reduction target.

Our absolute operational carbon emissions decreased by 3.11 per
cent last year and we are now 3.42 per cent lower than our 2005/06
baseline, despite our retail sales space increasing 53 per cent
within the same period. Our ability to grow whilst reducing carbon
emissions has been shown through innovations like our ten lorries
that are currently trialling a new natural refrigerant gas, with 45 per
cent less Global Warming Potential than our existing refrigerant.

Through robust water stewardship we will ensure
that our business addresses and manages all
areas of water vulnerability.

How we are measuring
our progress
Annual change in water
use in our operations
(Absolute)

Annual change in water
use in our operations
(Relative)

Status at
2015/16
year end

Target for
2016/17
year end

Our 2020
target

29% Absolute
reduction
versus 2005/06

30% Absolute
reduction versus
2005/06

54% Relative
reduction
versus 2005/06

55% Relative
reduction versus
2005/06

In 2015/16 we achieved 29 per cent absolute water reduction
against 2005/06 despite growing our sales area by 53 per cent during
this period.

During 2016/17 we aspire to save 85 million litres of water in our
existing estate to offset increases in water use by new stores and
other changes. By 2016/17 year end we are forecasting to effectively
break the link between space growth and the need for additional
water in our operations. By 2020 we will increase this to 55 per cent
relative reduction; the one per cent improvement in relative reduction
is sizable (equivalent to the annual usage of 220 households). We are
already using around 1 billion litres less water than in 2005/06.

1,240

Stores raising money
for a local charity

In its seventh year our
local charity programme
has raised over £7m

Making a positive difference
to our community
We will support our local communities in
relevant and impactful ways and donate over
£400 million to charitable causes by 2020.

One way we are delivering this is through growing our Local Charity
of the Year programme, founded in 2009.

Status at
2015/16
year end
1,240

Target for
2016/17
year end
1,300

Our
2020
target
All stores

How we are measuring
our progress
Number of stores
supporting their Local
Charity of the Year partner
through awareness-
raising, fundraising and
volunteering

We believe it is important that we continue to make a difference
where our customers and colleagues live. Our stores support over a
thousand charities through our Local Charity of the Year initiative.
Every year, each of our stores select a local charity to support, which
they feel they can make the most difference to through fundraising,
awareness-raising and volunteering throughout the year. Our
colleagues shortlist three charities and the final vote goes to our
customers in-store and online. It is our ambition for all our stores
to have Local Charity of the Year partners and for us to be able to
measure and report on the impact that their contributions are having
so we can celebrate success and make continuous improvements to
the scheme. Developing our impact reporting will be a focus for the
year ahead.

A great place to work
We will be an employer where colleagues
love to work.

We are committed to exceeding the National Living Wage (NLW)
proposal of over £9 per hour by 2020.

How we are measuring
our progress
Colleague reward

Status at
2015/16
year end

£7.36/hour
(2.2% above the
National Living
Wage)

Target for
2016/17
year end

To be in line with
or above the NLW

Our
2020
target

Standard
colleague rate
above the NLW
rate of £9/hour
or more

The National Living Wage of £7.20 per hour has now been introduced
for workers over the age of 25, rising to over £9 per hour by 2020. We
know what a difference our colleagues make to our customers every
day and we are committed to rewarding them.

Strategic Report

We will have an inclusive workforce that offers
employment opportunities to all members
of the community.

One way we are delivering against this is by providing work opportunities
and access to jobs for those who face barriers to the workplace.

How we are measuring
our progress
Number of colleagues
employed through our
You Can scheme since 2008

Status at
2015/16
year end
25,000

Target for
2016/17
year end
27,000

Our 2020
target
30,000

There are several barriers people face when entering the workforce.
Unemployment cannot be tackled by government alone and we
believe businesses have to contribute to a solution. That is why we
are committed to providing work opportunities and access to jobs for
those who face barriers to employment.

Since 2008, we have employed over 25,000 people through You Can,
our scheme to provide jobs for people who might otherwise struggle
to find employment. We have built strong partnerships with a variety
of organisations including MENCAP, Jobcentre Plus, Remploy, Shaw
Trust and A Fairer Chance. This helps us offer opportunities to people
from disadvantaged backgrounds; from supporting the long-term
unemployed to those with learning disabilities and former offenders.

During 2015/16 we also developed ‘People Plus’, offering pre-
employment courses to help potential candidates understand
important skills around customer service and the world of work.

1,400+

female colleagues
signed up to be
mentored

External and internal
research shows that
mentoring is a great way to
support women with their
career development

We have always paid above the National Minimum Wage and in
August we gave 137,000 colleagues working in stores across the
country a four per cent pay rise. This took our standard rate of pay
from £7.08 to £7.36 an hour, 2.2 per cent above the Government’s
new National Living Wage. While the new National Living Wage
secures a minimum pay only for people over 25, we do not
differentiate on age and our pay rise also applied to around 40,000
under-25 colleagues. This is not something new for us; our colleagues
are among the best rewarded in the industry. In 2015/16 nearly
126,000 management and colleagues shared a bonus pot of around
£100 million. We are committed to continuing the progression of our
wage rates and we are using the public discussion about the new
living wage to listen and gather opinions from our colleagues around
contracts, pay and benefits.

We will continue to invest in the training and
development of our colleagues.

We are actively supporting career progression for internal colleagues
aligned to our talent vision.

How we are measuring
our progress
Number of
apprentices trained

Status at
2015/16
year end

Target for
2016/17
year end

Our 2020
target

450 completed
apprenticeships

2,500 apprentices

413 colleagues
enrolled on
apprenticeship
schemes
covering: fish
preparation &
service, bakery
skills, business
administration,
management
skills and leading
teams

To retain and attract colleagues and be a place where people love to
work, it is important to deliver agile, responsive qualifications as part
of our development offer. Following the Government’s announcement
of the Apprenticeship Levy in autumn 2015, we have been
developing our current and future programmes to support colleagues
to be the best they can be. The world of apprenticeships is changing,
with the introduction of new programmes via the employer lead trail
blazer process and changes to funding which will start in March 2017.

During the year we introduced two Level 2 craft apprenticeships for
bakery and fish counter colleagues. These programmes will help our
colleagues develop the skills, knowledge and behaviours to achieve a
City & Guilds Apprenticeship Diploma. In January 2016 we launched
a pilot of a Level 2 Team Leading Apprenticeship and a Level 3
Management Apprenticeship across supermarkets, convenience
and logistics. The programme will help us to grow talent through
supporting the development of essential management skills.

We will continue to explore new opportunities for apprenticeships
that are right for our colleagues and our business, e.g. Accountancy,
Food Technology, Buying, Supply Chain and Fashion Retail.

Strategic Report

Our principal risks and uncertainties

The risk management process is closely aligned to our strategy. Risk
is an inherent part of doing business. The management of these risks
is based on a balance of risk and reward determined through careful
assessment of both the potential likelihood and impact as well as risk
appetite. Consideration is given to both reputational as well as financial
impact, recognising the significant commercial value attributable to
the Sainsbury’s brand. Each principal risk and uncertainty is
considered in the context of how it relates to the achievement of the
Group’s strategic objectives. The current business strategy and
objectives are categorised into the following areas of focus:

w o

W e k n o

r c u s t o m ers better than a

l
s

Great
products
and services
at fair prices

Colleagues
making the
difference

Our
values
make us
different

There
for our
customers

The risk discussion includes assessment of both gross and net risk,
where gross risk reflects the risk exposure and risk landscape before
considering the mitigations in place and net risk being the residual
risk after mitigations. The risk appetite for each key risk is also
discussed and assessed. The gross risk movement from prior year for
each principal risk and uncertainty has been assessed and is
presented as follows:

No change

Increased gross
risk exposure

Reduced gross
risk exposure

Mitigations in place supporting the management of the risk to a net
risk position are also described for each principal risk and uncertainty.

Key risk movements
The principal and emerging risks are discussed and monitored
throughout the year to identify changes to the risk landscape. Risks
are reviewed in line with the Company’s strategic objectives. A new
principal risk regarding the political and regulative environment has
been identified. High levels of transformation and change, including
the ongoing transformation of our Digital & Technology division, have
meant levels of management attention on risks associated with
change initiatives have been continued. This includes focus on
Colleague Engagement, Retention and Capability where risks have
increased due to higher levels of uncertainty amongst colleagues as
a result of changes which have been executed during the year
following our strategic review in 2014.

The most significant principal risks identified by the Board and the
corresponding mitigating controls are set out below in no order of
priority.

Business continuity and major incidents response

Risk

A major incident or catastrophic event could impact on the
Group’s ability to trade.

Mitigation
Sainsbury’s has detailed plans in place, supported by senior
representatives who are trained in dealing with major incidents and
have the authority levels to make decisions in the event of a
potentially disruptive incident.

The Business Continuity Steering Group meets quarterly to ensure
that the business continuity (‘BC’) policy and strategy is fit for
purpose. In addition, it oversees the mitigation of all risks associated
with BC and IT disaster recovery. In the event of any unplanned or
unforeseen events the Business Continuity Management Team is
convened at short notice to manage the response and any associated
risk to the business.

All key strategic locations have secondary backup sites which would be
made available within pre-defined timescales and are regularly tested.

Business strategy and change

Risk

If the Board adopts the wrong business strategy or does not
communicate or implement its strategies effectively, the
business may be negatively impacted. Risks to delivering the
strategy, change initiatives forming part of the strategy and
other significant supporting change such as the internal
transformation of the Digital and Technology function need to
be properly understood and managed to deliver long-term
growth for the benefit of all stakeholders alongside
management of business as usual.

Mitigation
The business strategy is focused on the following:
— We know our customers better than anyone else;
— We will be there wherever and whenever they need us;
— We will offer great products and services at fair prices;
— Our colleagues make the difference; and
— Our values make us different.

The progress against strategic programmes and any risks to delivery,
such as the ability to implement and deliver change and new
business initiatives, are regularly reviewed by the Board and the
overall strategy is reviewed at the annual two-day Strategy
Conference. The Operating Board also holds regular sessions to
discuss strategy. This activity is supported by a dedicated strategy
team. To ensure the strategy is communicated and understood, the
Group engages with a wide range of stakeholders including
shareholders, colleagues, customers and suppliers on a continual
basis. In addition, management performs ongoing monitoring of
business as usual performance to determine indicators of potential
negative performance as a result of change initiatives.

Strategic Report

A review of key third parties who hold sensitive customer or
colleague data continues to take place, and progress is monitored
by the Data Governance Committee. A risk based security testing
approach across Sainsbury’s IT infrastructure and applications is
in place to identify and remediate ongoing vulnerabilities.

Environment and sustainability

Risk

Environment and sustainability are core to Sainsbury’s values.
The key risk facing the Group in this area relates to reducing the
environmental impact of the business with a focus on reducing
packaging and new ways of reducing waste and energy usage
across stores, depots and offices.

Mitigation
A number of initiatives are in place, which are being led by the
Environmental Action Team and the Corporate Responsibility Steering
Group, to reduce our environmental impact and to meet our
customers’ expectations in this area. Further details are included in
the Corporate Responsibility review on pages 59 to 60.

Financial and treasury risk

Risk

The main financial risks are the availability of short and
long-term funding to meet business needs and fluctuations in
interest, commodity and foreign currency rates. The business
has now acquired full ownership of Sainsbury’s Bank which
presents a risk that the Group’s financial performance and
position may be negatively impacted if the Bank transition and
performance is not delivered as planned. In addition, there
remains a risk around Pensions as the Group operates a number
of pension arrangements that are subject to risks in relation to
liabilities as a result of changes in life expectancy, inflation and
future salary increases, and to risks regarding the value of
investments and the returns derived from such investments.

Mitigation
The Group Treasury function is responsible for managing the Group’s
liquid resources, funding requirements, interest rate and currency
exposures and the associated risks as set out in note 29 on page 126.
The Group Treasury function has clear policies and operating
procedures which are regularly reviewed and audited.

Sainsbury’s Bank operates an enterprise wide risk management
framework. The principal financial risks relating to the Bank and
associated mitigations are set out in note 29 to the financial
statements on page 131.

With regard to Pensions, an investment strategy is in place which
has been developed by the pension trustee, in consultation with
the Company, to mitigate the volatility of liabilities, to diversify
investment risk and to manage cash. In September 2013, the
Sainsbury’s Defined Benefit Pension Scheme was closed to future
contributions which will help us to manage the escalating costs of
pensions and protect the pensions that colleagues have already built
up in the Scheme.

Colleague engagement, retention and capability

Risk

The Group employs over 162,000 colleagues who are critical to
the success of our business. Attracting and maintaining good
relations with talented colleagues and investing in their training
and development is essential to the efficiency and
sustainability of the Group’s operations. Delivery of the strategic
objectives, including development of new businesses and
progress on multi-channel and digital, increases the risk of
Sainsbury’s ability to attract, motivate and retain talent, specific
skill sets and capability. In addition, the challenging trading
environment requires a focus on efficient operations which may
include change initiatives impacting colleagues, therefore
presenting a risk of loss of colleague trust or engagement.

Mitigation
The Group’s employment policies and remuneration and benefits
packages are regularly reviewed and are designed to be competitive
with other companies, as well as providing colleagues with fulfilling
career opportunities. Colleague surveys, performance reviews,
communications with trade unions and regular communication of
business activities are some of the methods the Group uses to
understand and respond to colleagues’ needs. In addition to strong
leadership and nurturing of talent by line managers, processes are also
in place to identify talent and actively manage succession planning
throughout the business. Ongoing reviews are performed to understand
the nature of capability and specific skill sets required to deliver
objectives. This is supported by embracing new ways of attracting talent
and our corporate value ‘Great Place to Work’ reinforces our commitment
to giving people the opportunity to be the best they can be.

Colleague surveys, performance reviews, listening groups,
communications with trade unions, regular communication of
business activities and colleague networking forums such as Yammer
and the updated colleague portal (Our Sainsbury’s) are some of the
methods the Group uses to understand and respond to colleagues’
needs. As change initiatives are implemented, the methods described
above will continue to be employed to understand and maintain
colleague trust and engagement.

Data security

Risk

It is essential that the security of customer, colleague and
company confidential data is maintained. A major breach of
information security could have a major negative financial and
reputational impact on the business. The risk landscape is
increasingly challenging with deliberate acts of cybercrime on
the rise targeting all markets and heightening the risk exposure.

Mitigation
A Data Governance Committee is established and is supported by
focused working groups looking at the management of colleague
data, customer data, information security, commercial data and
awareness and training. Senior appointments have been made into
new roles specifically focused on Data Governance and Information
Security. In April 2015, a Chief Information Security Officer was
appointed to further develop the Information Security Strategy and
build the necessary capability to deliver against that strategy. In
September 2015, a new Head of Data Governance was appointed
to focus on improving how we handle data across the organisation.
Various information security policies and standards are in place
which focus on encryption, network security, access controls,
system security, data protection and information handling.

Strategic Report
Our principal risks and uncertainties continued

Health and safety – people and product

Trading environment and competitive landscape

Risk

Effective management of the trading account is key to the
achievement of performance targets. The sector outlook has
been and is set to remain challenging. The challenging trading
environment, food price deflation and the price reduction and
price matching activity across the sector may adversely impact
performance. There is also an ongoing risk of supplier failure,
with possible operational or financial consequences for the Group.

Mitigation
We adopt a differentiated strategy with a continued focus on
delivering quality products and services with ‘universal appeal’, at fair
prices, helping our customers Live Well for Less. This is achieved
through the continuous review of our product quality, key customer
metrics, monitoring of current market trends and price points across
competitors, active management of price positions, development of
sales propositions and increased promotion and marketing activity.
In February 2016 we announced our plans to phase out multi-buy
promotions in favour of lower regular prices, the next step in our
commitment to provide customers even better value with lower
regular prices. In delivering our strategic plan, including our price
investment, we will maintain the strength of our balance sheet and
have therefore identified a series of measures to conserve cash in the
business. Through these measures we will deliver sustainable
operating cost savings. With regards to supplier continuity, Sainsbury’s
undertakes credit checks on suppliers and maintains regular, open
dialogue with key suppliers concerning their ability to trade.

Prevention of injury or loss of life for both colleagues and
customers is of utmost importance. In addition, it is paramount
to maintaining the confidence our customers have in our
business.

Mitigation
Clear policies and procedures are in place detailing the controls
required to manage health and safety and product safety risks across
the business and comply with all applicable regulations. These cover
the end-to-end operation, from the auditing and vetting of
construction contractors, to the health and safety processes in place
in our depots, stores and offices to the controls in place to ensure
people and product safety and integrity.

In addition, established product testing programmes are also in place
to support rigorous monitoring of product traceability and provide
assurance over product safety and integrity. Supplier terms and
conditions and product specifications set clear standards for product/
raw material safety and quality which suppliers are expected to
comply with.

Process compliance is supported by external accreditation and
internal training programmes, which are aligned to both health and
safety laws and Sainsbury’s internal policies. In addition, resource is
dedicated to manage the risk effectively, in the form of the Group
Safety Committee and specialist safety teams.

Political and regulatory environment

Risk

In the UK there are heightened levels of political uncertainty
and ongoing regulatory change. The uncertain outcome of the
EU referendum, an increasing focus on localism to drive and
deliver policy and current legislative requirements including the
Business Rates, Workplace Pensions, National Living Wage and
Apprenticeship Levy place a cumulative burden on Sainsbury’s.

Mitigation
We actively engage with the governments, administrations and
regulatory bodies to communicate our views, and those of our
customers and colleagues, regarding geopolitical issues with the aims
of informing the debate and ensuring our opinions are represented in
the policy and decision making processes. We publically
communicate matters where we believe industry change is required.

Strategic Report

Statement of Viability
1. How Sainsbury’s assesses its prospects
The Group’s business activities and strategy are central to assessing
its future prospects. These, together with factors likely to affect its
future development, performance and position, are set out in the
Strategic Report on pages 1 to 47. The financial position of the Group,
its cash flows and liquidity are highlighted in the Financial Review on
pages 40 to 47. The Group manages its financing by diversifying
funding sources, structuring core borrowings with long-term
maturities and maintaining sufficient levels of standby liquidity.

In performing the above analysis, the Directors have made certain
assumptions around the availability of future funding options,
including both the ability to raise future finance and reduce forecast
spend. Furthermore, the analysis was based on the existing Sainsbury’s
Group before the proposed acquisition of Home Retail Group plc. We
have not completed a detailed viability assessment on Home Retail
Group plc as the transaction has yet to complete. However, through
the due diligence process we have performed a review of the strategy,
risks and cash flows of the business and do not consider the proposed
acquisition will have an impact on the overall Group’s viability.

The results of the above stress testing showed that the Group would
be able to withstand the impact of these scenarios occurring over the
assessment period.

4. Viability Statement
Taking into account the Group’s current position and principal risks
and uncertainties, the Directors confirm that they have a reasonable
expectation that the Group will be able to continue in operation and
meet its liabilities as they fall due over the three years to March 2019.

5. Going concern
The Directors also considered it appropriate to adopt the going
concern basis in preparing the financial statements which are shown
on pages 88 to 150.

The Group’s prospects are assessed primarily through its corporate
planning process. This includes an annual review which considers
profitability, the Group’s cash flows, committed funding and liquidity
positions and forecast future funding requirements over three years,
with a further two years of indicative movements. The most recent
was signed off in October 2015. This is reviewed by the Operating
Board and ultimately by the PLC Board with involvement throughout
from both the CFO and CEO. Part of the Board’s role is to consider the
appropriateness of any key assumptions, taking into account the
external environment and business strategy.

2. The assessment period
The Directors have determined that the three years to March 2019 is
an appropriate period over which to provide its viability statement.
This period is consistent with that used for the Group’s corporate
planning process as detailed above, and reflects the Directors’ best
estimate of the future prospects of the business.

3. Assessment of viability
To make the assessment of viability, additional scenarios have been
tested over and above those in the corporate plan, based upon a
number of the Group’s principal risks and uncertainties (as
documented on pages 36 to 38). The scenarios were overlaid into the
corporate plan to quantify the potential impact of one or more of
these crystallising over the assessment period.

Whilst each of the risks on pages 36 to 38 has a potential impact,
only those that represent severe but plausible scenarios were selected
for modelling through the corporate plan. These included:
— The effects of long-term competitive price-matching
— A fall in forecast sales volumes as a result of increasing

competition or any reputational damage to the Sainsbury’s brand

— The impact of any regulatory fines
— A failure to achieve targeted cost savings

Strategic Report
Financial Review

Financial Review

John Rogers,
Chief
Financial
Officer

Dear Shareholder,
Sainsbury’s continues to operate in
a competitive trading environment
experiencing sustained food price
deflation. However, over the past year,
Sainsbury’s has maintained market
share at 16.5 per cent as a result of both
volume and transaction growth. Sainsbury’s
underlying Group sales (including VAT)
declined by 1.1 per cent to £25,829
million (2014/15: £26,122 million) and
underlying profit before tax (‘UPBT’)
declined by 13.8 per cent to £587 million
(2014/15: £681 million). Profit before tax
of £548 million (2014/15: £72 million loss)
was £39 million lower than UPBT, due
to items that are excluded from
underlying results.

As a result of our strategy to simplify our pricing and invest in lower
regular prices we have seen volume and transaction growth. Since
November 2014, we have reduced the price of over 1,900 products
and our price position against our main peers remains as competitive
as it has ever been. We will continue to remain competitive on price
in the market.

Despite an improvement in volume and transactions, our investment
in price and underlying food price deflation led to negative like-for-
like (‘LFL’) sales for the second year running, down 0.9 per cent. Our
supermarket sales declined by 1.6 per cent. At the same time, we
saw strong growth in our other channels: our convenience business
grew by over nine per cent and our Groceries Online business grew by
nearly nine per cent.

Growing our non-food and financial services businesses remains
an important part of our strategy. This is demonstrated by clothing,
which grew by 8.5 per cent, including the national launch of
Tu Online, and general merchandise, which grew by 3.5 per cent.
Sainsbury’s Bank increased its total income by over five per cent to
£274 million, and increased underlying operating profit to £65
million in 2015/16, compared with £62 million in 2014/15.

We achieved £225 million (2014/15: £140 million) of operational cost
savings. This significant step-up year-on-year is due to an increase in
the savings delivered from the core operational efficiency programme
and one-off benefits relating to a review of our commercial
expenditure and of the organisational structures within our stores
and store support centres. The Group is now expecting to deliver
operational cost savings of around £120 million in 2016/17 and we
are on track to deliver the three-year £500 million target by the end
of 2017/18. During the year, savings more than offset the impact of
inflationary pressures on costs. In 2016/17, Sainsbury’s expects cost
inflation to be at the lower end of the two to three per cent range.

Price investment and underlying food price deflation, partly offset
by the increased cost savings of £225 million, resulted in our retail
underlying operating profit decreasing by 11.8 per cent to £635
million (2014/15: £720 million) and our retail underlying operating
margin decreasing by 33 basis points to 2.74 per cent (39 basis
points at constant fuel prices to 2.68 per cent).

Core retail capital expenditure was £542 million (2014/15: £947
million), reflecting the reduction announced in the November 2014
Strategic Review. New space delivered a 1.3 per cent contribution to
sales growth, with six new supermarkets (including two replacement
stores) and 69 new convenience stores opened in the year.

Our return on capital employed (‘ROCE’) decreased by 88 basis points
to 8.8 per cent. ROCE excluding the net retirement benefit obligations
was 8.3 per cent, a decline of 68 basis points year-on-year. ROCE
decline was driven by reduced profitability.

During the year, the Group has taken steps to ensure continued
financial flexibility and to maintain the strength of the balance sheet.
On 5 May 2015, the unsecured Revolving Credit Facility (‘RCF’) was
refinanced with a new secured recourse £1,150 million RCF, with no
financial covenants. On 30 July 2015, the Group issued £250 million
perpetual subordinated capital securities and £250 million perpetual
subordinated convertible bonds (together, £500 million of ‘perpetual
securities’), enabling a £125 million exceptional contribution to the
pension fund in the year, with a further £125 million exceptional
contribution to take place in August 2016. Including both the RCF,
which was undrawn at the end of the year, and the perpetual
securities, which are accounted for as equity, the Group has total
facilities in place of £4.1 billion. All of this has led to a reduction in net
debt of £517 million since the start of the year, to £1,826 million
(note that if the perpetual securities were treated as debt, net debt
would be £2,320 million, £23 million lower than last year). The
coupons associated with the perpetual securities, together with lower
capitalised interest, have increased full-year underlying net finance
costs by £14 million.

Underlying basic earnings per share decreased to 24.2 pence (2014/15:
26.4 pence), an 8.3 per cent decline year-on-year. Basic earnings per
share were 23.9 pence for the year (2014/15: 8.7 pence loss per
share), lower than the underlying basic earnings per share mainly
due to the impact of one-off items excluded from underlying profit.

The Board has recommended a final dividend of 8.1 pence per share
(2014/15: 8.2 pence), making a full-year dividend of 12.1 pence per
share (2014/15: 13.2 pence), down 8.3 per cent year-on-year and

covered two times by underlying earnings. In 2016/17 Sainsbury’s
will continue to pay an affordable dividend at two times cover.

While continuing to drive the growth of the business, we remain
focused on our cost saving programme, improving operational cash
flow and working capital management. We currently expect the
proposed acquisition of Home Retail Group plc to take place in the
third quarter of the calendar year, at which point we will give further
guidance on how we will account for and report on the acquisition.

Summary income statement
52 weeks to 12 March 2016
Underlying Group sales (including VAT)1
Retail sales (including VAT)

Underlying Group sales (excluding VAT)1
Retail sales (excluding VAT)

Underlying operating profit
Retailing
Financial services – Sainsbury’s Bank
Total underlying operating profit

Underlying net finance costs2
Underlying share of post-tax profit from JVs3
Underlying profit before tax
Items excluded from underlying results
Profit/(loss) before tax
Income tax expense
Profit/(loss) for the financial period

Underlying basic earnings per share
Basic earnings/(loss) per share
Dividend per share

2016
£m
25,829
25,502

23,495
23,168

635
65
700

(121)
8
587
(39)
548
(77)
471

24.2p
23.9p
12.1p

2015
£m
26,122
25,813

23,752
23,443

720
62
782

(107)
6
681
(753)
(72)
(94)
(166)

26.4p
(8.7)p
13.2p

Change
%
(1.1)
(1.2)

(1.1)
(1.2)

(11.8)
4.8
(10.5)

(13.1)
33.3
(13.8)
94.8
n/a
18.1
n/a

(8.3)
n/a
(8.3)

1. Underlying Group sales excludes an £11 million acquisition adjustment fair value unwind relating to Sainsbury’s Bank (2014/15: £23 million).
2. Net finance costs including perpetual securities coupons before financing fair value movements and the IAS 19 pension financing charge.
3. The underlying share of post-tax profit from JVs is stated before investment property fair value movements, financing fair value movements and profit on disposal of properties.

Retail sales (including VAT) and space
Retail sales (including fuel) decreased by 1.2 per cent to £25,502
million (2014/15: £25,813 million). This includes a 1.3 per cent

contribution from new space (excluding extensions and
replacements) and a LFL sales decline of 2.5 per cent.

Retail sales growth (including VAT, including fuel)
52 weeks to 12 March 2016
Like-for-like sales
Net new space (excluding extensions and replacements)
Total sales growth

Excluding fuel, which experienced significant retail price deflation, retail
sales increased by 0.4 per cent, with a LFL decline of 0.9 per cent. LFL
sales (excluding fuel) declined 2.1 per cent in the first quarter, but this
improved throughout the year with a LFL growth of 0.1 per cent in the
fourth quarter; the first positive LFL sales performance since the third
quarter of 2013/14. The improvement throughout the year was a
result of several factors: simpler pricing and regular lower prices
caused volumes and transactions to grow; average basket spend
stabilised in supermarkets; and there was an improved performance of
a number of seasonal events throughout the year. On a 52 week
rolling basis, our market share has been maintained at 16.5 per cent
which is an improving trend (as measured by Kantar).

2016
%
(2.5)
1.3
(1.2)

2015
%
(3.6)
1.6
(2.0)

The contribution from net new space (excluding extensions and
replacements) of 1.3 per cent was in line with Sainsbury’s
expectations.

Our multi-channel strategy enables customers to shop whenever and
wherever they want. The convenience business grew sales by over
nine per cent to over £2.3 billion. Groceries Online grew by nearly nine
per cent year-on-year, a step-on from last year’s growth rate, driven
by nearly 15 per cent growth in order numbers, partly offset by a
smaller average basket size due to price investment, food price
deflation and a lower number of items per basket. Sainsbury’s
non-food offer continued to grow sales ahead of the market,
supported by continued range development and the roll-out of
new space.

Strategic ReportRetail sales growth (including VAT, excluding fuel)
52 weeks to 12 March 2016
Like-for-like sales1
Net new space (excluding extensions and replacements)
Total sales growth

2016
%
(0.9)
1.3
0.4

2015
%
(1.9)
1.7
(0.2)

1. This includes a 0.1 per cent contribution from stores extended in 2015/16, net of disruptions (2014/15: 0.2 per cent).

Average trading intensity (‘TI’) including VAT, excluding fuel,
excluding Sainsbury’s Bank (sales per sq ft per week) declined to
£17.88 per sq ft per week (2014/15: £18.24 per sq ft per week) due to
the challenging market conditions, in particular price deflation.
Convenience TI decreased £0.57 per sq ft to £26.33 per sq ft,
primarily due to price deflation in fresh categories as well as a fall
in TI of newly opened stores.

Sainsbury’s added a gross 454,000 sq ft of selling space in the year
(including replacements), an increase of 2.0 per cent (2014/15:
733,000 sq ft, an increase of 3.3 per cent). Including the impact of
closures and refurbishments, this translated into net space growth of

383,000 sq ft, an increase of 1.7 per cent since the start of the year
(2014/15: 659,000 sq ft, an increase of 3.0 per cent) with closing
space of 23,202,000 sq ft (2014/15: 22,819,000 sq ft).

In 2015/16, Sainsbury’s opened six new supermarkets, of which two
were replacement stores (2014/15: eight new supermarkets, of which two
were replacements) and completed seven supermarket refurbishments
(2014/15: 13 supermarket refurbishments, five extensions and one
closure). Convenience continues to be a key area of growth, with 69
stores opened during the year (2014/15: 98 stores). Three convenience
stores were closed (2014/15: two stores), six were refurbished
(2014/15: 43 stores) and one extended (2014/15: no extensions).

Store numbers and retailing space
52 weeks to 12 March 2016

At 14 March 2015
New stores
Disposals/closures
Extensions/refurbishments/downsizes
At 12 March 2016

Memorandum:
Extensions
Refurbishments/downsizes
Total projects

Supermarkets

Convenience

Total

Number
597
6
(2)
–
601

–
7
7

Area
000 sq ft
21,190
263
(67)
16
21,402

–
16
16

Number
707
69
(3)
–
773

1
6
7

Area
000 sq ft
1,629
175
(4)
–
1,800

2
(2)
–

Number
1,304
75
(5)
–
1,374

1
13
14

Area
000 sq ft
22,819
438
(71)
16
23,202

2
14
16

In 2016/17, contribution from net new space (excluding extensions
and replacements) is expected to be around 1.0 per cent.

In 2016/17, Sainsbury’s expects to deliver around 250,000 sq ft of
gross new space, including 40 to 50 convenience stores and five new
supermarkets.

Retail underlying operating profit
Retail underlying operating profit decreased by 11.8 per cent to
£635 million (2014/15: £720 million), reflecting the underlying food
price deflation, price investment and operating cost inflation, partly
offset by increased cost savings year-on-year of £225 million
(2014/15: £140 million).

Retail underlying operating margin declined by 33 basis points
year-on-year to 2.74 per cent (2014/15: 3.07 per cent), equivalent to
a 39 basis points decline at constant fuel prices. Retail underlying
EBITDAR margin decreased by 18 basis points to 7.58 per cent, or a
34 basis points decline to 7.42 per cent at constant fuel prices.

Retail underlying operating profit
52 weeks to 12 March 2016

Retail underlying operating profit (£m)1
Retail underlying operating margin (%)2

Retail underlying EBITDAR (£m)3
Retail underlying EBITDAR margin (%)4

2016
635
2.74

1,755
7.58

2015
720
3.07

1,819
7.76

Change
(11.8)%
(33)bps

(3.5)%
(18)bps

Change at
constant fuel
prices

(39)bps

(34)bps

1. Underlying earnings before interest, tax, Sainsbury’s Bank underlying operating profit and Sainsbury’s underlying share of post-tax profit from JVs.
2. Retail underlying operating profit divided by retail sales excluding VAT.
3. Retail underlying operating profit before rent, depreciation and amortisation.
4. Retail underlying EBITDAR divided by retail sales excluding VAT.

In 2016/17, Sainsbury’s expects cost inflation at the lower end of the
two to three per cent range. Operational cost savings are expected to
be around £120 million. Sainsbury’s remains on track to deliver our
three-year £500 million cost saving programme by the end of
2017/18.

Sainsbury’s will remain competitive on price in the market. Food price
deflation is likely to continue into the second half of 2016/17.

Strategic Report Financial Review continued
Supplier arrangements
We have considered our disclosures in respect of supplier
arrangements, and as a result of this we have decided to disclose
quantified balance sheet and income statement amounts for any
areas of supplier arrangements that involve a level of judgement or
estimation, but not those which are calculated through a mechanical
process. We believe this represents best practice disclosure.

The two types of supplier arrangements that involve a level of
judgement or estimation are:

— Fixed amounts – these are agreed with suppliers primarily to

support in-store activity including promotions, such as utilising
specific space.

— Supplier rebates – these are typically agreed on an annual basis,
aligned with the financial year, with the rebate amount linked to
pre-agreed targets such as sales volumes.

Supplier arrangement amounts are offset against cost of sales, and
have reduced by £268 million to £371 million (2014/15: £639
million). The year-on-year reduction has been driven by the
conscious decision to move away from supplier arrangements and
towards a reduction in the base cost of goods.

Supplier arrangements
52 weeks to 12 March 2016
Supplier rebates
Fixed amounts
Total supplier arrangements

2016
£m
69
302
371

2015
£m
88
551
639

Net interest margin increased by 24 basis points year-on-year to
4.1 per cent (2014/15: 3.9 per cent), driven by the growth in the
personal loans book and an in-year reclassification of certain credit
card fees from commission to interest income. Bad debt levels as a
percentage of lending improved to 0.4 per cent (2014/15: 0.7 per
cent) as a result of continued improvement in recovery processes,
low market interest rates and stable economic conditions. The Tier 1
capital ratio increased by 313 basis points year-on-year to 15.8 per
cent (2014/15: 12.7 per cent), reflecting profit retained for the year
and ongoing capital injections in support of transitioning the Bank to
a new, more flexible banking platform.

J Sainsbury plc completed its purchase of the remaining 50 per cent
share of Sainsbury’s Bank on 31 January 2014. Since then Sainsbury’s
Bank has embarked upon a business transformation programme to
exit from Lloyds Banking Group and build a new, more flexible
banking platform. The migration of savings customers to the new
banking platform is expected to be in late summer 2016 and the
timing of the migration of cards and loans customers is currently
being re-planned, particularly in light of the Group’s proposed
acquisition of Home Retail Group plc. Total transition costs are
forecast to be at the top of the £340 million to £380 million range.

In 2016/17, Sainsbury’s expects Bank operating profit to be around
ten per cent lower year-on-year due to investment required to enter
the mortgage market and the impact of reduced interchange fees.
Results prior to the impact of entering the mortgage market and the
reduced interchange fees, would result in a year-on-year profit
improvement.

Of the above amounts, the following was outstanding and held on
the balance sheet at 12 March 2016:

Capital injections to the Bank in 2016/17 are expected to be circa
£20 million.

Supplier arrangements
12 March 2016
Within current trade receivables
Supplier arrangements due

Within current trade payables
Supplier arrangements due
Accrued supplier arrangements

2016
£m

39
25

2015
£m

94
47

Financial services – Sainsbury’s Bank
Sainsbury’s Bank delivered an underlying operating profit of £65
million, a 4.8 per cent increase year-on-year. This increase was driven
by higher total income and favourable bad debt levels, partly offset
by additional administrative costs as a result of taking full ownership
of the Travel Money operation.

Sainsbury’s Bank results

Total income (£m)3
Underlying operating profit (£m)
Net interest margin (%)4
Bad debt as a percentage of lending (%)5
Tier 1 capital ratio (%)6

20161
274
65
4.1
0.4
15.8

20152
260
62
3.9
0.7
12.7

Change
%
5.4
4.8
24bps
22bps
313bps

Property and other joint ventures (‘JV’)
Sainsbury’s underlying share of post-tax profit from its JV with British
Land was £14 million (2014/15: £13 million). The underlying share of
post-tax profit from the JV with Land Securities was £1 million
(2014/15: £2 million).

An investment property fair value decrease of £18 million was
recognised outside underlying profit (2014/15: £7 million increase),
driven by the average property yield of the British Land JV increasing
to 5.1 per cent, 13 basis points higher than the prior year (2014/15:
5.0 per cent).

Sainsbury’s recognised a net £7 million share of loss (2014/15: net
£9 million share of loss) from the three start-up JVs: Netto, Mobile by
Sainsbury’s and I2C. This loss was driven by start-up costs alongside
closure costs of Mobile by Sainsbury’s. On 14 October 2015, it was
announced that Mobile by Sainsbury’s, a joint venture with Vodafone,
would close on 15 January 2016.

In 2016/17, Sainsbury’s expects the share of profit from the property
JVs to be slightly lower year-on-year. Sainsbury’s share of loss from
the start-up JVs, including Netto, is expected to be slightly higher
year-on-year.

1. 12 months to 29 February 2016.
2. 12 months to 28 February 2015.
3. Net interest, net commission and other operating income.
4. Net interest receivable divided by average interest-bearing assets.
5. Bad debt expense divided by average gross lending.
6. Tier 1 capital divided by risk-weighted assets.

Strategic Report

Underlying net finance costs
Underlying net finance costs increased by £14 million year-on-year
to £121 million (2014/15: £107 million), as a result of a reduction in
capitalised interest and the perpetual securities coupons.

The sale of our pharmacy business to LloydsPharmacy is expected to
complete in 2016/17, subject to Competition and Markets Authority
approval. Sainsbury’s expect to recognise a profit on disposal of
around £100 million.

Underlying net finance costs1
52 weeks to 12 March 2016
Underlying finance income
Interest costs
Perpetual securities coupons
Capitalised interest
Underlying finance costs
Underlying net finance costs

2016
£m
19
(132)
(15)
7
(140)
(121)

2015
£m
19
(143)
–
17
(126)
(107)

1. Finance income/costs before financing fair value movements and the IAS 19 pension

financing charge.

Sainsbury’s expects underlying net finance costs in 2016/17 to be
slightly higher year-on-year. Capitalised interest is expected to be
similar year-on-year.

Items excluded from underlying results
Items excluded from underlying results totalled a charge of £39
million (2014/15: £753 million charge), mainly due to one-off items.

Items excluded from underlying results
52 weeks to 12 March 2016
Profit on disposal of properties
Investment property fair value movements
Retail financing fair value movements
IAS 19 pension financing charge and scheme expenses
Perpetual securities coupons1
Acquisition adjustments
One-off items
Total items excluded from underlying results

2016
£m
101
(18)
(22)
(28)
15
3
(90)
(39)

2015
£m
7
7
(30)
(37)
–
13
(713)
(753)

1. Perpetual securities coupons are added back as accounting standards determine that for statutory

reporting purposes they are treated as dividends.

One-off items
The charge to one-off items of £90 million (2014/15: £713 million)
includes: costs of £59 million in relation to transitioning Sainsbury’s
Bank to a new, more flexible banking platform (capital costs relating
to the transition were £19 million), £15 million of costs mainly
relating to the proposed acquisition of Home Retail Group plc and
£15 million of internal restructuring costs.

One-off items
52 weeks to 12 March 2016
Net impairment and onerous contract charge
Sainsbury’s Bank transition
Pension compensation payments
Internal restructuring
Transaction costs1
Total one-off items

2016
£m
(1)
(59)
–
(15)
(15)
(90)

2015
£m
(628)
(53)
(17)
(15)
–
(713)

1. Transaction costs in 2016 are those incurred as part of the approach to Home Retail Group plc and

the sale of the pharmacy business.

In 2016/17, Sainsbury’s Bank transition costs are expected to be
around £40 million. Capital costs relating to the transition are also
expected to be around £40 million.

Property profits mainly from mixed-use developments, are expected
to be just over £100 million in 2016/17.

Taxation
The income tax charge was £77 million (2014/15: £94 million), with
an underlying tax rate of 20.8 per cent (2014/15: 25.8 per cent) and
an effective tax rate of 14.1 per cent (2014/15: (130.6) per cent). The
underlying rate is lower than last year, mainly due to the revaluation
of deferred tax balances from 20 to 18 per cent reducing the rate in
the current year. The effective tax rate was lower than the underlying
rate also as a result of the revaluation of non-underlying deferred tax
balances and the majority of profits on the disposal of properties not
being taxable.

Underlying tax rate
52 weeks to 12 March 2016
Underlying profit before tax, and tax thereon
Adjustments, and tax thereon, for:
Profit on disposal of properties

Investment property fair value movements

Retail financing fair value movements
IAS 19 pension financing charge and
scheme expenses

Perpetual securities coupons
Acquisition adjustments
One-off items
Revaluation of deferred tax balance
Profit before tax, and tax thereon

Profit
£m
587

101
(18)
(22)
(28)

15
3
(90)
–
548

Tax
£m
(122)

Rate
%
20.8

2
–
4
6

(3)
1
20
15
(77)

14.1

In 2016/17, Sainsbury’s expects the full year underlying tax rate to be
between 22 and 23 per cent.

In the UK, there are a large number of taxes, of which many are
relevant for Sainsbury’s. During the year ended 12 March 2016
Sainsbury’s paid £1.7 billion (2014/15: £1.7 billion) to the UK
Government, of which £890 million (2014/15: £854 million) was
borne by Sainsbury’s and the remaining £822 million (2014/15: £863
million) was collected on behalf of our colleagues, customers and
suppliers. Sainsbury’s participates in the Total Tax Contribution PwC
Survey for The 100 Group Finance Directors. For the year ended
14 March 2015, our total taxes borne ranked sixth (in the year to
15 March 2014: sixth) amongst the survey participants. The results
of the Total Tax Contribution Survey for 2016 had not been published
at the date of this report.

The key taxes paid by Sainsbury’s were business rates of £483
million (2014/15: £489 million), employers’ national insurance of
£141 million (2014/15: £145 million) and UK corporation tax of
£117 million (2014/15: £90 million). Other taxes including customs
duty, excise duty, VAT and energy taxes totalled £149 million
(2014/15: £130 million).

Earnings per share
Underlying basic earnings per share decreased by 8.3 per cent to
24.2 pence (2014/15: 26.4 pence) reflecting the fall in underlying
profits and the effect of additional shares issued during the year,
partly offset by a lower underlying tax rate year-on-year.

The weighted average number of shares in issue was 1,920.8 million
(2014/15: 1,911.0 million), an increase of 9.8 million shares or
0.5 per cent. Basic earnings per share were 23.9 pence (2014/15:
8.7 pence loss). The basic earnings per share is lower than the
underlying basic earnings per share due to items that are excluded
from underlying results.

Strategic Report Financial Review continued

On 30 July 2015, the Group issued £250 million of Perpetual
Subordinated Non-Convertible Bonds and £250 million of Perpetual
Subordinated Convertible Bonds. Costs of £6 million directly
associated with the issue have been set off against the value of the
proceeds. In line with accounting standards, both instruments have
been accounted for as equity and the coupon cost as dividends.
In addition, the coupon cost has been included within Sainsbury’s
definition of underlying finance costs and UPBT.

Since 14 March 2015, two bilateral bank loans amounting to
£95 million have matured and were repaid.

Net debt and cash flows
Group net debt includes the capital injections in to Sainsbury’s Bank,
but excludes Sainsbury’s Bank’s own net debt balances1. As at
12 March 2016, net debt was £1,826 million (14 March 2015: £2,343
million), a decrease of £517 million year-on-year. The year-on-year
decrease was primarily driven by the issue of the perpetual securities
and improved working capital, partly offset by a £125 million
exceptional pension contribution. Net debt, treating the perpetual
securities as debt, was £2,320 million, a decrease of £23 million
year-on-year.

Retail operating cash flow before changes in working capital
increased by 3.8 per cent to £1,126 million (2014/15: £1,085 million),
however retail cash generated from operations decreased 17.8 per
cent to £1,149 million (2014/15; £1,398 million) mainly due to a
reduction in the improvement of retail working capital year-on-year.
The £23 million improvement in retail working capital was driven by
operational efficiencies within trade payables and a decrease in
inventories year-on-year, partly offset by a reduction in Fuel trade
payables due to price deflation.

Bank working capital has increased by £429 million from 14 March
2015 driven by positive steps taken within the Bank to increase
customer lending and diversify funding sources.

The net cash used in investing activities of £525 million was £375
million lower year-on-year (2014/15: £900 million), driven by lower
capital spend. The £494 million proceeds from the issue of the
perpetual securities, net of fees, was partly offset by a repayment
of borrowings of £372 million during the year.

1. Net debt balances within Sainsbury’s Bank’s balance sheet are required for business as usual

activities and as such are excluded from Sainsbury’s definition of Group net debt.

Underlying earnings per share
52 weeks to 12 March 2016

Basic earnings/(loss) per share attributable
to ordinary shareholders
Adjustments (net of tax) for:
Profit on disposal of properties

Investment property fair value movements

Retail financing fair value movements

IAS 19 revised pension financing charge and
scheme expenses

Acquisition adjustments
Deferred tax rate change
One-off items
Underlying basic earnings per share
attributable to ordinary shareholders1

2016
pence
per share
23.9

2015
pence
per share
(8.7)

(5.4)
0.9
0.9
1.1

(0.2)
(0.8)
3.8
24.2

(0.9)
(0.4)
1.3
1.6

(0.5)
–
34.0
26.4

1. Underlying EPS calculation is based on underlying profit after tax attributable to ordinary

shareholders. Therefore the coupons on the perpetual securities are not added back.

Dividends
The Board has recommended a final dividend of 8.1 pence per share
(2014/15: 8.2 pence). This will be paid on 8 July 2016 to shareholders
on the Register of Members at the close of business on 13 May 2016,
subject to approval by shareholders at the AGM. This will result in a
decrease to the full-year dividend of 8.3 per cent to 12.1 pence per
share (2014/15: 13.2 pence).

The proposed final dividend was recommended by the Board on
3 May 2016 and, as such, has not been included as a liability as at
12 March 2016.

In 2016/17, Sainsbury’s will maintain dividend cover at two times our
underlying earnings.

Financing
The Group’s key financing objectives are to diversify funding sources,
to minimise refinancing risk and to maintain appropriate contingent
liquidity. As at 12 March 2016, the Group had drawn debt facilities of
£2.9 billion (including the perpetual securities) and undrawn but
committed borrowing facilities of £1.2 billion at its disposal.

The principal elements of the Group’s drawn debt facilities comprise
two long-term loans of £764 million maturing 2018 and £779 million
maturing 2031, both secured over property assets. In addition, the
Group has further secured loans of £200 million maturing August
2019 and €50 million maturing September 2016, a five-year
£450 million Convertible Bond maturing November 2019 and
£175 million hire purchase facilities and finance leases.

On 5 May 2015, the Group refinanced its unsecured Revolving Credit
Facility (‘RCF’) with a new secured recourse £1,150 million RCF, with a
final maturity of 2020. The new secured corporate facility is the same
size as, and has substantially similar economic terms to, the previous
unsecured facility. The new facility is secured against supermarket
properties, and contains no financial covenants. The facility is split
into two tranches, a £500 million Facility (A) maturing in April 2018
and a £650 million Facility (B) maturing in April 2020. As at 12 March
2016, £nil had been drawn from Facility (A) (March 2014/15:
£120 million) and £nil from Facility (B) (March 2014/15: £nil). As part
of this transaction, two further bank loans totalling £244 million were
secured on supermarket properties.

Strategic Report

Summary cash flow statement
52 weeks to 12 March 2016
Retail operating cash flow before changes in
working capital
Decrease in retail working capital
Retail cash generated from operations
Bank operating cash flow before changes in
working capital
Increase in Sainsbury's Bank working capital
Group cash generated from operations1
Interest paid
Corporation tax paid
Net cash generated from operating activities
Proceeds from sale of pharmacy business
Net cash used in investing activities
Proceeds from issue of ordinary shares
Purchase of own shares
Receipt of new debt
Proceeds from issue of perpetual securities
Proceeds from issue of convertible bonds
Repayment of borrowings
Exceptional pension contribution
Dividends paid on ordinary shares
Dividends paid on perpetual securities
Decrease in cash and cash equivalents
Elimination of net increase in Sainsbury's Bank cash
and cash equivalents
Decrease/(increase) in debt
Fair value and other non-cash movements
Movement in net debt

2016
£m
1,126

23
1,149
29

(429)
749
(108)
(124)
517
125
(525)
8
(20)
–
247
247
(372)
(125)
(234)
(4)
(136)
316

353
(16)
517

2015
£m
1,085

313
1,398
38

(300)
1,136
(134)
(91)
911
–
(900)
19
(18)
674
–
–
(659)
–
(330)
–
(303)
343

(31)
32
41

1. Statutory definition of cash generated from operations includes exceptional pension contribution

of £125 million.

Sainsbury’s expects 2016/17 year-end net debt to reduce year-on-year,
and a small improvement in retail working capital.

Retail capital expenditure
Core retail capital expenditure decreased by £405 million year-on-
year to £542 million (2014/15: £947 million). Core retail capital
expenditure as a percentage of retail sales (including fuel, including
VAT) was 2.1 per cent (2014/15: 3.7 per cent).

Supermarket openings decreased by two during the year to six
(2014/15: eight supermarkets). Sainsbury’s opened 69 new
convenience stores in the year (2014/15: 98 convenience stores).

During the year, there were no supermarket extensions completed
(2014/15: five extensions) and one convenience extension (2014/15:
nil extensions). Sainsbury’s also delivered 13 refurbishments during
the year (2014/15: 56 refurbishments) consisting of seven
supermarkets (2014/15: 13 supermarkets) and six convenience
stores (2014/15: 43 convenience stores).

There were no sale and leaseback proceeds in the year (2014/15:
£nil), resulting in net retail capital expenditure of £543 million
(2014/15: £941 million).

Retail capital expenditure
52 weeks to 12 March 2016
New store development (£m)
Extensions and refurbishments (£m)
Other – including supply chain and digital &

technology (£m)

Core retail capital expenditure (£m)
Acquisition of freehold and trading properties (£m)1
Debtor/creditor movements
Net retail capital expenditure

Capex/sales ratio (%)2

2016
£m
207
183
152

542
–
1
543

2.1

2015
£m
425
284
238

947
(9)
3
941

3.7

1. 2014/15 balance includes income from Harvest, our JV with Land Securities, relating to the

repayment of a loan.

2. Core retail capital expenditure divided by retail sales (including fuel, including VAT).

In 2016/17, Sainsbury’s expects core retail capital expenditure
(excluding Sainsbury’s Bank) to be around £550 million.

2015/16 year-on-year increase in depreciation was impacted by the
impairment taken in 2014/15. 2016/17 depreciation is expected to
increase by around £20 million year-on-year primarily due to investment
in Digital & Technology assets that are depreciated over a short lifetime.

Return on capital employed
The return on capital employed (‘ROCE’) over the 52 weeks to
12 March 2016 was 8.8 per cent (2014/15: 9.7 per cent), a decrease
of 88 basis points year-on-year. ROCE is enhanced by the net
retirement benefit obligations, which reduces capital employed.

ROCE excluding the net retirement benefit obligations over the 52
weeks to 12 March 2016 was 8.3 per cent (2014/15: 9.0 per cent),
a year-on-year decrease of 68 basis points. ROCE decline was due
mainly to the fall in underlying operating profit.

Return on capital employed
52 weeks to 12 March 2016
Total underlying operating profit (£m)
Underlying share of post-tax profit from JVs (£m)
Underlying profit before interest and tax (£m)
Average capital employed1 (£m)
Return on capital employed (%)
Return on capital employed (%)

(excluding net retirement benefit obligations)

52 week ROCE movement to 12 March 2016
52 week ROCE movement to 12 March 2016

(excluding net retirement benefit obligations)

1. Average of opening and closing net assets before net debt.

2015
782
6
788
8,136
9.7
9.0

2016
700
8
708
8,037
8.8
8.3

(88)bps
(68)bps

Summary balance sheet
Total equity as at 12 March 2016 was £6,365 million (14 March 2015:
£5,539 million), an increase of £826 million, mainly attributable to
the issue of the perpetual securities, net of fees, of £494 million, £181
million due to trade and other receivables and £116 million due to
property, plant and equipment.

Net debt was £517 million lower than at 14 March 2015 primarily
driven by the issue of the perpetual securities.

Sainsbury’s Bank net assets at 29 February 2016 of £650 million
(28 February 2015: £504 million) have been consolidated and
separately identified.

Accounting for the perpetual securities as equity, adjusted net debt
to EBITDAR was 4.0 times (2014/15: 4.1 times). Gearing decreased
during the year to 28.7 per cent (14 March 2015: 42.3 per cent) as
a result of the increase in equity shareholder funds. Excluding the net
retirement benefit obligations, gearing decreased to 27.0 per cent

Strategic Report Financial Review continued

(14 March 2015: 37.9 per cent). Treating the perpetual securities as debt,
adjusted net debt to EBITDAR increases to 4.3 times. Gearing increases
to 39.5 per cent and gearing excluding the net retirement benefit
obligations increases to 37.1 per cent.

Interest cover reduced year-on-year to 5.9 times (2014/15: 7.4 times).
Fixed charge cover reduced year-on-year to 2.7 times (2014/15: 2.9
times). Excluding the perpetual securities coupon from underlying
net finance costs, interest cover increases to 6.7 times and fixed
charge cover increases to 2.8 times.

Summary balance sheet
(Sainsbury’s Bank separated)
at 12 March 2016
Land and buildings (Freehold & long

leasehold)

Land and buildings (Short leasehold)
Fixtures and fittings
Property, plant and equipment
Other non-current assets
Inventories
Trade and other receivables
Sainsbury's Bank assets1
Cash and cash equivalents
Debt
Net debt
Trade and other payables and provisions
Retirement benefit obligations,
net of deferred tax
Sainsbury's Bank liabilities1
Net assets

1. As at 29 February 2016.

2016
£m
6,978

820
1,926
9,724
736
968
338
4,531
577
(2,403)
(1,826)
(3,836)
(389)

(3,881)
6,365

2015
£m
6,890

Movement
£m
88

791
1,941
9,622
828
997
294
4,267
403
(2,746)
(2,343)
(3,712)
(651)

(3,763)
5,539

29
(15)
102
(92)
(29)
44
264
174
343
517
(124)
262

(118)
826

Impact of perpetual securities
on key financial ratios

Net debt1
Adj. net debt to EBITDAR2
Gearing3
Gearing (excluding net retirement
benefit obligations)4

Perpetual
securities
accounted for
as equity
As at
12 March 2016
(1,826)

Perpetual
securities
treated as
debt
As at
12 March 2016
(2,320)
4.0 times 4.3 times
39.5%
37.1%

28.7%
27.0%

As at
14 March 2015
(2,343)
4.1 times
42.3%
37.9%

Impact on key financial ratios of
recognising perpetual securities
coupon within underlying
finance costs5

Interest cover6
Fixed charge cover7

UPBT ex.
UPBT inc.
perpetual
perpetual
securities
securities
coupon
coupon
52 weeks to
52 weeks to
12 March 2016
12 March 2016
6.7 times 5.9 times
2.8 times 2.7 times

52 weeks to
14 March 2015
7.4 times
2.9 times

1. Treating the perpetual securities, net of transaction fees, as debt increases net debt to

£2,320 million, and reduces net assets to £5,871 million.

2. Net debt of £1,826 million plus capitalised lease obligations of £5,500 million (5.5 per cent

discount rate), divided by Group underlying EBITDAR of £1,830 million, calculated for a 52 week
period to 12 March 2016.

3. Net debt divided by net assets.
4. Net debt divided by net assets, excluding net retirement benefit obligations.
5. Excluding the perpetual securities coupons, underlying net finance costs reduces to £106 million.
6. Underlying profit before interest and tax divided by underlying net finance costs.
7. Group underlying EBITDAR divided by net rent and underlying net finance costs.

As at 12 March 2016, Sainsbury’s estimated market value of properties,
including our 50 per cent share of properties held within property JVs,
was £10.6 billion (14 March 2015: £11.1 billion). The £0.5 billion
decrease year-on-year was due to property valuation movements
relating to rental value decrease of £0.2 billion, a yield movement of
£0.2 billion and British Land JV valuation decline of £0.1 billion.
The summary balance sheet discloses Sainsbury’s Bank assets and
liabilities separately to aid interpretation. A summary balance sheet
is also presented with Sainsbury’s Bank consolidated by line.

Summary balance sheet
(Sainsbury’s Bank consolidated)
at 12 March 2016
Land and buildings (Freehold &

long leasehold)

2016
£m
6,981

820
1,963
9,764
2,748
968
2,251
566

Land and buildings (Short leasehold)
Fixtures and fittings
Property, plant and equipment
Other non-current assets
Inventories
Trade and other receivables
Sainsbury's Bank cash and
cash equivalents
Cash and cash equivalents
577
Debt
(2,403)
Net debt
(1,826)
Trade and other payables and provisions (7,717)
Retirement benefit obligations,
(389)
net of deferred tax
Net assets

6,365

2015
£m
6,892

791
1,965
9,648
2,411
997
2,070
882

403
(2,746)
(2,343)
(7,475)
(651)

Movement
£m
89

29
(2)
116
337
(29)
181
(316)

174
343
517
(242)
262

5,539

826

Defined benefit pensions
As at 12 March 2016, the post-tax pension deficit was £389 million,
an improvement of £262 million since the year-end (14 March 2015:
£651 million). The reduction in the deficit was mainly driven by a
contribution of £206 million to the Group’s pension scheme, which
included the first 50 per cent of a one-off £250 million contribution
with the second 50 per cent to follow in 2016/17, and an increase in
the discount rate, partly offset by lower fair value of plan assets.

Retirement benefit obligations
at 12 March 2016
Present value of funded obligations
Fair value of plan assets
Pension deficit
Present value of unfunded obligations
Retirement benefit obligations
Deferred income tax asset
Net retirement benefit obligations

2016
£m
(7,625)
7,235
(390)
(18)
(408)
19
(389)

2015
£m
(7,680)
6,988
(692)
(16)
(708)
57
(651)

The scheme is subject to a triennial actuarial valuation at 14 March
2015, carried out by Willis Towers Watson, on the projected units basis.
The results of this valuation are expected to be finalised in June 2016.

John Rogers
Chief Financial Officer

Approval of the Strategic Report
Pages 1 to 47 of the Annual Report form the Strategic Report. Disclosures
concerning diversity, greenhouse gas emissions and human rights appear
on pages 57, 60 and 80 respectively.

By order of the Board
Tim Fallowfield
Company Secretary and Corporate Services Director

3 May 2016

Strategic Report

J Sainsbury PLC: Our Board of Directors

3. John Rogers (47)
Chief Financial Officer
Appointed Chief Financial Officer on 19 July 2010,
John is also a member of the Board of Sainsbury’s
Bank plc, and in June 2015, his role was expanded
to include online, business development and
strategy. John joined Sainsbury’s in November
2005 as Director of Corporate Finance and then
became Director of Group Finance from March
2007 to July 2008. In July 2008, he was appointed
to the Operating Board as Property Director. Prior
to Sainsbury’s, John was Group Finance Director for
Hanover Acceptances, a diversified corporation
with wholly-owned subsidiaries in the food
manufacturing, real estate and agri-business
sectors. John is a Non-Executive Director of Travis
Perkins plc and a director of Insight 2
Communication LLP.

4. John McAdam (68)
Senior Independent Non-Executive Director

Appointed to the Board on 1 September 2005,
John is the Senior Independent Director. John will
step down from the Board on 6 July 2016. He is
Chairman of Rentokil Initial plc and United Utilities
plc and also a Non-Executive Director of Rolls-
Royce Group plc. John joined Unilever PLC as a
management trainee in 1974 and went on to hold
a number of senior positions in Birds Eye Walls,
Quest and Unichema, before the sale of the
Specialty Chemical Businesses to ICI in 1997.
He was Chief Executive of ICI plc, until its sale to
Akzo Nobel, and was formerly a Non-Executive
Director of Sara Lee Corporation (2008-12) and
Severn Trent plc (2000-05).

5. Matt Brittin (47)
Non-Executive Director

Appointed to the Board on 27 January 2011, Matt
is Google’s President – Europe, Middle East and
Africa. Before joining Google to run its UK
operations at the start of 2007, Matt spent much
of his career in media and marketing, with
particular interests in strategy, commercial
development and sales performance. This
included commercial and digital leadership roles
in UK media. He is also a Director of charitable
organisation, The Media Trust.

6. Brian Cassin (48)
Non-Executive Director

Appointed to the Board on 1 April 2016, Brian is
Chief Executive Officer of Experian plc. Brian joined
Experian as Chief Financial Officer in April 2012, a
post he held until his appointment as Chief
Executive Officer in July 2014. Prior to this, Brian
spent his career in investment banking at Baring
Brothers International (1992-98), Greenhill & Co
(1998-2012) where he was Managing Director and
Partner and the London Stock Exchange (1988 to
92) where he held senior roles.

1. David Tyler (63)
Chairman

Appointed to the Board on 1 October 2009, David
became Chairman on 1 November 2009. He is also
non-executive Chairman of Hammerson plc and of
Domestic and General Group Limited. He was
previously Finance Director of GUS plc (1997-2006)
and has held senior financial and general
management roles with Christie’s International Plc
(1989-96), County NatWest Limited (1986-89) and
Unilever PLC (1974-86). He was Chairman of
Logica plc (2007-12) and of 3i Quoted Private
Equity PLC (2007-09), and a Non-Executive
Director of Experian plc (2006-12), Reckitt
Benckiser Group plc (2007-09) and Burberry
Group Plc (2002-2015).

2. Mike Coupe (55)
Chief Executive Officer

Appointed Chief Executive Officer on 9 July 2014,
Mike has been a member of the Operating Board
since October 2004 and an Executive Director
since 1 August 2007. He joined Sainsbury’s from
Big Food Group where he was a Board Director of
Big Food Group plc and Managing Director of
Iceland Food Stores. He previously worked for both
ASDA and Tesco, where he served in a variety of
senior management roles. Mike is also a
Non-Executive Director of Greene King plc.

Governance Report

7. Mary Harris (50)
Non-Executive Director

Appointed to the Board on 1 August 2007, Mary is
a member of the supervisory boards of TNT
Express NV and Unibail-Rodamco S.E. Mary is a
Non-Executive Director of ITV plc and Reckitt
Benckiser Group plc. She previously spent much of
her career with McKinsey & Company, most
recently as a partner, where she worked primarily
with retail/consumer clients in China, South East
Asia and Europe. Her previous work experience
includes working for PepsiCo in Greece and the UK,
as a sales and marketing executive.

8. David Keens (62)
Non-Executive Director

Appointed to the Board on 29 April 2015, David
is also a Non-Executive Director and the Senior
Independent Director of Auto Trader Group plc,
and chairs its Audit Committee. David was
formerly Group Finance Director of NEXT plc
(1991-2015) and their Group Treasurer (1986-
1991). Previous management experience includes
nine years in the UK and overseas operations
of multinational food manufacturer Nabisco
(1977-1986) and, prior to that, seven years
in the accountancy profession.

Key to Committee members
Remuneration Committee
Audit Committee
Nomination Committee

Corporate Responsibility and
Sustainability Committee

Denotes Chairman of Committee

Life President
Lord Sainsbury of Preston Candover KG

9. Susan Rice (70)
Non-Executive Director

Appointed to the Board on 1 June 2013 and is due
to be appointed Senior Independent Director on
6 July 2016. Susan is also Chairman of Scottish
Water, Business Stream, President of the Scottish
Council for Development and Industry, and a
Non-Executive Director of Big Society Capital
Limited, the North American Income Trust and the
Banking Standards Board. She is the first Chairman
of Scotland’s new Fiscal Commission and a lay
member of Court of Edinburgh University. She also
chairs the Patrons’ Board of Governors of the
National Galleries of Scotland. Susan was formerly
Chief Executive Officer and subsequently
Chairman of Lloyds TSB Scotland plc (2000-2009),
and a Non-Executive Director of Bank of England
(2007-2014), SSE plc (2003-2014), the Edinburgh
International Book Festival (2001-2015), and
Scotland’s Futures Forum.

10. Jean Tomlin (61)
Non-Executive Director

Appointed to the Board on 1 January 2013, Jean is
an Independent Board member of Michael Kors
Holdings Limited, a Trustee of The Join In Trust
and Step Up To Serve, and a Council Member at
Loughborough University. Formerly, she was Director
of HR, Workforce and Accreditation for The London
Organising Committee of the Olympic and
Paralympic Games, where she oversaw the creation
and execution of the hugely successful Games
Maker volunteering programme. She was previously
Group HR Director at Marks and Spencer Group Plc,
HR Director and founder member of Egg plc and
Sales & Operations Director of Prudential Direct.

Governance Report

Operating Board

3. Tim Fallowfield
Company Secretary and Corporate
Services Director
Tim joined Sainsbury’s in 2001 as Company
Secretary and joined the Operating Board in 2004.
In addition to his role as Company Secretary, Tim
is responsible for the Corporate Services Division
comprising Legal Services, Safety, Shareholder
Services, Insurance, Data Governance and Central
Security. He chairs the Group Safety Committee
and the Data Governance Committee. Tim joined
Sainsbury’s from Exel plc, the global logistics
company, where he was Company Secretary and
Head of Legal Services (1994-2001). He began his
career at the international law firm Clifford Chance
and is a qualified solicitor.

4. Peter Griffiths
Chief Executive Officer, Sainsbury’s Bank
Peter was appointed Chief Executive Officer,
Sainsbury’s Bank plc in November 2012 and joined
the Operating Board in May 2014. Prior to joining
Sainsbury’s he was Group Chief Executive of
Principality, the largest building society in Wales,
growing it from the 13th largest building society
in the UK to the 7th, during his decade in charge.
He previously worked for NatWest (1977-2000),
and was Chief Operating Officer at Morgan
Chambers Plc. He is former Chairman of the CBI
Wales and the Building Societies Association, and
is a Fellow of UWIC and The Chartered Institute of
Management. Peter was awarded an OBE in the
Queen’s Birthday Honours 2010, in recognition of
his support for the Financial Services Industry.

5. Jon Hartland
Acting Retail and Operations Director
Jon joined Sainsbury’s in 1986 and held the
position of Store Director for numerous stores until
1996. He then held a number of senior roles before
becoming the Change Director in 2002 and later
becoming the Central Retail Director. Jon was
appointed Director for Non Food Operations in
2011 and has been acting Retail and Operations
Director since October 2015. He sits on the GS1
apparel Europe board and was previously a
Regional manager for Fine Fare (part of Associated
British Foods plc).

6. Paul Mills-Hicks
Food Commercial Director
Paul joined the Operating Board in May 2014 as
Food Commercial Director having spent more than
ten years at Sainsbury’s. He was closely involved in
the formation and execution of the ‘Making
Sainsbury’s Great Again’ strategy in a variety of
roles in commercial, strategy and finance, most
recently as Business Unit Director for Grocery.
Previously Paul was European Controller at Marks
and Spencer Group plc and a Director at UBS
Warburg. Paul is a qualified electronic engineer
and a Chartered Accountant.

1. Mike Coupe
Chief Executive Officer
See page 48

2. John Rogers
Chief Financial Officer
See page 48

Governance Report 9

9. Sarah Warby
Marketing Director
Sarah joined Sainsbury’s and the Operating Board
in January 2012 as Marketing Director. She has
responsibility for all Sainsbury’s marketing
activity: all-brand communications, in-store,
loyalty and customer insight. She also has
responsibility for Customer Service and
Experience. Sarah previously held a number of
senior positions at Heineken and was their UK
Marketing Director where she was responsible for a
number of the UK’s most high-profile FMCG
brands. Prior to this, she was Innovation Director
at Heineken where she led the combined technical
and marketing team. Earlier in her career, Sarah
worked for several marketing agencies and was a
graduate employee at Unilever PLC.

7. Angie Risley
Group HR Director
Angie was appointed Group HR Director and a
member of the Operating Board in January 2013
with responsibility for human resources. She is a
Non-Executive Director of Serco Group plc and
chairs their Remuneration Committee. She is also
a Director of Sainsbury’s Bank plc. Angie was most
recently Group HR Director at Lloyds Banking
Group and prior to this an Executive Director of
Whitbread plc with responsibility for HR and
Corporate Social Responsibility. She was a
member of the Low Pay Commission.

8. Jon Rudoe
Digital and Technology Director
Jon joined the Operating Board in March 2014 with
responsibility for Digital and the IT function. He
joined Sainsbury’s in July 2011 as Director of
Online and in March 2013 he took on responsibility
for Digital. Jon joined Sainsbury’s from Ocado
where he led marketing, user experience, trading,
own-brand and supply chain. Previously, Jon was
a management consultant at Bain & Company
and worked in venture capital.

Governance ReportThe culture and values of the Company, together with our commitment to
strong governance, are embedded throughout the organisation. This
continues to underpin our success. In March, we carried out a comprehensive
internal review of the Board’s performance which built upon the conclusions
and action plan from the prior year’s review. This year’s review is described in
detail on pages 54 and 55.

Succession remains a key focus of the Board and we continue to identify and
reviewed the resourcing needs across the business. Particular focus is given to
ensuring that the skills mix of Board and senior management positions are
optimised to deliver shareholder value, through our commitment to
developing our own people and attracting external talent.

I would like to thank John McAdam for his very valuable contribution over the
last ten years and particularly for his counsel as Senior Independent Director.
As previously advised, John will step down at the forthcoming AGM. I am
delighted to welcome Brian Cassin, the CEO of Experian, who joined the Board
in April 2016. His experience in big data and analytics, and of running a FTSE
40 company, will be invaluable over the coming years. I am also pleased that
Susan Rice will be appointed as our Senior Independent Director at the AGM.

The commitment to diversity on the Board and across senior management
continues to be an area of focus. In particular, our recruitment policy takes
into account each candidate’s merits and considers a number of diversity
factors including experience, gender and ethnicity. Gender diversity on the
Board continues to be in line with the Davies Report target and, more
importantly, is appropriate for both Sainsbury’s and our customer base.
Further information on diversity can be found on page 57.

Our strong governance, culture and values, in conjunction with our
established strategy and our committed and challenging Board, provide
the foundations which are the basis of Sainsbury’s long-term success.

David Tyler
Chairman

Corporate Governance

David Tyler,
Chairman

Dear Shareholder,
The Board’s particular focus this year has
been the successful implementation across
the business of the strategy announced in
November 2014. We are pleased with the
progress made to date and remain
confident that successful execution of
the strategy will drive shareholder value.
In addition, the Board has been very
engaged with the proposed acquisition
of the Home Retail Group plc, owner of
the Argos retail chain, which we believe
will accelerate our strategy for
shareholders’ benefit.

The Board is committed to strong governance and, during the year, the
Company has complied with all the provisions of the UK Corporate
Governance Code 2014 (the Governance Code). This report explains how
the main principles of the Governance Code were applied throughout the
financial year.

I would like to highlight some of the other activities that we have focused on
during the year.

— David Keens took over as Audit Committee Chairman with effect from our

AGM in July 2015.

— Brian Cassin, Chief Executive of Experian plc, was appointed to the Board

in April 2016.

— We have successfully undertaken the transition of our auditors to Ernst &
Young LLP (Ernst & Young) from PricewaterhouseCoopers LLP (PwC).

— We are now required by the Governance Code to include an assessment of
the viability of the Company. This is covered in further detail in the Audit
Committee report on page 63.

— The Remuneration Committee firmly believes in the link between pay and
performance. Mary Harris’ letter to shareholders and our Remuneration
Report are set out on pages 66 to 79.

1. Published by the Financial Reporting Council, the Governance Code is publicly available at www.frc.org.uk.

Governance Report Leadership
The role of the Board
The Board’s key areas of focus in helping to create long-term sustainable
value for shareholders are on strategic leadership, performance management,
risk management, governance, succession planning and investor relations.

Investor relations
The Board received an independent survey from Makinson Cowell, on the
views of major shareholders and analysts, together with updates at each
Board meeting on the Investor Relations programme and feedback from
major shareholders, particularly following each announcement of the
Company’s results (see page 55 for further details).

The Board has a scheduled forward programme of meetings to ensure that we
can allocate sufficient time to each of these key areas. This enables us to plan
Board and Committee meetings appropriately and use the Board’s time
together most effectively. There is sufficient flexibility in the programme for
specific items to be added to any particular agenda and this ensures that the
Board can focus on the key matters relating to the business at the appropriate
time.

Board operation and attendance
The Board held eight scheduled meetings during the year, including a
two-day Strategy Conference. Additional ad hoc meetings and conference
calls were also convened to deal with specific matters particularly in relation
to key reviews and decisions concerning the proposed acquisition of Home
Retail Group plc.

The Board’s scheduled forward programme includes the following items,
some of which are considered at each meeting, and others are reviewed
periodically throughout the year:

— Annual budget

— Corporate (five year)

plan

— CEO Report and
trading update

— Financial items

— Preliminary and
Interim results

— Annual Report

— Cyber security

— Dividend policy and
recommendations
— Committee reports
— Investor Relations
— Strategic items
— Safety reports (Health
& Safety and Food)
— Customer insights
— HR policy
— Pensions

— Project updates

— Treasury and tax

policy

— Governance

— Risk management

— Board evaluation

— Public Affairs

— Litigation

Key activities
The principal activities of the Board during the financial year were:

Strategic leadership
Given the fundamental change in the sector, the Board has particularly
focused on strategic matters in the last year. The principal focus has been the
proposed acquisition of Home Retail Group plc. The Board has also closely
monitored the execution of the strategic plan approved in November 2014,
the Bank transition programme and other key strategic projects, as well as
the competitive landscape and the rapid growth of multi-channel retail.
A two-day Strategy Conference, with the attendance of the Board and
Operating Board Directors, was held in the autumn. This enabled the Board to
conduct an in-depth review of each of these topics, and the latest customer
insights. The Board evaluated key opportunities and threats, and the five year
corporate plan, including cost savings, capital expenditure and balance sheet
projections. Our brokers UBS and Morgan Stanley, strategic advisers OC&C
and our investor relations advisers Makinson Cowell, attended for part of the
meeting in order to provide an external view of the sector.

Performance management
Performance against delivery of the agreed key targets was reviewed at every
meeting, with particular reference to the detailed Group management
accounts. The Chief Executive and Chief Financial Officer provided an update
on the market and current trading at each meeting and presented
comparative data and customer insight.

Risk management
The Board reviewed the Company’s principal risks, and received regular
updates on risk management and internal controls from the Chairman of the
Audit Committee after each Committee meeting (see page 64 for further
details).

The Board received an annual update on all matters relating to safety,
supported by quarterly updates, together with updates on other relevant
controls and governance. Specific issues on these and other matters which
could have affected the Company’s reputation were reported to the Board as
they occurred.

We ensure that all Directors are aware of the key discussions and decisions of
each of the four principal Committees, partly by the Chairman of each
Committee providing a detailed summary to all Directors at the Board
meeting following the relevant Committee meeting. Minutes of Board and
Committee meetings are circulated to Directors shortly after those meetings
take place. The Board has a schedule of formally reserved powers, which it
reviews each year, and receives a number of in-depth presentations during
the year. A copy of the reserved powers is available on the Company’s
website.

There were a number of informal meetings during the year when Directors
met individual members of the Operating Board to receive updates on their
specific areas of responsibility. In addition, the Chairman and Non-Executive
Directors met without the Executive Directors being present, and the
Non-Executive Directors also met without the Executive Directors or the
Chairman being present.

The following table shows the attendance of Directors at scheduled Board and
Committee meetings.

Matt Brittin
Mike Coupe
Mary Harris
Gary Hughes
David Keens
John McAdam
Susan Rice
John Rogers
Jean Tomlin
David Tyler

Audit
Committee
3(4)
–
–
1(1)
4(4)
–
4(4)
–
–
–

Board
7(8)
8(8)
8(8)
3(3)
8(8)
8(8)
8(8)
6(8)
7(8)
8(8)

CR&S
Committee
–
2(2)
1(2)
–
–
–

–
2(2)
–

Nomination
Committee
2(2)
–
2(2)
–
2(2)
2(2)
2(2)
–
2(2)
2(2)

Remuneration
Committee
–
–
4(4)
–
–
4(4)
2(3)
–
4(4)
–

Note: The maximum number of meetings held during the year that each Director could attend is
shown in brackets.

On the rare occasions that a Director is unavoidably unable to attend a
meeting, the Chairman briefs them before the meeting so that their
comments and input can be taken into account at the meeting, and provides
an update to them after the meeting. John Rogers attended the Advanced
Management Programme in Harvard which coincided with the September
and October Board meetings.

Division of responsibilities
Chairman
There is a clear division of responsibilities between the Chairman and the Chief
Executive which is set out in writing and has been approved by the Board. The
Chairman is responsible for leadership of the Board, ensuring its effectiveness
in all aspects of its role and for setting its agenda. The Chairman ensures
effective communication with shareholders and that the Board is aware of the
views of major shareholders. He facilitates the contribution of the Non-
Executive Directors through a culture of openness and debate, and ensures
constructive relations between Executive and Non-Executive Directors.

Governance ReportGovernance Report
Corporate Governance continued

Senior Independent Director
The role of the Senior Independent Director is to act as a sounding board for
the Chairman and as a trusted intermediary for the other Directors. In
addition, the Senior Independent Director meets with the other Non-
Executive Directors in the absence of the Chairman at least once a year in
order to undertake a review of the Chairman’s performance. He is also
available to shareholders as required.

The induction programme includes a full review of corporate responsibility
and the Company’s values and culture. This programme is ongoing for
Non-Executive Directors who often meet members of the management team on
an individual basis to continue to build their knowledge of the Company, or
visit stores, depots and suppliers. Subsequent training is available on an
ongoing basis to meet any particular needs. Detail on David Keens’ induction
can be found in his statement as chairman of the Audit Committee on page 61.

Chief Executive
The Chief Executive is responsible for the day-to-day management of the
Company and executing the strategy, once agreed by the Board. He creates a
framework of strategy, values, organisation and objectives to ensure the
successful delivery of results, and allocates decision making and
responsibilities accordingly. He manages the risk profile in line with the risk
appetite and categories of risk identified and accepted by the Board. He takes
a leading role, with the Chairman, in the relationship with all external
agencies and in promoting Sainsbury’s.

Board effectiveness
Composition and diversity
The Board currently comprises two Executive Directors, the Chairman and
seven Non-Executive Directors. Following the 2016 AGM the Board will revert
to having six Non-Executive Directors. The Non-Executive Directors bring wide
and varied commercial experience to Board and Committee deliberations.
They are appointed for an initial three-year term, subject to election by
shareholders at the first AGM after their appointment and re-election at each
AGM thereafter, after which their appointment may be extended for further
terms, subject to mutual agreement. All members of the Board, other than
John McAdam, will retire and seek election or re-election by shareholders at
this year’s AGM.

The Board’s policy on diversity is set out on page 57.

Independence and conflicts
The Chairman satisfied the independence criteria of the Governance Code on
his appointment to the Board and all the Non-Executive Directors are
considered to be independent.

Each of the Directors has a duty under the Companies Act 2006 to avoid a
situation where he/she has, or can have, a direct or indirect interest that
conflicts, or possibly may conflict, with the Company’s interests. The
Company’s articles of association permit the Directors to authorise conflicts
and potential conflicts, where appropriate. The Board has established
procedures for the disclosure by Directors of any such conflicts, and also for
the consideration and authorisation of these conflicts by the Board. In
accordance with the Act, the Board considered and authorised each Director’s
potential conflicts of interest during the year. Whenever a Director takes on
additional external responsibilities, the Board considers any potential
conflicts that may arise. The Board continues to monitor and review potential
conflicts of interest on a regular basis.

The Board has specifically considered the executive or non-executive roles
that some of the Non-Executive Directors have with companies that may be
suppliers to Sainsbury’s. The Board is satisfied that the independence of the
Directors who have executive or non-executive roles with other companies is
not compromised.

Prior to appointment, each Non-Executive Director confirms that they will
have sufficient time available to be able to discharge their responsibilities
effectively. During the year, the Board reviewed, in advance, disclosures by
Non-Executive Directors seeking to undertake additional commitments.
The Board remains confident that individual members are able to devote
sufficient time to undertake their responsibilities effectively.

Induction and development
We have a programme for meeting Directors’ training and development
requirements.

Directors participate in a comprehensive and tailored induction programme
including store and depot visits and meetings with other members of the Board,
members of the Operating Board, senior management and external advisers.

During the year, the Company Secretary, Tim Fallowfield, has provided
updates to the Board on relevant governance matters, Directors’ duties and
obligations, and new legislation and its impact on the Company. The Audit
Committee regularly considers new accounting developments through
presentations from management and the external auditor. This year this
included changes to the UK Corporate Governance Code applicable to the
Group for the 2015/16 financial year, including the requirement for a viability
statement and changes to risk management disclosures and current and
future accounting standard changes, such as the new consolidation
standards, revenue recognition and lease accounting.

The Board programme includes regular presentations from management and
informal meetings which increase the Non-Executive Directors’ understanding
of the business and the sector. During the year, the Board held a meeting and
toured the distribution centre at Daventry which was opened in 2015. The
Board met and received presentations from the Retail and Operations Director,
the Director of Logistics and senior members of the Retail Leadership team.
The Board visited Sainsbury’s Bank in September, met with management and
colleagues and reviewed the Bank’s operations. Directors have also visited
stores and other sites on an informal basis as part of their continuing
engagement with the business.

Information and support
The Chairman, in collaboration with the Company Secretary and
management, is responsible for ensuring that all Directors are properly
briefed on issues arising at Board meetings and that they have full and timely
access to relevant information. Directors also have access to independent
professional advice as well as to the advice of the Company Secretary in
fulfilling their duties and responsibilities.

Board evaluation
2014/15 Review

Key findings
Given the scale of change in the sector the Board
agreed to continue to devote more time to
reviewing the implementation of the strategy.
The Board would continue to develop strong
links to the broader management team.

Progress made
See Strategic leadership
on page 53 and following
paragraphs
See Induction and
development above

2015/16 Review
The Board agreed that the 2015/16 review would be carried out by the
Company Secretary. The Board is satisfied that the internal review follows an
established process which enables a thorough evaluation with full and open
participation from all Directors. The key objectives were to determine whether
progress had continued on the key points raised by the previous evaluation
exercise, to identify any emerging themes, and to consider whether the Board
and its Committees were working effectively.

A questionnaire was circulated to all Directors seeking their evaluation of a
number of matters, which was updated in order to include new questions
focused on specific points of interest. The questionnaire covered strategy,
Board and management succession, Board culture, balance and diversity,
meetings and processes, investor relations, decision making, risk
management and Board committees. This was followed up in separate
discussions with each of the Directors to take their detailed feedback on any
emerging themes. The Company Secretary then presented the principal
conclusions to the Board at a meeting convened for that purpose, and the
Board discussed the key points and agreed certain actions.

As part of the Board Evaluation exercise, the Senior Independent Director
reviewed the Chairman’s performance with the other Directors and
subsequently met him to provide feedback. The Chairman provided feedback
to each Director on their individual contributions to the Board and, with each
of them, considered their development priorities.

The Board concluded that good progress had been made under Mike Coupe’s
leadership in the year and that the execution of the strategy was being well
managed, with appropriate pace of change. The strategic debate had been
effective with more opportunities to discuss key aspects, including a highly
effective Strategy Conference. The Committees were performing effectively
with good balance, debate and challenge.

The Board identified the following actions:

— Continue to develop strong links with the Board of Sainsbury’s Bank and

the broader management team;

— Some specific items could be given more visibility at Board level, including

the work to increase diversity at all levels across the business; and

— Continue to monitor the broader competition landscape, given the extent

of the multi-channel retail market and the pace of change.

The last external evaluation was conducted in 2014. It is therefore anticipated
that the 2017 Board Evaluation will be externally facilitated.

Investor relations
The Company is committed to maintaining good communications with
investors. Normal shareholder contact is the responsibility of Mike Coupe,
John Rogers and Duncan Cooper, Head of Investor Relations. The Chairman is
generally available to shareholders and meets with institutional and other
large investors; the Senior Independent Director is also available as required.

The Company regularly meets with its large investors and institutional
shareholders who, along with sell-side research analysts, are invited to
presentations by the Company immediately after the announcement of the
Company’s interim and full-year results. They are also invited to participate in
conference calls following the announcement of the Company’s trading
statements. The content of these presentations and conference calls are

webcast and are posted on the Company’s website (www.j-sainsbury.co.uk/
investor-centre) so as to be available to all investors.

The Board receives feedback at each Board meeting on the views of major
investors and the Investor Relations (‘IR’) programme. In addition, Makinson
Cowell provides investor relations consultancy services to the Company and
external analysis to the Board on the views of institutional investors and
sell-side analysts. Non-Executive Directors also receive regular market reports
and broker updates from the Company’s IR department.

Shareholders have the opportunity to meet and question the Board at the
AGM, which this year will be held on 6 July 2016. There will be a display of
various aspects of the Company’s activities and Mike Coupe will make a
business presentation. All resolutions proposed at the AGM will be taken on a
poll vote. This follows best practice guidelines and enables the Company to
count all votes, not just those of shareholders who attend the meeting.

Information on matters of particular interest to small shareholders is set out
on pages 152 to 154 and on the Company’s website (www.j-sainsbury.co.uk/
investor-centre).

Board committees
The Board has delegated certain responsibilities to the Audit, Nomination,
Remuneration and Corporate Responsibility and Sustainability Committees.
The terms of reference for each Committee are available on the Company’s
website.

Operating Board
Day-to-day management of the Group is delegated to the Operating Board,
which is chaired by Mike Coupe. The Operating Board held 11 scheduled
meetings during the year and each Director’s responsibilities are set out on pages
50 and 51. It has formal terms of reference setting out its key responsibilities.

The Operating Board has delegated certain powers to the Trading Board, the
Investment Board, the Group Safety Committee, the Corporate Responsibility
and Sustainability Steering Group, the Diversity Steering Group and the Data
Governance Committee, each of which has approved terms of reference
setting out its areas of responsibility.

J Sainsbury plc Board

David Tyler

Operating Board

Mike Coupe

Audit
Committee

David Keens

Corporate Responsibility and
Sustainability Committee

Jean Tomlin

Remuneration
Committee

Mary Harris

Nomination
Committee

David Tyler

PLC Committees

Corporate
Responsibility
and Sustainability
Steering Group

Mike Coupe

Data
Governance
Committee

Tim Fallowfield

Operating Board Committees

Trading
Board

Sarah Warby

Investment
Board

John Rogers

Group Safety
Committee

Tim Fallowfield

Diversity
Steering Group

Angie Risby

Governance ReportNomination Committee

David Tyler,
Chairman,
Nomination
Committee

Dear Shareholder,
The Nomination Committee ensures that
the Board has an effective balance of skills
and experience around the Boardroom
table. Succession and diversity at board and
senior management levels are key aspects
of our agenda.

The key focus of the Committee this year has been on managing the
appointment process for a new Non-Executive Director to replace John
McAdam and to decide upon his successor as Senior Independent Director.
The Committee has also continued to review the succession planning at the
Operating Board and senior management levels.

The appointment of Brian Cassin to the Board has been made taking into
account the balance of skills, experience and diversity of the Board as a
whole. The Board is satisfied that it continues to have the necessary skills
mix and experience to enable it to operate effectively.

Succession and diversity at senior management levels are key aspects of our
agenda. The Committee also oversees the Company’s approach to resourcing
the needs of the business, developing our colleagues and recruiting new
talent. Diversity on a broader basis is an important feature of the Committee’s
agenda. A detailed summary of the diversity priorities is set out below.

Succession planning
The Board takes succession planning for both Board members and senior
management very seriously. All of the Non-Executive Directors are members
of the Nomination Committee which is chaired by David Tyler. Mike Coupe is
not a member of the Committee although he is invited to attend meetings.

Our Board evaluations consider the balance, skills and diversity of the Board.
They also consider succession planning. The evaluation reviews any senior
appointment processes during the year and identifies priorities for the
year ahead.

We believe we have good balance and diversity amongst our Non-Executive
Directors with several having extensive experience of consumer-facing
businesses and other highly relevant skills derived from serving in a range of
major executive and non-executive positions throughout their careers. Each
of our Non-Executive Directors has been recruited following a robust selection
process which has been facilitated by Egon Zehnder International, who
provide search and recruitment services for the Company.

Egon Zehnder was engaged to identify a suitable candidate to fill the vacancy
resulting from John McAdam stepping down from the Board at the 2016 AGM.
The Committee considered the balance of skills, experience and diversity of
the Board and identified that the preferred candidate would have experience
of running a major listed company, in order to complement the existing
Board skills. Following a thorough search process which involved meetings
with the Chairman and other Directors, the Board was pleased to be able to
appoint Brian Cassin as a Non-Executive Director.

Our Non-Executive Directors’ tenure on our Board as at the year-end
is as follows:

Board tenure
Non-Executive
0-1 years
2-3 years
4-5 years
6-7 years
8-9 years
9-10 years

Number
1
2
1
1
1
1

Percentage
14
29
14
14
14
14

The above table includes the Chairman.

On an annual basis, the Committee reviews succession plans for the
Operating Board, as well as Divisional Director development and talent
management.

The Committee’s terms of reference are available on the website at
www.jsainsbury.co.uk/investor-centre/corporate-governance and set out
the Committee’s responsibilities. The Committee meets on such occasions
as are necessary and in 2015/16 held two formal meetings and a number
of other updates, particularly relating to the search process for the new
Non-Executive Director.

David Tyler
Chairman

Governance Report

We aspire to take a leadership approach to disability, commensurate with our
Paralympic commitment to create a legacy of greater inclusion for people
with disabilities. We sit on the Paralympic Legacy Advisory Group and take an
active role in the Government’s Disability Confident campaign. We are Partner
members of the Business Disability Forum and received two Disability-Smart
Awards that recognise organisations that demonstrate an outstanding
commitment to employing and working with individuals with disabilities.
These awards were for our exclusively designed disabled child trolleys and for
our You Can scheme which helps those who have previously faced significant
barriers to finding work, to enter the workplace. Since its launch in 2008 we
have successfully recruited over 25,000 colleagues through the You Can
programme.

We are one of only a few FTSE 100 companies with a carers’ policy and have
worked closely with Carers UK over the last 16 years to ensure that we
properly support our estimated 18,000 colleagues with caring responsibilities.
Carers UK celebrated its 50th anniversary last year and we supported Carers
Rights Day for the fifth year running. Tim Fallowfield, Operating Board
sponsor for Disability and Carers, also hosted the Carers Rights Day reception
in parliament. We hosted events for local support and community groups
during Carers Week. We also continue to invest in licences of Carers UK’s
Jointly App for all our colleagues who are juggling work with caring
responsibilities.

We are members of Stonewall’s Diversity Champions programme and
featured for the first time in this year’s Stonewall Workplace Equality Index.
Sarah Warby, our LGBT sponsor, hosted the Stonewall Multi-Faith event in
early 2016, which saw attendees from diverse religious, spiritual and
non-religious communities come together for discussion and networking.
Our LGBTA (lesbian, gay, bisexual, transgender and allies) network, Proud@
Sainsbury’s, continues to grow and engage with colleagues from across our
business. The elected co-chairs work alongside a panel of committed
individuals to drive forward our LGBT agenda. Last year we also attended 27
Pride events across the UK and were presented with the Leeds’ Pride Partner
of the Year award for our involvement with this event.

Diversity and inclusion
Our diversity and inclusion vision is to be ‘the most inclusive retailer where
people love to work and shop’. We will achieve this aspiration by recruiting,
retaining and developing diverse and talented people and creating an
inclusive environment where everyone can be the best they can be and
where diverse views are listened to. This will enable us to anticipate and
accommodate the needs of our diverse customers, reflecting the
communities we serve.

Four Board Sponsors lead our diversity strategy: Peter Griffiths (gender),
Angie Risley (ethnicity, religion and belief), Tim Fallowfield (disability and
carers) and Sarah Warby (lesbian, gay, bisexual and transgender). Our Board
Sponsors, together with our Head of Talent and Performance Deborah
Dorman, form our Diversity Steering Group. The Group meets regularly to
govern progress. They are also responsible for updating the Board and
Operating Board. In addition, we have 160 Diversity Champions who support
the agenda in every part of our organisation.

Over half of our colleagues are women and we are taking active steps to
support talented women to develop their careers at all levels of management.
At year-end, women made up 33 per cent of our Board and 22 per cent of our
Operating Board. A number of our senior women also hold non-executive
director positions in other organisations. However, there remain areas of
management where women are under-represented. Research shows that
mentoring is a great way to support women with their career development
and our recently launched Mentoring Matters programme targeting women
has been well received, with over 1,400 female colleagues signing up since
November 2015. Over the last 12 months more of our colleagues have signed
up to the Inspiring the Future campaign, and we now have over 500
colleagues actively sharing their careers experience with young women and
girls in schools and colleges.

Board
Operating Board
Divisional Directors and
Senior Managers
Company

Colleagues
9
9

Male
6 (67%)
7 (78%)

Female
3 (33%)
2 (22%)

199
164,535

136 (68%)
72,486 (44%)

63 (32%)
92,049 (56%)

We are Champion members of Race for Opportunity. Around 14 per cent of
the population of England and Wales and 11 per cent of the UK workforce is
from a BAME (Black Asian Ethnic Minority) background. This compares with
14 per cent of all Sainsbury’s colleagues. We are working to increase our
representation of BAME colleagues at management grades through
participating both in Race for Opportunity’s cross-organisational mentoring
circles and our own internal mentoring networks. Last year, we were also
co-sponsors of the largest ever race at work survey in the UK. Run by Business
in the Community, the survey was completed by 24,000 working people
(over 4,000 of which were Sainsbury’s colleagues) to better understand the
experience of BAME people at work. We are committed to supporting all of
our BAME colleagues to reach their potential and are using these findings to
inform our future plans.

Governance Report

Corporate Responsibility
and Sustainability Committee

The strategic review process looked at research into what our customers care
about. We know our customers care about a wide range of issues. Our Closer to
Customers insight launched in May 2015 and looked at what corporate
responsibility areas matter most to our customers. Resoundingly, food waste
emerged as a top priority where our customers wanted our support in
managing household waste, and ultimately their household budget. This led
to the launch of our Waste less, Save more initiative, a £10 million investment
in helping our customers reduce their food waste by engaging communities,
schools and organisations in developing a blueprint for the nation to reduce
domestic waste.

Highlights for us over the past year have been our Carbon Disclosure Project
Score of 100 per cent, our highest score yet. This made us one of 37
companies in the world awarded a position on the FTSE 350 Climate Disclosure
Leadership Index (CDLI). We are also proud of the work we have achieved
across our values, from supporting hundreds of local food donation
partnerships to receiving gold accreditation from Investors in People, twice in
a row – the only retailer to have done so. We also made great progress against
our Sustainability Standards, successfully implementing our Farmed Prawn
standard that works across our prawn farmers in Thailand.

Whether it is our alignment with the UN Sustainable Development Goals, our
Waste less, Save more initiative or our work with suppliers to identify key risks
over the coming years, we are constantly looking for ways to improve the
world around us through our business wherever we can.

Further information about our progress can be found at
www.j-sainsbury.co.uk/responsibility.

Jean Tomlin
Chair of Corporate Responsibility
and Sustainability Committee

Jean Tomlin,
Chair of
Corporate
Responsibility and
Sustainability
Committee

Dear Shareholder,
Our values are part of our DNA at
Sainsbury’s and fundamental to how we
do business. We are always listening and
understanding the role that business plays
in driving sustainability.

As Chair of the Board’s Corporate Responsibility and Sustainability Committee,
I oversee the governance of our Sustainability Plan which spans our five
values: ‘Living healthier lives’, ‘Sourcing with integrity’, ‘Respect for our
environment’, ‘Making a positive difference to our community’ and ‘A great
place to work’.

This year marks the halfway point to 2020, since the launch of our plan in
2011 and we took this opportunity to undertake a strategic review of our
Sustainability Plan, ensuring it was stretching and focused on the most
material issues for our customers, colleagues, stakeholders and business.

This year also marked the launch of the UN Sustainable Development Goals,
a set of global targets designed to improve the world by 2030. As we reviewed
our plan it was important that we aligned ourselves to this sustainable
development agenda, as well as our business strategy. We also wanted to be
transparent and accountable through a clear set of KPIs that measures our
performance across our Sustainability Plan.

Governance Report
Corporate Responsibility and Sustainability Committee
Our Corporate Responsibility and Sustainability Committee is chaired by Jean
Tomlin and attended by Mary Harris, Mike Coupe and David Tyler. It met twice
during the year to oversee the governance of each of our five values as well as
our Sustainability Plan.

These formal Committee meetings were supported by Corporate
Responsibility and Sustainability (CR&S) stakeholder meetings that were
hosted by Jean Tomlin and Mike Coupe. Each meeting is based around one of
our five values and key external stakeholders are invited to attend including
representatives from the government, industry, non-governmental organisations
and key suppliers to our business. During the year three such meetings were
held, relating to the values areas of Sourcing with integrity, Respect for our
environment and Making a positive difference to our community.

The Committee is supported by an internal CR&S governance structure
whereby members of the Operating Board have responsibility for each of our
five values and sit on our CR&S Steering Group, chaired by Mike Coupe.
The members of this biannual Steering Group are shown below.

The terms of reference of the Committee are available at
www.j-sainsbury.co.uk/investor-centre/corporate-governance.

Our Sustainability Plan
Sustainability is at the core of our business strategy. Throughout our
147-year history, we have strived to lead by acting as a responsible retailer.
Examples of our contribution over the past decade include supporting the
future of British farming, transforming the market for fairly traded products and
sustainable seafood, improving animal welfare and championing food waste.

During the year we refreshed our Sustainability Plan and formalised our
activities against our values in light of the new and changing issues that
today’s world faces. We launched this in December 2015 to our stakeholders,
sharing our vision and plan for the next five years. In developing the plan we
undertook a detailed auditing and consultation process. We have continued
to listen to our customers, colleagues, suppliers and stakeholders to make
sure we have the most relevant and effective strategy, leverage the
knowledge and experience of experts and remain at the forefront of
sustainability between now and 2020 and beyond.

Further information about our approach can be found at
www.j-sainsbury.co.uk/responsibility, with quarterly updates also
given as part of our broader trading statements.

Ethical trading and the Modern Slavery Act
Our commitment to ethical trade is long-standing and as a founding member
of the Ethical Trading Initiative (ETI) we expect our policies, which are
underpinned by the ETI base code, to be upheld throughout our supply-chains.
Extensive second and third party audits underpin our approach to assurance
and we undertake, both collectively and solely, significant capacity and
capability activities to ensure and improve standards within our global supply
chains. Examples of this include our collaborative working within project
Issara, our strategic relationship and training programme with The
Gangmasters Licensing Authority and a number of focused activities with
our strategic suppliers.

The Modern Slavery Act, passed in March 2015, and the associated
Transparency in Supply Chains Clause (TISC), further reflect the importance
and wide ranging nature of ethical trade. The requirements to report against
TISC are already being updated into our commercial terms and conditions.
As a business we will update more broadly on our approach to modern
slavery in the context of the TISC guidance before the end of 2016, ahead
of our first regulatory reporting requirement due by September 2017.

J Sainsbury
plc Board

David Tyler
Chairman

CR&S Steering Group

Established 2001,
meets twice annually

Mike Coupe
Chairman, Chief Executive

Living healthier
lives

Sarah Warby
Marketing Director

Sourcing with integrity

Paul Mills-Hicks
Food Commercial Director

Respect for our
environment

John Rogers
Chief Financial Officer

Making a positive
difference to our
community

Jon Hartland (interim)
Acting Retail and Operations
Director

A great place to work

Angie Risley
Group HR Director

Corporate
Responsibility
and Sustainability
Committee

Established January 2007,
meets twice annually

Jean Tomlin, Chair
Non-Executive Director

Health
Steering
Group

Product
Forum

Environment
Steering
Group

Community
Steering
Group

A Great
Place To Work
Steering
Group

Governance ReportDual emissions reporting
Overall emissions have been presented to reflect both location and market-
based methodologies, affecting both Scope 1 & Scope 2 emissions. Scope 1;
12 per cent of total natural gas usage is covered by Green Gas Certification
(100 per cent Renewable Gas Guarantee of Origin Contract); therefore 12 per
cent of natural gas emissions have been reported at zero emissions. All other
Scope 1 market-based emissions have been calculated using UK
Government’s GHG Conversion Factors for Company Reporting 2015 for all
sources. Scope 2; 17 per cent of UK electricity is covered by a PPA, which
meets all of the required quality criteria; therefore 17 per cent of UK electricity
emissions have been reported at zero emissions. Remaining UK electricity has
been reported at supplier-specific emissions rate. Non-UK electricity has been
reported at local grid average.

Electricity use
Our absolute electricity consumption has decreased this year by 2.74 per cent,
as a result of our investment in energy reduction initiatives, for example fitting
our 355,000 sq ft distribution centre in Tamworth with over 4,000 solar panels.
Overall, our energy reduction measures have decreased absolute electricity
use by over ten per cent since 2005/06 despite a 53% increase in sales area.

Methodology
We have reported on all of the emission sources required under
the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations
2013. We have calculated and reported our emissions in line with the GHG
Protocol Corporate Accounting and Reporting Standard (revised edition) and
emission factors from UK Government’s GHG Conversion Factors for Company
Reporting 2015. The reporting period is the financial year 2015/16, the same
as that covered by the Annual Report and Financial Statements. The
boundaries of the GHG inventory are defined using the operational control
approach. In general, the emissions reported are the same as those which
would be reported based on a financial control boundary.

Greenhouse gas emissions
We have measured our greenhouse gas (GHG) footprint since 2005 and set
ourselves a challenging target to reduce our emissions by 30 per cent by
2020, compared to our baseline (and 65 per cent relative to sales floor area).

For further information on initiatives to reduce our GHG footprint, please refer
to our Sustainability Plan available at www.j-sainsbury.co.uk/responsibility.

Location-based emissions
In 2015/16 our emissions reduced by 3.11 per cent.

Emission source
Combustion of fuel and operation
of facilities (‘Scope 1’)
Electricity, heat, steam and
cooling purchased for own
use (‘Scope 2’)
Total
Intensity measurement
(tCO2e/’000 sq ft)

GHG emissions (tCO2e)

2005/06
(baseline)

2013/14

2014/15

2015/16

536,694

635,191

571,673

601,091

833,805

722,512
1,370,499 1,372,266 1,366,102 1,323,603

794,429

737,074

90.36

61.93

59.87

57.05

Intensity ratio
In order to express our annual emissions in relation to the growth of our
business, we report an emissions intensity measurement, calculated using
sales area (’000 sq ft). Using this measure, our emissions intensity decreased
by over 4.7 per cent in 2015/16 and has decreased by over 36.8 per cent since
2005/06.

Market-based emissions
The market-based emissions method reflects the emissions from the
electricity that a company is using, which may be different from emissions
for the electricity that is generated as a UK average. For example, different
electricity suppliers emit more or less greenhouse gases depending on the
energy source or technology, and companies who have invested in their own
renewable or low carbon energy generation by this method can show the
actual emissions level for the energy used. Using this methodology our total
absolute GHG emissions in 2015/16 are lowered by 192,799 tCO2e (14.6 per
cent). As this is the first year this method has been used it is not possible to
compare to previous years.

Emission source
Combustion of fuel and operation of facilities (‘Scope 1’)
Electricity, heat, steam and cooling purchased for own use

(‘Scope 2’)

Total
Intensity measurement (tCO2e/’000 sq ft)

GHG emissions (tCO2e)

2015/16
589,702

541,102
1,130,804
48.74

Governance Report

Audit Committee

David Keens,
Chairman,
Audit
Committee

Dear Shareholder,
The Committee’s work during the year has
included reviewing the risk framework in
light of changes to the Governance Code,
continuing to monitor both the transition
of Sainsbury’s Bank and the management
of data security throughout the business.

This is my first report as Chairman of the Audit Committee. I joined the Board
in April 2015 and became Chairman of the Committee in July. My priority in
this first year has been to invest time in visiting Company sites, meeting with
colleagues and understanding the risk management processes and internal
controls. I have also met with the Company’s professional advisers as
appropriate to my duties. My site visits have been operational, financial and
risk-based, encompassing a range of stores, distribution facilities and
administration centres.

At the 2015 AGM Ernst & Young were appointed as the Group’s auditor for
the year to March 2016. The transition from PwC to Ernst & Young has been
conducted professionally and effectively. We thank them both for their
diligence and support during what has been a very busy period.

The Committee has promoted the Company’s culture of identification and
management of significant risks across the business, with continuous
oversight by the Operating Board. We are satisfied that the business has
maintained robust risk management and internal controls, supported by
strong overall governance processes, and that the Board continues to instil
a strong risk management culture across the business.

The Company’s principal risks and uncertainties are set out on pages 36 to 38.
We have reviewed these during the year and consider that the business has
addressed them appropriately within its ongoing operating model and
through specific actions.

The Committee continues to pay particular attention to data governance,
with an emphasis on information security. We have requested and received
detailed presentations and have thereby encouraged the Company’s strong
approach to risk management and controls, given that any data breach could
have a detrimental impact on the Company’s reputation.

We have monitored the transition programme and governance of Sainsbury’s
Bank, which is included on the agenda of, and is represented at, each
Committee meeting.

New provisions of the Governance Code have been introduced. There is now a
requirement to make a statement in the Annual Report concerning the
Company’s long-term viability over a specified period of time. In response to
this, the Committee has developed its risk management monitoring
processes to accommodate the longer-term nature of this statement. Further
details are on page 39.

The significant issues considered by the Committee during the year are set
out on page 63.

Finally, I would like to thank my predecessor as Audit Chair, Gary Hughes,
and all Audit Committee members for their work and support during this
past year of transition. My aim for the coming year is to increase my own
Company knowledge whilst ensuring that this Committee continues to
provide diligent enquiry across all aspects of our business.

David Keens
Chairman, Audit Committee

Governance Report — Reviewed the Annual Report and Financial Statements,
including the recommendation to the Board that the
going concern basis be adopted and that the Annual
Report and Financial Statements are fair, balanced and
understandable.

— Reviewed the year-end report of the external auditor.

— Reviewed the preliminary statement and recommended

its adoption by the Board.

— Recommended the appointment of Ernst & Young as

auditor and confirmed their independence.

— Approved the non-audit fees.

— An update on compliance with the Grocery Supply Code
of Practice and approval of the annual compliance report
to the OFT.

— A risk management update including a review of

principal risks and uncertainties.

— Reviewed and approved the Internal Audit Charter.

Fair, balanced and understandable assessment
One of the key compliance requirements of the Code is for the Board to
confirm that the Annual Report and Financial Statements, taken as a whole,
is fair, balanced and understandable (see page 82). To enable the Board to
make this declaration, a formal process is embedded in the year-end review
process to ensure the Committee, and the Board as a whole, has access to all
relevant information and, in particular, management’s papers on significant
issues faced by the business. The Committee receives a paper from
management detailing the approach taken in the preparation of the Annual
Report and Financial Statements, highlighting areas where it has met the
requirements of the Code. The Committee, and all other Board members, also
receive drafts of the Annual Report and Financial Statements in sufficient
time to facilitate their review and enable them to challenge the disclosures
where necessary. In addition, the Group’s external auditor reviews the
consistency between the narrative reporting of the Annual Report and the
Financial Statements.

Financial statements and significant issues
An accounting and tax paper is prepared by management and presented to
the Audit Committee four times a year, which provides detail on the main
financial reporting judgements and issues. Specific accounting papers have
also been prepared when considered necessary.

Significant financial and reporting issues considered in the year, in no
particular order, were as follows:

Governance Report
Audit Committee continued

Committee membership
The Audit Committee is chaired by David Keens, with Matt Brittin, Brian
Cassin (appointed 1 April 2016) and Susan Rice as its other members, all of
whom are independent Non-Executive Directors. Susan Rice will step down as
a member of the Committee on 4 May 2016. The Board has determined that
David Keens has recent and relevant financial experience. The Chairman, Mike
Coupe, John Rogers, Susannah Parden (Director of Internal Audit), Ed Barker
(Director of Group Finance), Tim Fallowfield (Company Secretary and
Corporate Service Director), representatives from Sainsbury’s Bank and the
external auditor are invited to attend Committee meetings.

April

Committee activities
The Committee’s role primarily covers five areas being, internal controls, risk
management, internal audit, external audit and financial reporting.

The Committee’s activities during the financial year were as follows:

At each meeting the Committee received a report on the internal controls
framework and the Internal Audit activities. This included a fraud update.
The Committee also received updates on the key agenda items discussed at
the meeting of the Sainsbury’s Bank Audit Committee and on all important
operating and regulatory matters, including the transition of the Bank
following its acquisition, its liquidity, cash flows, capital adequacy and risk
management processes. The Committee received accounting and tax updates
covering all relevant accounting issues and regulatory decisions. In addition,
the Committee regularly reviewed the Company’s funding and liquidity
position and considered its impact on the Company’s financial and
operational capabilities. Updates on litigation were also provided.

Other activities at each meeting were as follows:

September

Standard items
— Approved the external audit plan and fee proposal.

— Reviewed and approved the H2 internal audit plan.

— Received an update on risk management.

— Received an update on data governance and

information security.

— Reviewed the process being undertaken to support the

long-term viability statement.

— Received an update on the integration of Sainsbury’s

Bank.

— Reviewed the Committee’s terms of reference and

proposed some amendments to the Board.
— Reviewed the Interim Results, including the

recommendation to the Board that the going concern
basis be adopted.

— Reviewed the findings of the internal report of the

external auditor.

— Received a progress report on the viability statement.

— Reviewed developments in the PCI compliance

landscape and the Company’s compliance programme.

November

March

— An update on the long-term viability statement

including stress testing against risk materialisation.

— Reviewed and approved the H1 internal audit plan.

— Reviewed the FRC AQR letter.

— Received an update on risk management.

— Received an update on data governance and

information security.

— Received an update on information security within

Sainsbury’s Bank.

— Reviewed a report of the external auditor.

Significant financial and reporting issues and how the issue has been addressed
Impairment
of financial
and non-
financial
assets
Complex
property
transactions
Pensions
accounting

The impairment of financial and non-financial assets is always a significant area of focus for the Audit Committee, especially in today’s
challenging marketplace. As disclosed in note 2 to the financial statements, a review for impairment triggers is performed at each reporting
date by considering if any current or future events suggest the recoverable value of certain assets may be less than their carrying value. The
Committee reviewed management’s assessment of recoverable value and relevant judgements made. No impairment triggers were identified
in the year.
The Committee has reviewed a number of complex property transactions executed during the year to ensure that all accounting and tax
issues are identified and appropriately presented in the accounts, including whether amounts recognised reflect the overall substance of these
transactions. Please refer to note 3 to the financial statements for property profits recognised in the year.
The Committee reviewed a summary of the key assumptions used in arriving at a valuation for the defined benefit pension scheme for both
half-year and year-end reporting.

Items
excluded
from
underlying
results
Sainsbury’s
Bank
reporting

Supplier
arrangements

Viability
statement

Audit
Quality
Review

The Committee reviewed the key assumptions driving the movement in the retirement benefit funded obligations including inflation, discount
and mortality rates. Benchmarking is assessed to ensure that the assumptions are appropriate.
The Committee is satisfied that the Group’s definition of items excluded from underlying results remains clear and further disclosure is
included where appropriate. The definition has been updated this year to show the coupons on the perpetual capital securities and perpetual
convertible bonds within underlying profit in order to be transparent to readers of the accounts around the costs of these securities.

The Committee received updates on the key agenda items discussed at the Bank’s Audit Committee including accounting judgements and estimates
and on all important operating and regulatory matters such as its liquidity, cash flows, capital adequacy and risk management processes.
Representatives from the Bank’s Audit Committee, Risk Committee and Internal Audit team attend all meetings of the Committee.

During the year the accounting judgements and estimates reviewed by the Committee have included impairment assessments of the loans
and advances due to Sainsbury’s Bank customers, progress on the bank transition, tax judgements and provisions.
As in previous years, the Committee reviewed the amounts and movements in supplier arrangements in the year. The Committee remain
comfortable with the controls in place to manage any estimation or judgement. The Committee also considered the disclosures in respect of
supplier arrangements, and as a result of this have decided to disclose quantified balance sheet and income statement amounts for any areas
of supplier arrangements that involve a level of judgement or estimation, but not those which are calculated through a mechanical process.
The Committee believes this represents best practice disclosure.
Changes to the Corporate Governance Code (‘the Code’) have introduced a Directors’ ‘longer-term viability statement’ into annual reports.
This is the first year that we have adopted this new requirement so significant time was spent assessing the appropriate timeframe over which
to make the statement. The processes underpinning the assessment of the Group’s longer-term prospects were also reviewed in detail.

As a result, an assessment period of three years has been chosen for which the Directors have confirmed the Group’s viability (see page 39).
During the year, the Audit Quality Review team of the Financial Reporting Council (“FRC”) team reviewed PwC’s March 2015 year-end audit of
the Group. The FRC has given us a copy of their confidential report which has been reviewed and discussed by the Committee and separately
with both PwC and our current external auditor EY.

The Committee is satisfied that the matters raised do not give it concerns over the quality, objectivity or independence of the audit.

We note that within the External Audit report there is a risk associated with adjustments made to revenue. We have considered this and have concluded that
we have appropriate procedures and controls in place not to include this as a significant area of judgement.

External Auditor
Independence of External Auditor
In order to ensure their independence, the Committee has overseen the
Company’s policy which restricts the engagement of Ernst & Young in relation
to non-audit services. We are satisfied that Ernst & Young are fully
independent from the Company’s management and free from any conflicts
of interest.

Audit and professional fees paid to the auditor
The majority of the non-audit work undertaken by Ernst & Young during
2015/16 was audit related assurance services such as the interim review and
the provision of accounting advice, which totalled £0.1 million. The audit fee
for the year in respect of the Group, Company and its subsidiaries totalled
£0.7 million. For a breakdown on the fees please refer to note 5 of the Notes
to the financial statements. The Committee remains satisfied with Ernst &
Young’s independence and their overall challenge to management.

The policy is consistent with the Auditing Practices Board’s Ethical Standards
No. 5 – Non Audit Services. The policy is designed to ensure that the provision
of such services does not have an impact on the external auditors’
independence and objectivity. It identifies certain types of engagement that
the external auditors shall not undertake, including internal audit and
actuarial services relating to the preparation of accounting estimates for the
financial statements. It also requires that individual engagements above a
certain fee level may only be undertaken with appropriate authority from the
Committee Chairman or the Committee. The policy also recognises that there
are some types of work, such as accounting and tax advice, where a detailed
understanding of the Company’s business is advantageous. The policy is
designed to ensure that the auditor is only appointed to provide a non-audit
service where it is considered to be the most suitable supplier of the service.
The Committee receives a report at each meeting on the non-audit services
being provided and the cumulative total of non-audit fees. In the event that
cumulative non-audit fees exceed the audit fee then all subsequent
non-audit expenditure must be approved by the Committee Chairman.

Effectiveness of External Auditor
Ernst & Young were appointed in July 2015 replacing PwC as the Company’s
auditor following a competitive tender which completed in January 2015.
An effectiveness review was undertaken as part of the tender process.

Appointment of External Auditor
The Committee reviewed Ernst & Young’s overall work plan, and approved
their remuneration and terms of engagement. The Committee has made a
recommendation to the Board to reappoint Ernst & Young as the Company’s
auditor for the 2016/17 financial year. Accordingly, a resolution proposing the
reappointment will be tabled at the 2016 AGM.

CMA Order 2014 Statement of compliance
The Committee confirms that during the year the Company has complied
with the provisions of the Statutory Audit Services for Large Companies
Market Investigation (Mandatory Use of Competitive Tender Processes and
Audit Committee Responsibilities) Order 2014, as published by the UK
Competition and Markets Authority.

Governance Report
Governance Report
Audit Committee continued

Risk management and internal controls
The Board has overall responsibility for risk management and the system of
internal controls and for reviewing their effectiveness. Certain of these
responsibilities have been delegated to the Audit Committee as outlined
below. The system is designed to manage rather than eliminate the risk of
failure to achieve the Company’s business objectives and can only provide
reasonable and not absolute assurance against material misstatement or loss.

Risk management
Accepting that risk is an inherent part of doing business, the risk
management system is designed to identify key risks and to provide
assurance that these risks are fully understood and managed. The
effectiveness of the process is reviewed twice a year by the Audit Committee.
The Board carries out an annual review of the significant risks facing the
business, which includes reviewing risk appetite.

The risk management process and the system of internal controls have been
in place for the whole year, up to the date of approval of the Annual Report
and Financial Statements, and accord with the UK Financial Reporting
Council’s Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting and the Governance Code.

The Audit Committee has reviewed the effectiveness of the system of internal
controls and has ensured that any required remedial action on any identified
weaknesses has been or is being taken.

The Operating Board maintains an overall corporate risk register which is
reviewed twice yearly by the Audit Committee and formally discussed with
the Board. The risk register contains the significant risks faced by the
business and identifies the potential impact and likelihood at both a gross
level (before consideration of mitigating controls) and net level (after
consideration of mitigating controls). This gives the Board the opportunity to
review the level of risk that the business is prepared to accept. The register
also contains the assurance provided over current key mitigating controls.
Where further actions have been identified to mitigate risks to a level deemed
acceptable, these are agreed with specific timelines for delivery and progress
on implementation of these actions is monitored.

Risk Management Process

Divisions

Operating Board

Audit Committee

plc Board

Internal Audit

January/
February

Divisional Risk
Workshops
assess key risks
to their business
objectives

Operating Board
Risk Review
review/challenge
divisional risk output
and update corporate
risk register as
appropriate

Audit Committee
review corporate
and divisional risks
and sign-off
Principal Risks
and Uncertainties

Internal Audit
risk-based
half-year plan

plc Board
review of risk
process, corporate
risks and sign-off
of Principal Risks
and Uncertainties

Management
annual certification that
risks in their areas of
responsibility are
identified, evaluated
and managed

Horizon Scanning
and Game-Changer
Risk Workshops
focus on
external and
unknown risks

Divisional Risk
Workshops
assess key risks
to their business
objectives

Operating
Board Annual
Risk Workshop
assessment of key
corporate risks and risk
appetite discussion

Operating Board
Risk Review
review/challenge
divisional risk
output and update
corporate risk register
as appropriate

Audit
Committee
review corporate
and divisional
risks

Internal Audit
risk-based
half-year plan

Output
Divisional risk
maps and registers

Output
Corporate risk
map and register

Output
Principal Risk and Uncertainties
(reflecting key corporate risks)

Output
The risk management process feeds into the
Company strategy, plan and objectives

March

May

June

July

August

September

Summary
The Corporate Risk Management process as referenced on page 64
continues to be effectively embedded and robust discussion on risk,
mitigations and risk appetite occurs at both the Operating Board and
Divisional leadership team levels. The risk management process is
supported by the principle that the Board is focused on those risks
capable of undermining the strategy or long-term viability of the
Company and damaging its reputation, and business as usual risks
are assessed and managed by the divisional leadership teams.

Risk management process
The risk management process is embedded at the Operating Board level and
through the review of the risk registers of each of the operating divisions of
the business:

— the divisional operating management teams are responsible for managing

the risks to their business objectives and for identification and
implementation of internal controls so as to provide reasonable, but not
absolute, assurance that the risks in their areas of responsibility are
appropriately identified, evaluated and managed;

— this divisional risk process is achieved through twice yearly workshops

held by the divisional management and facilitated by Internal Audit. Each
divisional management team produces and maintains a divisional key
risk register. The likelihood and impact of each key risk is evaluated,
management’s risk appetite is discussed and any further actions deemed
necessary to mitigate the risk are identified. In addition, the risks and the
robustness of the mitigating controls are regularly reviewed by divisional
management as part of their normal business activities;

— management certify annually that they are responsible for managing

their business objectives and that the internal controls are such that they
provide reasonable but not absolute assurance that the risks in their areas
of responsibility are appropriately identified, evaluated and managed;

— the Operating Board reviews and challenges the output of the divisional
risk process and then updates the overall corporate risk register as
appropriate;

— game-changer and horizon scanning risk workshops are held annually to
focus on external and unknown risks. Key themes and outputs from these
are reviewed by the Operating Board and the potential impact on key risks
is discussed;

— the corporate and divisional risk registers form the basis of the risk based

plan of Internal Audit for the subsequent half-year period;

— Internal Audit provides independent assurance to management and the

Audit Committee as to the existence and effectiveness of the risk
management process; and

— the Board reviews the risk process and corporate risks at the year end and
approves the Company’s principal risks and uncertainties (as set out on
pages 36 to 38).

Internal controls
The system of internal control encompasses all controls, including those
relating to financial reporting processes (including the preparation of the
consolidated Group accounts), operational and compliance controls and
those relating to risk management processes. It also includes the controls
over Sainsbury’s interests in joint ventures.

The Audit Committee assesses the effectiveness of the internal controls
systems on an ongoing basis, enabling a cumulative assessment to be made.
The processes used during the year to support this assessment are as follows:

— discussion and approval by the Board of the Company’s strategy, plans

and objectives, and the risks to achieving them;

— review and approval by the Board of budgets and forecasts, including

those for both revenue and capital expenditure;

— regular reviews by management of the risks to achieving objectives and

mitigating controls and actions;

— regular reviews by management and the Audit Committee of the scope
and results of the work of Internal Audit across the Company and of the
implementation of their recommendations;

— regular reviews by the Audit Committee of the scope and results of the
work of the external auditors and of any significant issues arising;

— regular reviews by the Audit Committee of accounting policies and levels

of delegated authority; and

— regular reviews by the Board and the Audit Committee of material

fraudulent activity and any significant whistleblowing by colleagues or
suppliers and actions being taken to remedy any control weaknesses.

Additional matters
Internal Audit
The Committee has regularly reviewed the Internal Audit department’s
resources, budget, work programme, results and management’s
implementation of its recommendations.

The Director of Internal Audit, Susannah Parden, reports to the Committee
Chairman and has direct access to all members of the Committee and the
Chairman. She is given the opportunity after each meeting to meet with the
Committee separately without management being present. She has regular
meetings with all Committee members. The purpose, authority and
responsibility of Internal Audit are defined in the Internal Audit Charter which
the Committee reviews annually.

Whistleblowing
The Company’s whistleblowing procedures ensure that arrangements are in
place to enable colleagues and suppliers to raise concerns about possible
improprieties on a confidential basis. All issues raised have been investigated
and appropriate actions taken. Any significant issues are highlighted to the
Audit Committee.

Sainsbury’s Bank
Sainsbury’s Bank is a subsidiary of the Company which has an independent
board responsible for setting the Bank’s strategy, risk appetite and annual
business plan as well as the day-to-day management of the business.
The Board of the Bank has an independent Chairman and a majority of
independent Non-Executive Directors.

The Bank will continue to provide to each Audit Committee an update
on performance and the chairs of the Bank’s Audit Committee and Risk
Committee will present to the Audit Committee. There is alignment
between the Sainsbury’s Internal Audit function and their colleagues
within Sainsbury’s Bank equivalent team.

Grocery Supply Code of Practice
In February 2010, a new Grocery Supply Code of Practice (‘GSCOP’) was
implemented following the recommendation of the Competition
Commission. Each grocery retailer to which it applies had to appoint a Code
Compliance Officer whose duties include hearing disputes between suppliers
and the relevant retailer. Sainsbury’s appointed the Director of Internal Audit
as its Code Compliance Officer.

GSCOP requires that each grocery retailer (to which it applies) delivers an
annual compliance report to the Groceries Code Adjudicator which has been
approved by the Chairman of the Audit Committee. Furthermore, a summary
of the compliance report must be included in our Annual Report and Financial
Statements.

Summary Annual Compliance Report
Sainsbury’s has invested significant time and resource in providing
comprehensive training to all relevant colleagues as required under GSCOP
which is reinforced by online knowledge testing. Sainsbury’s has also
dedicated internal resource to provide all relevant colleagues with day-to-day
advice and guidance. The Trading Division, in consultation with the Legal
Services Team and the Code Compliance Officer, continues to assess the
adequacy of policies and procedures in place to support GSCOP awareness
and compliance.

A small number of alleged breaches of GSCOP have been received in the
reporting period, which were dealt with within the Trading Division using our
standard internal escalation procedure. The resolution of four of these alleged
breaches was facilitated by the Code Compliance Officer.

Governance ReportGovernance Report
Directors’ Remuneration Report

Annual Statement from the
Remuneration Committee Chairman

At the start of the year there was considerable uncertainty regarding the
retail environment and to a large extent performance expectations had been
reset across the UK grocery sector. The Committee firmly believes in pay for
performance and the targets set for 2015/16 were demanding in the context
of this challenging and competitive retail environment. The Committee notes
the year-on-year reduction in profit and like-for-like sales. However, the results
for 2015/16 represent a good outcome, demonstrated by maintaining market
share (as measured by Kantar), the outperformance of both internal and
external forecasts as well as outperformance of our main supermarket peers.

Annual bonus
The Executive Directors’ bonus assessed performance against profit, sales,
customer and individual measures. During the year the Company made good
progress against these metrics and as such the bonus paid out at 76 per cent
of maximum for Mike Coupe and 78 per cent of maximum for John Rogers. In
a move towards greater transparency and consistent with best practice, in
this year’s report, expanded retrospective disclosure has been provided
regarding both the bonus outcomes and the targets set (see page 71). I hope
this provides useful additional insight into the decision making process.

Deferred Share Award (‘DSA’)
Reflecting the Company’s significant outperformance of the target for sales
and profit, strong performance against peers and progress against specific
strategic goals, awards were made at 80 per cent of the maximum available
(compared to 52 per cent last year). These outcomes are detailed on page 72.

John Rogers’ role change
On 31 July 2015, John Rogers’ role was expanded to include Business
Development. In his expanded role, John has assumed responsibility for
Group strategy, Sainsbury’s Online, Netto and new business development,
in addition to his existing responsibilities of finance, property, procurement
and operational efficiency. John is a valued member of the Operating Board
and it was a natural progression for John to take on further operational
responsibilities. Alongside Mike and the rest of the Operating Board, John will
play a major operational and strategic role in driving forward our business.
As announced to the market at the time of the change, John’s salary was
increased to £675,000 to reflect his additional responsibilities.

Mary Harris,
Chairman,
Remuneration
Committee

Dear Shareholder,
The grocery retail market remains highly
competitive and so it is as important as
ever that our remuneration principles
support and encourage the delivery of our
strategy to enable us to differentiate
ourselves from our peers.

This was Mike Coupe’s first full financial year as Chief Executive. During the
year, Mike, together with the Operating Board and senior leaders, continued
to implement the strategy that was launched in November 2014. Through
the dedication and hard work of colleagues throughout the business, we are
making strong progress against our strategic objectives, which will support
the long-term success of the Company in future years.

2015/16 remuneration decisions
As well as making progress against our strategic objectives, we have also
outperformed our main supermarket peers and maintained market share in
a sector facing competitive pricing strategies and deflation. Outcomes for
performance-related pay reflect the achievement of stretching targets which
were set in the context of the environment in which we are operating. Overall
variable pay has increased as a result of a payout under the annual bonus
(unlike last year) and a higher level of Deferred Share Award. However, Future
Builder – our long-term incentive plan – did not vest for a second consecutive
year, which reflects the shift in market conditions since this award was
originally granted.

Looking ahead to 2016/17
We will continue to operate within the policy as approved by shareholders at
the 2014 AGM. The overall structure of the remuneration package and
incentive award levels will remain unchanged for 2016/17.

AGM
In line with the regulations, this Directors’ Remuneration Report, excluding
the Directors’ Remuneration Policy, will be put to an advisory vote at the AGM
on 6 July 2016.

Base salary
Salaries for the Executive Directors increased in March 2016 by 1.5 per cent,
which is in line with the percentage salary increases for other management
and central colleagues and below the four per cent for store colleagues
awarded in August 2015.

From a wider pay perspective, the announcement of the legislative National
Living Wage during 2015 was significant and has particular impact within the
retail sector. The Committee will continue to monitor the Company’s plans for
colleague pay over both the short and longer term.

Annual bonus
A minor change is to be made to the annual bonus for 2016/17 in relation to
how the customer element is assessed. This year it will be based on the
Customer Satisfaction Index, which measures the satisfaction of our
customers across the business whether they shop with us in-store or online.
This measure will help drive our strategic objective of being there for our
customers.

Future Builder
Prior to the grant of Future Builder awards, the Committee rigorously reviews
the performance criteria to ensure the measures and targets are aligned to
our corporate strategy and appropriately motivate participants to deliver
performance above and beyond the expected level. Ordinarily these targets
would be disclosed in the Directors’ Remuneration Report prior to the grant of
the awards.

In light of the proposed acquisition of Home Retail Group plc, the Committee
has decided that, on a one-off basis, the setting of the performance criteria
for the 2016 awards should be deferred until the outcome of the acquisition
is known. The Committee believes it is important to ensure that the
performance conditions and targets are aligned to the Company’s strategic
objectives over the next three years. If the acquisition successfully completes,
the targets need to be meaningful in the context of the enlarged group and
the strategy communicated to shareholders. The targets for any awards
would be expected to be of comparable stretch to those granted in prior
years. Following determination of the performance criteria later in the year,
the Committee will communicate details of the measures and targets to
shareholders.

In addition this year, the Company will be seeking shareholder approval for a
renewal of the Company’s share incentive plan. The current Long-Term
Incentive Plan (‘LTIP’), under which Future Builder awards are granted, was
approved by shareholders in 2006 and will expire in July 2016. The new plan
is principally the same as the existing plan except for minor updates to reflect
evolving market and best practice. The operation of the plan will remain
unchanged and will continue to be fully in line with the policy approved by
shareholders at the 2014 AGM.

Structure of report
Following this letter, the remainder of the report is split into the following
sections:

— A remuneration summary, on pages 68 and 69, detailing remuneration

decisions made in relation to 2015/16 and how remuneration
arrangements will be operated for 2016/17. I hope this section provides
shareholders with a useful overview of the key features of our
remuneration arrangements.

— The Annual Report on Remuneration, on pages 70 to 77, discusses all

payments and decisions made in relation to the 2015/16 financial year.

— For ease of reference, at the back of this report the policy tables which

formed part of the Directors’ Remuneration Policy approved by
shareholders at the 2014 AGM have been included. The full policy can be
found in our 2014 Annual Report on our website at: http://
www.j-sainsbury.co.uk/investor-centre/reports/.

The Remuneration Committee remains firmly committed to the principle of
pay for performance, ensuring that rewards of the senior leadership team are
aligned with the experience of long-term shareholders, while staying true to
our Company values.

Mary Harris
Chairman, Remuneration Committee

Governance ReportSummary of 2015/16 remuneration decisions

Pay element
Salary

2015/16 decisions
— Mike Coupe – £915,750 – salary increase of 1.75 per cent in March 2015, in line with other management and central colleagues.

— John Rogers – £675,000 – salary increase on 31 July 2015, to reflect expanded role and additional responsibility of Business

Development.

Annual bonus

Payout of 76% of max
for the CEO and 78%
of max for the CFO

The Company performed well against the challenging targets that were set at the start of the year, which reflected the stretching
internal and external forecasts for the retail market.

— Profit delivered between the threshold and stretch targets

— Stretch sales target exceeded

— Customer-focused measure exceeded and strong individual performance assessed against key objectives

— Profit gateway achieved

For 2014/15, reflecting performance and the targets set, no bonus was paid to Mike and John.

Mike Coupe

Maximum % of salary

60%

Payment % of salary

37%

10%

40%

10%

37%

John Rogers

Maximum % of salary

45%

Payment % of salary

28%

10%

35%

10%

32%

Profit

Sales

Customer focused & individual performance

Deferred Share Award

Award of 80% of max

Performance assessed taking into account financial performance, returns to shareholders, relative performance against peers
and strategic goals.

— Significant outperformance of target for sales and profit

— Performed strongly compared to peers in terms of financials, returns, price, quality and service

— One-year total shareholder return ahead of FTSE 100 and listed peers

— Significant progress against strategic goals; the proposed acquisition of Home Retail Group plc has the scope to further

accelerate the Company’s strategy

— Profit gateway achieved

For 2014/15 the DSA paid out at 52 per cent of the maximum.

LTIP/Future Builder

Vesting 0% of max

No awards will vest in May 2016. The Company’s performance was within the vesting range for the performance conditions but
the earnings gateway was not achieved.

In May 2015 there was also no vesting due to the earnings gateway not being achieved.

Total remuneration
As a result of the weighting on performance-related pay, total remuneration levels are higher for 2015/16 due to the payouts under the annual bonus and DSA
as described above.

Fixed pay

Salary
Benefits
Pension

Performance-related pay Annual bonus

Deferred Share Award
LTIP/Future Builder

Total pay

Mike Coupe
£000

John Rogers
£000

2014/15
annual1
900
17
270
–
515
–
1,702

2014/15
actual1
801
17
231
–
458
–
1,507

2015/162
650
17
163
472
486
–
1,788

2014/15
600
17
150
–
281
–
1,048

2015/16
916
38
275
767
806
–
2,802

1. Mike Coupe was appointed Chief Executive on 9 July 2014. The 2014/15 actual figures relate to the actual payments for the 2014/15 financial year; the 2014/15 annual figures relate to his annualised payments as

Chief Executive.

2. John Rogers’ salary was increased to £675,000 on 31 July 2015 when he took on the additional responsibility of Business Development.

Governance ReportDirectors’ Remuneration Report continued

Summary of 2016/17 remuneration

No major changes to the remuneration structure are proposed for the coming year.

Pay element
Salary

Increase in line with
colleagues

Summary of policy
Salaries are set taking into consideration a
range of internal and external factors. Increases
are normally in line with those for the wider
workforce.

Benefits

Pension

Annual bonus

No change to quantum
and general structure

Deferred Share Award

No change to quantum
and general structure

Range of benefits provided in line with market
practice and reflecting individual circumstances.

Participation in either the Company defined
contribution plan and/or a cash salary
supplement. The maximum value is 30 per cent
of salary.

Based on key financial, operational and individual
objectives measured over one year, with bonus
payable in cash after the year-end.
Maximum opportunity of up to 125 per cent of
salary per annum.

Recognises and rewards for delivery of short-
term strategic and financial objectives which
contribute towards long-term sustainable growth.
Performance measured over one year, after which
award made as conditional shares deferred for
two financial years.
Maximum opportunity of up to 125 per cent of
salary per annum.

Approach for 2016/17
The Executive Directors received a salary increase of 1.5 per cent in March
2016 in line with other management and central colleagues. The 2016/17
salaries are:

— Mike Coupe – £929,486

— John Rogers – £685,125

No changes to current arrangements.

No changes to salary supplement in lieu of pension for Mike Coupe (30 per
cent of salary) and John Rogers (25 per cent of salary).

Performance is based on profit, sales, customer and individual performance.
Profit will account for at least half of the bonus. A profit gateway needs to be
achieved before any bonus is payable.
The maximum bonus for 2016/17 is:

— Mike Coupe – 110 per cent of salary

— John Rogers – 90 per cent of salary

Performance over the financial year is based on financial performance, returns
to shareholders, relative performance against peers and strategic goals.
Financial performance and returns to shareholders account for over half of
the DSA. A profit gateway needs to be achieved before any award is made.
The maximum award for 2016/17 is:

— Mike Coupe – 110 per cent of salary

— John Rogers – 90 per cent of salary

LTIP/Future Builder

No change to quantum

Performance measures
aligned to strategic
priorities

Recognises and rewards for delivery of Company
performance and shareholder value over the
longer term.
Awards dependent on performance measured
over a period of at least three financial years.
50 per cent vests following the end of the
performance period and 50 per cent is deferred
for a further year.
Maximum award of up to 250 per cent of salary
per annum.

Awards are structured as core awards, with a performance multiplier of up to
four times. The 2016/17 awards are:

— Mike Coupe – core award of 62.5 per cent of salary (max 250 per cent)

— John Rogers – core award of 50 per cent of salary (max 200 per cent)

As a result of the proposed acquisition of Home Retail Group plc, setting of
the performance criteria for the 2016 Future Builder award has been deferred,
to ensure they remain aligned to our strategic priorities over the three-year
period. Shareholders will be updated with details of the measures and targets
in due course.

Shareholding guidelines

The Executive Directors are required to build a shareholding (Mike Coupe 2.5 x salary and John Rogers 1.5 x salary), within five
years of appointment.

Recovery provisions

The Executive Directors’ incentive arrangements are subject to malus and clawback.

Governance ReportAnnual Report on Remuneration

Remuneration principles
Our colleagues are central to the Company’s ongoing success and the
Company’s overall reward strategy supports this. Our objective is to have a
fair, equitable and competitive total reward package that supports our vision
of being the most trusted retailer where people love to work and shop,
encourages colleagues to perform in ways that deliver great service for
customers, drives sales and provides opportunities for colleagues to share in

Sainsbury’s success. This overall reward strategy is the foundation for the
remuneration policy for senior executives.

The over-arching objectives of the remuneration policy are to ensure rewards are
performance-based and encourage long-term shareholder value creation. The
remuneration policy for senior executives is based on the following principles:

Linked to business
strategy

Supports
Sainsbury’s values

Drives long-term
growth

Secures high
calibre leaders

Encourages share
ownership

Specifically built
around our strategy

Aligned to the
Company’s values as
outlined in our
Sustainability Plan

Encourages the right
behaviours to deliver
long-term growth

Recruit and retain
high calibre leaders who
can deliver operational
excellence

Enables executives to
become shareholders
in the Company

The Committee takes a rounded approach to pay and considers a variety of
factors when determining, and subsequently implementing, the
remuneration policy for senior executives. It believes it is important to
exercise suitable judgement at all stages during the process to ensure that
executive pay levels appropriately reflect performance and are aligned with
the interests of shareholders.

The Committee regularly reviews the overall structure of remuneration for
senior executives to ensure that it continues to evolve and is aligned to the
corporate plan and business goals as well as supporting the interests of
shareholders. When reviewing remuneration arrangements, the Committee
considers pay practices across the Company and the retail sector more
generally, the impact on colleagues, the cost to the Company, stakeholder views
(including shareholders, governance bodies and colleagues) and best practice.

Single total figure of remuneration for Executive Directors
(audited information)
The table below shows a single remuneration figure for all qualifying services
for the 52 weeks to 12 March 2016, together with comparative figures for the
52 weeks to 14 March 2015.

Mike Coupe6
£000

John Rogers6
£000

Base salary
Benefits
Pension
Total fixed pay
Annual bonus
Deferred Share Award
Long-Term Incentive Plan
Total

Notes
1
2

3
4
5

2015/16
916
38
275
1,229
767
806
–

2015/16
650
17
163
830
472
486
–
2,802 1,507 1,788

2014/15
801
17
231
1,049
–
458
–

2014/15
600
17
150
767
–
281
–
1,048

1. The 2014/15 base salary figure for Mike Coupe reflects his promotion to Chief Executive on 9 July 2014. The

2015/16 base salary figure for John Rogers reflects his salary increase from £610,500 to £675,000 on 31 July 2015.

2. Benefits include a combination of cash and non-cash benefits, valued at the taxable value. For Mike Coupe and
John Rogers this includes a cash car allowance (£15,250) and private medical cover. Also included is a value for
Sharesave options based on a 20 per cent discount on the savings in the year. The 2015/16 figure for Mike Coupe
includes a one-off payment for the reimbursement of costs incurred as a result of Company commitments
(£21,160). During 2015/16 Justin King received taxable benefits of £423; these have now ceased.

3. Annual bonus relates to performance during the financial year, paid in May following the relevant year-end.
4. The Deferred Share Award relates to performance during the financial year, shares are granted in May following

the relevant year-end and vest after a two-year deferral period.
5. The Long-Term Incentive Plan relates to Future Builder awards.
6. The Executive Directors are entitled to retain the fees earned from non-executive appointments outside the

Company. Mike Coupe was appointed a Non-Executive Director of Greene King plc on 26 July 2011 and received
£45,744 (2014/15: £44,269) for his services during 2015/16. John Rogers was appointed a Non-Executive Director
of Travis Perkins plc on 1 November 2014 and received £56,240 (2014/15: £23,192) for his services during the year.

The following sections provide detail for each element of the package during
2015/16 as well as details of the Committee’s intended approach in respect of
2016/17.

Base salary

Mike Coupe
John Rogers

Salary as at
2015/16 year-end
£915,750
£675,000

Salary effective from
13 March 2016
£929,486
£685,125

In line with our remuneration policy, the Committee takes account of
a number of factors when considering salaries, with particular focus on
the general level of salary increases awarded throughout the Company.
The salary review for management and central colleagues in March 2016 was
generally 1.5 per cent and for hourly paid retail colleagues in August 2015
was four per cent. External pay data is provided to the Committee for
reference, relating to the UK retail market and similar-sized companies in
terms of sales revenue and market capitalisation, but the Committee applies
judgement when considering market data.

As outlined in the Annual Statement, and as disclosed to the market at the
time of the change, John Rogers’ salary was increased to £675,000 with effect
from 31 July 2015, to reflect the expansion of his role to include Business
Development. The Committee agreed a 1.5 per cent increase for both
Mike Coupe and John Rogers effective 13 March 2016, in line with other
management and central colleagues.

Pension
In lieu of pension plan participation, Mike Coupe receives a cash pension
supplement of 30 per cent of salary and John Rogers 25 per cent of salary.
Neither Director has any entitlement to a Sainsbury’s defined benefit pension.

Benefits
For 2015/16 and 2016/17, benefits for Executive Directors include the
provision of company car benefits, private medical cover, long-term disability
insurance, life assurance and colleague discount. Mike Coupe’s taxable
benefits for 2015/16 also include a one-off payment for the reimbursement
of the costs incurred as a result of Company commitments.

Governance ReportDirectors’ Remuneration Report continuedPerformance-related pay
The Committee believes it is important that for Executive Directors a
significant portion of the package is performance-related and the
performance conditions applying to incentive arrangements support the
delivery of the Company’s strategy and the long-term sustainable success of
the Company. The Committee considers performance against a range of
metrics to ensure that the assessment is rounded, taking into account both
qualitative and quantitative factors.

The table below outlines each of the performance measures currently used in
our performance-related pay arrangements and how they support our
business strategy.

What the business is focused on

Great products and
services at fair prices
There for our customers
Colleagues making the
difference

We know our
customers
better than
anyone else

Our values
make us
different

Annual bonus
Profit
Sales
Customer
Individual performance
DSA
Financial performance
Returns to shareholders
Relative performance
Strategic goals
Future Builder
ROCE
EPS
Cash flow
Strategic element: cost savings



















The Board is of the opinion that the performance targets for the 2016/17
annual bonus and Deferred Share Award are commercially sensitive as the
Company operates in a highly competitive, consumer-facing sector. The
disclosure of targets would provide competitors with insights into the
Company’s strategic aims, budgeting and growth projections. However, for the
first time, the Company is retrospectively disclosing the financial performance
targets set for the 2015/16 annual bonus in order to provide greater
transparency. Consistent with previous years, detailed disclosure is provided in
relation to the Deferred Share Award so that shareholders can understand the
basis for payments.

Annual bonus
2016/17 policy
All bonus plans across the Company are aligned under a set of common principles.
The Board and senior management plans are based on profit, sales, a customer-
focused measure and individual performance. Bonus awards are weighted to
the achievement of profit, at least 50 per cent under the current structure,
and profit also acts as the overall ‘gateway’ measure for the plan, reflecting
the emphasis on profit. The annual bonus is paid in cash after the year-end.

The profit and sales targets are set against the Company’s expected
performance and are subject to a rigorous process of challenge before the
proposals are considered by the Board. For 2016/17, the targets have been
set such that considerably stretching performance in excess of internal and
external forecasts is required for maximum payout. The customer-focused
measure for 2016/17 has been amended to be more aligned to our strategic
objective of being there for our customers. It will now be based on the
Customer Satisfaction Index, which is a survey operated by a third party, that
assesses the satisfaction of our customers across the business whether they
shop with us in-store or online.

Individual performance objectives are set annually for each Executive Director
and are reviewed by the Committee. These objectives cover a variety of
financial and operational targets that contribute to the achievement of
longer-term strategic goals; some of these objectives relate, either directly or
indirectly, to the Company’s values.

2015/16 annual bonus payment (audited information)
The performance measures for 2015/16 were the same as outlined above for
2016/17 with the exception of the change to the customer-focused measure.

The table below sets out the threshold and stretch profit and sales targets set
at the start of the year and the actual outturn for 2015/16.

Profit1
Sales2

Threshold
£525m

Actual
£587m
£25,034m £25,234m £25,502m

Stretch
£625m

1. Underlying profit before tax.
2. Total sales including VAT and duty, including petrol sales, excluding Sainsbury’s Bank. Petrol volumes and

prices held constant to remove the effect of fuel volatility on sales.

The profit and sales targets were set at the start of the year and reflected the
continuing challenges in the UK retail market. The targets were set reflecting
both our internal and external forecasts at that time. During the year, the
Company performed strongly against these targets as the Company focused on
the execution of the strategy which was launched in November 2014. Our senior
team, managers and colleagues throughout our business all shared a consistent
focus to drive sales, control costs and to deliver great products and services to
our customers whenever and wherever they want. The Committee acknowledges
the absolute year-on-year decline in profit and like-for-like sales, but is
comfortable that the targets were robustly set, particularly when the broader
context of the retail market and Sainsbury’s outperformance of our main
supermarket peers is considered. In the context of expectations at the start of
the year, the profit and sales results represent strong performance outcomes.

The remainder of the bonus was subject to customer-focused and individual
performance objectives. The customer-focused measure, which related to
how well store support centre colleagues supported customers and stores,
was met. The Committee also carefully reviewed the performance of the
Executive Directors against key financial and strategic priorities that were
set at the start of the year. Both Executive Directors exceeded their stretching
personal objectives and had significant impact on the strong progress that
has been made with executing the Company’s strategy.

The table below shows the overall bonus payable as well as a breakdown
by element. These are the figures included in the annual bonus row in the
single total figure table.

Maximum
opportunity

Outcome

Per cent
of salary

Value
£000

Mike Coupe
Profit
Sales
Customer-focused & individual performance
Total
John Rogers
Profit
Sales
Customer-focused & individual performance
Total

60%
10%
40%
110%

45%
10%
35%
90%

37%
10%
37%
84%

28%
10%
32%
70%

£341
£92
£334
£767

£188
£68
£216
£472

Deferred Share Award
2016/17 policy
The Deferred Share Award (‘DSA’) is used to drive performance against a
diverse range of key financial and strategic scorecard measures and rewards
Executive Directors for achieving the short-term objectives that will directly
lead to building the sustainable, long-term growth of the Company. These
awards are made in shares to ensure further alignment of Executive Directors’
interests with shareholders.

Governance ReportThe DSA covers broadly the top 40 senior leaders in the Company, including
Executive Directors. Performance is assessed in the round based on the
Committee’s judgement of performance achieved against a number of
measures within four broad categories. The categories and examples of the
measures that will be reviewed for 2016/17 are set out below.

Financial performance
Returns to shareholders
Relative performance against peers Market share, industry profit pool
Strategic goals

Profit, earnings per share, sales
Total shareholder return, dividend yield

Products, services, price, customers,
colleagues, values

As outlined in our remuneration policy, at least 50 per cent of the award will be
based on the delivery of financial performance and returns to shareholders. In
addition, no shares will be awarded unless a profit gateway target is achieved.

Performance is assessed over one financial year, but any shares awarded are
deferred for a further two financial years. The shares are subject to forfeiture
if the participant resigns or is dismissed for cause prior to their release date.
Dividends accrue on any shares that subsequently vest.

The maximum DSA award opportunity for the Chief Executive is 110 per cent
of base salary and for the Chief Financial Officer 90 per cent of base salary.

2015/16 Deferred Share Award (audited information)
Following the year-end, the Committee conducted a rigorous assessment
of performance. Consistent with the underlying principles of the DSA, the
Committee assessed achievements in the round and also considered the

2015/16 Deferred Share Award performance

manner in which these performance goals had been delivered, in particular
how the overall performance of the Company had contributed to its future
sustainable growth and success.

2015/16 continued to be a challenging year for retailers and the Company
performed well against its key financial objectives. The Company’s
performance was strong against its peers in terms of financials, returns, price,
quality and service. Significant progress was made against specific strategic
goals and the proposed acquisition of Home Retail Group plc has scope to
further accelerate the Company’s strategy.

The profit gateway which enables awards to be made was met and, as a
result, the Committee agreed that for 2015/16 awards would be made at 80
per cent of the maximum level, compared with 52 per cent last year. The
table below sets out details of the awards and these are the figures set out in
the DSA row of the single total figure table. The share award is made after the
end of the 2015/16 financial year and the shares vest in March 2018 subject
to continued employment.

Mike Coupe
John Rogers

Maximum opportunity

Outcome

Per cent
of salary
110%
90%

Per cent
of salary
88%
72%

Value
£000
£806
£486

Although some of the specific measures and targets are commercially sensitive,
the table below presents a selection of performance highlights which the
Committee took into account within each of the four categories.

Financial performance
— Retail sales of £25,502 million, significant

outperformance of target of £25,034 million
— Underlying profit before tax of £587 million,
significant outperformance of target of
£525 million

— Strong sales and retail operating profit
performance relative to listed peers
— Sainsbury’s Bank growth of 4.8 per cent,
non-food sales up five per cent, Groceries
Online sales up nearly nine per cent and orders
growth of nearly 15 per cent, convenience
sales growth of over nine per cent

Returns to shareholders
— One-year total shareholder return ahead of the

Relative performance against peers
— Sales and retail operating profit have

FTSE 100 and listed peers

— Maintained an affordable dividend, with a

proposed full-year dividend of 12.1 pence, and
dividend cover 2.0x underlying earnings
— Underlying basic EPS of 24.2 pence per share

outperformed our main supermarket peers
— Sales growth ahead of the market for the 52

weeks to 12 March 2016, based on Institute of
Grocery Distribution (‘IGD’)

— Maintained market share, as measured by

Kantar

— Competitive price position
— Continued to lead on quality perception, based
on HPI brand and communications tracker

Strategic goals
Accelerating our strategy
— Our proposed acquisition of Home Retail Group
plc will accelerate our strategy to be the multi-
product, multi-channel proposition of choice

Great products and services at fair prices
— We are making improvements to the quality of
3,000 own-brand products and we continue to
lead on quality perception

— It optimises the use of the combined retail

— We have invested in the price of everyday

space

— Combines delivery networks for fast, flexible
and reliable delivery to store or to home for
food, clothing and general merchandise
— Creates a financial services proposition with

consumer-centric services

— Delivers significant cost and revenue synergies

products and this continues to drive improved
price satisfaction scores and ensure we are
competitive

— We have seen strong growth in our clothing and
general merchandise businesses this year, both
in stores and online

— Sainsbury’s Bank continues to perform well with
an operating profit increase of 4.8 per cent to
£65 million

There for our customers
— Convenience now generates sales of over

£2.3 billion – we have opened 69 convenience
stores in the year, reaching a total of 773 stores
— Groceries Online achieved nearly nine per cent
sales growth and order growth of nearly 15 per
cent. We have rolled out 101 Click & Collect
grocery sites

— Clothing online launched in August 2015, giving

customers access to our full clothing offer
— Six new format supermarkets being trialled

Colleagues making a difference
— Achieving our customer service targets, winning
Grocer Gold Customer Service and Availability
Awards for the third year running

— We were named Grocer 33 Store of the Week 19
times in the year, the highest of any grocer
— We continue to invest in colleague training and
development, with new mentoring programmes
launched to support women that we identify as
future talent in our business

We know our customers better than
anyone else
— We introduced a new customer insight system
that gives us an even better understanding of
our customers and allows us to better meet
their individual needs

— Through Nectar we reward people for their

loyalty across our different products and services
— Our coupon-at-till technology also enables us to

reward our customers with offers tailored
specifically to them

Our values make us different
— This year we launched our ambitious Waste less,
Save more initiative, to invest £10 million over
the next five years to help households reduce
their food waste

— More than £1.5 million raised from the book and
companion toy from our 2015 Mog’s Christmas
Calamity campaign was donated to Save the
Children’s literacy campaign, Read on, Get on
— We have now raised over £100 million for Comic

and Sport Relief since 1999

Governance ReportDirectors’ Remuneration Report continuedLong-term incentives
2016/17 policy
The long-term incentive vehicle in use at Sainsbury’s is known as Future
Builder. Around 200 senior managers participate in this arrangement. A core
award of shares is granted, calculated as a percentage of salary and scaled
according to level of seniority. Vesting of the core award is dependent upon
performance against specific measures (common for all participants) tested
at the end of a three-year performance period. The core award can grow by
up to four times at stretch levels of performance. Half of any vested shares are
released at the end of the performance period, while the remaining half are
released after a further year. Dividends accrue on any shares that
subsequently vest.

As noted in the Chairman’s Annual Statement, in light of the proposed
acquisition of Home Retail Group plc, the Committee has decided to defer the
setting of performance criteria for the 2016 awards until the outcome of the
acquisition is known. This is to ensure that the performance conditions are
aligned to the Company’s strategic objectives and are meaningful in the
context of the enlarged group. Following determination of the performance
criteria later in the year, the Committee will communicate the criteria to
shareholders.

Furthermore, if the acquisition does complete, the Committee recognises
that under the terms of the plan, adjustments may also be required to the
assessment under the 2014 and 2015 Future Builder awards to ensure they
remain a fair reflection of performance over the relevant period. Details of
any adjustments made will be disclosed in due course.

At the 2016 AGM, the Company will also be seeking shareholder approval
for a renewal of the LTIP, as the current plan, which was approved by
shareholders in 2006, will expire in July 2016. The replacement plan will
enable the Committee to continue to grant long-term share awards in future
years. The terms of the 2016 plan are principally the same as the existing
2006 plan, save for minor updates to reflect evolving market and best
practice. Further details regarding the terms of the new plan will be included
in the Notice of AGM.

In 2016 Mike Coupe will receive a core award of 62.5 per cent of salary
(maximum 250 per cent of salary) and John Rogers will receive a core award
of 50 per cent of salary (maximum 200 per cent of salary).

2015 awards
The table below details the performance measures, targets and weightings
applying to the Future Builder awards made in May 2015.

Threshold
target
(1.0x core
award)
9.0%
23.0p

Maximum
target
(4.0x core
award)
12.0%
30.0p

25%

£3,500m

Weighting
25%
25%

Measure
Return on capital employed (‘ROCE’)
Underlying basic earnings per share
(‘EPS’)
Cumulative underlying cash flow
from retail operations after capex
(‘cash flow’)
Cumulative strategic cost savings
(‘cost savings’)
Performance gateway:
The Remuneration Committee must be satisfied that the Company’s underlying
performance over the period justifies the level of vesting. Vesting will be reduced
if the vesting outcome is not considered to be justified. At vesting, when making
this judgement the Committee has scope to consider such factors as it deems
relevant.

£5,150m

£450m

£600m

25%

Future Builder performance measures

ROCE
— ROCE reflects the returns generated for shareholders and measures

the efficiency of capital use.

— It is based on the underlying profit before interest and tax for the

whole business, with Sainsbury’s Bank fully consolidated, including
the underlying share of post-tax profit from joint ventures. The capital
employed figure excludes the impact of movements in the IAS 19
pension deficit.

EPS
— EPS directly reflects returns generated for shareholders.

— Underlying basic EPS is based on underlying profit after tax divided
by the weighted average number of ordinary shares in issue during
the year.

Cash flow
— Cash flow measures the total flow of cash in and out of the business

as well as providing an assessment of underlying profitability.

— Cumulative underlying cash flow from retail operations after capital
expenditure is based on the reported cash flow generated from core
retail operations over the performance period after adding back net
rent, cash pension costs and deducting core capital expenditure. Only
core retail operations are included in recognition of the differences in
cash generation between the retail business and Sainsbury’s Bank.

Strategic element: cost savings
— Cost savings is one of our key strategic targets and the level of savings

targeted will require structural changes. This is a key long-term
measure which is fundamental to delivering returns to shareholders.

— Cumulative strategic cost savings represents cost reductions over the
performance period as a result of identified initiatives. It excludes
Sainsbury’s Bank.

2016 vesting (audited information)
The 2013 Future Builder award was subject to ROCE, cash flow and relative
sales performance targets. In addition, the award was also subject to an EPS
performance gateway which required EPS growth of at least four per cent per
annum (further details are set out in the footnotes to the table on page 77). The
EPS gateway applicable to the 2013 awards was not achieved and therefore
no awards will vest under this plan in May 2016, despite the Company’s
performance being within the vesting range for the performance conditions.

Recovery provisions
The approved remuneration policy contains a recovery provision in relation to
Future Builder awards. In cases of material mis-statement of financial results,
serious reputational damage, serious misconduct and fraud, the Committee
may reduce the number of shares under an unvested award, cancel an
unvested award in full or impose further conditions on an unvested award.
This provision was extended to the Deferred Share Award from 2015/16.

Also from 2015/16 the Committee further strengthened the recovery
provisions applicable to future awards by introducing a clawback provision
in relation to all incentive plans. In the circumstances listed above, the
Committee may require an Executive Director to make a repayment in
relation to bonus payments or share awards received within two years of
the end of the relevant performance period.

Governance ReportShare awards made during the financial year (audited information)
The following share awards were made to Executive Directors during the year. The Future Builder award levels are determined by the normal grant policy for the
role and, in the case of the DSA, performance over the previous year.

Mike Coupe

John Rogers

Scheme
Future Builder1
DSA2
Future Builder1
DSA2

Basis of award
(maximum)
250% of salary
57% of salary
200% of salary
47% of salary

Face value
£2,289,375
£458,237
£1,221,000
£280,800

Percentage vesting at
threshold performance
25% of each element
N/A
25% of each element
N/A

Number of shares
828,880
165,907
442,068
101,665

Performance
period end date
10/03/2018
N/A
10/03/2018
N/A

1. The performance conditions applying to 2015 Future Builder awards are set out on page 73. The basis of award shows the maximum value, being four times the core award. The award was made on 14 May 2015 and the

number of shares has been calculated using the five-day average share price prior to grant (7 to 13 May 2015) of £2.762. Subject to performance, 50 per cent of the award vests on 14 May 2018 and 50 per cent 12 months
later. The award is structured as a nil-cost option with a two-year exercise period.

2. The DSA was made on 14 May 2015 based on performance over the 2014/15 financial year. The award was made at 52 per cent of the maximum level (maximum of 110 per cent of salary for Mike Coupe and 90 per cent of
salary for John Rogers). The number of shares has been calculated using the five-day average share price prior to grant (7 to 13 May 2015) of £2.762. No further performance conditions apply. Awards become exercisable on
17 March 2017. The award is structured as a nil-cost option with an eight-year exercise period.

Executive Directors’ shareholdings and share interests (audited information)
The table below sets out details of the Executive Directors’ shareholdings and a summary of their outstanding share awards at the end of the 2015/16 financial
year. Further details of the movements of the Executive Directors’ share awards during the year are set out on page 77.

Ordinary shares1

Mike Coupe
John Rogers

14 March
2015
960,487
501,351

12 March
2016
1,068,515
560,226

3 May
20162
1,068,515
560,306

Deferred
Share Awards4
292,468
213,780

Scheme interests3

Value/Future Builder
awards with
performance period
completed5
0
62,975

Future Builder
awards with
performance period
outstanding6
1,734,604
1,072,468

SAYE
4,518
6,302

1. Ordinary shares are beneficial holdings which include the Directors’ personal holdings and those of their spouses and minor children. They also include the beneficial interests in shares which are held in trust under the

Sainsbury’s Share Purchase Plan.

2. The total includes shares purchased under the Sainsbury’s Share Purchase Plan between 12 March 2016 and 3 May 2016.
3. Deferred Share Awards and Value/Future Builder awards are structured as nil-cost options.
4. Relates to 2013/14 and 2014/15 Deferred Share Awards.
5. Where amounts shown, relate to vested but unexercised 2011 Value Builder awards. The 2012 Future Builder awards lapsed.
6. Relates to 2013, 2014 and 2015 Future Builder awards (maximum) where the performance period has not ended. The 2013 awards have subsequently lapsed after the end of the financial year.

Note: The Executive Directors are potential beneficiaries of the Company’s employee benefit trust, which is used to satisfy awards under the Company’s employee share plans, and they are therefore treated as interested in the
7.9 million shares (2015: 6.0 million) held by the Trustees.

Shareholding guidelines (audited information)
The Executive Directors are required to build up a specified level of
shareholding in the Company. This is to create greater alignment of the
Directors’ interests with those of shareholders, in line with the objectives of
the remuneration policy. The guidelines require the Chief Executive to have a
holding of 2.5 times base salary and the Chief Financial Officer 1.5 times base
salary. Directors are required to build this shareholding within five years of
appointment to the relevant role. In addition to shares held, share awards
under the DSA and Value/Future Builder awards where the performance
period has ended count towards the guideline (on a net of tax basis).

All-employee share plans
The Company encourages share ownership and operates two all-employee
share plans for colleagues, namely the Savings-Related Share Option Plan
(‘Sharesave’) and the All-Employee Share Ownership Plan, of which the
Sainsbury’s Share Purchase Plan (‘SSPP’) is a part. Executive Directors may
participate in these plans in the same way as all other colleagues. Mike Coupe
participates in Sharesave and John Rogers currently participates in both
plans. As these are all-employee plans there are no performance conditions.
The Committee approves the adoption or amendment of these plans and
awards to Executive Directors.

Both Executive Directors have shareholdings that meet and significantly
exceed the current shareholding guideline.

Shareholding guidelines

)
0
0
0
(
s
e
r
a
h
s
f
o
r
e
b
m
u
N

1,400

1,200

1,000

800

600

400

200

3.7 x salary

2.9 x salary

Mike Coupe

John Rogers

Shareholding

Share awards

Guideline

Shareholding calculated using (i) salaries as at 12 March 2016, (ii) share total based on total of shareholding
plus net of tax value (tax assumed to be 47 per cent) of share awards not subject to performance as at
12 March 2016 and (iii) the closing mid-market share price on 11 March 2016 of £2.733.

The 2010 Sharesave plan (five-year), with a £2.97 option price, and the 2012
Sharesave plan (three-year), with a £2.67 option price, came to an end on
1 March 2016 for over 12,000 colleagues. Colleagues could either take their
savings and any tax-free bonus or use the money to buy Sainsbury’s shares
1400
at the option price. Using the market price on the date of the first exercise,
the value of all the shares subject to the maturity was just over
£21 million. The Company currently has over 30,000 colleagues participating
in Sharesave with around 65,000 individual savings contracts.

1000

1200

800

600

Dilution
The Company ensures that the level of shares granted under the Company’s
share plans and the means of satisfying such awards remains within best
400
practice guidelines so that dilution from employee share awards does not
200
exceed ten per cent of the Company’s issued share capital for all-employee
share plans and five per cent in respect of executive share plans in any
0
ten-year rolling period. The Company monitors dilution levels on a regular
basis and the Committee reviews these at least once a year. Up to 12 March
2016, an estimated 8.6 per cent of the Company’s issued share capital has
been allocated for the purposes of its all-employee share plans over a
ten-year period, including an estimated 3.1 per cent over ten years in respect
of its executive share plans. This is on the basis that all outstanding awards
vest in full.

Governance ReportDirectors’ Remuneration Report continued

Performance and CEO remuneration
The graph shows the TSR performance of an
investment of £100 in J Sainsbury plc shares over
the last seven years compared with an equivalent
investment in the FTSE 100 Index. The FTSE 100 Index
has been selected to provide an established and broad-
based index. The graph also includes data for the FTSE
All-Share Food & Drug Retailers Index. The Company is
a constituent of both indices. The table details the total
remuneration for the Chief Executive over this period.

TSR performance since March 2009
250

200

150

100

Mar 09

Mar 10

Mar 11

Mar 12

Mar 13

Mar 14

Mar 15

Mar 16

Sainsbury’s

FTSE 100

FTSE All-Share Food & Drug Retailers

Single figure remuneration £000

M Coupe
J King

Bonus/DSA award as a percentage of maximum M Coupe

LTIP vesting percentage of maximum

J King
M Coupe
J King

Chief Executive’s total remuneration in last seven financial years

2009/10

2010/11

2011/12

2012/13

2013/14

4,441

4,380

3,471

4,366

3,906

92%

65%

61%

84%

73%

80%

48%

43%

44%

40%

2014/151
1,507
405
26%
0%
0%
0%

2015/16
2,802

78%

1. Justin King’s figures relate to the time he was Chief Executive during 2014/15. Consistent with the single figure table, the figures for Mike Coupe relate to the whole of 2014/15; he was Chief Executive from 9 July 2014.

Percentage change in Chief Executive’s remuneration
The table below shows how the percentage change in the Chief Executive’s
salary, benefits and bonus between 2014/15 and 2015/16 compares with the
percentage change in the average of each of those components of pay for all
our colleagues.

Relative importance of spend on pay
The table below illustrates the year-on-year change in total
colleague pay (being the aggregate staff costs as set out in note 7
to the financial statements) and distributions to shareholders
(being declared dividends).

Chief Executive1
All colleagues2

Salary
% change
14.4%
1.9%

Benefits
% change
0.0%
(4.1)%

Bonus
% change
N/A
92.2%

Colleague pay

Distribution to shareholders

2014/15
£m
2,445

2015/16
£m
2,541

% change
3.9%

2014/15
£m
330

2015/16
£m
234

% change
(29.1)%

1. The salary % change incorporates Mike Coupe’s promotion to Chief Executive during the 2014/15 financial
year. At the start of 2015/16 financial year he received an increase of 1.75 per cent of salary, in line with
other management and central colleagues. For ease of comparison, the benefits % change excludes the
one-off payment in 2015/16 relating to the reimbursement of cost incurred as a result of Company
commitments. The bonus % change relates to the cash annual bonus and there was no payment in 2014/15.
2. Figures relate to average based on number of full-time equivalent colleagues. While there has been a decline

in the benefit % change figure, the Company continues to offer the same benefits as in previous years.

Single total figure of remuneration for Non-Executive Directors (audited information)
The table below shows a single remuneration figure for all qualifying services for the 52 weeks to 12 March 2016 for each Non-Executive Director, together with
comparative figures for the 52 weeks to 14 March 2015.

David Tyler
Matt Brittin
Mary Harris
Gary Hughes3
David Keens4
John McAdam
Susan Rice
Jean Tomlin

Fees1
£000
495
64
82
25
68
82
64
76

Benefits2
£000
1
–
4
8
–
–
14
2

2015/16

Total
£000
496
64
86
33
68
82
78
78

Fees1
£000
490
62
80
80
–
80
62
75

Benefits2
£000
1
–
4
12
–
–
8
–

2014/15

Total
£000
491
62
84
92
–
80
70
75

1. Paid in relation to the year.
2. David Tyler received a non-cash benefit of private medical cover. The benefits for the other Non-Executive Directors relate to the reimbursement of travelling expenses to Board meetings held at the Company’s registered office.
3. Gary Hughes ceased to be a Director on 8 July 2015.
4. David Keens was appointed to the Board on 29 April 2015.

Governance ReportThe Chairman receives an annual cash fee and benefits of private medical
cover and a colleague discount card.

Non-Executive Directors receive a base annual cash fee; additional fees are
paid to the Senior Independent Director and to the Chairmen of the Audit,
Remuneration and Corporate Responsibility and Sustainability Committees.
Non-Executive Directors receive no benefits other than a colleague
discount card.

Details of the Board and Committee schedule of meetings and the number of
meetings attended by the Directors are set out on page 53.

During the year, the Chairman and Non-Executive Directors’ fees were
reviewed. From 27 September 2015, the fees were amended (for the first time
in two years) reflecting the responsibilities and time commitment of the
roles, as set out in the table below.

Chairman fee
Base fee
Senior Independent Director fee (additional)
Chairman of Remuneration Committee fee
(additional)
Chairman of Audit Committee fee (additional)
Chairman of Corporate Responsibility and
Sustainability Committee fee (additional)

Fees effective
from
29 September
2013
£490,000
£62,500
£17,500
£17,500

Fees effective
from
27 September
2015
£500,000
£65,000
£18,500
£18,500

£17,500
£12,500

£18,500
£13,000

The beneficial interest of the Non-Executive Directors, in post at the year-end,
and their families in the shares of the Company are shown below.

David Tyler
Matt Brittin
Mary Harris
Gary Hughes2
David Keens3
John McAdam
Susan Rice
Jean Tomlin

14 March 2015
50,000
1,000
12,848
35,006
100,000
1,000
1,000
1,315

Ordinary shares1

12 March 2016
50,000
1,000
13,252
35,006
100,000
1,000
1,000
1,315

3 May 2016
50,000
1,000
13,252
N/A
100,000
1,000
1,000
1,315

1. Ordinary shares are beneficial holdings which include the Directors’ personal holdings and those of their

spouses and minor children.

2. 12 March 2016 figure relates to 8 July 2015 when Gary Hughes ceased to be a Director.
3. 14 March 2015 figure relates to 29 April 2015 when David Keens was appointed as a Director.

Directors’ appointment dates

Mike Coupe

John Rogers
David Tyler
Matt Brittin
Brian Cassin
Mary Harris
David Keens
John McAdam
Susan Rice
Jean Tomlin

1 August 2007 (post appointment as Chief Executive
9 July 2014)
19 July 2010
1 October 2009 (Chairman from 1 November 2009)
27 January 2011
1 April 2016
1 August 2007
29 April 2015
1 September 2005
1 June 2013
1 January 2013

Governance – the Remuneration Committee
Committee membership
The Remuneration Committee during the year comprised Mary Harris, John
McAdam, Susan Rice (from September 2015) and Jean Tomlin. All members
of the Committee are independent Non-Executive Directors.

Role and responsibilities of the Committee
The Committee complies with relevant regulations and considers the UK
Corporate Governance Code and best practice when determining pay and
policy. The specific responsibilities of the Committee include:

— Determining and agreeing with the Board the remuneration policy for
the Chairman, Executive Directors and the Operating Board Directors;

— Setting individual remuneration arrangements for the Chairman,

Executive Directors and Operating Board Directors;

— Reviewing and noting the remuneration trends across the Company;

— Approving the service agreements of each Executive Director, including

termination arrangements; and

— Considering the achievement of the performance conditions under annual

and long-term incentive/bonus arrangements.

The Committee’s terms of reference are available on the Company’s website
(www.j-sainsbury.co.uk/investor-centre/corporate-governance).

Tim Fallowfield, Company Secretary, acts as secretary to the Committee.
David Tyler, Mike Coupe, Angie Risley (Group HR Director), Sarah Desai
(Executive Reward Manager) and Ed Barker (Director of Group Finance)
are invited to attend Committee meetings. John Rogers has also attended
selected meetings. The Committee considers their views when reviewing
the remuneration of the Executive Directors and Operating Board Directors.
Individuals who attend Remuneration Committee meetings are not present
when their own remuneration is being determined.

Principal activities and matters addressed during 2015/16
The Committee has a calendar of standard items within its remit and in
addition it held in-depth discussions on specific topics during the year. The
Committee typically meets four times each year, or more as required. The
table below shows the standard items considered at each meeting. The key
issues the Committee discussed during the year were remuneration
arrangements in relation to changes on the Operating Board, new LTIP rules
and share plans in light of the proposed acquisition of Home Retail Group plc.
The Committee also remained updated on the impact of the National Living
Wage legislation on colleague pay.

September

Standard agenda items
— Performance update on outstanding incentive awards

— Review of incentive arrangements

— Review of dilution under Company share plans

— Corporate governance and market update

January

— Review of the Chairman’s fee
— Competitive review of Executive Directors’ salary and total

remuneration packages

— Performance update on outstanding incentive awards

— Initial discussions on incentive arrangements for the next

financial year

March

— Corporate governance update
— Review of incentive arrangements for the next financial year

— Executive Directors’ salary review decisions

— Performance update on outstanding incentive awards

April

— Review of advisers and their independence
— Review of performance and outcomes under the annual

bonus and Deferred Share Award

— Review of performance and vesting under long-term incentives

— Determining incentive structure for the next financial year

including finalisation of targets

— Directors’ Remuneration Report

Governance ReportDirectors’ Remuneration Report continued

Advisers to the Remuneration Committee
The Committee is authorised by the Board to appoint external advisers if
it considers this beneficial. Over the course of the year, the Committee was
supported by its appointed advisers, Deloitte LLP (‘Deloitte’). Deloitte were
reappointed by the Committee as advisers in 2013 following a competitive
tender. During the year they provided advice to the Committee on a range of
topics including remuneration trends, corporate governance, incentive plan
design and a review of the incentive plan rules. Their consultants attended all
of the Committee meetings. In relation to their advice, Deloitte received fees
of circa £103,000 (fees are based on hours spent). During the year, Deloitte
provided the Company with unrelated advice and consultancy regarding due
diligence on the proposed acquisition of Home Retail Group plc, information
technology, organisational structure, data analytics, taxation and matters
relating to Sainsbury’s Bank.

Willis Towers Watson provided comparative data, which was considered by
the Committee in setting remuneration levels, for which they received fees
of circa £23,000. Willis Towers Watson also provided comparative data to
Sainsbury’s Bank and other services to the Company relating to pensions
and employee engagement.

Both Deloitte and Willis Towers Watson are members of the Remuneration
Consulting Group and, as such, operate under the Code of Conduct in
relation to executive remuneration consulting in the UK. During the year,
the Committee reviewed the advice provided by Deloitte and Willis Towers
Watson and has confirmed that it has been objective and independent.
The Committee has also determined that the Deloitte partner who provides
remuneration advice to the Committee does not have any connections with
the Company that may impact their independence. The Committee has
reviewed the potential for conflicts of interest and judged that there were
appropriate safeguards against such conflicts.

Statement of voting at general meeting
The table below sets out the votes on the Annual Report on Remuneration
at the 2015 AGM and the Remuneration Policy at the 2014 AGM. The
Committee is keen to hear the views of all shareholders and continually
reviews the remuneration policy and implementation.

Remuneration Report
(2015 vote)
Remuneration Policy
(2014 vote)

Votes for
98.78%
1,229 million
99.15%
1,154 million

Votes against
1.22%
15 million
0.85%
9.8 million

Votes abstained
34.7 million

49.8 million

Details of the Executive Directors’ share awards and movements during the year (audited information)
The table below shows the conditional awards granted and exercised under each of the Company’s share plans.

Share
price at
date of
award
(pence)
343
295
375
333
269
375
333
269
388

343
295
375
333
269
375
333
269
297

Option
price
(pence)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
332

Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
238

Date of grant
19/05/2011
17/05/2012
16/05/2013
15/05/20144
14/05/2015
16/05/2013
15/05/2014
14/05/2015
11/12/2013

19/05/2011
17/05/2012
16/05/2013
15/05/2014
14/05/2015
16/05/2013
15/05/2014
14/05/2015
09/12/2011

Name
Mike Coupe

Award
Long-Term
Incentive Plan
20061

Deferred Share
Award2

Sharesave3

Long-Term
Incentive Plan
20061

Deferred Share
Award2

Sharesave3

Total
John Rogers

Total

Number
of options
released
during
the year
79,957
–
–
–
–
124,235
–
–
–

Number of
options
held as at
15 March
2015
63,730
370,988
305,984
599,740
–
111,948
126,561
–
4,518

Number
of options
granted/
dividend
Number
shares
of options
allocated
lapsed
during the
during
year
the year
16,2275
–
370,988
–
–
–
–
–
–
828,880
12,2875
–
–
–
–
165,907
–
–
1,583,469 1,023,301 204,192 370,988
–
329,052
–
–
–
–
–
–
–
567,412 173,166 329,052

50,194
329,052
271,056
359,344
–
99,293
112,115
–
6,302
1,227,356

12,7815
–
–
–
442,068
10,8985
–
101,665
–

62,975
–
–
–
–
110,191
–
–
–

Date of
exercise
10/06/2015

06/05/2015

Share price
on exercise
(pence)
261
–
–
–
–
265
–
–
–

–
–
–
–
–
265
–
–
–

Number
of options
exercised
79,957
–
–
–
–
124,235
–
–
–
204,192
–
–
–
–
–
110,191
–
–
–
110,191

Notional
gain on
exercise6
(£000)
209
–
–
–
–
329
–
–
–

Number
of options
held as at
12 March
2016
–
–
305,984
599,740
828,880
–
126,561
165,907
4,518
538 2,031,590
62,975
–
271,056
359,344
442,068
–
112,115
101,665
6,302
292 1,355,525

–
–
–
–
–
292
–
–
–

1. The 2013 and 2014 awards are based on ROCE – 50 per cent (threshold – 10.75 per cent; maximum – 12 per cent), cumulative cash flow from operations – 30 per cent (2013: threshold – £5,500m; maximum – £6,500m;

2014: threshold – £5,750m; maximum – £6,750m ) and relative sales against the IGD index – 20 per cent (threshold – match index; maximum – index + 1 per cent pa). In addition, a performance gateway must be achieved.
For 2013 awards, EPS must grow by at least four per cent per annum for any award to vest. For 2014 awards, the Remuneration Committee must be satisfied that the Company’s underlying performance over the period
justifies the level of vesting. Details of the performance conditions applying to 2015 Future Builder awards are set out on page 73. The LTIP share figures relate to the maximum that could be achieved.

2. See page 72 for details of the Deferred Share Award, including performance conditions.
3. Sharesave is an all-employee share option plan and has no performance conditions as per HMRC Regulations.
4. Mike Coupe’s 2014 Future Builder award was made in two parts on 15 May 2014 and 10 July 2014. The combined award is shown.
5. In accordance with the plan rules under which the awards were granted, the vested awards have been increased to reflect the dividends paid in the period from date of grant to the vesting date.
6. This is the notional gain on the date of exercise had all shares been sold.

Governance Report

Directors’ Remuneration Policy

The Directors’ Remuneration Policy was approved by shareholders at the AGM on 9 July 2014. The full policy, including approach to recruitment, service
contracts, termination arrangements etc, can be found in the 2014 Annual Report on our website.

The approved remuneration policy tables for Executive Directors and Non-Executive Directors, which were first published in the 2014 Directors’ Remuneration
Policy, are set out below. For clarity, where the policy table included references to implementation of the policy in 2013/14 or 2014/15, these references have
been removed. Details of remuneration arrangements for 2015/16 and 2016/17 are set out in the Annual Report on Remuneration.

Remuneration policy for Executive Directors

Core element of remuneration used to attract and retain executives who can deliver our strategic objectives.

Typically reviewed annually in March.
Consideration is given to a number of internal and external factors including business and individual performance, role, responsibilities,
scope, market positioning, inflation and colleague pay increases.
Salary increases (in percentage of salary terms) for Executive Directors will normally be within the range of those for the wider
workforce. There is no maximum salary opportunity.
Where the Committee considers it necessary and appropriate, larger increases may be awarded in individual circumstances such as:
— A change in scope or responsibility;
— If a new Executive Director is appointed at a lower rate and the salary is realigned over time as the individual gains experience in the

role; or

— Alignment to market level.
None

Competitive benefits to assist in attracting and retaining executives.

A range of benefits may be provided including, but not limited to, the provision of company car benefits (or cash equivalent), private
medical cover, life assurance, long-term disability insurance, all-employee share plan participation and colleague discount.
The Committee keeps the benefits offered, the policies and the levels provided under regular review.
The value of benefits provided will be reasonable in the context of relevant market practice for comparable roles and taking into account
any individual circumstances (e.g. relocation). There is no maximum monetary value.
Participation in any HMRC-approved all-employee share plan is limited to the maximum award levels permitted by the relevant
legislation.
None

Provides an income following retirement and assists colleagues building wealth for their future.

JS Self Invested Pension Plan (‘SIPP’, a defined contribution plan) and/or a cash salary supplement.
Maximum value of up to 30 per cent of salary per annum for existing Executive Directors.
For new hires the nature and value of any pension provided will be, in the Committee’s view, reasonable in the context of market
practice for comparable roles and take account of both the individual’s circumstances and the cost to the Company.
None

Rewards performance on an annual basis against key financial, operational and individual objectives.

Performance measured over one year, bonus payable in cash after the year-end.
Bonus level determined by the Committee after the year-end based on performance against targets.
Measures and targets are reviewed annually.
Maximum opportunity of up to 125 per cent of salary per annum.
The level of threshold payment for performance varies depending on the performance measure, with payouts from zero per cent.
Full vesting requires outperformance of stretch objectives.
Based on a combination of financial (e.g. profit), operational (e.g. customer, availability) and individual metrics.
A profit gateway must be achieved before any bonus payments can be made.
The detail of the measures, targets and weightings may be varied by the Committee year-on-year based on the Company’s strategic
goals. At least half of any award will be subject to financial measures.

Base salary
Purpose and link
to strategy
Operation

Opportunity

Performance details

Benefits
Purpose and link
to strategy
Operation

Opportunity

Performance details

Pension
Purpose and link
to strategy
Operation
Opportunity

Performance details

Annual bonus
Purpose and link
to strategy
Operation

Opportunity

Performance details

Governance ReportDirectors’ Remuneration Report continuedDeferred Share Award (‘DSA’)
Purpose and link
to strategy

Operation

Opportunity

Performance details

Recognises and rewards for delivery of short-term strategic and financial objectives which contribute towards long-term sustainable growth.
Balance with annual bonus to ensure management remain mindful of long-term consequences of short-term actions.
Awards delivered in shares to provide further alignment with shareholders.
Performance measured over one year, after which award made as conditional shares (or equivalent) deferred for two financial years.
After the year-end, performance is assessed in the round based on the Committee’s judgement of performance achieved.
Measures and targets are reviewed annually in light of the strategic plan.
Dividends (or equivalents) may accrue on shares during the deferral period.
Maximum opportunity of up to 125 per cent of salary per annum.
No DSA grants are made unless threshold performance levels are reached, with full vesting requiring outperformance of stretch objectives.
Basket of metrics covering four categories: financial performance, returns to shareholders, relative performance against peers and
strategic goals.
A profit gateway must be achieved before any awards can be made.
The detail of the measures, targets and weightings may be varied by the Committee year-on-year based on the Company’s strategic
goals. At least half of any award will be based on the delivery of financial performance and returns to shareholders.

Long-Term Incentive Plan (‘LTIP’) – Future Builder
Purpose and link
to strategy
Operation

Recognises and rewards for delivery of Company performance and shareholder value over the longer term.
Share-based to provide greater alignment with shareholder interests.
Awards of conditional share awards (or equivalent) with vesting dependent on performance measured over a period of at least three
financial years.
To the extent that targets are met, 50 per cent vests following the end of the performance period and 50 per cent is deferred for a further year.
The Committee reviews the metrics, targets and weightings prior to each grant to ensure that they remain appropriate.
Recovery provisions apply.
Dividends (or equivalents) may accrue on vested shares.
Maximum award of up to 250 per cent of salary per annum under the rules of the plan in respect of any financial year.
Awards structured as core award (up to 62.5 per cent per annum) with a performance multiplier of up to four times.
For performance at threshold levels of performance, up to 25 per cent of maximum under each element may vest. Based on the current
structure this is equivalent to a multiplier of one times the core award.
Performance measures and targets will be reviewed and then disclosed once there is clarity on the proposed acquisition of Home Retail
Group plc. Any revisions will be within the scope of the approved policy and shareholders will be consulted as appropriate.
A performance gateway must be achieved before any awards vest.
Prior to granting awards, the Committee will review the performance conditions and may opt to vary the metrics and weightings to
ensure targets and measures remain aligned with the corporate strategy. The Committee would seek to consult as appropriate with its
major shareholders regarding any material changes.

Opportunity

Performance details

Shareholding Guidelines
Purpose and link
to strategy
Operation

Alignment of Executive Directors with shareholders.

Guideline expected to be met within five years of appointment.
Guidelines are: Chief Executive 2.5 times salary, other Executive Directors 1.5 times salary.

Remuneration policy for the Chairman and Non-Executive Directors
The remuneration of the Chairman is determined by the Remuneration Committee and the remuneration of the Non-Executive Directors by the Chairman and
Executive Directors. The Chairman and Non-Executive Directors receive fees and are eligible for certain benefits. They are not entitled to any performance-
related pay or pension.

Remuneration
Approach to setting
remuneration

Opportunity

The fees for Non-Executive Directors are set at a level which is considered appropriate to attract individuals with the necessary
experience and ability to oversee the business. Fees may be paid in cash or shares.
Typically reviewed annually in September.
Judgement is used but consideration is given to a number of internal and external factors including responsibilities, market positioning,
inflation and colleague pay increases.
Where appropriate, benefits may be provided such as private medical cover, annual medical assessment and colleague discount.
Travel and other reasonable expenses (including any associated taxes) incurred in the course of performing their duties are reimbursed
to Non-Executive Directors.
Fee opportunity reflects responsibility and time commitment.
Additional fees are paid for further responsibilities such as chairmanship of committees.
The value of benefits provided will be reasonable in the market context and take account of the individual circumstances and benefits
provided in comparable roles.

The Directors’ Remuneration Report, excluding the Directors’ Remuneration Policy, will be put to an advisory vote at the AGM on 6 July 2016. The Directors
confirm that this report has been prepared in accordance with the Companies Act 2006 and reflects the provisions of the Large and Medium-sized Companies
and Groups (Accounts & Reports) (Amendment) Regulations 2013.

Approved by the Board on 3 May 2016.

Mary Harris
Chairman, Remuneration Committee

Governance ReportGovernance Report

Other disclosures

Dividends
The Directors recommend the payment of a final dividend of 8.1 pence per
share (2015/16: 8.2 pence), making a total dividend for the year of 12.1 pence
per share (2015/16: 13.2 pence), a decrease of 8.3 per cent over the previous
year. Subject to shareholders approving this recommendation at the Annual
General Meeting (‘AGM’), the dividend will be paid on 8 July 2016 to
shareholders on the register at the close of business on 13 May 2016.

Share capital and control
Except as described below in relation to the Company’s employee share
schemes, there are no restrictions on the voting rights attaching to the
Company’s ordinary shares or the transfer of securities in the Company; no
person holds securities in the Company carrying special rights with regard to
control of the Company; and the Company is not aware of any agreements
between holders of securities that may result in restrictions in the transfer of
securities or voting rights. Further details of the rights, restrictions and
obligations attaching to the share capital of the Company, including voting
rights, are contained in the Company’s Articles of Association. The Articles of
Association may only be changed with the agreement of shareholders.

Shares acquired through the Company’s employee share plans rank pari
passu with shares in issue and have no special rights. Where, under the
Company’s All Employee Share Ownership Plan, participants are beneficial
owners of the shares but the Trustee is the registered owner, the voting rights
are normally exercised by the registered owner at the direction of the
participants. The J Sainsbury Employee Benefit Trusts waive their right to
vote and to dividends on the shares they hold which are unallocated. Some of
the Company’s employee share plans include restrictions on transfer of shares
while the shares are held within the plan.

At the AGM held in July 2015, the Company was authorised by shareholders
to purchase its own shares, within certain limits and as permitted by the
Articles of Association. The Company made no purchases of its own shares
during the year and no shares were acquired by forfeiture or surrender or
made subject to a lien or charge.

All of the Company’s employee share plans contain provisions relating to a
change of control. On a change of control, options and awards granted to
employees under the Company’s share plans may vest and become
exercisable, subject to the satisfaction of any applicable performance
conditions at that time.

Certain of the Company’s credit facilities and banking arrangements
contain change of control clauses under which lenders may cancel their
commitments and declare all outstanding amounts immediately due and
payable. There are no other significant agreements that would take effect,
alter or terminate upon a change of control following a takeover bid.

Ordinary shares
Details of the changes to the ordinary issued share capital during the year are
shown on page 121. At the date of this report, 1,925,075,512 ordinary shares
of 284/7 pence have been issued, are fully paid up and are listed on the
London Stock Exchange.

Major interests in shares
As at 3 May 2016, the Company had been notified by the following investors
of their interests in three per cent or more of the Company’s shares. These
interests were notified to the Company pursuant to Disclosure and
Transparency Rule 5:

Judith Portrait
Qatar Holdings LLC

% of voting rights
3.31
25.02

Directors’ interests
The beneficial interests of the Directors and their families in the shares of the
Company are shown in the Annual Report on Remuneration on pages 74 and
76. The Company’s Register of Directors’ Interests contains full details of
Directors’ interests, shareholdings and options over ordinary shares of the
Company.

During the year, no Director had any material interest in any contract of
significance to the Group’s business.

Directors’ indemnities
The Directors are entitled to be indemnified by the Company to the extent
permitted by law and the Company’s Articles of Association in respect of all
losses arising out of or in connection with the execution of their powers,
duties and responsibilities. The Company has executed deeds of indemnity
for the benefit of each Director in respect of liabilities which may attach to
them in their capacity as Directors of the Company. The Company purchased
and maintained Directors’ and Officers’ liability insurance throughout
2015/16, which has been renewed for 2016/17. Neither the indemnities nor
the insurance provide cover in the event that the Director is proved to have
acted fraudulently.

Employment policies
The Company is committed to an equal opportunities policy for recruitment
and selection, through training and development, performance reviews and
promotion through our ‘A Great Place to Work’ strategy. The Company has
well developed policies for the fair and equal treatment of all colleagues and
the employment of disadvantaged persons. During the year, a number of
training courses have been held to ensure that our policies are understood
throughout the organisation. We will adapt and retrain colleagues who have
become disabled during their employment. See page 57 for further
information on our diversity strategy.

As well as creating jobs we are committed to providing a workplace where
people feel they are given the right opportunities to succeed in a safe, healthy
and respectful environment. We know this is important and this is the reason
why a Great Place to Work is one of our five values. Our Sustainability Plan
includes a number of commitments within the category; for further
information see our website at http://www.j-sainsbury.co.uk/responsibility/
factsheets/.

Human rights
The Company does not have a specific human rights policy but fairness and
integrity are an important part of the responsible way we run our business, as
shown by the values and policies described above and throughout this report.
In addition, our customers want to be confident that the people who make
and sell our products are not being exploited, or exposed to unsafe working
conditions. Our Code of Conduct for Ethical Trade covers the employment
practices we expect from our suppliers, both in the UK and abroad. As we are
a founder member of the Ethical Trading Initiative (‘ETI’), our Code of Conduct
is consistent with the ETI Base Code and national and international laws.
For further information on this Code of Conduct see our website at
http://www.j-sainsbury.co.uk/suppliers/ethical-trading/.

Political donations
The Company made no political donations in 2015/16 (2014/15: £nil).

Essential contracts
Sainsbury’s has contractual and other arrangements with numerous third
parties in support of its business activities. None of the arrangements is
individually considered to be essential to the business of Sainsbury’s.

Governance Report

The following information is also incorporated into the Directors’ Report:

Interest capitalised
Publication of unaudited financial information
Details of any long-term incentive schemes

Shareholder waiver of dividends
Shareholder waiver of future dividends

Location
in Annual Report
See note 11
Leverage ratio, see note 29
See Remuneration Report
and note 32
See note 26
See note 26

Other information requirements set out in LR9.8.4R are not applicable to the
Company.

By order of the Board

Tim Fallowfield
Company Secretary and Corporate Services Director
3 May 2016

Taxation
The Company complies with relevant tax laws, regulations and obligations
regarding the filing of tax returns, payment and collection of tax. Sainsbury’s
does not undertake any tax planning schemes that seek to use so-called ‘tax
havens’ for aggressive tax planning and for the purpose of tax avoidance.

Sainsbury’s aims to develop an open, honest relationship with the tax
authorities and involve them at an early stage should any complex tax issues
arise. The taxation policy is reviewed annually by the Board. Tax is a key item
on the Audit Committee agenda and is discussed quarterly where large or
complex tax items will feature, together with compliance and key risk
management updates.

All of Sainsbury’s stores are based in the UK, and all our sales are generated
here. As such, substantially all (more than 99 per cent) of our taxes are paid
here. The Group also includes companies based in the following jurisdictions:
Hong Kong, China, India and Bangladesh – these offices source many of our
non-food products, and local taxes of £2 million were paid in the year
(2014/15: £1 million); Isle of Man – our insurance company is based here for
regulatory reasons, as are many other insurance companies; Ireland, Jersey,
and the USA – these companies are all dormant and accordingly do not pay
any tax. There are also other Group companies that were incorporated in
Ireland, USA and Jersey that are UK tax resident, meaning that all relevant
taxes are payable to the UK Government.

Post balance sheet events
There were no post balance sheet events.

Financial risk management
The financial risk management and policies of the Group are disclosed in
note 29 on pages 126 to 134 to the financial statements.

Disclosure of information to the external auditor
Each of the Directors has confirmed that, so far as he/she is aware, there is no
relevant audit information of which the auditor is unaware. Each Director has
taken all steps that he/she ought to have taken as a Director in order to make
himself/herself aware of any relevant audit information and to establish that
the auditor is aware of that information.

Appointment of the external auditor
Ernst & Young have expressed their willingness to be reappointed as auditor
of the Company. Upon the recommendation of the Audit Committee,
resolutions to appoint them as auditor and to authorise the Audit Committee
to determine their remuneration will be proposed at the AGM.

Directors’ Report
The Directors’ Report comprises pages 1 to 65 and 80 to 82 of this Annual
Report and Financial Statements.

Governance Report

Statement of Directors’ responsibilities

The Directors are responsible for preparing the Annual Report and financial
statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have prepared the Group and
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 and fair view of the state of affairs of
the Group and the Company and of the profit or loss of the Group for that
period. In preparing these financial statements, the Directors are required to:

— select suitable accounting policies and then apply them consistently;

— make judgements and accounting estimates that are reasonable and

prudent;

— 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; and

— prepare the financial statements on the going concern basis unless it is

inappropriate to presume that the Group and the Company will continue
in business.

The Directors are responsible for keeping adequate accounting records that
are sufficient to show and explain the Group’s and the Company’s
transactions and disclose with reasonable accuracy at any time the financial
position of the Company and the Group and enable them to ensure that the
financial statements and the Directors’ Remuneration Report comply with the
Companies Act 2006 and, as regards the Group financial statements, Article 4
of the IAS Regulation. They are also responsible for safeguarding the assets of
the Company and the Group and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.

Having taken all the matters considered by the Board and brought to the
attention of the Board during the year into account, we are satisfied that the
Annual Report and financial statements, taken as a whole, is fair, balanced
and understandable.

The Board believes that the disclosures set out in this Annual Report provide
the information necessary for shareholders to assess the Company’s
performance, business model and strategy.

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.

Each of the Directors, whose names and functions are listed on pages 48 to 49,
confirms that, to the best of their knowledge:

— the Group 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 Group; and

— the Strategic Report and Directors’ Report contained in the Annual Report
and financial statements include a fair review of the development and
performance of the business and the position of the Group, together with
a description of the principal risks and uncertainties that it faces.

By order of the Board

Tim Fallowfield
Company Secretary and Corporate Services Director
3 May 2016

Independent auditors’ report
to the members of J Sainsbury plc

Our opinion on the financial statements
In our opinion:

— J Sainsbury plc’s Group financial statements and parent company

financial statements (the ‘financial statements’) give a true and fair
view of the state of the Group’s and of the parent company’s affairs as
at 12 March 2016 and of the Group’s profit for the period then ended;

— the Group financial statements have been properly prepared in

accordance with International Financial Reporting Standards (‘IFRSs’)
as adopted by the European Union;

— the parent company financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union as applied in
accordance with the provisions of the Companies Act 2006; and

— the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006, and, as regards the Group
financial statements, Article 4 of the IAS Regulation.

What we have audited
J Sainsbury plc’s financial statements comprise:

Group
Group income statement for the period
ended 12 March 2016
Group statement of comprehensive
income for the period ended 12 March
2016
Group balance sheet as at 12 March 2016 Statement of changes in equity

Parent company
Balance sheet as at 12 March
2016
Cash flow statement for the
period then ended

for the period then ended
Related notes 1 to 38 to the
financial statements

Group cash flow statement for the period
then ended
Group statement of changes in equity for
the period then ended
Related notes 1 to 38 to the financial
statements

The financial reporting framework that has been applied in their preparation
is applicable law and IFRSs as adopted by the European Union and, as regards
the parent company financial statements, as applied in accordance with the
provisions of the Companies Act 2006.

Overview of our audit approach

Risks of material misstatement
— Supplier arrangements

— Aspects of revenue recognition

— Sainsbury’s Bank customer receivables impairment

— Impairment of land and stores and onerous leases

— Pensions accounting

— IT environment

Audit scope
— We performed a full scope audit of the complete financial information

of the following components: J Sainsbury plc, Sainsbury’s
Supermarkets Limited and Sainsbury’s Bank plc. We performed audit
procedures on specific balances for the property companies, joint
ventures and insurance company due to the size and risk of certain
individual balances within these components.

— The components where we performed full or specific audit procedures
accounted for 98 per cent of Profit before tax before one-off items, 100
per cent of Revenue and 95 per cent of Total assets.

Materiality
— Overall Group materiality is £31.9 million which represents 5 per cent

of profit before tax before one-off items.

Our assessment of risk of material misstatement
We identified the risks of material misstatement described below as those
that had the greatest effect on our overall audit strategy, the allocation of
resources in the audit and the direction of the efforts of the audit team. In
addressing these risks, we have performed the procedures below which were
designed in the context of the financial statements as a whole and,
consequently, we do not express any opinion on these individual areas.

Financial StatementsFinancial Statements
Independent auditors’ report to the members of J Sainsbury plc continued

Risk
Supplier arrangements
Refer to the Audit Committee Report (page 63); Accounting policies (page
96); and note 2 of the Consolidated Financial Statements (page 102)

Risk
Aspects of revenue recognition
Refer to the Audit Committee Report (page 63); Accounting policies
(page 96); and note 4 of the Consolidated Financial Statements (page 103)

Our assessment is that the vast majority of Sainsbury’s revenue transactions
are non-complex, with no judgement applied over the amount recorded.
We focused our work on the manual adjustments that are made to revenue.
These adjustments included the deferral and recognition of revenues for the
Nectar loyalty scheme, coupon redemptions and gift cards and vouchers. Our
procedures were designed to address the risk of manipulation of accounting
records and the ability to override controls that otherwise appear to be
operating effectively.

Our response to the risk
— We obtained a detailed understanding of these adjustments and walked

through the controls over them and found them to be operating
effectively. Due to the manual nature of some of these adjustments, we
did not test these controls, but performed substantive audit procedures.

— We used our computer aided analytics tools to perform a correlation

analysis to identify those revenue journals for which the corresponding
entry was not cash. We obtained corroborating evidence for these
adjustments which included coupon redemptions, gift cards and
vouchers. For the Nectar loyalty scheme adjustment we obtained and
corroborated to evidence from the administrator of the scheme.

— Using data extracted from the accounting system, we tested the

appropriateness of journal entries impacting revenue, as well as other
adjustments made in the preparation of the financial statements. We
considered unusual journals such as those posted outside of expected
hours, or by unexpected individuals and for large or unusual amounts.

— We performed cut-off testing procedures including review of post period
end cash receipts and an analytical review of significant movements.

What we concluded to the Audit Committee
Adjustments to revenue have been appropriately recognised.

The Group receives material discounts from suppliers, referred to as supplier
arrangements. There are three streams as described in note 1 to the
financial statements. We focused our audit procedures on the areas where
management applies judgement, where the processing is either manual or
more complex and where the quantum of agreements is high.

Our response to the risk
— We walked through and tested the design effectiveness of controls in

place within the supplier arrangements process. We were able to take a
controls-reliance approach over certain aspects of the process.

— We selected a sample of suppliers to send confirmations across all deal
types to confirm key deal input terms. We did not receive any response
where suppliers disagreed with the deal terms recorded. Where we did not
receive a response from the supplier, we performed alternative procedures,
including obtaining evidence of initiation and settlement of the deal.

— We tested the existence and valuation of balance sheet amounts

recognised in accounts receivable and as a contra-asset in accounts
payable by reviewing post-period end settlement. We also performed a
‘look-back’ analysis of prior period balance sheet amounts to check that
these amounts were appropriately recovered.

— We tested the accurate settlement of a sample of supplier arrangements

recognised in the income statement, which included settlement in cash or
by off-set to amounts payable.

— Using data extracted from the accounting system, we tested the

appropriateness of journal entries and other adjustments to supplier
arrangements.

— We obtained the register of client entertaining to cross check this against
significant deals made during the period to look for correlations that
might indicate a higher risk of management override. Conversely we also
reviewed entertainment expenses charged in the year to corroborate
unusual movements. There was nothing outside of our expectations
meriting further investigation.

— We tested deals recorded post period end and obtained the supplier
agreement to validate that the deal was correctly recorded post
period end.

— We assessed management’s approach to provisioning for specific supplier
arrangements’ recoverability and concur that the amounts recorded
reflect management’s best estimate of amounts to be recovered.

— We performed detailed analytical review procedures to understand

movements in income statement and balance sheet accounts period on
period, including ageing analysis. Where unusual movements were
identified these were investigated further.

— We discussed details of supplier relationships with certain category

managers of key suppliers to confirm our understanding of the balances
recorded and identify how disputes with suppliers are identified and dealt
with. These discussions corroborated the balances and movements in the
accounts and the results of substantive procedures described above.

— We reviewed management’s disclosure in respect of supplier arrangement

amounts recorded in the income statement and balance sheet.

What we concluded to the Audit Committee
Supplier arrangement amounts are appropriately recognised in the income
statement and balance sheet and disclosures included are appropriate.

Risk
Sainsbury’s Bank customer receivables impairment
Refer to the Audit Committee Report (page 63); Accounting policies (page
100); and note 17(b) of the Consolidated Financial Statements (page 115)

Sainsbury’s Bank customer receivables relating to credit cards or loans
recognised at 29 February 2016 are £3,423 million (2015: £3,098 million).
The provision for impairment is £79 million (2015: £87 million).

What we concluded to the Audit Committee
The net impairment and onerous lease charge of £1 million is appropriately
recognised.

Risk
Pensions accounting
Refer to the Audit Committee Report (page 63); Accounting policies (page
99); and note 31 of the Consolidated Financial Statements (page 141)

Sainsbury’s Bank customer receivables, through either credit cards or loans,
are significant. There is judgement in the assumptions applied to calculate
the loan provisions against outstanding balances.

Our response to the risk
The audit of Sainsbury’s Bank was completed by a component auditor from
another audit firm. We agreed an audit strategy with the component auditor
in advance of their testing and we reviewed the results of their work. We also
attended meetings with the management of Sainsbury’s Bank. The audit
strategy included the following:

— The loan impairment methodology was reviewed, to confirm it was

consistent with both the IFRS requirements and that previously applied.

— The mathematical accuracy of management’s impairment models was
verified and confirmed that the methodology applied was in accordance
with the requirements of IAS 39, ‘Financial instruments: Recognition and
measurement’.

— The completeness and accuracy of the data from underlying systems that

were used in the impairment models was tested.

— Key assumptions including the probability of default and the size of the
loss if default occurred were assessed against internal and external
evidence. The key assumptions within the models were compared to
knowledge of assumptions used in the banking sector and also with
historical trends within Sainsbury’s Bank, concluding that, based on the
evidence obtained, management’s conclusions were supportable.

— The accuracy of prior year impairment reserves was considered to assess

the quality of management’s estimation process.

— Changes to the modelling assumptions were assessed to confirm these

were appropriate and in line with accounting standards.

What we concluded to the Audit Committee
The impairment of Sainsbury’s Bank receivables due from customers has
been appropriately recognised.

Risk
Impairment of land and stores and onerous leases
Refer to the Audit Committee Report (page 63); Accounting policies (page
97); and notes 3, 11 and 22 of the Consolidated Financial Statements (pages
103, 110 and 121)

A net impairment and onerous lease charge of £1 million (2014/15:
£628 million) has been recognised during the period. Based on the current
volatility in the industry and the magnitude of the Group’s fixed assets and
lease portfolio this was an area of audit focus.

Our response to the risk

— We understood management’s process for identifying whether an indicator

of impairment existed in line with IAS 36, ‘Impairment of assets’.

— Where there has been a known change in future use of an asset, a more
detailed impairment review has been performed. We discussed the
changes in use or changes in development plans with management. We
corroborated key assumptions to confirm the changes in use assumptions
were appropriate and recalculated the impairment charges and releases.

— Where previously impaired stores had new capitalisation in the period we
investigated to validate that an appropriate business case was in place
and capitalisation was appropriate.

— We understood management’s process for identifying onerous leases as
well as the factors considered and determined whether appropriate
provision had been made. This included an assessment of whether the
appropriate discount rate had been applied.

The net defined benefit pension deficit is £408 million (2014/15: £708 million)
comprising scheme assets of £7,235 million and a defined benefit obligation
of £7,643 million. Our focus is on the areas of significant judgement,
including the assumptions underpinning the valuation of the pension
obligation and the valuation of certain unquoted assets.

Our response to the risk
Pension obligation

— With the assistance of our EY actuarial specialists, we reviewed the

methodology used to value the defined benefit obligation to confirm
consistency with IFRS and the prior period.

— We reviewed and benchmarked the key input assumptions of discount

rate and inflation to relevant industry and internal benchmarks.

Pension assets

— Unquoted assets amounted to £1,417 million at period end (2014/15:

£897 million). These included private equity investments and swaps. For
these assets we confirmed bid price valuation and existence to independent
sources and reviewed period on period movements to look for unusual
movements. For the swaps we recalculated a sample of contracts to
confirm appropriate valuation.

What we concluded to the Audit Committee
The net defined benefit deficit is appropriately recognised.

Risk
IT environment
The IT systems across the Group are complex and there are varying levels of
integration between them. The systems are vital to the ongoing operations
of the business and to the integrity of the financial reporting process. We
assessed the IT general controls environment for the key systems impacting
the accurate recording of transactions and the presentation of the financial
statements. For Sainsbury’s Bank the key systems as described above are
provided by an external outsource provider.

Our response to the risk
— We held discussions with management to understand the IT environment
and walked through the key financial processes to understand where IT
systems were integral to the Group’s controls over financial reporting.
From this we identified which IT systems to include in the scope for our
detailed IT testing.

— We designed our IT audit procedures to assess the IT environment,

including an assessment of controls over changes made to the system
and controls over appropriate access to the systems.

— Where we found that adequate IT general controls were not in place, we
performed additional substantive testing to mitigate the risk of material
misstatement.

— Sainsbury’s Bank’s auditors received a report from the auditors of the
outsourced systems and followed up on matters arising, performing
further procedures as necessary. We discussed the work performed by
Sainsbury’s Bank’s auditors and reviewed their work.

What we concluded to the Audit Committee
We have not identified any misstatements in the financial statements due to
the limitations of the IT environment.

Financial StatementsFinancial Statements
Independent auditors’ report to the members of J Sainsbury plc continued

The scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation
of performance materiality determine our audit scope for each entity within
the Group. Taken together, this enables us to form an opinion on the
consolidated financial statements. We take into account size, risk profile, the
organisation of the Group and effectiveness of Group-wide controls, changes
in the business environment and other factors such as recent internal audit
results when assessing the level of work to be performed at each entity.

In assessing the risk of material misstatement to the Group financial
statements, and to ensure we had adequate quantitative coverage of
significant accounts of the components of the Group in the Group financial
statements, we selected J Sainsbury plc, Sainsbury’s Supermarkets Limited
and Sainsbury’s Bank plc components to perform full scope procedures, which
represent the principal business units within the Group based on their size
and risk characteristics. For the property companies, joint ventures and
insurance components we performed audit procedures on specific accounts
which we considered had the potential for the greatest impact on the
significant accounts in the financial statements either because of the size of
these accounts or their risk profile.

The audit scope of these components may not have included testing of all
significant accounts of the component but will have contributed to the
coverage of significant accounts tested for the Group.

Materiality
The magnitude of an omission or misstatement that, individually or in the
aggregate, could reasonably be expected to influence the economic
decisions of the users of the financial statements. Materiality provides a
basis for determining the nature and extent of our audit procedures.

We determined materiality for the Group to be £31.9 million, which is five per
cent of profit before tax excluding one-off items of £90 million as described in
note 3. We believe that this materiality basis provides us with the best
assessment of the requirements of the users of the financial statements. This
is consistent with the approach taken by the auditors in the prior period.

Starting basis

— Profit before tax £548 million

Adjustments

— One-off items £90 million

Materiality

— Totals £638 million Profit before tax before one-off items

— Materiality of £31.9 million (five per cent)

Performance materiality
The application of materiality at the individual account or balance level. It is
set at an amount to reduce to an appropriately low level the probability that
the aggregate of uncorrected and undetected misstatements exceeds
materiality.

For remaining balances we performed other procedures, including analytical
review, testing of consolidation journals, intercompany eliminations and
foreign currency translation recalculations to respond to any potential risks
of material misstatement to the Group financial statements.

On the basis of our risk assessments, together with our assessment of the
Group’s overall control environment and this being our first period of
engagement, our judgement was that performance materiality was
approximately 50 per cent of our planning materiality, namely £16 million.

Involvement with component teams
In establishing our overall approach to the Group audit, we determined the
type of work that needed to be undertaken at each of the components by us,
as the primary audit engagement team, or by component auditors from the
other firm operating under our instruction. Of the full scope components,
audit procedures were performed on the J Sainsbury plc, Sainsbury’s
Supermarkets Limited components and consolidation of the Group. The work
at the specific scope locations was performed by the primary team.

For the Sainsbury’s Bank full scope component, where the work was
performed by auditors from another audit firm, we instructed the component
auditor to perform specified procedures in response to our risk assessment.
We then determined the appropriate level of direct involvement to enable us
to determine that sufficient audit evidence had been obtained as a basis for
our opinion on the Group as a whole. During the current period’s audit cycle,
the Senior Statutory Auditor visited Sainsbury’s Bank and held discussions
with management. Separately he and other senior team members from EY
discussed the audit approach with the component team and significant
issues arising from their work, reviewing key audit working papers on risk
areas. The closing discussion was attended by the primary team. The primary
team interacted regularly with the component team where appropriate
during various stages of the audit, reviewed key working papers and were
responsible for the scope and direction of the audit process. This, together
with the additional procedures performed at Group level, gave us appropriate
evidence for our opinion on the Group financial statements.

Our application of materiality
We apply the concept of materiality in planning and performing the audit, in
evaluating the effect of identified misstatements on the audit and in forming
our audit opinion.

Audit work at component locations for the purpose of obtaining audit
coverage over significant financial statement accounts is undertaken based
on a percentage of total performance materiality. The performance materiality
set for each component is based on the relative scale and risk of the component
to the Group as a whole and our assessment of the risk of misstatement at
that component. In the current period, the range of performance materiality
allocated to components was £3.0 million to £11.3 million.

Reporting threshold
An amount below which identified misstatements are considered as being
clearly trivial.

We agreed with the Audit Committee that we would report to them all
uncorrected audit differences in excess of £1.5 million, which is set at
approximately five per cent of planning materiality, as well as differences below
that threshold that, in our view, warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative
measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.

Scope of the audit of the financial statements
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: whether the accounting policies
are appropriate to the Group’s and the parent company’s circumstances and
have been consistently applied and adequately disclosed; the reasonableness
of significant accounting estimates made by the Directors; and the overall
presentation of the financial statements. 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.

Respective responsibilities of Directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on
page 82, 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 International Standards on Auditing
(UK and Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.

This report is made solely to the Company’s members, as a body, in accordance
with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been
undertaken so that we might state to the Company’s members those matters
we are required to state to them in an auditor’s report and for no other

purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company’s members
as a body, for our audit work, for this report, or for the opinions we have formed.

Opinion on other matters prescribed by the Companies Act
2006
In our opinion:

— the part of the Directors’ Remuneration Report to be audited has been
properly prepared in accordance with the Companies Act 2006; and

— the information given in the Strategic Report and the Directors’ Report for
the financial period for which the financial statements are prepared is
consistent with the financial statements.

Matters on which we are required to report by exception

ISAs (UK
and Ireland
reporting)

We are required to report to you if, in our opinion, financial and non-financial information in the Annual Report is:

— materially inconsistent with the information in the audited financial statements; or

— apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the

We have no
exceptions to
report.

course of performing our audit; or

— otherwise misleading.

In particular, we are required to report whether we have identified any inconsistencies between our knowledge acquired
in the course of performing the audit and the Directors’ statement that they consider the Annual Report and Accounts
taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess
the entity’s performance, business model and strategy; and whether the Annual Report appropriately addresses those
matters that we communicated to the Audit Committee that we consider should have been disclosed.

We are required to report to you if, in our opinion:

— adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not

been received from branches not visited by us; or

— the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in

agreement with the accounting records and returns; or

— certain disclosures of Directors’ remuneration specified by law are not made; or

— we have not received all the information and explanations we require for our audit.

We are required to review:

— the Directors’ statement in relation to going concern, set out on page 39, and longer-term viability, set out on page 39; and

— the part of the Corporate Governance Statement relating to the Company’s compliance with the provisions of the UK

Corporate Governance Code specified for our review.

Companies
Act 2006
reporting

Listing
Rules
review

We have no
exceptions to
report.

Statement on the Directors’ assessment of the principal risks that would threaten the solvency or liquidity of the entity

ISAs (UK
and Ireland)
reporting

We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to:

— the Directors’ confirmation in the Annual Report that they have carried out a robust assessment of the principal risks
facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;

— the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated;

We have nothing
material to
add or to draw
attention to.

— the Directors’ statement in the financial statements about whether they considered it appropriate to adopt the going
concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability
to continue to do so over a period of at least 12 months from the date of approval of the financial statements; and

— the Directors’ explanation in the Annual Report as to how they have assessed the prospects of the entity, over what

period they have done so and why they consider that period to be appropriate, and their statement as to whether they
have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall
due over the period of their assessment, including any related disclosures drawing attention to any necessary
qualifications or assumptions.

Nigel Jones
(Senior statutory auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor London
3 May 2016

Notes:
1. The maintenance and integrity of the J Sainsbury 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.

2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Financial StatementsFinancial Statements

Group income statement
for the 52 weeks to 12 March 2016

Revenue
Cost of sales
Gross profit
Administrative expenses
Other income
Operating profit
Finance income
Finance costs
Share of post-tax (loss)/profit from joint ventures and associates
Profit/(loss) before tax

Analysed as:

Underlying profit before tax
Profit on disposal of properties
Investment property fair value movements
Retail financing fair value movements
IAS 19 pension financing charge and scheme expenses
Perpetual securities coupons
Acquisition adjustments
One-off items

Income tax expense

Profit/(loss) for the financial year

Earnings/(loss) per share
Basic
Diluted
Underlying basic
Underlying diluted

The notes on pages 95 to 150 form an integral part of these financial statements.

Note
4

5
6
6
14

3
3
3
3
3
3
3

2016
£m
23,506
(22,050)
1,456
(850)
101
707
19
(167)
(11)
548

2015
£m
23,775
(22,567)
1,208
(1,132)
5
81
19
(180)
8
(72)

587
101
(18)
(22)
(28)
15
3
(90)
548

(77)

471

pence
23.9
22.5
24.2
22.8

681
7
7
(30)
(37)
–
13
(713)
(72)

(94)

(166)

pence
(8.7)
(8.7)
26.4
25.7

Group statement of comprehensive income
for the 52 weeks to 12 March 2016

Profit/(loss) for the financial year

Items that will not be reclassified subsequently to the income statement
Remeasurement on defined benefit pension schemes
Current tax relating to items not reclassified
Deferred tax relating to items not reclassified

Items that may be reclassified subsequently to the income statement
Currency translation differences
Available-for-sale financial assets fair value movements
Attributable to Group
Items reclassified from available-for-sale assets reserve
Cash flow hedges effective portion of fair value movements
Attributable to Group
Attributable to joint ventures and associates
Items reclassified from cash flow hedge reserve
Current tax relating to items that may be reclassified
Deferred tax relating to items that may be reclassified

Total other comprehensive income/(expense) for the financial year (net of tax)
Total comprehensive income/(expense) for the financial year

The notes on pages 95 to 150 form an integral part of these financial statements.

Note

31b
8
8

24
24
24
8
8

2016
£m
471

121
–
(36)
85

(1)
–

4
1
7
–
3
16
101
572

2015
£m
(166)

(19)
6
(1)
(14)

(39)
1

(13)
3
21
–
9
(15)
(29)
(195)

Financial StatementsFinancial Statements

Balance sheets
At 12 March 2016 and 14 March 2015

Non-current assets
Property, plant and equipment
Intangible assets
Investments in subsidiaries
Investments in joint ventures and associates
Available-for-sale financial assets
Other receivables
Amounts due from Sainsbury’s Bank customers
Derivative financial instruments

Current assets
Inventories
Trade and other receivables
Amounts due from Sainsbury’s Bank customers
Available-for-sale financial assets
Derivative financial instruments
Cash and bank balances

Assets held for sale

Total assets
Current liabilities
Trade and other payables
Amounts due to Sainsbury’s Bank customers and banks
Borrowings
Derivative financial instruments
Taxes payable
Provisions

Liabilities held for sale

Net current (liabilities)/assets
Non-current liabilities
Other payables
Amounts due to Sainsbury’s Bank customers and other deposits
Borrowings
Derivative financial instruments
Deferred income tax liability
Provisions
Retirement benefit obligations

Net assets
Equity
Called up share capital
Share premium account
Capital redemption reserve
Other reserves
Retained earnings
Total equity before perpetual securities
Perpetual capital securities
Perpetual convertible bonds
Total equity

Note

11
12
13
14
15
17a
17b
30

16
17a
17b
15
30
27b

19a
19b
20
30

19a
19b
20
30
21
22
31

23
23
24
24
26

25
25

Group

2016
£m

Company

2015
£m

2016
£m

2015
£m

9,764
329
–
327
340
103
1,649
17
12,529

968
508
1,695
48
51
1,143
4,413
31
4,444
16,973

(3,077)
(3,173)
(223)
(43)
(158)
(46)
(6,720)
(4)
(6,724)
(2,280)

(269)
(582)
(2,190)
(69)
(237)
(129)
(408)
(3,884)
6,365

550
1,114
680
155
3,370
5,869
248
248
6,365

9,648
325
–
359
184
83
1,412
21
12,032

997
471
1,599
–
69
1,285
4,421
84
4,505
16,537

(2,961)
(3,395)
(260)
(75)
(188)
(44)
(6,923)
–
(6,923)
(2,418)

(265)
(266)
(2,506)
(38)
(215)
(77)
(708)
(4,075)
5,539

548
1,108
680
146
3,057
5,539
–
–
5,539

–
–
4,500
33
35
1,531
–
22
6,121

–
1,195
–
–
32
338
1,565
1
1,566
7,687

(157)
–
(40)
(35)
(21)
–
(253)
–
(253)
1,313

(692)
–
(616)
(13)
–
(2)
–
(1,323)
6,111

550
1,114
680
31
3,240
5,615
248
248
6,111

1
–
7,630
18
37
1,363
–
33
9,082

–
1,399
–
–
44
92
1,535
15
1,550
10,632

(4,422)
–
(87)
(57)
(21)
(2)
(4,589)
–
(4,589)
(3,039)

(798)
–
(764)
(18)
–
(2)
–
(1,582)
4,461

548
1,108
680
40
2,085
4,461
–
–
4,461

The notes on pages 95 to 150 form an integral part of these financial statements.

The financial statements on pages 88 to 150 were approved by the Board of Directors on 3 May 2016, and are signed on its behalf by:

Mike Coupe Chief Executive

John Rogers Chief Financial Officer

Cash flow statements
for the 52 weeks to 12 March 2016

Cash flows from operating activities
Cash generated from/(used in) operations
Interest paid
Corporation tax paid
Net cash generated from/(used in) operating activities

Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds from disposal of property, plant and equipment
Receipt of advance disposal proceeds
Acquisition of subsidiaries net of cash acquired
Investment in joint ventures
Investment in subsidiaries
Disposal of subsidiaries
Proceeds from repayment of loan to joint venture
Interest received
Dividends and distributions received
Net cash (used in)/generated from investing activities

Cash flows from financing activities
Proceeds from issuance of ordinary shares
Repayment of short-term borrowings
Proceeds from long-term borrowings
Repayment of long-term borrowings
Proceeds from issue of perpetual capital securities
Proceeds from issue of perpetual convertible bonds
Purchase of own shares
Repayment of capital element of obligations under finance lease payments
Interest elements of obligations under finance lease payments
Dividends paid on ordinary shares
Dividends paid on perpetual securities
Net cash (used in)/generated from financing activities

Net (decrease)/increase in cash and cash equivalents

Net opening cash and cash equivalents

Closing cash and cash equivalents

1,276

1,579

27b

1,140

1,276

The notes on pages 95 to 150 form an integral part of these financial statements.

Group

Company

Note

27a

18,19

25
25

10
25

2016
£m

624
(108)
(124)
392

(646)
(34)
109
125
–
(18)
–
(1)
–
19
46
(400)

8
(95)
–
(238)
247
247
(20)
(30)
(9)
(234)
(4)
(128)

(136)

2015
£m

1,136
(134)
(91)
911

(951)
(78)
40
–
(6)
(12)
–
–
17
20
70
(900)

19
(381)
674
(240)
–
–
(18)
(29)
(9)
(330)
–
(314)

(303)

2016
£m

93
(71)
–
22

–
–
15
–
(137)
(15)
–
–
–
62
250
175

8
(95)
–
(120)
247
247
–
–
–
(234)
(4)
49

246

338

2015
£m

(492)
(74)
–
(566)

–
–
–
–
–
(12)
(59)
450
–
44
252
675

19
(336)
644
(143)
–
–
–
–
–
(330)
–
(146)

(37)

129

Financial Statements
Financial Statements

Group statement of changes in equity
for the 52 weeks to 12 March 2016

Called up
share capital
£m
548
–

Note

25,26

Share
premium
account
£m
1,108
–

Capital
redemption
and other
reserves
£m
826
–

Total equity
before
perpetual
securities
£m
5,539
452

Retained
earnings
£m
3,057
452

Perpetual
capital
securities
£m
–
13

Perpetual
convertible
bonds
£m
–
6

Total equity
£m
5,539
471

24
26

24
24
24

10,26
25

24,26

26
26
23,26

–
–

–

–
–
–

–

–
–

–

–
–
2

–
–

–

–
–
–

–

–
–

–

–
–
6

2
–

4
1
7

–
85

–

–
–
–

2
85

4
1
7

–
–

–

–
–
–

537

553

–
–

–

–
–
–

2
85

4
1
7

572

–
–

–

(7)

–
–
–

(234)
–

–
248

(234)
496

–

23
(20)
–

–

23
(20)
8

(13)

(6)

(19)

–

–
–
–

–

–
–
–

–

23
(20)
8

At 15 March 2015
Profit for the year
Other comprehensive income/
(expense):
Currency translation differences
Remeasurements on defined benefit
pension schemes (net of tax)
Available-for-sale financial assets fair
value movements (net of tax):
Attributable to Group
Cash flow hedges effective portion of
changes in fair value (net of tax):
Attributable to Group
Attributable to joint ventures
Items reclassified from cash flow
hedge reserve
Total comprehensive income for
the year ended 12 March 2016
Transactions with owners:

Dividends paid
Issue of perpetual subordinated
capital securities and perpetual
subordinated convertible bonds
Distributions to holders of
perpetual subordinated
convertible bonds (net of tax)
Amortisation of convertible bond
equity component
Share-based payment (net of tax)
Purchase of own shares
Allotted in respect of share option
schemes

At 12 March 2016

550

1,114

835

3,370

5,869

248

6,365

Group statement of changes in equity continued
for the 52 weeks to 12 March 2016

At 16 March 2014
Loss for the year
Other comprehensive income/(expense):
Currency translation differences
Remeasurements on defined benefit pension
schemes (net of tax)
Available-for-sale financial assets fair value
movements (net of tax):
Attributable to Group
Items reclassified from available-for-sale financial
asset reserve
Cash flow hedges effective portion of changes in
fair value (net of tax):
Attributable to Group
Attributable to joint ventures
Items reclassified from cash flow hedge reserve
Total comprehensive expense for the year
ended 14 March 2015
Transactions with owners:

Dividends paid
Convertible bond equity component
Amortisation of convertible bond – equity
component
Share-based payment (net of tax)
Purchase of own shares
Allotted in respect of share option schemes
Purchase of non-controlling interest

At 14 March 2015

Note

24
26

24
24

24
24
24

10,26
24
24,26

26
26
23,26
26

Called up
share capital
£m
545
–

Share
premium
account
£m
1,091
–

Capital
redemption
and other
reserves
£m
807
–

–
–

–
–
–
–

–
–
–

–
–

–
–
–
–

–
–
–

–
–
3
–
548

–
–
17
–
1,108

3
–

(30)
1

(13)
3
21
(15)

–
39
(5)

–
–
–
–
826

Retained
earnings
£m
3,560
(166)

–
(14)

–
–

–
–
–
(180)

(330)
–
5

21
(18)
(3)
2
3,057

Total
£m
6,003
(166)

Non-controlling
interests
£m
2
–

Total equity
£m
6,005
(166)

3
(14)

(30)
1

(13)
3
21
(195)

(330)
39
–

21
(18)
17
2
5,539

–
–

–
–
–
–

–
–
–

–
–
–
(2)
–

3
(14)

(30)
1

(13)
3
21
(195)

(330)
39
–

21
(18)
17
–
5,539

The notes on pages 95 to 150 form an integral part of these financial statements.

Financial Statements
Financial Statements

Company statement of changes in equity
for the 52 weeks to 12 March 2016

Called up share
capital
£m
548
–

Share premium
account
£m
1,108
–

Note

25,26

Capital
redemption
and other
reserves
£m
720
–

Total equity
before
perpetual
securities
£m
4,461
1,360

Retained
earnings
£m
2,085
1,360

Perpetual
capital
securities
£m
–
13

Perpetual
convertible
bonds
£m
–
6

Total equity
£m
4,461
1,379

10,26
25

24,26

23,26

–

–
–

–

–
–

–

(2)

–
–

–

(7)

–

(2)

–

1,360

1,358

–

(2)

1,377

(234)
–

–
248

(234)
496

–

(13)

(6)

(19)

–

At 15 March 2015
Profit for the year
Other comprehensive (expense)/
income:

Available-for-sale financial assets
fair value movements (net of tax)
Cash flow hedges effective portion
of changes in fair value (net of tax)
Items reclassified to cash flow
hedge reserve

Total comprehensive (expense)/
income for the year ended
12 March 2016
Transactions with owners:

At 12 March 2016

550

1,114

711

3,240

5,615

248

6,111

At 16 March 2014
Profit for the year
Other comprehensive income/
(expense):

Available-for-sale financial assets
fair value movements (net of tax)
Cash flow hedges effective portion
of changes in fair value (net of tax)
Items reclassified to cash flow
hedge reserve

Total comprehensive (expense)/
income for the year ended
14 March 2015
Transactions with owners:

Dividends paid
Convertible bond equity
component
Amortisation of convertible bond
equity component
Allotted in respect of share option
schemes
Utilised in respect of share option
schemes

At 14 March 2015

10,26
24

24,26

23,26

545
–

1,091
–

687
–

2,046
344

4,369
344

–

–
–

–

–
–

–

(5)

(1)

–
39

(5)

–

(5)

344

343

(330)
–

(330)
39

(1)

–

(1)

548

1,108

720

2,085

4,461

The notes on pages 95 to 150 form an integral part of these financial statements.

–
–

–

–
–

–

–
–

–

–
–

–

4,369
344

(5)

343

(330)
39

–

(1)

4,461

Notes to the financial statements

1 Accounting policies
General information
J Sainsbury plc is a public limited company (the ‘Company’) incorporated in
the United Kingdom, whose shares are publicly traded on the London Stock
Exchange. The Company is domiciled in the United Kingdom and its
registered address is 33 Holborn, London EC1N 2HT, United Kingdom.

The financial year represents the 52 weeks to 12 March 2016 (prior financial
year 52 weeks to 14 March 2015). The consolidated financial statements for
the 52 weeks to 12 March 2016 comprise the financial statements of the
Company and its subsidiaries (the ‘Group’) and the Group’s share of the
post-tax results of its joint ventures and associates.

The Group’s principal activities are grocery related retailing and retail banking.

Basis of preparation
The Group’s financial statements have been prepared in accordance with
International Financial Reporting Standards (‘IFRSs’) as adopted by the
European Union and International Financial Reporting Interpretations
Committee (‘IFRIC’) and with those parts of the Companies Act 2006
applicable to companies reporting under IFRSs. The Company’s financial
statements have been prepared on the same basis and, as permitted by
Section 408(3) of the Companies Act 2006, no income statement or
statement of comprehensive income is presented for the Company.

The financial statements are presented in sterling, rounded to the nearest
million (‘£m’) unless otherwise stated. They have been prepared on a going
concern basis under the historical cost convention, except for derivative
financial instruments, defined benefit scheme assets, investment properties
and available-for-sale financial assets that have been measured at fair value.

Basis of consolidation
The consolidated financial statements of the Group consist of the financial
statements of the ultimate parent company J Sainsbury plc, all entities
controlled by the Company and the Group’s share of its interests in joint
ventures and associates.

a) Subsidiaries
Subsidiaries are all entities (including structured entities) over which
the Group has control. The Group controls an entity when the Group is
exposed to, or has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its power over the
entity. The results of subsidiaries are included in the income statement from
the date of acquisition or, in the case of disposals, up to the effective date of
disposal. Intercompany transactions and balances between Group companies
are eliminated upon consolidation. Accounting policies of subsidiaries have
been changed where necessary to ensure consistency with the policies
adopted by the Group.

Investments in joint ventures and associates are carried in the Group balance
sheet at cost plus post-acquisition changes in the Group’s share of net assets
of the entity, less any provision for impairment.

Investments in joint ventures and associates are carried in the Company
balance sheet at cost less any provision for impairment.

Associates are entities over which the Group has significant influence
but not control.

Investment properties held by the Group are those contained within its joint
ventures with Land Securities Group PLC and The British Land Company PLC.
These are properties held for capital appreciation and/or to earn rental
income. They are initially measured at cost, including related transaction
costs. After initial recognition at cost, they are carried at their fair values
based on market value determined by professional valuers at each reporting
date. The difference between the fair value of an investment property at the
reporting date and its carrying amount prior to re-measurement is included
within the income statement but is excluded from underlying profit in order
to provide a clear and consistent presentation of the underlying performance
of the Group’s ongoing business for shareholders.

Amendments to published standards
Effective for the Group and Company in these financial
statements:
The Group has considered the following amendments to published standards
that are effective for the Group for the financial year beginning 15 March
2015 and concluded that they are either not relevant to the Group or that
they do not have a significant impact on the Group’s financial statements.
These standards and interpretations have been endorsed by the European
Union.

— Amendments to IFRS 2, ‘Share-based payments’ on the definition of

vesting conditions

— Amendments to IFRS 3, ‘Business combinations’ on scope exclusions for

joint ventures and the subsequent measurement of contingent
considerations

— Amendments to IFRS 8, ‘Operating segments’ on aggregation of operating

segments and reconciliations of assets

— Amendments to IFRS 13, ‘Fair value measurements’ on application of the

portfolio exception

— Amendments to IAS 16, ‘Property, plant and equipment’ and IAS 38,
‘Intangible assets’ on the proportionate restatement of accumulated
depreciation/amortisation

— Amendments to IAS 19, ‘Employee benefits’ on the recognition of

employee contributions to defined benefit plans

— Amendments to IAS 24, ‘Related party disclosures’ on entities providing

key management personnel services

— Amendments to IAS 40, ‘Investment property’ on the interrelationship

Investments in subsidiaries are carried at cost less any impairment loss
in the financial statements of the Company.

between IFRS 3 and IAS 40

b) Joint ventures and associates
The Group applies IFRS 11 to all joint arrangements. Under IFRS 11,
investments in joint arrangements are classified as either joint operations or
joint ventures depending on the contractual rights and obligations of each
investor. The Group has assessed the nature of its joint arrangements and
determined them to be joint ventures. The Group’s share of the post-tax
results of its joint ventures and associates is included in the income
statement using the equity method of accounting. Where the Group transacts
with a joint venture or associate, profits and losses are eliminated to the
extent of the Group’s interest in the joint venture or associate.

Financial Statements
1 Accounting policies continued
The following standards and revisions will be effective for future
periods:
— Amendments to IFRS 11, ‘Joint arrangements’ on the accounting for

acquisitions of interests in joint operations

— Amendments to IAS 1, ‘Presentation of financial statements’ which

clarifies existing IAS 1 requirements

— Amendments to IAS 16, ‘Plant, property and equipment’ and IAS 38,

‘Intangible assets’ which clarifies acceptable methods of depreciation and
amortisation

— Amendments to IAS 27, ‘’Consolidated and separate financial statements’
which allow an entity to use the equity method as described in IAS 28 to
account for its investments in subsidiaries

— IFRS 9, ‘Financial instruments’

— IFRS 15, ‘Revenue from contracts with customers’

— IFRS 16, ‘Leases’

— Amendments to IFRS 10, ‘Consolidated financial statements’, IFRS 12,
‘Disclosure of interests in other entities’ and IAS 28, ‘Investments in
associates and joint ventures’ on applying the consolidation exception

— Amendments to IAS 7, ‘Statement of cashflows’ on the disclosures in

financial statements

— Amendments to IAS 12, ‘Income taxes’ on the recognition of deferred tax

assets for unrealised losses

— Annual Improvements 2012

— Annual Improvements 2013

— Annual improvements 2014

IFRS 9 will supersede IAS 39 in its entirety, and is effective for accounting
periods commencing on or after 1 January 2018. The new standard is broadly
split into three areas:

— Classification and measurement. New classification and measurement
criteria require financial instruments to be classified into one of three
categories being amortised cost, fair value through other comprehensive
income or fair value. Classification will be determined by the business
model and contractual cash flow characteristics of the instruments.

— Expected credit losses (ECL). The requirement to recognise impairment losses
based on ECL methodology is a change to the current requirements whereby
losses are only recognised once an impairment event has happened.

— Hedge accounting. The general hedge accounting mechanisms of IAS 39
have been retained, however greater flexibility has been introduced over
the instruments eligible for hedge accounting and effectiveness testing
has been more closely aligned with the underlying risk management
practices of the entity.

The Group is currently implementing a project to assess the impact of IFRS 9
and implement systems to ensure ongoing compliance with its requirements.

IFRS 15 establishes a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes
a number of existing standards and interpretations from its effective date for
accounting periods beginning on or after 1 January 2018. IFRS 15 introduces
principles to recognise revenue by allocation of the transaction price to
performance obligations. IFRS 15 will apply to the Group’s revenue and other
operating income, superseding IAS 18. Income from financial instruments
will continue to be recognised under IAS 39/IFRS 9.

IFRS 16 specifies how an entity will recognise, measure, present and disclose
leases. The standard provides a single lessee accounting model, requiring
lessees to recognise assets and liabilities for all leases unless the lease term is
12 months or less or the underlying asset has a low value. IFRS 16 supersedes
IAS 17 and applies to accounting periods beginning on or after 1 January 2019.

The Group is reviewing the requirements of IFRS 15 and 16 to
determine their impact.

The Group and Company have considered the impact of the remaining above
standards and revisions and have concluded that they will not have a
significant impact on the Group and Company’s financial statements, apart
from additional disclosures.

The accounting policies set out below have been applied consistently to all
periods presented in the financial statements by the Group and the Company.

Revenue
Revenue consists of sales through retail outlets and, in the case of Sainsbury’s
Bank, interest receivable, fees and commissions and excludes Value Added Tax.

a) Retail – sale of goods
Sales through retail outlets are shown net of returns, the cost of Nectar reward
points issued and redeemed, colleague discounts, vouchers and sales made
on an agency basis. Commission income is recognised in revenue based on
the terms of the contract.

Revenue is recognised when the significant risks and rewards of goods and
services have been passed to the buyer and it can be measured reliably.

The cost of Nectar points is treated as a deduction from sales and a
corresponding liability recognised on the balance sheet. Revenue is then
recognised as each point is redeemed in store.

b) Sainsbury’s Bank interest receivable
Interest income is recognised in the income statement for all instruments
measured at amortised cost using the effective interest method. This
calculation takes into account all amounts that are integral to the yield as
well as incremental transaction costs. The effective interest rate is the rate
that discounts the expected future cash flows over the expected life of the
financial instrument to the net carrying amount of the financial asset or
liability at initial recognition.

c) Sainsbury’s Bank fees and commissions
Fees and commissions that are not integral to the effective interest rate
calculation primarily relate to credit card and ATM interchange fees and
insurance introduction commission receivable from insurance partners. These
are recognised in the income statement on an accruals basis as services are
provided. Where in the case of insurance commissions the income comprises
an initial commission and profit share, both are recognised on completion of
the service to the extent reliably measurable. Where there is a risk of potential
claw back, an appropriate element of the commission receivable is deferred
and amortised over the claw back period. Where the relevant contract requires
the Bank to perform future services in respect of the income receivable, initial
commission is recognised on completion of the service provided, with an
element deferred to reflect services yet to be performed in future periods.

d) Sainsbury’s Bank other operating income
Margin from the sale of travel money, representing the difference between
the cost price and the selling price, is recognised when the sale to the
customer takes place within other operating income.

Cost of sales
Cost of sales consists of all costs to the point of sale including warehouse and
transportation costs and all the costs of operating retail outlets and, in the
case of Sainsbury’s Bank, interest expense on operating activities, calculated
using the effective interest method.

Supplier arrangements
Supplier incentives, rebates and discounts, collectively known as ‘supplier
arrangements’, are recognised within cost of sales on an accruals basis as
they are earned for each relevant supplier contract. The accrued value at the
reporting date is included in trade receivables or trade payables, depending
on the right of offset.

Financial Statements Notes to the financial statements continued
1 Accounting policies continued
The most common types of supplier arrangement, in order of magnitude,
which Sainsbury’s receives are:

— Discounts and supplier incentives – these represent the majority of all

supplier arrangements and are linked to individual unit sales. The incentive
is typically based on an agreed sum per item sold on promotion for a period
and therefore is considered part of the purchase price for that product.

— Fixed amounts – these are agreed with suppliers primarily to support
in-store activity including promotions, such as utilising specific space.

— Supplier rebates – these are typically agreed on an annual basis, aligned

with the Group’s financial year, with the rebate amount linked to
pre-agreed targets such as sales volumes.

Finance income and costs
For Sainsbury’s Bank, finance income and finance costs are recognised in
revenue and cost of sales, as discussed above.

Finance income and costs, excluding those arising from Sainsbury’s Bank, are
recognised in the income statement for financial assets and liabilities
measured at amortised cost using the effective interest method.

Interest paid and interest received for the purpose of the cash flow statement
relates to retail only, with Sainsbury’s Bank’s interest paid and interest
received included in the net operating cash flow.

Business combinations
The Group applies the acquisition method of accounting for business
combinations. The consideration transferred for the acquisition of a
subsidiary is the fair value of the assets transferred, the liabilities incurred and
the equity interests issued by the Group. The consideration transferred
includes the fair value of any asset or liability resulting from a contingent
consideration arrangement. Identifiable assets and liabilities acquired and
contingent liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date. The Group recognises any
non-controlling interest in the acquiree on an acquisition-by-acquisition
basis, either at fair value or at the non-controlling interest’s proportionate
share of the recognised amounts of the acquiree identifiable net assets.
Acquisition-related costs are expensed as incurred. If the business
combination is achieved in stages, the acquisition date fair value of the
acquirer’s previously held equity interest in the acquiree is re-measured to fair
value at the acquisition date through the income statement.

Intangible assets
a) Goodwill
Goodwill represents the excess of the fair value of the consideration of an
acquisition over the fair value of the Group’s share of the net identifiable
assets of the acquired subsidiary at the date of acquisition. Goodwill is
recognised as an asset on the Group’s balance sheet in the year in which it
arises, and is considered to have an indefinite useful life. Goodwill is tested for
impairment annually and again whenever indicators of impairment are
detected and is carried at cost less any provision for impairment.

b) Computer software
Computer software is carried at cost less accumulated amortisation and any
provision for impairment. Externally acquired computer software and
software licences are capitalised and amortised on a straight-line basis over
their useful economic lives of five to ten years. Costs relating to development
of computer software for internal use are capitalised once the recognition
criteria of IAS 38, ‘Intangible assets’ are met. Other development
expenditures that do not meet these criteria are expensed as incurred. When
the software is available for its intended use, these costs are amortised on a
straight-line basis over their useful economic lives of five to seven years
within administrative expenses.

c) Acquired intangible assets
Intangible assets acquired in a business combination are recognised at fair value
at the acquisition date. Intangible assets with finite useful economic lives are
carried at cost less accumulated amortisation and any provision for impairment
and are amortised on a straight-line basis over their estimated useful economic
lives, ranging from three to six years, within administrative expenses.

d) Other intangible assets
Pharmacy licences are carried at cost less accumulated amortisation and any
recognised provision for impairment and amortised on a straight-line basis
over the licence period of up to 15 years within cost of sales.

Other intangible assets are carried at cost less accumulated amortisation and
any provision for impairment. They are amortised on a straight-line basis over
their contractual useful economic lives within cost of sales.

Property, plant and equipment
a) Land and buildings
Land and buildings are stated at cost less accumulated depreciation and any
recognised provision for impairment. Capital work in progress is held at cost
less any recognised provision for impairment. Cost includes the original
purchase price of the asset and the costs incurred attributable to bringing the
asset to its working condition for its intended use. This includes capitalised
borrowing costs.

b) Fixtures and equipment
Fixtures, equipment and vehicles are held at cost less accumulated
depreciation and any recognised provision for impairment. Cost includes the
original purchase price of the asset and the costs attributable to bringing the
asset to its working condition for its intended use.

c) Depreciation
Depreciation is calculated to write down the cost of the assets to their residual
values, on a straight-line basis, using the following rates:

— Freehold buildings and leasehold properties – 50 years, or the lease term

if shorter

— Fixtures, equipment and vehicles – three to 15 years

— Freehold land is not depreciated

Capital work in progress is not depreciated.

Gains and losses on disposal are determined by comparing proceeds less any
associated costs of disposal with the asset’s carrying amount and are
recognised within operating profit. The assets’ residual values and useful lives
are reviewed, and adjusted if appropriate, at the end of each reporting period.

Impairment of non-financial assets
At each reporting date, the Group reviews the carrying amounts of its
property, plant and equipment and intangible assets to determine whether
there is any indication that those assets have suffered an impairment loss. If
any such indication exists, the recoverable amount of the asset, being the
higher of its fair value less costs to dispose and its value in use, is estimated in
order to determine the extent of the impairment loss.

Where the asset does not generate cash flows that are independent from
other assets, the Group estimates the recoverable amount of the cash-
generating unit (‘CGU’) to which the asset belongs. For retail property, plant
and equipment and intangible assets excluding goodwill, the CGU is deemed
to be each trading store or store pipeline development site. For retail goodwill,
the CGU is deemed to be each retail chain of stores acquired. Non-store
assets, including depots and IT assets, are reviewed separately, whilst
Sainsbury’s Bank is deemed a separate CGU.

Any impairment loss is recognised in the income statement in the year in
which it occurs. Where an impairment loss, other than an impairment loss on
goodwill, subsequently reverses due to a change in the original estimate, the
carrying amount of the asset is increased to the revised estimate of its
recoverable amount, or its original carrying value less notional accumulated
depreciation if lower.

Capitalisation of interest
Borrowing costs that are directly attributable to the acquisition or
construction of qualifying assets are capitalised to the cost of the asset, gross
of tax relief. See note 11 for further information.

Financial Statements1 Accounting policies continued
Assets and liabilities held for sale
Assets held for sale are stated at the lower of the carrying amount and fair
value less costs to dispose. Assets held for sale are not depreciated.

Assets and liabilities are classified as held for sale if their carrying amount is
to be recovered principally through a sale transaction rather than through
continuing use. This condition is regarded as met only when the sale is highly
probable and the assets and liabilities are available for sale in their present
condition. A sale should be expected to complete within one year from the date
of classification.

Leased assets
Leases are classified as finance leases when the terms of the lease transfer
substantially all the risks and rewards of ownership to the Group. All other
leases are classified as operating leases. For property leases, the land and
building elements are treated separately to determine the appropriate lease
classification.

a) Finance leases
Assets funded through finance leases are capitalised as property, plant and
equipment and depreciated over their estimated useful lives or the lease
term, whichever is shorter. The amount capitalised is the lower of the fair
value of the asset or the present value of the minimum lease payments
during the lease term at the inception of the lease. The resulting lease
obligations are included in liabilities net of finance charges. Finance costs
on finance leases are charged directly to the income statement.

b) Operating leases
Assets leased under operating leases are not recorded on the balance sheet.
Rental payments are charged directly to the income statement on a
straight-line basis over the lease term.

c) Sale and leaseback
A sale and leaseback transaction is one where a vendor sells an asset and
immediately reacquires the use of that asset by entering into a lease with the
buyer. The accounting treatment of the sale and leaseback depends upon the
substance of the transaction and whether or not the sale was made at the
asset’s fair value.

Cash and cash equivalents
Cash and bank balances in the Group balance sheet comprise cash in hand
and at bank, deposits at central banks, investments in money market funds
and deposits and other short-term highly liquid investments that are readily
convertible to a known amount of cash and are subject to an insignificant risk
of changes in value.

Bank overdrafts that are repayable on demand and form an integral part of
the Group’s cash management are included as a component of cash and cash
equivalents for the purposes of the cash flow statement.

Current tax
Current tax is accounted for on the basis of tax laws enacted or substantively
enacted at the balance sheet date. Current tax is charged or credited to the
income statement, except when it relates to items charged to equity or other
comprehensive income, in which case the current tax is also dealt with in
equity or other comprehensive income respectively.

Deferred tax
Deferred tax is accounted for on the basis of temporary differences arising
from differences between the tax base and accounting base of assets and
liabilities.

Deferred tax is recognised for all temporary differences, except to the extent
where it arises from the initial recognition of an asset or a liability in a
transaction that is not a business combination and, at the time of transaction,
affects neither accounting profit nor taxable profit. It is determined using tax
rates (and laws) that have been enacted or substantively enacted by the
balance sheet date and are expected to apply when the related deferred
income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets are recognised to the extent that it is probable that future
taxable profits will be available against which the temporary differences can
be utilised.

Deferred tax is charged or credited to the income statement, except when it
relates to items charged or credited directly to equity or other comprehensive
income, in which case the deferred tax is also dealt with in equity or other
comprehensive income respectively.

For sale and finance leasebacks, any apparent profit or loss from the sale
is deferred and amortised over the lease term. For sale and operating
leasebacks, generally the assets are sold at fair value, and the profit or loss
from the sale is recognised immediately in the income statement.

Deferred tax is provided on temporary differences associated with investments
in subsidiaries, branches and joint ventures except where the Group is able to
control the timing of the reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the foreseeable future.

Following initial recognition, the lease treatment is consistent with those
principles described above.

d) Lease incentives
Lease incentives primarily include up-front cash payments or rent-free
periods. Lease incentives are capitalised and spread over the period of the
lease term.

e) Leases with predetermined fixed rental increases
The Group has a number of leases with predetermined fixed rental increases.
These rental increases are accounted for on a straight-line basis over the term
of the lease.

f) Operating lease income
Operating lease income consists of rentals from sub-tenant agreements
and is recognised as earned on a straight-line basis over the lease term.

Inventories
Inventories comprise goods held for resale and properties held for, or in the
course of, development and are valued on a weighted average cost basis and
carried at the lower of cost and net realisable value. Net realisable value
represents the estimated selling price less all estimated costs of completion
and costs to be incurred in marketing, selling and distribution. Cost includes
all direct expenditure and other appropriate attributable costs incurred in
bringing inventories to their present location and condition.

Provisions
Provisions are recognised when there is a present legal or constructive
obligation as a result of a past event, for which it is probable that an outflow
of economic benefit will be required to settle the obligation, and where the
amount of the obligation can be reliably estimated. Provisions are measured
at the present value of the expenditures expected to be required to settle the
obligation using a pre-tax rate that reflects current market assessments of
the time value of money and the risks specific to the obligation. The increase
in the provision due to passage of time is recognised as interest expense.

a) Onerous leases
The need for provisions for onerous leases, measured net of expected rental
income, is assessed when the leased property becomes vacant and is no
longer used in the operations of the business or when the leased property
relates to an unprofitable trading store. Onerous lease provisions are
recognised after any impairment of assets. Provisions for dilapidation costs
are recognised on a lease-by-lease basis.

b) Onerous contracts
Provisions for onerous contracts are recognised where expected cash outflows
exceed the anticipated future benefits. The amounts provided are based on
the Group’s best estimate of the likely committed outflow net of anticipated
future benefits and after any impairment of pipeline development site assets
where applicable.

Financial Statements Notes to the financial statements continued1 Accounting policies continued
c) Restructuring
A restructuring provision is recognised when the Group has developed a detailed
formal plan for the restructuring and has raised a valid expectation in those
affected that it will carry out the restructuring by starting to implement the plan
or announcing its main features to those affected by it. The measurement of a
restructuring provision includes only the direct expenditures arising from the
restructuring, which are those amounts that are both necessarily entailed by
the restructuring and not associated with the ongoing activities of the entity.

Employee benefits
a) Pensions
The Group operates various defined benefit and defined contribution pension
schemes for its employees. A defined benefit scheme is a pension plan that
defines an amount of pension benefit that an employee will receive on
retirement. A defined contribution scheme is a pension plan under which the
Group pays fixed contributions into a separate entity. The defined benefit
pension scheme is now closed to new employees and future accrual.

In respect of the defined benefit pension scheme, the pension scheme
surplus or deficit recognised in the balance sheet represents the difference
between the fair value of the plan assets and the present value of the defined
benefit obligation at the balance sheet date. The defined benefit obligation is
actuarially calculated on an annual basis using the projected unit credit
method. Plan assets are recorded at fair value.

The income statement charge consists of a financing charge, which is the net
of interest cost on pension scheme liabilities and interest income on plan
assets and defined benefit pension scheme expenses. The financing charge
is determined by applying the discount rate used to measure the defined
benefit obligation to the pension scheme liabilities and plan assets at the
beginning of the financial year.

Payments to defined contribution pension schemes are charged as an
expense as they fall due. Any contributions unpaid at the balance sheet date
are included as an accrual as at that date. The Group has no further payment
obligations once the contributions have been paid.

b) Long service awards
The costs of long service awards are accrued over the period the service is
provided by the employee when it is probable that settlement will be required
and they are capable of being measured reliably. Liabilities recognised in
respect of long-term employee benefits are measured at the present value of
the estimated future cash outflows to be made by the Group in respect of
services provided by employees up to the reporting date.

Share-based payments
The Group provides benefits to employees (including Directors) of the Group
in the form of equity-settled and cash-settled share-based payment
transactions, whereby employees render services in exchange for shares,
rights over shares or the value of those shares in cash terms.

For equity-settled share-based payments, the fair value of the employee
services rendered is determined by reference to the fair value of the shares
awarded or options granted, excluding the impact of any non-market vesting
conditions. All share options are valued using an option-pricing model
(Black-Scholes or Monte Carlo). This fair value is charged to the income
statement over the vesting period of the share-based payment scheme.

For cash-settled share-based payments, the fair value of the employee
services rendered is determined at each balance sheet date and the charge
recognised through the income statement over the vesting period of the
share-based payment scheme, with the corresponding increase in accruals.

The value of the charge is adjusted in the income statement over the
remainder of the vesting period to reflect expected and actual levels of options
vesting, with the corresponding adjustments made in equity and accruals.

The grant by the Company of options over its equity instruments to the
employees of subsidiary undertakings in the Group is treated as a capital

contribution. The fair value of employee services received, measured by
reference to the grant date fair value, is recognised over the vesting period as
an increase to investment in subsidiary undertakings, with a corresponding
credit to equity.

Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new ordinary shares or options are shown in
equity as a deduction, net of tax, from the proceeds.

Perpetual securities
Perpetual securities (perpetual capital securities and perpetual convertible
bonds) are issued securities that qualify for recognition as equity. Accordingly
any periodic returns are accounted for as dividends and recognised directly in
equity and as a liability at the time the Company becomes obligated to pay the
periodic return. Any associated tax impacts are recognised directly in equity.

Foreign currencies
a) Foreign operations
On consolidation, assets and liabilities of foreign operations are translated
into sterling at year-end exchange rates. The results of foreign operations
are translated into sterling at average rates of exchange for the year.
The functional currency of the Company is sterling.

b) Foreign currency transactions
Transactions denominated in foreign currencies are translated at the
exchange rate at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated at
the exchange rate ruling at that date. Foreign exchange differences arising on
translation are recognised in the income statement.

Financial instruments
a) Financial assets
The Group classifies its financial assets in the following categories: at fair
value through profit or loss (‘FVTPL’), loans and receivables, and available-for-
sale (‘AFS’). AFS investments are initially measured at fair value including
transaction costs. Financial assets held at FVTPL are initially recognised at fair
value and transaction costs are expensed.

Financial assets at FVTPL include financial assets held for trading and those
designated at FVTPL at inception. Derivatives are classified as held for trading
unless they are accounted for as an effective hedging instrument. Financial
assets at FVTPL are recorded at fair value, with any fair value gains or losses
recognised in the income statement in the period in which they arise.

Available-for-sale financial assets are non-derivatives that are either
designated in this category or not classified in any of the other categories.
They are included in non-current assets unless management intends to
dispose of the investment within 12 months of the balance sheet date.
Subsequent to initial recognition at fair value plus transaction costs, these
assets are recorded at fair value with the movements in fair value recognised
in other comprehensive income until the financial asset is derecognised or
impaired at which time the cumulative gain or loss previously recognised in
other comprehensive income is recognised in the income statement.
Dividends on AFS equity instruments are recognised in the income statement
when the entity’s right to receive payment is established. Interest on AFS debt
instruments is recognised using the effective interest method.

Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. The Group
has no intention of trading these loans and receivables. They include
amounts due from Sainsbury’s Bank customers and amounts due from other
banks. Subsequent to initial recognition at fair value plus transaction costs,
these assets are carried at amortised cost less impairment using the effective
interest method. Income from these financial assets is calculated on an
effective yield basis and is recognised in the income statement.

Financial assets are derecognised when the rights to receive cash flows from
the financial assets have expired or where the Group has transferred
substantially all risks and rewards of ownership.

Financial Statements1 Accounting policies continued
b) Impairment of financial assets
An assessment of whether there is objective evidence of impairment is
carried out for all financial assets or groups of financial assets at the balance
sheet date. This assessment may be of individual assets (‘individual
impairment’) or of a portfolio of assets (‘collective impairment’). A financial
asset or a group of financial assets is considered to be impaired if, and only if,
there is objective evidence of impairment as a result of one or more events
that occurred after the initial recognition of the asset (a ‘loss event’) and that
loss event (or events) has an impact on the estimated future cash flows of the
financial asset or group of financial assets that can be reliably estimated.

For individual impairment, the principal loss event is one or more missed
payments, although other loss events can also be taken into account,
including arrangements in place to pay less than the contractual payments,
fraud and bankruptcy or other financial difficulty indicators. An assessment
of collective impairment will be made of financial assets with similar risk
characteristics. For these assets, portfolio loss experience is used to provide
objective evidence of impairment.

Where there is objective evidence that an impairment loss exists on loans and
receivables, impairment provisions are made to reduce the carrying value of
financial assets to the present value of estimated future cash flows
discounted at the financial asset’s original effective interest rate.

For financial assets carried at amortised cost, the charge to the income
statement reflects the movement in the level of provisions made, together
with amounts written off net of recoveries in the year.

In the case of equity investments classified as available-for-sale, a significant
or prolonged decline in the fair value of the asset below its cost is considered
in determining whether the asset is impaired. If any such evidence exists for
available-for-sale financial assets, the cumulative loss is removed from equity
and recognised in the income statement. The cumulative loss is measured as
the difference between the acquisition cost and the current fair value, less
any impairment loss on that financial asset previously recognised in the
income statement.

Impairment losses recognised in the income statement on equity
instruments are not reversed. If, in a subsequent period, the fair value of a
debt instrument classified as available-for-sale increases and the increase can
be objectively related to an event occurring after the impairment loss was
recognised in the income statement, the impairment loss is reversed through
the income statement.

Interest will continue to accrue on all financial assets, based on the written
down balance. Interest is calculated using the rate of interest used to discount
the future cash flows for the purpose of measuring the impairment loss. To the
extent that a provision may be increased or decreased in subsequent periods,
the recognition of interest will be based on the latest balance net of provision.

c) Sainsbury’s Bank loans and advances including impairment
For Sainsbury’s Bank’s portfolios of loans, such as credit card lending and
personal loans, impairment provisions are calculated for groups of assets,
otherwise impairment is identified at a counterparty specific level following
objective evidence that a financial asset is impaired. Such evidence may
include a missed interest or principal payment or the breach of a banking
covenant. Provisioning on unsecured balances identified as being in arrears is
calculated based on past experience, with regularly updated assumptions.
The present value of estimated cash flows recoverable is determined after
taking into account any security held. The amount of impairment is
calculated by comparing the present value of the cash flows discounted at
the loan’s original effective interest rate with the balance sheet carrying value.
If impaired, the carrying value is adjusted and the difference charged to the
income statement and a provision recognised in the balance sheet.

The written down value of the impaired loan is compounded back to its net
realisable balance over time using an effective interest rate. This is reported
through interest receivable within the income statement and represents the
unwinding of the discount.

100

A write-off is made when all or part of a claim is deemed uncollectable or forgiven.
Write-offs are charged against previously established provisions for impairment
or directly to the income statement. Subsequent recoveries of amounts
written off decrease the charge for loan impairment in the income statement.

An allowance for impairment losses is also maintained in respect of assets
which are impaired at the balance sheet date but which have not been
identified as such, based on historical loss experience and other relevant
factors. This includes analysis of the likelihood of a particular balance to move
into an arrears status within a defined period of time and application of an
appropriate loss rate. The emergence period into an arrears state represents
the average time elapsed between the loss trigger event and default.
The methodology and assumptions used are regularly reviewed to reduce
any differences between estimates and actual results.

Interest-bearing bank loans, overdrafts, other deposits and amounts due to
Sainsbury’s Bank customers are recorded initially at fair value, which is
generally the proceeds received, net of direct issue costs. Subsequently, these
liabilities are held at amortised cost using the effective interest method.

d) Financial liabilities
Finance charges, including premiums payable on settlement or redemption
and direct issue costs, are accounted for on an accrual basis in the income
statement using the effective interest method and are added to the carrying
amount of the instrument to the extent that they are not settled in the period
in which they arise.

The fair value of the liability component of a convertible bond is determined
using the market interest rate for an equivalent non-convertible bond. This
amount is recorded as a liability on an amortised cost basis until extinguished
on conversion or maturity of the bonds. The remainder of the proceeds are
allocated to the conversion option. This is recognised and included in
shareholders’ equity, net of income tax effects and is not subsequently
re-measured.

Issue costs are apportioned between the liability and the equity components
of the convertible bonds based on their carrying amounts at the date of issue.
The portion relating to the equity component is charged directly against equity.

e) Fair value estimation
The methods and assumptions applied in determining the fair values of
financial assets and financial liabilities are disclosed in note 30.

f) Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in
the balance sheet when there is a legally enforceable right to offset the
recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously. The legally
enforceable right must not be contingent on future events and must be
enforceable in the normal course of business and in the event of default,
insolvency or bankruptcy of the company or the counterparty.

Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments to hedge its exposure to
foreign exchange, interest rate and commodity risks. All derivative financial
instruments are initially measured at fair value on the contract date and are
also measured at fair value at subsequent reporting dates. Where derivatives
do not qualify for hedge accounting, any changes in the fair value of the
derivative financial instrument are recognised in the income statement as
finance income or costs as they arise.

To qualify for hedge accounting, the Group documents, at the inception of the
hedge, the hedging risk management strategy, the relationship between the
hedging instrument and the hedged item or transaction and the nature of the
risks being hedged. The Group also documents the assessment of the
effectiveness of the hedging relationship, to show that the hedge has been
and will be highly effective on an ongoing basis.

Where a derivative does qualify for hedge accounting, any changes in fair
value are recognised depending on the nature of the hedge relationship and
the item being hedged as follows:

Financial Statements Notes to the financial statements continued1 Accounting policies continued
a) Cash flow hedges
Hedge relationships are classified as cash flow hedges where the derivative
financial instruments hedge the Group’s exposure to variability in cash flows
resulting from a highly probable forecasted transaction. These include the
exchange rate risk of inventory purchases denominated in foreign currency,
as well as the commodity risk on purchases of power and fuel. Changes in the
fair value of derivative financial instruments that are designated and effective
as hedges of future cash flows are recognised directly in other comprehensive
income and the ineffective portion is recognised immediately in the income
statement. If the cash flow hedge of a firm commitment or forecast
transaction results in the recognition of a non-financial asset or liability, then,
at the time the asset or liability is recognised, the associated gains or losses
on the derivative that had previously been recognised in other comprehensive
income are included in the initial measurement of the asset or liability. For
more information on the cash flow hedges within the Group, see note 30.

b) Fair value hedges
Hedge relationships are classified as fair value hedges where the derivative
financial instruments hedge the change in the fair value of a financial asset
or liability due to movements in interest rates. The changes in fair value of
the hedging instrument are recognised in the income statement. The hedged
item is also adjusted for changes in fair value attributable to the hedged risk,
with the corresponding adjustment made in the income statement. For more
information on the fair value hedges within the Group, see note 30.

c) Portfolio fair value hedging
During the period the Bank used portfolio fair value hedging as a risk
management tool for hedging interest rate risk on the personal loans
portfolio. Portfolio fair value hedging allows the designation of the whole or
part of a portfolio of assets or liabilities with similar risk exposures. The
hedged item can be designated based on expected maturities to match the
hedging derivative maturity.

Hedge accounting is discontinued when the hedging instrument expires or is
sold, terminated, or exercised, or no longer qualifies for hedge accounting. At
that time, any cumulative gain or loss on the hedging instrument recognised
in other comprehensive income is retained in equity until the forecasted
transaction occurs. If a hedged transaction is no longer expected to occur, the
net cumulative gain or loss recognised in other comprehensive income is
transferred to the income statement for the period.

2 Significant accounting judgements, estimates and
assumptions
The preparation of financial statements in conformity with IFRSs requires the
use of judgements, estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Those which are significant to the Group are discussed separately below:

Judgements
In the process of applying the Group’s accounting policies, management has
made the following judgements, which have the most significant effect on
the amounts recognised in the consolidated financial statements:

a) Assets and liabilities held for sale
At each balance sheet date management assesses whether any assets and
liabilities, whose carrying amount will be recovered through a sale transaction
rather than continued use, meet the definition of held for sale. Where there is
an active plan in place to locate a buyer, management consider such assets
and liabilities to meet the criteria to be classified as held for sale if they are
available for immediate sale and the sale is highly probable.

For more information on the assets and liabilities held for sale, refer to note 18.

b) Operating lease commitments
The Group is party to commercial property leases on a number of its stores.
At inception of each lease, the terms and conditions of the arrangements are
evaluated to assess whether the lease terms constitute a major part of the
economic life of the assets and whether the present value of the minimum
lease payments amount to substantially all of the fair value of the
commercial property. Where there is no evidence of this, management
concludes that all the significant risks and rewards of ownership do not
transfer to the Group and these leases are accounted for as operating leases.

c) Consolidation of structured entities
A structured entity is one in which Sainsbury’s does not hold the majority
interest but for which management has concluded that voting rights are not
the dominant factor in deciding who controls the entity. In making such an
assessment, management considers the terms of the arrangement to assess
who has responsibility for the management of the entity and its assets.
Where Sainsbury’s has this responsibility, it is deemed that the Group
controls the entity and it is fully consolidated into the Group accounts.

Estimates and assumptions
The areas where assumptions and estimates are significant to the financial
statements are as described below. The estimates and associated
assumptions are based on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results of which
form the basis of making the judgements about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates.

a) Goodwill impairment
The Group is required to assess whether goodwill has suffered any impairment
loss, based on the recoverable amount of the CGU or group of CGUs to which it
is allocated. The recoverable amounts of the CGUs have been determined
based on value in use calculations and these calculations require the use of
estimates in relation to future cash flows and suitable discount rates as
disclosed in note 12. Actual outcomes could vary from these estimates.

b) Impairment of assets other than goodwill
Financial and non-financial assets are subject to impairment reviews based
on whether current or future events and circumstances suggest that their
recoverable amount may be less than their carrying value. Recoverable
amount is based on the higher of the value in use and fair value less costs to
dispose. Value in use is calculated from expected future cash flows using
suitable discount rates and includes management assumptions and
estimates of future performance as disclosed in note 11.

Impairment loss calculations on loans and advances within Sainsbury’s Bank
(note 17(b)) involve the estimation of future cash flows of financial assets,
based on observable data at the balance sheet date and historical loss
experience for assets with similar credit risk characteristics. This will typically
take into account the level of arrears, security, past loss experience and
default levels. These calculations are undertaken on a portfolio basis using
various statistical modelling techniques.

Impairment models are continually reviewed to ensure data and assumptions
are appropriate, with the most material assumption being around expected
loss rates. The accuracy of any such impairment calculation will be affected
by unexpected changes to the economic situation, and assumptions which
differ from actual outcomes. As such, judgement is applied when determining
the levels of provisioning.

101

Financial Statements2 Significant accounting judgements, estimates and
assumptions continued
c) Post-employment benefits
The Group operates a defined benefit scheme for its employees. The present
value of the scheme’s liabilities recognised at the balance sheet date and the
net financing charge recognised in the income statement are dependent on
interest rates of high quality corporate bonds. Other key assumptions within
this calculation are based on market conditions or estimates of future events,
including mortality rates, as set out in note 31. Any changes to assumptions
used will impact the carrying value of the retirement benefit obligation. As
detailed in note 31, the retirement benefit obligations are most sensitive to
changes in the discount rate.

d) Provisions
Provisions have been made for onerous leases, onerous contracts,
dilapidations, restructuring, long service awards and self-insured claims.
These provisions are estimates and the actual costs and timing of future cash
flows are dependent on future events and market conditions. Any difference
between expectations and the actual future liability will be accounted for in
the period when such determination is made. The carrying amount of
provisions will be impacted by changes in the discount rate. Details of
provisions are set out in note 22.

e) Income taxes
The Group recognises expected liabilities for tax based on an estimation of
the likely taxes due, which requires significant judgement as to the ultimate
tax determination of certain items. Where the actual liability arising from
these items differs from these estimates, such differences will have an impact
on income tax and deferred tax provisions in the period when such
determination is made. Details of the tax charge and deferred tax are set out
in notes 8 and 21 respectively.

f) Determining fair values
The fair value of financial assets and liabilities are based on prices available
from the market on which the instruments are traded. Where market values
are not available, the fair values of financial assets and liabilities have been
calculated by discounting expected future cash flows at prevailing interest
rates. The fair values of short-term deposits, trade receivables, overdrafts and
payables are assumed to approximate to their book values.

g) Supplier arrangements
Supplier incentives, rebates and discounts, collectively known as ‘supplier
arrangements’, represent a material deduction to cost of sales and directly
affect the Group’s reported margin. The arrangements can be complex, with
amounts spanning multiple products over different time periods, and there
can be multiple triggers and discounts. The three key types are explained in
the cost of sales accounting policy on pages 96 and 97. The areas requiring a
level of judgement and estimation involved are considered below:

— Fixed amounts – these involve a degree of judgement and estimation in

ensuring the appropriate cut-off of arrangements for fixed amounts which
span period-end. These require judgement to determine when the terms
of the arrangement are satisfied and that amounts are recognised in the
correct period.

— Supplier rebates – these are agreed with a supplier on an annual basis and
require estimates of the amount earned up to the balance sheet date, for
each relevant supplier contract. Where agreements span a financial
period-end, estimations are required of projected turnover and judgement
may also need to be applied to determine the rebate level earned as
agreements may involve multiple tiers. In order to minimise any risk
arising from estimation, supplier confirmations are obtained to agree the
value to be recognised at year-end, prior to it being invoiced. Rebates
represent the smallest element of Sainsbury’s supplier arrangements and
by aligning the agreements to Sainsbury’s financial year, where possible,
the judgements required are minimised.

Supplier arrangement amounts recognised in the income statement for the
above two categories in the financial year are as follows:

Supplier arrangements recognised in
cost of sales
Supplier rebates
Fixed amounts
Total supplier arrangements

2016
£m

69
302
371

Of the above amounts, the following was outstanding and held on the
balance sheet at year-end:

Within current trade receivables
Supplier arrangements due

Within current trade payables
Supplier arrangements due
Accrued supplier arrangements

2016
£m

39
25

2015
£m

88
551
639

2015
£m

94
47

3 Non-GAAP performance measures
Certain items recognised in reported profit or loss before tax can vary
significantly from year to year and therefore create volatility in reported
earnings which does not reflect the Group’s underlying performance.
Similarly, whilst defined benefit pension scheme expenses may not vary
significantly, they no longer relate to the Group’s ongoing activities given the
closure of the defined benefit pension scheme to future accrual. In addition
the coupons on the perpetual securities, whilst accounted for as equity in line
with IAS 32 ‘Financial instruments: Presentation’, are accrued on a straight-
line basis and included as an expense within underlying profit.

The Directors believe that the ‘underlying revenue’, ‘underlying profit before
tax’ (‘UPBT’) and ‘underlying diluted and basic earnings per share’ measures
presented provide a clear and consistent presentation of the underlying
performance of Sainsbury’s ongoing business for shareholders. Underlying
profit is not defined by IFRS and therefore may not be directly comparable
with the ‘adjusted’ profit measures of other companies.

The adjusted items are:

— Profit on disposal of properties;

— Investment property fair value movements – these reflect the difference
between the fair value of an investment property at the reporting date
and its carrying amount at the previous reporting date;

— Retail financing fair value movements – these are fair value gains and
losses on non-derivative financial assets and liabilities carried at
amortised cost, on derivatives relating to financing activities and on
hedged items in fair value hedges;

— The financing element of IAS 19 and defined benefit pension scheme

expenses;

— Coupons on perpetual securities – these are accounted for as equity in line
with IAS 32 ‘Financial instruments: Presentation’, however are accrued on
a straight-line basis and included as an expense within underlying profit
(see note 25);

— Acquisition adjustments – these reflect the adjustments arising from
the Sainsbury’s Bank acquisition including the fair value unwind and
amortisation of acquired intangibles; and

— One-off items – these are items which are material and infrequent in
nature and do not relate to the Group’s underlying performance.

102

Financial Statements Notes to the financial statements continued3 Non-GAAP performance measures continued
The adjustments made to reported profit/(loss) before tax to arrive at underlying profit before tax are:

Underlying profit before tax
Profit on disposal of properties1
Investment property fair value movements
Retail financing fair value movements2
IAS 19 pension financing charge and scheme expenses3
Perpetual securities coupons4
Acquisition adjustments5
One-off items
Total adjustments
Profit/(loss) before tax

2016
£m
587
101
(18)
(22)
(28)
15
3
(90)
(39)
548

2015
£m
681
7
7
(30)
(37)
–
13
(713)
(753)
(72)

1. Profit on disposal of properties for the financial year comprised £100 million for the Group (2015: £5 million) and £1 million for the property joint ventures (2015: £2 million).
2. Retail financing fair value movements for the financial year comprised £(20) million for the Group (2015: £(23) million) and £(2) million for the joint ventures (2015: £(7) million).
3. Comprises pension financing charge of £(22) million (2015: £(31) million) and defined benefit scheme expenses of £(6) million (2015: £(6) million).
4. The coupons on the perpetual subordinated capital securities and the perpetual subordinated convertible bonds are accounted for as equity in line with IAS 32 ‘Financial instruments: Presentation’,

however are accrued on a straight-line basis and included as an expense within underlying profit before tax.

5. Acquisition adjustments include £11 million (2015: £23 million) fair value unwind included in revenue, £2 million (2015: £8 million) fair value unwind included in cost of sales offset by £(10) million (2015:

£(18) million) acquired intangible amortisation included in administrative expenses.

The tax impact of adjusted items is included within note 8.

One-off items
One-off items of £(90) million (2015: £(713) million) include:

Net impairment and onerous contract charge
Sainsbury’s Bank transition
Pension compensation payments
Internal restructuring
Transaction costs1

2016
£m
(1)
(59)
–
(15)
(15)
(90)

2015
£m
(628)
(53)
(17)
(15)
–
(713)

1. Transaction costs in 2016 are those incurred as part of the approach to Home Retail Group plc and the sale of the pharmacy business.

4 Segment reporting
The Group’s businesses are organised into three operating segments:

— Retailing (supermarkets and convenience);

— Financial services (Sainsbury’s Bank); and

— Property investments (joint ventures with the British Land Company PLC and Land Securities Group PLC).

Management has determined the operating segments based on the information provided to the Operating Board (the Chief Operating Decision Maker for the
Group) to make operational decisions on the management of the Group. All material operations and assets are in the UK. The business of the Group is not
subject to highly seasonal fluctuations, although within retailing there is an increase in trading in the period leading up to Christmas.

Revenue from operating segments is measured on a basis consistent with the revenue number in the income statement. Revenue is generated by the sale of
goods and services, as set out in note 1.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment
capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period.

The Operating Board assesses the performance of all segments on the basis of underlying profit before tax. The reconciliation provided below reconciles
underlying operating profit from each of the segments disclosed to profit/(loss) before tax.

103

Financial Statements4 Segment reporting continued

52 weeks to 12 March 2016
Segment revenue
Retail sales to external customers
Financial services to external customers
Underlying revenue
Acquisition adjustment fair value unwind1
Revenue
Underlying operating profit
Underlying finance income
Underlying finance costs2
Underlying share of post-tax (loss)/profit from joint ventures and associates
Underlying profit before tax
Profit on disposal of properties
Investment property fair value movements
Retail financing fair value movements
IAS 19 pension financing charge and scheme expenses
Perpetual securities coupons2
Acquisition adjustments
One-off items:
Net impairment and onerous contract charge
Sainsbury’s Bank transition

Internal restructuring

Transaction costs
Profit/(loss) before tax
Income tax expense
Profit for the financial year

Assets
Investment in joint ventures and associates
Segment assets
Segment liabilities

Other segment items
Capital expenditure3
Depreciation expense
Amortisation expense4
Net impairment and onerous contract charge5
Share-based payments

Retailing
£m

23,168
–
23,168
–
23,168
635
19
(140)
(7)
507
100
–
(20)
(28)
15
–

(1)
–
(15)
(15)
543

Financial
services
£m

Property
investments
£m

–
327
327
11
338
65
–
–
–
65
–
–
–
–
–
3

–
(59)
–
–
9

–
–
–
–
–
–
–
–
15
15
1
(18)
(2)
–
–
–

–
–
–
–
(4)

Group
£m

23,168
327
23,495
11
23,506
700
19
(140)
8
587
101
(18)
(22)
(28)
15
3

(1)
(59)
(15)
(15)
548
(77)
471

12,115
16
12,131
(6,727)

4,531
–
4,531
(3,881)

–
311
311
–

16,646
327
16,973
(10,608)

654
552
14
(1)
22

35
7
11
–
1

–
–
–
–
–

689
559
25
(1)
23

1. Represents fair value unwind on loans and advances to customers resulting from the Sainsbury’s Bank acquisition.
2. The coupons on the perpetual capital securities and the perpetual convertible bonds are accounted for as equity in line with IAS 32 ‘Financial instruments: Presentation’, however are accrued on a

straight-line basis and included as an expense within underlying finance costs, as detailed in note 3.

3. Retail capital expenditure consists of property, plant and equipment additions of £635 million and intangible asset additions of £19 million. Financial services capital expenditure consists of property, plant

and equipment additions of £20 million and intangible asset additions of £15 million.

4. Amortisation expense within the financial services segment includes £10 million of intangible asset amortisation arising from Sainsbury’s Bank acquisition fair value adjustments.
5. Net impairment and onerous contract charge includes a £9 million impairment reversal recognised against property, plant and equipment as detailed in note 11.

104

Financial Statements Notes to the financial statements continued

4 Segment reporting continued

52 weeks to 14 March 2015
Segment revenue
Retail sales to external customers
Financial services to external customers
Underlying revenue
Acquisition adjustment fair value unwind1
Revenue
Underlying operating profit
Underlying finance income
Underlying finance costs
Underlying share of post-tax (loss)/profit from joint ventures and associates
Underlying profit before tax
Profit on disposal of properties
Investment property fair value movements
Retail financing fair value movements
IAS 19 pension financing charge and scheme expenses
Acquisition adjustments
One-off items:

Impairment and onerous contract charge

Sainsbury’s Bank transition
Internal restructuring costs

Pension compensation payments
(Loss)/profit before tax
Income tax expense
Loss for the financial year

Assets
Investment in joint ventures and associates
Segment assets
Segment liabilities

Other segment items
Capital expenditure2
Depreciation expense
Amortisation expense3
Impairment4
Share-based payments

Financial
services
£m

Property
investments
£m

Retailing
£m

23,443
–
23,443
–
23,443
720
19
(126)
(9)
604
5
–
(23)
(37)
–

(628)
–
(17)
(15)
(111)

–
309
309
23
332
62
–
–
–
62
–
–
–
–
13

–
(53)
–
–
22

11,908
8
11,916
(7,232)

4,270
–
4,270
(3,766)

968
540
14
548
21

82
5
20
–
–

Group
£m

23,443
309
23,752
23
23,775
782
19
(126)
6
681
7
7
(30)
(37)
13

(628)
(53)
(17)
(15)
(72)
(94)
(166)

16,178
359
16,537
(10,998)

1,050
545
34
548
21

–
–
–
–
–
–
–
–
15
15
2
7
(7)
–
–

–
–
–
–
17

–
351
351
–

–
–
–
–
–

1. Represents fair value unwind on loans and advances to customers resulting from the Sainsbury’s Bank acquisition.
2. Retail capital expenditure consists of property, plant and equipment additions of £951 million and intangible asset additions of £17 million. Financial services capital expenditure consists of property, plant

and equipment additions of £14 million and intangible asset additions of £68 million.

3. Amortisation expense within the financial services segment includes £18 million of intangible asset amortisation arising from Sainsbury’s Bank acquisition fair value adjustments.
4. Impairment charge includes £540 million recognised against property, plant and equipment and £8 million against intangible assets, as detailed in note 11 and note 12.

105

Financial Statements

5 Operating profit

Operating profit is stated after charging/(crediting) the following items:
Employee costs (note 7)
Depreciation expense (note 11)
Amortisation expense (note 12)1
Profit on disposal of properties (note 3)
Operating lease rentals:
Land and buildings
Other leases
Sublease payments receivable
Foreign exchange losses/(gains)
Impairment losses on loans and advances
Acquisition adjustments (note 3)
One-off items (note 3)2,3

2016
£m

2,541
559
25
(100)

532
73
(49)
24
15
(3)
90

2015
£m

2,445
545
34
(5)

516
72
(41)
(12)
21
(13)
713

1. Amortisation expense includes £10 million (2015: £18 million) amortisation on acquired intangibles resulting from the Sainsbury’s Bank acquisition fair value adjustments also included in acquisition

adjustments in this note.

2. One-off items includes £8 million (2015: £17 million) employee restructuring costs also included in employee costs in this note.
3. One-off items includes an impairment reversal of £9 million (2015: £540 million charge) recognised against property, plant and equipment and a charge of £nil (2015: £8 million) against intangible assets,

as detailed in note 11 and note 12.

Group
Auditors’ remuneration1
Fees payable to the Company’s auditors for the audit of the parent company and consolidated financial statements
Fees payable to the Company’s auditors for other services:
— The audit of the Company’s subsidiaries
— Audit related assurance services
— Tax advisory, tax compliance, and other non-audit fees
Total fees

1. The prior year also included £0.3 million of audit fees relating to Sainsbury’s Bank by PricewaterhouseCoopers LLP.

6 Finance income and finance costs1,2

Interest on bank deposits and other financial assets
Finance income

Interest costs:

Secured borrowings
Unsecured borrowings
Obligations under finance leases
Provisions – amortisation of discount (note 22)

Other finance costs:

Interest capitalised – qualifying assets (note 11)
Retail financing fair value movements3
IAS 19 pension financing charge (note 31)

Finance costs

2016
£m

0.3

0.4
0.1
–
0.8

2016
£m
19
19

(88)
(30)
(9)
(5)
(132)

7
(20)
(22)
(35)
(167)

2015
£m

0.3

0.7
0.1
0.1
1.2

2015
£m
19
19

(84)
(47)
(9)
(3)
(143)

17
(23)
(31)
(37)
(180)

1. Sainsbury’s Bank’s interest income is reported in revenue and interest cost is reported in cost of sales, and therefore not included in this note.
2. The coupons on the perpetual capital securities and the perpetual convertible bonds (included within underlying profit – see note 3) are accounted for as dividends in accordance with IAS 32 ‘Financial

instruments: Presentation’ and hence are not a finance cost.

3. Retail financing fair value movements include net fair value movements on derivative financial instruments not designated in a hedging relationship of £(20) million (2015: £(18) million) and fair value

movements on early repayment of bank loans carried at amortised cost of £nil (2015: £(5) million).

106

Financial Statements Notes to the financial statements continued

7 Employee costs

Employee costs for the Group during the year amounted to:

Wages and salaries, including bonus and termination benefits
Social security costs
Pension costs – defined contribution schemes
Share-based payments expense (note 32)

The average number of employees, including Directors, during the year was:

Full-time
Part-time

Full-time equivalent

Details of key management compensation can be found in note 37 and within the Directors’ Remuneration Report on pages 66 to 79.

8 Income tax expense

Current tax expense:

Current year UK tax
Current year overseas tax
Over-provision in prior years
Total current tax expense

Deferred tax credit:

Origination and reversal of temporary differences
Under-provision in prior years
Revaluation of deferred tax balances
Total deferred tax credit (note 21)

Total income tax expense in income statement

Underlying tax rate
Effective tax rate

2016
£m

2,272
148
98
23
2,541

2015
£m

2,180
144
100
21
2,445

Number
000s

48.0
114.7
162.7
108.3

48.9
112.2
161.1
107.4

2016
£m

105
–
(17)
88

17
7
(35)
(11)

2015
£m

123
1
(26)
98

(25)
20
1
(4)

25.8%
20.8%
14.1% (130.6)%

The effective tax rate of 14.1 per cent (2015: (130.6) per cent) is lower than (2015: lower than) the standard rate of corporation tax in the UK. The differences
are explained below:

Profit/(loss) before tax

Income tax at UK corporation tax rate of 20.05% (2015: 21.09%)
Effects of underlying items:

Disallowed depreciation on UK properties
Over-provision in prior years
Revaluation of deferred tax balances
Other

Effects of non-underlying items:
Profit on disposal of properties
Investment property fair value movements
Revaluation of deferred tax balances
Over-provision in prior years
Impairment
Other one-off items

Total income tax expense in income statement

2016
£m
548

110

26
(1)
(20)
(1)

(21)
4
(15)
(9)
–
4
77

2015
£m
(72)

(15)

30
(5)
1
6

(6)
(1)
–
(1)
84
1
94

107

Financial Statements
8 Income tax expense continued
The tax impact of items excluded from underlying profit is shown below:

Income tax expense on underlying profit
Tax on items excluded from underlying profit:

Profit on disposal of properties
Retail financing fair value movements
IAS 19 pension financing charge and scheme expenses
Perpetual securities coupon
Acquisition adjustments
One-off items
Revaluation of deferred tax balances

Total income tax expense in income statement

2016
£m
122

(2)
(4)
(6)
3
(1)
(20)
(15)
77

2015
£m
176

(10)
(5)
(8)
–
4
(63)
–
94

Reductions in the UK corporation tax rate were substantively enacted in the year. The main rate of corporation tax was reduced from 20 per cent to 19 per cent
effective from 1 April 2017 and to 18 per cent from 1 April 2020. Deferred tax on temporary differences and tax losses as at the balance sheet date is calculated
at the substantively enacted rates at which the temporary differences and tax losses are expected to reverse. A further reduction in the corporation tax rate to
17 per cent, rather than 18 per cent, from 1 April 2020 was announced in the 2016 Budget. However, this further rate change was not substantively enacted at
the balance sheet date, so its effect is not reflected in these financial statements.

The effect of a one per cent reduction in the corporation tax rate on the deferred tax balances at the balance sheet date would reduce the deferred tax liability
by £13 million which is primarily recognised in the income statement.

Income tax charged or (credited) to equity and/or other comprehensive income during the year is as follows:

52 weeks to 12 March 2016
Current tax recognised in equity or other comprehensive income
Deferred tax recognised in equity or other comprehensive income
Income tax charged/(credited)

52 weeks to 14 March 2015
Current tax recognised in equity or other comprehensive income
Deferred tax recognised in equity or other comprehensive income
Income tax credited

Retirement
benefit
obligations
£m

Fair value
movements
£m

Perpetual
security
coupons
£m

–
36
36

(6)
1
(5)

–
(3)
(3)

–
(9)
(9)

(6)
–
(6)

–
–
–

Total
£m

(6)
33
27

(6)
(8)
(14)

The current and deferred tax in relation to the Group’s defined benefit pension scheme’s remeasurements, available-for-sale fair value movements and
perpetual securities coupons have been charged or credited through other comprehensive income where appropriate.

9 Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in
issue during the year, excluding those held by the Employee Share Ownership Plan trusts (note 26), which are treated as cancelled.

For diluted earnings per share, the earnings attributable to the ordinary shareholders are adjusted by the interest on the senior convertible bonds (net of tax)
and by the coupons on the perpetual subordinated convertible bonds (net of tax). The weighted average number of ordinary shares in issue is adjusted to
assume conversion of all potentially dilutive ordinary shares. These represent share options granted to employees where the exercise price is less than the
average market price of the Company’s ordinary shares during the year and the number of shares that would be issued if all senior convertible bonds and
perpetual subordinated convertible bonds are assumed to be converted.

Underlying earnings per share is provided by excluding the effect of any profit or loss on disposal of properties, investment property fair value movements,
retail financing fair value movements, impairment of goodwill, IAS 19 pension financing and defined benefit pension scheme expenses, acquisition
adjustments and one-off items that are material and infrequent in nature (see note 3). This alternative measure of earnings per share is presented to reflect
the Group’s underlying trading performance.

All operations are continuing for the periods presented.

108

Financial Statements Notes to the financial statements continued9 Earnings per share continued

Weighted average number of shares in issue
Weighted average number of dilutive share options
Weighted average number of dilutive senior convertible bonds
Weighted average number of dilutive subordinated perpetual convertible bonds
Total number of shares for calculating diluted earnings per share

Profit/(loss) for the financial year (net of tax)
Less profit attributable to:

Holders of perpetual capital securities
Holders of perpetual convertible bonds

Profit/(loss) for the year attributable to ordinary shareholders1

Profit/(loss) for the financial year attributable to ordinary shareholders
Add interest on senior convertible bonds, net of tax2
Add coupon on subordinated perpetual convertible bonds, net of tax
Diluted earnings/(loss) for calculating diluted earnings per share

Profit/(loss) for the financial year attributable to ordinary shareholders of the parent
Adjusted for (net of tax):

Profit on disposal of properties
Investment property fair value movements
Retail financing fair value movements
IAS 19 pension financing charge and scheme expenses
Acquisition adjustments
One-off items
Revaluation of deferred tax balances

Underlying profit after tax attributable to ordinary shareholders of the parent3
Add interest on convertible bonds, net of tax
Add coupon on subordinated perpetual convertible bonds, net of tax
Diluted underlying profit after tax attributable to ordinary shareholders of the parent

Basic earnings/(loss)
Diluted earnings/(loss)
Underlying basic earnings
Underlying diluted earnings

2016
million
1,920.8
14.6
131.4
41.4
2,108.2

2015
million
1,911.0
17.3
62.3
–
1,990.6

£m
471

(8)
(4)
459

£m
459
11
4
474

£m
459

(103)
18
18
22
(4)
70
(15)
465
11
4
480

£m
(166)

–
–
(166)

£m
(166)
–
–
(166)

£m
(166)

(17)
(7)
25
29
(9)
650
–
505
7
–
512

Pence
per share
23.9
22.5
24.2
22.8

Pence
per share
(8.7)
(8.7)
26.4
25.7

1. Profit attributable to ordinary shareholders of the parent is calculated in accordance with IAS 33, ‘Earnings per share’.
2. Dilutive share options and convertible bonds have been excluded from the calculation in 2015, as in accordance with IAS 33, ‘Earnings per share’, they are only included where the impact is dilutive.
3. Underlying earnings per share calculation is based on underlying profit after tax attributable to ordinary shareholders. Therefore the coupons on the perpetual securities (note 25) are not added back.

10 Dividend

Amounts recognised as distributions to ordinary shareholders in the year:
Final dividend of prior financial year

Interim dividend of current financial year

2016
Pence
per share

2015
Pence
per share

8.2
4.0
12.2

12.3
5.0
17.3

2016
£m

157
77
234

2015
£m

234
96
330

After the balance sheet date, a final dividend of 8.1 pence per share (2015: 8.2 pence per share) was proposed by the Directors in respect of the 52 weeks to 12
March 2016, resulting in a total final proposed dividend of £155 million (2015: £157 million). The proposed final dividend has not been included as a liability at
12 March 2016.

The dividend was approved by the Board on 3 May 2016.

109

Financial Statements

11 Property, plant and equipment

Cost
At 15 March 2015
Additions
Disposals
Transfer from/(to) assets held for sale1
At 12 March 2016

Accumulated depreciation and impairment
At 15 March 2015
Depreciation expense for the year
Impairment reversal2
Disposals
Transfer from/(to) assets held for sale
At 12 March 2016

Net book value at 12 March 2016

Capital work-in-progress included above

Cost
At 16 March 2014
Acquisition of subsidiaries
Additions
Disposals
Transfer to assets held for sale
At 14 March 2015

Accumulated depreciation and impairment
At 16 March 2014
Depreciation expense for the year
Impairment
Disposals
Transfer to assets held for sale
At 14 March 2015

Net book value at 14 March 2015

Capital work-in-progress included above

Group
Land and
buildings
£m

Group
Fixtures and
equipment
£m

9,932
259
(152)
75
10,114

2,249
166
(9)
(97)
4
2,313

4,922
396
(173)
–
5,145

2,957
393
–
(168)
–
3,182

Group
Total
£m

14,854
655
(325)
75
15,259

5,206
559
(9)
(265)
4
5,495

7,801

1,963

9,764

259

342

9,652
5
475
(110)
(90)
9,932

1,774
158
412
(86)
(9)
2,249

5,049
–
485
(608)
(4)
4,922

3,047
387
128
(604)
(1)
2,957

14,701
5
960
(718)
(94)
14,854

4,821
545
540
(690)
(10)
5,206

7,683

1,965

9,648

322

412

Company
Land and
buildings
£m

2
–
–
(2)
–

1
–
–
–
(1)
–

–

19
–
–
–
(17)
2

3
–
–
–
(2)
1

–

1. Transfers from assets held for sale include land and buildings with a net book value of £83 million transferred to, and land and buildings with a net book value of £12 million which were transferred from,

property, plant and equipment during the year.

2. An impairment reversal of £9 million was recognised on land where there has been an increase in the market value during the year.

Impairment of property, plant and equipment
In accordance with IAS 36, ‘Impairment of assets’, property, plant and equipment is only tested for impairment in the event that a triggering event is
identified. No such trigger was identified this year. In the prior year, an impairment of £540 million was recognised, as detailed in note 4.

The Group has determined that for the purposes of impairment testing, following a triggering event, each store is a cash-generating unit (‘CGU’).

The recoverable amounts for the CGUs are based on value in use which is calculated on the cash flows expected to be generated by the stores using the latest
budget and forecast data, the results of which are reviewed by the Board. Budget and forecast data reflect both past experience and future expectation of
market conditions. The key assumptions in the value in use calculation are the discount rate, sales growth rates and expected changes in operating margins.
Changes in income and expenditure are based on past experience and expectations of future changes in the market. Board approved cash flow projections for
five years are used and then extrapolated out assuming flat cash flows and discounted at a pre-tax rate of nine per cent (2015: nine per cent) over the earlier of
a 25-year period, being the estimated average remaining useful life of a freehold store, or lease length for leasehold stores. The discount rate is based on the
Group’s pre-tax weighted average cost of capital.

Non-store assets, including depots, store pipeline development sites and IT assets, and the property, plant and equipment of Sainsbury’s Bank are reviewed
separately for impairment in the event that a triggering event is identified. When an impairment review is required, the carrying value of the asset is compared
with its value in use using a methodology consistent with that described above or with its fair value less costs to dispose to determine the recoverable amount.
The key assumptions in the fair value less costs to dispose include expected future rental yields, estimated costs to completion, where applicable, and
consideration of alternative use values.

110

Financial Statements Notes to the financial statements continued

11 Property, plant and equipment continued
Interest capitalised
Interest capitalised included in additions amounted to £7 million (2015: £17 million) for the Group and £nil (2015: £nil) for the Company. Accumulated interest
capitalised included in the cost of property, plant and equipment net of disposals amounted to £348 million (2015: £360 million) for the Group and £nil
(2015: £nil) for the Company. The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation is 4.0 per cent (2015: 4.3 per cent).

Security
Property, plant and equipment of 195 (2015: 125) supermarket properties, with a net book value of £3.6bn (2015: £2.1bn), has been pledged as security for
long-term financing (note 20).

In addition, property, plant and equipment of a further six supermarket properties, with a net book value of £64 million (2015: £65 million), has been pledged
as security to underpin the residual value guarantee given by the Group with regards to 16 supermarket properties sold in March 2000 and ten supermarket
properties sold in July 2000.

On 17 June 2010, property, plant and equipment comprising eight supermarket properties, with a net book value of £167 million, were transferred to the
Sainsbury’s Property Scottish Partnership (‘the partnership’) and a further 13 properties with a net book value of £345 million on 25 March 2011.

On 26 February 2016, one property with a net book value of £17 million was substituted out of the partnership for a further four properties with a net book
value of £52 million (see note 31).

Analysis of assets held under finance leases

Group
Cost
Accumulated depreciation and impairment
Net book value

12 Intangible assets

Group
Cost
At 15 March 2015
Additions
Disposals
Transfer to assets held for resale
At 12 March 2016

Accumulated amortisation and impairment
At 15 March 2015
Amortisation expense for the year
Transfer to assets held for sale
At 12 March 2016

Net book value at 12 March 2016

138

172

Cost
At 16 March 2014
Additions
Disposals
At 14 March 2015

Accumulated amortisation and impairment
At 16 March 2014
Amortisation expense for the year
Impairment
Disposals
At 14 March 2015

145
–
(2)
143

1
–
3
–
4

186
84
(73)
197

96
15
4
(71)
44

Net book value at 14 March 2015

139

153

2016
Land and
buildings
£m
82
(30)
52

2016
Fixtures and
equipment
£m
–
–
–

2016
Total
£m
82
(30)
52

2015
Land and
buildings
£m
75
(29)
46

2015
Fixtures and
equipment
£m
–
–
–

Goodwill
£m

Computer
software
£m

Acquired
intangibles
£m

143
–
(1)
–
142

4
–
–
4

197
34
–
–
231

44
15
–
59

Other
£m

49
–
–
(39)
10

36
–
(35)
1

48
1
–
49

34
1
1
–
36

39
–
–
–
39

19
10
–
29

39
–
–
39

1
18
–
–
19

2015
Total
£m
75
(29)
46

Total
£m

428
34
(1)
(39)
422

103
25
(35)
93

329

418
85
(75)
428

132
34
8
(71)
103

325

111

Financial Statements
12 Intangible assets continued
Goodwill comprises the following:

Jacksons Stores Limited
Sainsbury’s Bank plc
Bells Stores Limited
Other

2016
£m
53
45
17
23
138

2015
£m
53
45
17
24
139

The goodwill balances above are allocated to the respective cash-generating units (‘CGUs’) or group of CGUs within the retailing or financial services segment.
The CGUs to which goodwill has been allocated and the level at which it is monitored in the retailing segment are deemed to be the respective acquired retail
chains of stores, whilst within financial services Sainsbury’s Bank is a separate CGU.

The value of the goodwill was tested for impairment during the current financial year by means of comparing the recoverable amount of each CGU or group
of CGUs with the carrying value of its goodwill. The calculation of the retail CGU’s value in use is detailed in note 11. The Sainsbury’s Bank CGU’s value in use is
calculated using Board approved cash flows discounted at a pre-tax rate of nine per cent over a five-year period with a terminal value.

Based on the operating performance of the CGUs, an impairment of retail goodwill of £nil was identified in the current financial year (2015: £3 million).
The valuations indicate sufficient headroom such that a reasonably possible change to key assumptions would not result in any impairment of goodwill.

Acquired intangibles relating to customer relationships, purchased credit card relationships and the value of core deposits were recognised as part of the fair
value accounting on the acquisition of Sainsbury’s Bank. Other intangibles primarily comprised pharmacy licences.

The transfers in the year relate to pharmacy licences being transferred to assets held for resale. Further detail about the sale of the pharmacy business can be
found in note 18.

13 Investment in subsidiaries

Shares in subsidiaries – Company
Beginning of the year
Additions
Disposals
Provision for diminution in value of investment
Release of provision for diminution in value of investment
End of the year

2016
£m

7,630
160
(3,294)
–
4
4,500

2015
£m

7,562
530
(450)
(23)
11
7,630

A full list of the Company’s subsidiaries is included in note 38. All principal operating subsidiaries operate in the countries of their registration or incorporation.
Sainsbury’s Bank plc has been consolidated for the 12 months to 29 February 2016, the Bank’s nearest month-end to the Group’s year-end, as it is impractical
to close the Bank mid-month. Adjustments have been made for the effects of significant transactions or events that occurred between this date and the
Group’s balance sheet date.

A provision of £nil (2015: £23 million) was made against investments in subsidiaries where the carrying value exceeded the recoverable amount.

During the year a number of subsidiaries were liquidated as part of a corporate simplification project. This resulted in dividends received of £5,307 million
and a subsequent disposal of subsidiaries of £3,294 million.

Sainsbury’s Property Scottish Partnership and Sainsbury’s Property Scottish Limited Partnership are two partnerships the Group has an interest in, which are
fully consolidated into these Group accounts. The Group has taken advantage of the exemption conferred by Regulation 7 of the Partnerships (‘Accounts’)
Regulations 2008 and has therefore not appended the accounts of these qualifying partnerships to these accounts. Separate accounts for these partnerships
are not required to be, and have not been, filed at Companies House.

112

Financial Statements Notes to the financial statements continued14 Investments in joint ventures and associates

At 15 March 2015
Additions
Dividends and distributions received1
Share of retained profit:2

Underlying profit after tax
Investment property fair value movements
Retail financing fair value movements
Share of profit on disposal of properties
Unrealised profit on disposal of properties

Movements in other comprehensive income (note 24)
At 12 March 2016

At 16 March 2014
Additions
Disposals
Dividends and distributions received1
Share of retained profit:

Underlying profit after tax
Investment property fair value movements
Retail financing fair value movements
Share of profit on disposal of properties

Movements in other comprehensive income (note 24)
At 14 March 2015

Group shares
at cost
£m
296
18
(13)

Group share
of post-
acquisition
reserves
£m
63
–
(33)

Group total
£m
359
18
(46)

Company
shares at cost
£m
18
15
–

–
–
–
–
4
305
–
305

318
12
(4)
(30)

–
–
–
–
296
–
296

10
(18)
(2)
1
–
21
1
22

86
–
–
(40)

12
7
(7)
2
60
3
63

10
(18)
(2)
1
4
326
1
327

404
12
(4)
(70)

12
7
(7)
2
356
3
359

–
–
–
–
–
33
–
33

6
12
–
–

–
–
–
–
18
–
18

1. The dividends and distributions received include £13 million (2015: £30 million) return of partner capital.
2. In addition to the above, £2 million share of joint venture losses (2015: £6 million) was recognised in relation to joint ventures with a carrying value of £nil.

The Group’s principal joint venture is:

BL Sainsbury Superstores Limited (property investment)

Statutory
year-end
31 March

Share of
ordinary
allotted capital
50%

Country of
registration or
incorporation
England

A full list of the Group’s joint ventures is included in note 38. Joint ventures with a different year-end date to the Group are reported to include the results up to
29 February 2016, the nearest month-end to the Group’s year-end. BL Sainsbury Superstores Limited joint venture continues to be reported to the Group’s
year-end 12 March 2016. Management accounts for the joint ventures are used where relevant and adjustments have been made for the effects of significant
transactions or events that occurred between 29 February and the Group’s balance sheet date.

The Group’s share of the assets, liabilities, income and expenses of its joint ventures are detailed below:

Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Provision for share of joint venture losses
Goodwill
Investments in joint ventures and associates

Income
Expenses
Investment property fair value movements
Share of joint venture (loss)/profit after tax

2016
£m
499
83
(58)
(210)
314
8
5
327

80
(73)
(18)
(11)

2015
£m
558
53
(45)
(218)
348
6
5
359

73
(72)
7
8

113

Financial Statements

14 Investments in joint ventures and associates continued
The total assets, liabilities, income and expenses of the Group’s principal joint venture BL Sainsbury Superstores Limited are detailed below:

Non-current assets
Current assets (excluding cash and cash equivalents)
Cash and cash equivalents
Current liabilities
Non-current liabilities
Joint venture net assets

Revenue
Other expenses
Other income
Interest expense
Joint venture (loss)/profit

Analysed as:
Underlying joint venture profit before tax
Profit/(loss) on disposal of properties
Retail financing fair value movements
Investment property fair value movements

Income tax expense
Joint venture (loss)/profit after tax
Other comprehensive income (net of tax)
Total comprehensive (loss)/income

2016
£m
946
2
65
(28)
(417)
568

55
(41)
3
(24)
(7)

30
3
(4)
(36)
(7)
(3)
(10)
1
(9)

2015
£m
1,038
3
8
(21)
(435)
593

60
(19)
14
(28)
27

31
(4)
(14)
14
27
(6)
21
3
24

The joint venture had no other capital commitments nor contingent liabilities other than those disclosed in notes 34 and 36.

15 Available-for-sale financial assets

Non-current
Unlisted equity investments
Investment securities
Interest bearing financial assets
Other financial assets

Current
Investment securities

Group
2016
£m

Group
2015
£m

Company
2016
£m

Company
2015
£m

3
156
35
146
340

48
388

2
–
37
145
184

–
184

–
–
35
–
35

–
35

–
–
37
–
37

–
37

The other financial asset represents the Group’s beneficial interest in a commercial property investment pool. The fair value of the other financial asset is based
on discounted cash flows assuming a property rental growth rate of 0.6 per cent (2015: 0.8 per cent) and a weighted average cost of capital of nine per cent
(2015: nine per cent). There were no disposals or impairment provisions on available-for-sale financial assets in either the current or the previous financial year
(see note 30 for sensitivity analysis).

16 Inventories

Goods held for resale
Development properties

2016
£m
967
1
968

2015
£m
994
3
997

The amount of inventories recognised as an expense and charged to cost of sales for the 52 weeks to 12 March 2016 was £17,210 million (2015: £17,501 million).

114

Financial Statements Notes to the financial statements continued

17 Receivables
(a) Trade and other receivables

Non-current
Amounts owed by Group entities
Other receivables

Prepayments and accrued income

Current
Trade receivables
Amounts owed by Group entities
Other receivables

Prepayments and accrued income

Group
2016
£m

Group
2015
£m

Company
2016
£m

Company
2015
£m

–
92
92
11
103

96
–
305
401
107
508

–
73
73
10
83

101
–
271
372
99
471

1,531
–
1,531
–
1,531

–
1,189
–
1,189
6
1,195

1,363
–
1,363
–
1,363

–
1,395
–
1,395
4
1,399

Trade receivables are non-interest bearing and are on commercial terms. Current other receivables of £305 million (2015: £271 million), which include
£170 million (2015: £121 million) of bank funds in the course of settlement, are generally non-interest bearing. The carrying amounts of trade and other
receivables are denominated in sterling.

The Group’s exposure to credit risk arising from its retail operations is minimal given that the customer base is large and unrelated and that the overwhelming
majority of customer transactions are settled through cash or secure electronic means. New parties wishing to obtain credit terms with the Group are credit
checked prior to invoices being raised and credit limits are determined on an individual basis.

(b) Amounts due from Sainsbury’s Bank customers

Non-current
Loans and advances to customers
Impairment of loans and advances

Current
Loans and advances to customers
Impairment of loans and advances

2016
£m

1,680
(31)
1,649

1,743
(48)
1,695

2015
£m

1,444
(32)
1,412

1,654
(55)
1,599

Loans and advances to customers accrue interest at the effective interest rate. Sainsbury’s Bank has pledged the rights to £468 million (2015: £487 million)
of its personal loans book with the Bank of England for £240 million (2015: £240 million) of Treasury Bills under the Bank of England Funding for Lending
Scheme. These Treasury Bills can then be converted to cash as a source of future funding to the Bank. As at 12 March 2016, there was £nil (2015: £nil)
borrowings drawn down.

Sainsbury’s Bank has assigned the beneficial interest in £379 million (2015: £191 million) of its personal loans book to a Special Purpose Entity for use as
collateral in securitisation transactions, facilitating £300 million (2015: £150 million) of drawings.

Refer to note 29 for details on Sainsbury’s Bank credit risk.

Opening provision
Additional provisions
Utilisation of provision
Amortisation of discount
Closing provision

2016
£m
(87)
(15)
22
1
(79)

2015
£m
(83)
(21)
16
1
(87)

115

Financial Statements

17 Receivables continued
(d) Major counterparties
Major counterparties are identified as follows:

Other receivables
Related parties

2016
Number of
counterparties
2
–

2016
Balance
£m
43
–

2015
Number of
counterparties
2
1

2015
Balance
£m
35
13

The related party receivable in 2015 is from the Group’s joint venture, The Harvest Limited Partnership. This was repaid in the current financial year. Loans are
approved by the Investment Committee.

No major counterparty balances are considered overdue or impaired.

18 Assets and liabilities held for sale

Retail segment properties
Assets relating to pharmacy business:

Fixed assets
Intangible assets
Inventory

Liabilities relating to pharmacy business:

Creditors

Group

Company

2016
£m
9

3
4
15
31

4
4

2015
£m
84

–
–
–
84

–
–

2016
£m
1

–
–
–
1

–
–

2015
£m
15

–
–
–
15

–
–

On 29 July 2015 Sainsbury’s signed a Business Sale Agreement (‘BSA’) to sell its pharmacy business to Celesio, the owner of LloydsPharmacy for a headline
price of £125 million. The transaction is expected to complete during the year ending 11 March 2017 and therefore the assets and liabilities relating to the
pharmacy business are classed as held for sale at the current financial year-end. Management considers the assets and liabilities to meet the criteria to be
classified as held for sale as the business is available for immediate sale and the sale is highly probable.

The cash consideration of £125 million was received on 29 February 2016 as an advance payment. This income has been deferred at year-end and presented
as a liability within current creditors. See note 19.

For the Group, of the assets held for sale at 14 March 2015, £1 million worth was sold during the financial year ended 12 March 2016, with the remainder being
re-classified from held for sale to plant, property and equipment due to a management decision to no longer sell these assets. All of the Company’s assets held
for sale at 14 March 2015 were sold during the current financial year.

116

Financial Statements Notes to the financial statements continued19 Payables
(a) Trade and other payables

Current
Trade payables
Amounts owed to Group entities
Other payables
Accruals and deferred income/gains

Non-current
Amounts owed to Group entities
Other payables
Accruals and deferred income/gains

Group
2016
£m

Group
2015
£m

Company
2016
£m

Company
2015
£m

2,082
–
590
405
3,077

–
6
263
269

2,089
–
580
292
2,961

–
9
256
265

–
125
32
–
157

692
–
–
692

–
4,403
19
–
4,422

798
–
–
798

The Group’s policy on payment of creditors is to agree terms of payment prior to commencing trade with a supplier and to abide by those terms on the timely
submission of satisfactory invoices.

Accruals and deferred income/gains includes accounting for leases with fixed rental increases and lease incentives on a straight-line basis over the term of the
lease. Also included within current accruals and deferred income/gains is the £125 million advance payment received as consideration for the sale of the
pharmacy business.

The decrease in Company intercompany payables is as a result of the corporate simplification project referred to in note 13.

Foreign currency risk
The Group has net Euro denominated trade payables of £11 million (2015: £16 million) and US dollar denominated trade payables of £49 million
(2015: £46 million).

(b) Amounts due to Sainsbury’s Bank customers and banks

Current
Customer accounts
Other deposits
Senior secured loan notes

Non-current
Customer accounts
Other deposits
Senior secured loan notes

2016
£m

2015
£m

3,026
29
118
3,173

182
219
181
582

3,305
20
70
3,395

185
3
78
266

With the exception of fixed rate bonds, amounts due to Sainsbury’s Bank customers are generally repayable on demand and accrue interest at retail deposit rates.

Sainsbury’s Bank, via its subsidiary undertakings, has entered a £400 million asset backed commercial paper securitisation of consumer loans. Of this facility,
£300 million had been drawn as at 12 March 2016 (14 March 2015: £150 million). Interest on the notes is repayable at a floating rate linked to three-month
LIBOR and their contractual repayment is determined by cash flows on the relevant personal loans included in the collateral pool.

Other deposits include £248 million (2015: £23 million) of UK non-financial wholesale counterparties.

117

Financial Statements
20 Borrowings

Group
Loan due 2018
Loan due 2031
Bank overdrafts
Revolving credit facility due 2017
Revolving credit facility due 2018
Bank loans due 2015
Bank loans due 2016
Bank loans due 2019
Convertible bond due 2019
Finance lease obligations
Total borrowings

Company
Bank overdrafts
Revolving credit facility due 2017
Revolving credit facility due 2018
Bank loans due 2015
Bank loans due 2016
Bank loans due 2019
Convertible bond due 2019
Total borrowings

2016
Current
£m
101
41
3
–
–
–
39
–
1
38
223

2016
Current
£m
–
–
–
–
39
–
1
40

2016
Non-current
£m
679
758
–
–
–
–
–
199
417
137
2,190

2016
Non-current
£m
–
–
–
–
–
199
417
616

2016
Total
£m
780
799
3
–
–
–
39
199
418
175
2,413

2016
Total
£m
–
–
–
–
39
199
418
656

2015
Current
£m
95
39
9
–
–
86
–
–
1
30
260

2015
Current
£m
–
–
–
86
–
–
1
87

2015
Non-current
£m
778
795
–
120
–
–
35
200
409
169
2,506

2015
Non-current
£m
–
120
–
–
35
200
409
764

2015
Total
£m
873
834
9
120
–
86
35
200
410
199
2,766

2015
Total
£m
–
120
–
86
35
200
410
851

a) Loan due 2018 and Loan due 2031
Secured loans are secured on 125 (2015: 125) supermarket properties (note 11) and comprise loans from two finance companies, Eddystone Finance plc and
Longstone Finance plc:

— a fixed rate amortising loan from Eddystone Finance plc with an outstanding principal value of £764 million (2015: £850 million) at a weighted average rate

of 4.89 per cent and carrying amount of £780 million (2015: £873 million) with a final repayment date of April 2018; and

— an inflation linked amortising loan from Longstone Finance plc with an outstanding principal value of £779 million (2015: £811 million) at a fixed real rate
of 2.36 per cent where principal and interest are uplifted annually by RPI subject to a cap at five per cent and floor at nil per cent with a carrying amount of
£799 million (2015: £834 million) with a final repayment date of April 2031.

The Group has entered into interest rate swaps to convert £206 million (2015: £211 million) of the £764 million (2015: £850 million) loan due 2018 from fixed
to floating rates of interest. These transactions have been accounted for as fair value hedges (note 30). In previous years, £572 million of fixed to floating rate
swaps accounted for as fair value hedges were de-designated from their fair value hedging relationship. The fair value adjustment of the debt previously
hedged by these swaps will be amortised over the remaining life of the loans, resulting in an amortisation charge to the income statement in the current
financial year of £1 million (2015: £1 million).

The Group has entered into inflation swaps to convert £400 million (2015: £400 million) of the £779 million (2015: £811 million) loan due 2031 from RPI linked
interest to fixed rate interest for periods maturing April 2017 to April 2019. These transactions have been designated as cash flow hedges (note 30).

The principal activity of Eddystone Finance plc and Longstone Finance plc is the issuing of commercial mortgage backed securities and applying the proceeds
towards the Secured loans due 2018 and 2031 with the Group as summarised above.

SFM Corporate Services Limited holds all the issued share capital of Eddystone Finance Holdings Limited and Longstone Finance Holdings Limited on trust for
charitable purposes. Eddystone Finance Holdings Limited beneficially owns all the issued share capital of Eddystone Finance plc and Longstone Finance
Holdings Limited beneficially owns all the issued share capital of Longstone Finance plc. As the Group has no interest, power or bears any risk over these
entities they are not included in the Group consolidation.

b) Bank overdrafts
Bank overdrafts are repayable on demand and bear interest at a spread above bank base rate.

c) Revolving credit facility
On 5 May 2015, the Group refinanced its unsecured £1,150 million syndicated revolving credit facility due 2019 with a new secured corporate £1,150 million
syndicated revolving credit facility due 2020. The new facility is structured on a dual tranche basis with a £500 million Facility (A) due May 2018 and a £650
million Facility (B) due May 2020. As at 12 March 2016, £nil had been drawn under the new facility (2015: £120 million drawn under the previous Revolving
Credit Facility (A) due 2017).

The revolving credit facility incurs commitment fees at market rates and drawdowns bear interest at a spread above LIBOR.

118

Financial Statements Notes to the financial statements continued
20 Borrowings continued
d) Bank loans due 2015
During March 2015, the Group repaid upon maturity a €50 million loan due March 2015 at floating rates of interest swapped into a £45 million floating rate loan.

During June 2015, the Group repaid upon maturity a £50 million loan due June 2015 at floating rates of interest swapped into a fixed rate loan. The £50 million
loan and associated interest rate swap had been designated as a cash flow hedge.

e) Bank loans due 2016
On 5 May 2015, the Group amended its €50 million unsecured bank loan due September 2016 into a secured corporate €50 million bank loan due September
2016. This €50 million floating rate loan has been swapped into a £44 million floating rate loan.

f) Bank loans due 2019
On 5 May 2015, the Group amended its £200 million unsecured bank loan due August 2019 into a secured corporate £200 million bank loan due August 2019
at floating rates of interest. £100 million of this has been swapped into fixed rate liabilities. The £100 million portion of the loan and associated interest rate
swap has been designated as a cash flow hedge.

g) Convertible bond due 2019
In November 2014, the Group issued £450 million of unsecured convertible bonds due November 2019. The bonds pay a coupon of 1.25 per cent payable
semi-annually. Each bond is convertible into ordinary shares of J Sainsbury plc at any time up to 21 November 2019 at a conversion price of 337 pence.

The net proceeds of the convertible bond have been split as at 12 March 2016 into a liability component of £418 million and an equity component of
£32 million. The equity component represents the fair value of the embedded option to convert the bond into ordinary shares of the Company.

Liability component brought forward
Interest expense
Interest paid
Other1
Liability component as at the end of the year

1. Other relates to fees.

h) Finance lease obligations

Amounts payable under finance leases:

Within one year
In the second to fifth years inclusive
After five years

Less: future finance charges
Present value of lease obligations

Disclosed as:
Current
Non-current

2016
£m
410
13
(6)
1
418

2015
£m
411
5
–
(6)
410

Present
value of
minimum
lease
payments
2016
£m

38
63
74
175

Present
value of
minimum
lease
payments
2015
£m

30
100
69
199

Minimum
lease
payments
2016
£m

Minimum
lease
payments
2015
£m

46
87
209
342
(167)
175

38
137
175

38
124
207
369
(170)
199

30
169
199

Finance leases have effective interest rates ranging from 4.3 per cent to 8.5 per cent (2015: 2.4 per cent to 9.0 per cent). The average remaining lease term is
66 years (2015: 67 years).

119

Financial Statements

21 Deferred tax
The movements in deferred income tax assets and liabilities during the financial year, prior to the offsetting of the balances within the same tax jurisdiction,
are shown below.

Accelerated
capital
allowances
£m
(162)
(15)
–

18
–
(159)

(176)
16
–

(2)
(162)

Group
At 15 March 2015
(Charge)/credit to income statement
Charge to equity or other comprehensive

income

Rate change adjustment to income statement
Rate change adjustment to equity
At 12 March 2016

At 16 March 2014
Credit/(charge) to income statement
Credit/(charge) to equity or other comprehensive
income
Rate change adjustment to income statement
At 14 March 2015

Group
Total deferred income tax liabilities
Total deferred income tax assets
Net deferred income tax liability

Company
At 15 March 2015
Rate change adjustment to income statement
At 12 March 2016

At 16 March 2014
Rate change adjustment to income statement
At 14 March 2015

Company
Total deferred income tax liabilities
Total deferred income tax assets
Net deferred income tax asset

Capital
losses
£m
52
5
–

Fair value
movements
£m
(29)
1
–

Rolled over
capital gains
£m
(97)
(8)
–

Retirement
benefit
obligations
£m
57
(12)
(24)

Share-based
payments
£m
6
2
–

(6)
–
51

48
4
–

–
52

–
3
(25)

(34)
(4)
9

–
(29)

10
–
(95)

(96)
(1)
–

–
(97)

10
(12)
19

58
–
(1)

–
57

(1)
–
7

12
(6)
–

–
6

Capital
losses
£m
25
(3)
22

25
–
25

Other
£m
(42)
3
–

4
–
(35)

(39)
(4)
–

1
(42)

2016
£m
(314)
77
(237)

Rolled over
capital gains
£m
(25)
3
(22)

(25)
–
(25)

2016
£m
(22)
22
–

Total
£m
(215)
(24)
(24)

35
(9)
(237)

(227)
5
8

(1)
(215)

2015
£m
(330)
115
(215)

Total
£m
–
–
–

–
–
–

2015
£m
(25)
25
–

Deferred income tax assets have been recognised in respect of all temporary differences and tax losses giving rise to deferred income tax assets because it is
probable that these assets will be recovered. Deferred income tax assets and liabilities are only offset where there is a legally enforceable right of offset and the
deferred income tax assets and the deferred income tax liabilities relate to income taxes levied by the same taxation authority.

120

Financial Statements Notes to the financial statements continued
22 Provisions

At 15 March 2015
Reclassification from accruals
Additional provisions
Unused amounts reversed
Utilisation of provision
Amortisation of discount
At 12 March 2016

At 16 March 2014
Additional provisions
Unused amounts reversed
Utilisation of provision
Amortisation of discount
At 14 March 2015

Disclosed as:
Current
Non-current

Group onerous
leases and
onerous
contracts
£m
88
–
23
(2)
(18)
5
96

Group long
service awards
£m
7
–
–
(2)
(1)
–
4

29
88
(3)
(29)
3
88

7
1
–
(1)
–
7

Other
provisions1
£m
26
68
25
(4)
(40)
–
75

33
21
(2)
(26)
–
26

Group
total
£m
121
68
48
(8)
(59)
5
175

Company
onerous leases
£m
3
–
–
–
(2)
–
1

Company
disposal
provision
£m
1
–
–
–
–
–
1

1
–
–
–
–
1

Company
total
£m
4
–
–
–
(2)
–
2

4
–
–
(1)
1
4

3
–
–
(1)
1
3

Group
2015
£m

Company
2016
£m

Company
2015
£m

44
77
121

–
2
2

2
2
4

69
110
(5)
(56)
3
121

Group
2016
£m

46
129
175

The onerous lease provision covers residual lease commitments of up to an average of 28 years (2015: 23 years), after allowance for existing or anticipated
sublet rental income. The prior year additional provisions of £88 million includes £50 million onerous lease charge and £30 million onerous contract charge
recognised as part of the prior year impairment review (see note 3).

Long service awards are accrued over the period the service is provided by the employee.

Additional provisions of £25 million (2015: £21 million) within other provisions include an £11 million provision for restructuring costs (2015: £14 million).

23 Called up share capital and share premium account

Group and Company

Called up share capital
Allotted and fully paid ordinary shares – 284/7p

Share premium account
Share premium

The movements in the called up share capital and share premium accounts are set out below:

Group and Company
At 15 March 2015
Allotted in respect of share option schemes
At 12 March 2016

At 16 March 2014
Allotted in respect of share option schemes
At 14 March 2015

2016
million

2015
million

2016
£m

2015
£m

1,924

1,919

550

548

1,114

1,108

Ordinary
shares
million
1,919
5
1,924

1,907
12
1,919

Ordinary
shares
£m
548
2
550

545
3
548

Share
premium
account
£m
1,108
6
1,114

1,091
17
1,108

121

Financial Statements
24 Capital redemption and other reserves

Group
At 15 March 2015
Currency translation differences
Available-for-sale financial assets fair value movements (net of tax):
Attributable to Group
Cash flow hedges effective portion of fair value movements (net of tax):
Attributable to Group
Attributable to joint ventures (note 14)
Items reclassified from cash flow hedge reserve
Amortisation of convertible bond – equity component
At 12 March 2016

At 16 March 2014
Currency translation differences
Available-for-sale financial assets fair value movements (net of tax):
Attributable to Group
Items reclassified from available-for-sale financial assets reserve
Cash flow hedges effective portion of fair value movements (net of tax):
Attributable to Group
Attributable to joint ventures (note 14)
Items reclassified from cash flow hedge reserve
Convertible bond – equity component
Amortisation of convertible bond – equity component
At 14 March 2015

Company
At 15 March 2015
Available-for-sale financial assets fair value movements (net of tax)
Cash flow hedges effective portion of fair value movements (net of tax)
Items reclassified from cash flow hedge reserve
Amortisation of convertible bond – equity component
At 12 March 2016

At 16 March 2014
Available-for-sale financial assets fair value movements (net of tax)
Cash flow hedges effective portion of fair value movements (net of tax)
Items reclassified from cash flow hedge reserve
Convertible bond – equity component
Amortisation of convertible bond – equity component
At 14 March 2015

Currency
translation
reserve
£m
1
2

Available-
for-sale
assets
£m
124
–

Cash flow
hedge
reserve
£m
(15)
–

Convertible
bond
reserve
£m
36
–

Total
other
reserves
£m
146
2

Capital
redemption
reserve
£m
680
–

–

–
–
–
–
3

(2)
3

–
–

–
–
–
–
–
1

–
–
–
–
126

153
–

(30)
1

–
–
–
–
–
124

–

4
1
7
–
(3)

(26)
–

–
–

(13)
3
21
–
–
(15)

Available-
for-sale
assets
£m
8
(2)
–
–
–
6

Convertible
bond
reserve
£m
36
–
–
–
(7)
29

6
2
–
–
–
–
8

2
–
–
–
39
(5)
36

–

–
–
–
(7)
29

2
–

–
–

–
–
–
39
(5)
36

Cash flow
hedge
reserve
£m
(4)
–
(2)
2
–
(4)

(1)
–
(5)
2
–
–
(4)

4
1
7
(7)
155

127
3

(30)
1

(13)
3
21
39
(5)
146

–

–
–
–
–
680

680
–

–
–

–
–
–
–
–
680

Total
other
reserves
£m
40
(2)
(2)
2
(7)
31

Capital
redemption
reserve
£m
680
–
–
–
–
680

7
2
(5)
2
39
(5)
40

680
–
–
–
–
–
680

The currency translation reserve represents the cumulative foreign exchange differences on the translation of the net assets of the Group’s foreign operations
from their functional currency to the presentation currency of the parent.

The available-for-sale assets reserve represents the fair value gains and losses on the available-for-sale financial assets held by the Group. The cash flow hedge
reserve represents the cumulative effective fair value gains and losses on cash flow hedges in the Group.

The convertible bond reserve represents the equity component of the £450 million convertible bond issued in November 2014.

The capital redemption reserve arose on the redemption of B shares. Shareholders approved a £680 million return of share capital, by way of a B share scheme,
at the Company’s Extraordinary General Meeting on 12 July 2004. The final redemption date for B shares was 18 July 2007 and all transactions relating to the B
shares have now been completed.

122

Financial Statements Notes to the financial statements continued
25 Perpetual securities

Group and Company
At 14 March 2015
Issue of £250 million 6.5% perpetual subordinated capital securities (net of issue costs)
Issue of £250 million 2.875% perpetual subordinated convertible bonds (net of issue costs)
Current tax relief on issue costs
Distributions to holders of perpetual securities
Current tax relief on distributions to holders of perpetual securities
Profit for the year attributable to holders of perpetual securities
At 12 March 2016

Perpetual
capital
securities
£m
–
247
–
1
(16)
3
13
248

Perpetual
convertible
bonds
£m
–
–
247
1
(7)
1
6
248

On 30 July 2015 the Group issued £250 million of perpetual subordinated capital securities and £250 million of perpetual subordinated convertible bonds,
collectively known as perpetual securities. Costs directly associated with the issue of £6 million have been offset against the value of the proceeds. The
securities are perpetual with no fixed redemption date. Holders of the perpetual securities do not benefit from any put option rights, however the Group does
have the right to call the perpetual subordinated capital securities at their principal amount on 30 July 2020, and the perpetual subordinated convertible bonds
on 30 July 2021. The perpetual subordinated convertible bonds may be converted into ordinary shares of the Company at the option of the holders at any time
up to 23 July 2021 at a conversion price of 342.9737 pence.

The Group has the right to defer coupons on the perpetual securities on any coupon payment date where the Company has not either paid a dividend on its
ordinary shares or bought back ordinary shares (excluding shares bought to satisfy employee share schemes) within the previous 12 month period. The coupon
rate on the perpetual subordinated capital securities increases after the fifth anniversary and for the perpetual subordinated convertible bonds after the sixth
anniversary.

The next coupon date on the perpetual securities is 30 July 2016. As the Company paid a dividend to ordinary shareholders in the 12 months prior to this date
(in January 2016), the periodic distributions of £16 million for the perpetual subordinated capital securities and £7 million for the perpetual subordinated
convertible bonds have been recognised in the financial year.

26 Retained earnings

At 15 March 2015
Profit for the year
Remeasurements on defined benefit pension schemes (net of tax)
Dividends paid
Share-based payment (net of tax)
Purchase of own shares
Allotted in respect of share option schemes
Amortisation of convertible bond – equity component
At 12 March 2016

At 16 March 2014
(Loss)/profit for the year
Remeasurements on defined benefit pension schemes (net of tax)
Dividends paid
Share-based payment (net of tax)
Shares vested
Purchase of own shares
Allotted in respect of share option schemes
Utilised in respect of share option schemes
Amortisation of convertible bond – equity component
Purchase of non-controlling interest
At 14 March 2015

Group

Own shares
£m
(18)
–
–
–
–
(20)
17
–
(21)

Group
Profit and loss
account
£m
3,075
452
85
(234)
23
–
(17)
7
3,391

Group
Total retained
earnings
£m
3,057
452
85
(234)
23
(20)
–
7
3,370

(9)
–
–
–
–
9
(18)
–
–
–
–
(18)

3,569
(166)
(14)
(330)
21
–
–
(12)
–
5
2
3,075

3,560
(166)
(14)
(330)
21
9
(18)
(12)
–
5
2
3,057

Company
Retained
earnings
£m
2,085
1,360
–
(234)
–
–
22
7
3,240

2,046
344
–
(330)
–
–
–
21
(1)
5
–
2,085

Own shares held by Employee Share Ownership Plan (‘ESOP’) trusts
The Group owns 7,857,148 (2015: 5,960,476) of its ordinary shares of 284/7 pence nominal value each. At 12 March 2016, the total nominal value of the own
shares was £2 million (2015: £2 million).

All shares (2015: all shares) are held by an ESOP trust for the Executive Share Plans. The ESOP trusts waive the rights to the dividends receivable in respect of the
shareholder under the above schemes.

The cost of the own shares is deducted from equity in the Group financial statements. The market value of the own shares at 12 March 2016 was £21 million
(2015: £15 million).

123

Financial Statements
27 Notes to the cash flow statements
(a) Reconciliation of operating profit/(loss) to cash generated from operations

Profit/(loss) before tax
Net finance costs
Share of post-tax profits/(losses) of joint ventures (note 14)
Dividend income from subsidiaries
Operating profit/(loss)
Adjustments for:
Depreciation expense
Amortisation expense
Non-cash acquisition adjustments1

Impairment of subsidiaries

Sainsbury’s Bank impairment losses on loans and advances
Profit on disposal of properties

(Release)/impairment of property, plant and equipment
Impairment of intangible assets

Foreign exchange differences
Share-based payments expense
Retirement benefit obligations2
Provision for diminution in value of investment
Release of provision for diminution in value of investment
Write down of advances to Group companies
Operating cash flows before changes in working capital
Changes in working capital:
Decrease in inventories

(Increase)/decrease in investment securities
(Increase)/decrease in trade and other receivables
Increase in amounts due from Sainsbury’s Bank customers and other deposits
(Decrease)/increase in trade and other payables
Increase in amounts due to Sainsbury’s Bank customers and other deposits
Increase in provisions and other liabilities
Cash generated from/(used in) operations

Group
2016
£m
548
148
11
–
707

559
25
(13)
–
15
(100)
(9)
–
24
23
(201)
–
–
–
1,030

12
(202)
(25)
(318)
(16)
95
48
624

Group
2015
£m
(72)
161
(8)
–
81

545
34
(31)
–
21
(5)
540
8
(12)
21
(79)
–
–
–
1,123

6
32
(57)
(426)
294
114
50
1,136

Company
2016
£m
1,395
(149)
–
(5,556)
(4,310)

–
–
–
4,290
–
–
–
–
–
–
–
–
–
–
(20)

–
–
122
–
(9)
–
–
93

Company
2015
£m
373
(123)
–
(252)
(2)

–
–
–
–
–
–
–
–
–
–
–
23
(11)
(28)
(18)

–
–
45
–
(519)
–
–
(492)

1. Refer to note 3 for details of acquisition adjustments. This excludes £10 million (2015: £18 million) amortisation on acquired intangibles included within amortisation in this note.
2. The adjustment for retirement benefit obligations reflects the difference between the defined benefit pension scheme expenses of £6 million (2015: £6 million), and the cash contributions of £207 million

made by the Group to the defined benefit scheme (2015: £85 million).

(b) Cash and cash equivalents
For the purposes of the cash flow statements, cash and cash equivalents comprise the following:

Group
2016
£m
374
480
20
269
1,143

(3)
1,140

Group
2015
£m
485
262
53
485
1,285

(9)
1,276

Company
2016
£m
1
337
–
–
338

–
338

Company
2015
£m
1
91
–
–
92

–
92

Cash in hand and bank balances
Money market funds and deposits
Treasury bills
Deposits at central banks
Cash and bank balances

Bank overdrafts (note 20)
Net cash and cash equivalents

124

Financial Statements Notes to the financial statements continued

28 Analysis of net debt

Non-current assets
Interest bearing available-for-sale financial assets
Available-for-sale investment securities
Derivative financial instruments

Current assets
Cash and cash equivalents
Interest bearing available-for-sale financial assets
Derivative financial instruments

Current liabilities
Bank overdrafts
Borrowings
Finance leases
Derivative financial instruments

Non-current liabilities
Borrowings
Finance leases
Derivative financial instruments

Total net debt

Group
2016
£m

35
156
17
208

1,143
48
51
1,242

(3)
(182)
(38)
(43)
(266)

(2,053)
(137)
(69)
(2,259)
(1,075)

Sainsbury’s
Bank
2016
£m

Adjusted
Group
20161,2
£m

–
(156)
(4)
(160)

(566)
(48)
–
(614)

–
–
–
2
2

–
–
21
21
(751)

35
–
13
48

577
–
51
628

(3)
(182)
(38)
(41)
(264)

(2,053)
(137)
(48)
(2,238)
(1,826)

Group
2015
£m

37
–
21
58

1,285
–
69
1,354

(9)
(221)
(30)
(75)
(335)

(2,337)
(169)
(38)
(2,544)
(1,467)

Sainsbury’s
Bank
2015
£m

Adjusted
Group
20151
£m

–
–
(1)
(1)

(882)
–
–
(882)

–
–
–
1
1

–
–
6
6
(876)

37
–
20
57

403
–
69
472

(9)
(221)
(30)
(74)
(334)

(2,337)
(169)
(32)
(2,538)
(2,343)

1. The Group’s definition of net debt excludes Sainsbury’s Bank’s own net debt balances.
2. The perpetual capital securities and perpetual convertible bonds are accounted for as equity in accordance with IAS 32 ‘Financial instruments: Presentation’ and therefore are not included within net debt.

Reconciliation of net cash flow to movement in net debt

Net debt as at the beginning of the year
Net decrease in cash and cash equivalents
Elimination of net decrease in Sainsbury’s Bank cash and cash equivalents
Net decrease/(increase) in borrowings1
Net decrease/(increase) of obligations under finance leases
Fair value movements
Equity component of convertible bond
Net debt as at the end of the year

1. Excluding fair value and Sainsbury’s Bank derivative movements.

2016
£m
(2,343)
(136)
316
329
24
(16)
–
(1,826)

2015
£m
(2,384)
(303)
343
(20)
(11)
(7)
39
(2,343)

125

Financial Statements
29 Financial risk management
The principal financial risks faced by the Group relate to liquidity risk, counterparty credit risk, foreign currency risk, interest rate risk, commodity risk and
capital risk.

Financial risk management is managed by a central treasury department in accordance with policies and guidelines approved by the Board of Directors.
The risk management policies are designed to minimise potential adverse effects on the Group’s financial performance by identifying financial exposures
and setting appropriate risk limits and controls.

Financial risk management with respect to Sainsbury’s Bank is separately managed by the Bank’s Asset and Liability Committee (‘ALCO’) with significant
matters reported to the Sainsbury’s Bank Board Risk Committee. The risks are more fully described in the Sainsbury’s Bank section below.

The Group uses forward contracts to hedge foreign exchange and commodity exposures, and cross currency swap contracts and interest rate swap contracts
to hedge interest rate exposures. The use of financial derivatives is governed by the Group’s treasury policy which prohibits the use of derivative financial
instruments for speculative purposes.

Liquidity risk
Liquidity risk is the risk that the Group could be unable to meet its financial obligations as they fall due.

The principal operational cash flow of the Group is largely stable and predictable reflecting the low business risk profile of the food retail sector. Cash flow
forecasts are produced regularly to assist management in identifying future liquidity requirements. The Group’s liquidity policy sets a minimum funding
headroom of £300 million in excess of forecast net debt over a rolling 12 month time horizon. The Group manages its liquidity risk by maintaining a core
of long-dated borrowings, pre-funding future cash flow commitments and holding adequate standby credit facilities.

Short-term and seasonal funding is sourced from the Group’s revolving credit facility and the wholesale inter-bank money market where interest is charged at
various spreads above LIBOR. The Group maintains a syndicated committed revolving credit facility for £1,150 million. The £1,150 million facility is split into
two tranches, a £500 million Facility (A) maturing in May 2018 and a £650 million Facility (B) maturing in May 2020. As at 12 March 2016, £nil had been drawn
(2015: £120 million).

The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period to the contractual maturity date.
The amounts disclosed in the tables are the contractual undiscounted cash flows or an estimate of cash flows in respect of floating interest rate liabilities.

Less than
one year
£m

One to
two years
£m

Two to
five years
£m

More than
five years
£m

(134)
(64)

(3)
(39)
(4)
(6)
(46)
(2,939)
(3,223)

(5)
(8)
(1)

(562)
585
(15)
9
45
(40)

(137)
(66)

–
–
(4)
(6)
(30)
(6)
(232)

–
(10)
(1)

(74)
74
(15)
9
–
–

(575)
(210)

–
–
(207)
(458)
(56)
–
(375)

–
(5)
–

–
–
(43)
26
–
–

–
(817)

–
–
–
–
(209)
–
–

–
–
–

–
–
(37)
29
–
–

Group
At 12 March 2016
Non-derivative financial liabilities
Secured loans:
Loan due 2018
Loan due 20311
Unsecured loans:
Bank overdraft
Bank loans due 20162,3
Bank loans due 20192
Convertible bond due 2019
Finance lease obligations2
Trade and other payables
Amounts due to Sainsbury’s Bank customers and banks5
Derivative contracts – net settled
Commodity contracts
Interest rate swaps in hedging relationships1,4
Other interest rate swaps4
Derivative contracts – gross settled
Foreign exchange forwards – outflow3
Foreign exchange forwards – inflow3
Commodity contracts – outflow
Commodity contracts – inflow
Cross currency swaps – outflow3,4
Cross currency swaps – inflow3,4

126

Financial Statements Notes to the financial statements continued
29 Financial risk management continued

Group
At 14 March 2015
Non-derivative financial liabilities
Secured loans:
Loan due 2018
Loan due 20311
Unsecured loans:
Bank overdraft
Revolving credit facility due 20172
Bank loans due 20152,3
Bank loans due 20162,3
Bank loans due 20192
Convertible bond due 2019
Finance lease obligations2
Trade and other payables
Amounts due to Sainsbury’s Bank customers and banks5
Derivative contracts – net settled
Commodity contracts
Interest rate swaps in hedging relationships1,4
Other interest rate swaps4
Derivative contracts – gross settled
Foreign exchange forwards – outflow3
Foreign exchange forwards – inflow3
Commodity contracts – outflow
Commodity contracts – inflow
Cross currency swaps – outflow3,4
Cross currency swaps – inflow3,4

Company
At 12 March 2016
Bank loans due 20162,3
Bank loans due 20192
Convertible bond due 2019
Amounts owed to Group entities2
Other payables
Derivative contracts – net settled
Interest rate swaps in hedging relationships1,4
Other interest rate swaps4
Derivative contracts – gross settled
Foreign exchange forwards – outflow3
Foreign exchange forwards – inflow3
Cross currency swaps – outflow3,4
Cross currency swaps – inflow3,4

At 14 March 2015
Revolving credit facility due 20172
Bank loan due 20152,3
Bank loans due 20162,3
Bank loans due 20192
Convertible bond due 2019
Amounts owed to Group entities2
Other payables
Derivative contracts – net settled
Interest rate swaps in hedging relationships1,4
Other interest rate swaps4
Derivative contracts – gross settled
Foreign exchange forwards – outflow3
Foreign exchange forwards – inflow3
Cross currency swaps – outflow3,4
Cross currency swaps – inflow3,4

Less than
one year
£m

One to
two years
£m

Two to
five years
£m

More than
five years
£m

(130)
(64)

(9)
(1)
(86)
(1)
(4)
(6)
(39)
(2,926)
(3,763)

(8)
(4)
1

(367)
382
(15)
12
(47)
37

(134)
(65)

–
(1)
–
(36)
(4)
(6)
(46)
(9)
(171)

–
(3)
1

(21)
21
(15)
13
(45)
36

(712)
(204)

–
(120)
–
–
(211)
(467)
(88)
–
(101)

–
1
–

–
–
(46)
38
–
–

–
(863)

–
–
–
–
–
–
(207)
–
–

–
–
–

–
–
(61)
60
–
–

Less than
one year
£m

One to
two years
£m

Two to
five years
£m

More than
five years
£m

(39)
(4)
(6)
(126)
(32)

2
(1)

(27)
27
45
(40)

(1)
(86)
(1)
(4)
(6)
(4,438)
(19)

–
1

(17)
19
(47)
37

–
(4)
(6)
(99)
–

(2)
(1)

–
–
–
–

(1)
–
(36)
(4)
(6)
(131)
–

(1)
1

–
–
(45)
36

–
(207)
(458)
(592)
–

1
–

–
–
–
–

(120)
–
–
(211)
(467)
(724)
–

2
–

–
–
–
–

–
–
–
–
–

–
–

–
–
–
–

–
–
–
–
–
–
–

–
–

–
–
–
–

Assumptions:
1. Cash flows relating to debt and swaps linked to inflation rates have been calculated using a RPI of 1.1 per cent for the year ended 12 March 2016, 1.3 per cent for the year ended 11 March 2017 and 3.0 per

cent for future years (2015: RPI of 1.1 per cent for the year ended 14 March 2015, 1.8 per cent for the year ended 12 March 2016, and 2.6 per cent for future years).

2. Cash flows relating to debt bearing a floating interest rate have been calculated using prevailing interest rates as at 12 March 2016 and 14 March 2015.
3. Cash flows in foreign currencies have been translated using spot rates as at 12 March 2016 and 14 March 2015.
4. The swap rate that matches the remaining term of the interest rate swap as at 12 March 2016 has been used to calculate the floating rate cash flows over the life of the interest rate swaps shown above

(2015: 14 March 2015).

5. Cash flows relating to amounts due to Sainsbury’s Bank customers and banks are calculated using contractual terms and interest rates for fixed rate instruments. Where balances are contractually repayable

on demand, behavioural assumptions are applied to estimate the interest payable on those balances. These are shown as due within one year.

127

Financial Statements29 Financial risk management continued
Further information relating to liquidity risk in Sainsbury’s Bank is more fully described in the separate section on Sainsbury’s Bank financial risk factors below.

Counterparty credit risk
Counterparty credit risk is the risk of a financial loss arising from counterparty default or non-performance in respect of the Group holdings of cash and cash
equivalents, derivative financial assets, deposits with banks, investments in marketable securities, trade and other receivables and loans and advances to
customers. The Group considers its maximum credit risk to be £5,554 million (2015: £5,124 million), equivalent to the Group’s total financial assets, and of this
amount £4,326 million relates to Sainsbury’s Bank (2015: £4,074 million).

The Group (excluding Sainsbury’s Bank) sets counterparty limits for each of its banking and investment counterparties based on their credit ratings but with
minimum senior unsecured long-term credit ratings of BBB+ from Standard & Poor’s and Fitch or Baa1 from Moody’s or, in the case of sterling liquidity funds,
AAAm from Standard & Poor’s and Fitch or Aaa/MR1+ from Moody’s.

Sainsbury’s Bank sets counterparty limits to ensure that the investments of the Bank’s treasury assets are made with counterparties with a minimum
investment grade of BBB-/Baa 3 from Moody’s.

The table below analyses the Group’s cash and cash equivalents by credit exposure excluding bank balances, store cash, cash in transit and cash at ATMs:

Counterparty
Financial institutions – money market funds
Financial institutions – money market deposits
Financial institutions – money market deposits
UK Government Treasury Bills
Deposits at central banks

Long-term rating
AAAm/Aaa
AAAm/Aaa
AA+/Aa1 to A/A2
AA+/Aa1 to A/A2
AA+/Aa1

Management does not expect any losses arising from non-performance of deposit counterparties.

Group
2016
£m
330
50
100
20
269

Group
2015
£m
114
–
148
53
485

Company
2016
£m
290
–
47
–
–

Company
2015
£m
65
–
25
–
–

Interest rate swaps, cross currency swaps, forward contracts and commodity contracts are used by the Group to hedge interest rate, foreign currency and fuel
exposures. The table below analyses the fair value of the Group’s derivative financial assets by credit exposure, excluding any collateral held.

Counterparty
Interest rate swaps
Interest rate swaps
FX forward contracts
FX forward contracts

Long-term rating
AA+/Aa1 to A/A2
A/A3- to BBB+/Baa1
AA+/Aa1 to A/A2
A/A3- to BBB+/Baa1

Group
2016
£m
48
–
17
3

Group
2015
£m
43
21
24
2

Company
2016
£m
44
–
–
–

Company
2015
£m
43
21
–
–

Further information relating to counterparty credit risk in Sainsbury’s Bank is more fully described in the section on Sainsbury’s Bank financial risk factors below.

Offsetting of financial assets and liabilities
The following table sets out the Group’s financial assets and financial liabilities that are subject to counterparty offsetting or a master netting agreement.
The master netting agreements regulate settlement amounts in the event either party defaults on their obligations.

Amounts not offset
in balance sheet

Gross amounts
of recognised
financial assets
and liabilities
£m

Amounts
offset in the
balance sheet
£m

Net amounts
recognised in
the balance
sheet
£m

Balances
subject to a
contractual
right of offset
£m

Cash
collateral
pledged
£m

68
(112)
1,143
(3)
(1,785)
(689)

90
(113)
1,285
(9)
(1,939)
(686)

–
–
–
–
114
114

–
–
–
–
247
247

68
(112)
1,143
(3)
(1,671)
(575)

90
(113)
1,285
(9)
(1,692)
(439)

(7)
7
–
–
–
–

(16)
16
(8)
8
–
–

–
13
–
–
–
13

(10)
5
–
–
–
(5)

Net
amounts
£m

61
(92)
1,143
(3)
(1,671)
(562)

64
(92)
1,277
(1)
(1,692)
(444)

Group
At 12 March 2016
Derivative financial assets
Derivative financial liabilities
Cash and cash equivalents
Bank overdrafts
Trade and other payables

At 14 March 2015
Derivative financial assets
Derivative financial liabilities
Cash and cash equivalents
Bank overdrafts
Trade and other payables

128

Financial Statements Notes to the financial statements continued29 Financial risk management continued

Company
At 12 March 2016
Derivative financial assets
Derivative financial liabilities
Cash and cash equivalents

At 14 March 2015
Derivative financial assets
Derivative financial liabilities
Cash and cash equivalents

Amounts not offset
in balance sheet

Gross amounts
of recognised
financial assets
and liabilities
£m

Amounts offset
in the balance
sheet
£m

Net amounts
recognised in
the balance
sheet
£m

Balances
subject to a
contractual
right of offset
£m

Cash
collateral
pledged
£m

Net
amounts
£m

54
(48)
338
344

77
(75)
92
94

–
–
–
–

54
(48)
338
344

77
(75)
92
94

–
–
–
–

(10)
–
–
(10)

54
(48)
338
344

67
(75)
92
84

The Group holds certain financial derivatives which are subject to credit support agreements. Under these agreements cash collateral is posted by one party to
the other party should the fair value of the financial derivative exceed a pre-agreed level. As at 12 March 2016, the Group held no collateral against financial
derivative assets (2015: £10 million).

Sainsbury’s Bank has derivatives that are governed by the International Swaps and Derivatives Association and their associated credit support annex bilateral
agreements whereby if the fair value exceeds a pre-agreed level, cash collateral is exchanged. As at 12 March 2016, the Bank and its subsidiary undertakings
had provided collateral of £13 million (14 March 2015: £5 million) against the derivatives.

The Group also operates a cash pooling arrangement and collective net overdraft facility with its main clearing bank. As at 12 March 2016, the Group had no
overdraft (2015: £8 million) under this facility.

Market risk
(a) Currency risk
Currency risk is the risk of increased costs arising from unexpected movements in exchange rates impacting the Group’s foreign currency denominated
supply contracts.

The Group’s currency risk policy seeks to limit the impact of fluctuating exchange rates on the Group’s income statement by requiring anticipated foreign
currency cash flows to be hedged. The future cash flows, which may be either contracted or un-contracted, are hedged on a layered basis from 20 per cent
to 80 per cent using forward contracts and options.

The Group has exposure to currency risk on balances held in foreign currency denominated bank accounts, which may arise due to short-term timing
differences on maturing hedges and underlying supplier payments.

The Group considers that a ten per cent movement in exchange rates against sterling is a reasonable measure of volatility. The impact of a ten per cent
movement in the exchange rate of US dollar and euro versus sterling as at the balance sheet date, with all other variables held constant, is summarised in the
table below:

Group
USD/GBP
EUR/GBP

2016
Change in exchange
rate impact on post-tax
loss +/-10%
£m
(3)/4
(3)/4

2016
Change in exchange rate
impact on cash flow
hedge reserve +/-10%
£m
(48)/59
(9)/11

2015
Change in exchange
rate impact on post-tax
profit +/-10%
£m
(3)/4
(1)/1

2015
Change in exchange
rate impact on cash flow
hedge reserve +/-10%
£m
(25)/31
(10)/12

(b) Interest rate risk
Interest rate risk is the risk of increased costs or lower income arising from unexpected movements in interest rates and inflation rates impacting on the
Group’s borrowing and investment portfolios. The Group’s interest rate policy seeks to limit the impact of fluctuating interest and inflation rates by maintaining
a diversified mix of fixed rate, floating rate and variable capped rate liabilities.

Interest on financial instruments is classified as fixed rate if interest re-sets on the borrowings are less frequent than once every 12 months. Interest on
financial instruments is classified as floating rate if interest re-sets on the borrowings are more frequent than once every 12 months. Interest on financial
instruments is classified as variable capped rate if interest re-sets on the borrowings are more frequent than once every 12 months and the nominal interest
rate is subject to a cap.

129

Financial Statements
29 Financial risk management continued
The mix of the Group’s financial assets and liabilities as at the balance sheet date was as follows:

Group
At 12 March 2016
Interest bearing available-for-sale financial assets
Amounts due from Sainsbury’s Bank customers
Cash and cash equivalents
Borrowings
Finance lease obligations
Amounts due to Sainsbury’s Bank customers and banks
Derivative effect:

Interest rate swaps
Inflation linked swaps

Total
At 14 March 2015
Interest bearing available-for-sale financial assets
Amounts due from Sainsbury’s Bank customers
Cash and cash equivalents
Borrowings
Finance lease obligations
Amounts due to Sainsbury’s Bank customers and banks
Derivative effect:

Interest rate swaps
Inflation linked swaps

Total

Fixed
£m

Floating
£m

–
2,507
475
(1,202)
(114)
(410)

(2,160)
(400)
(1,304)

–
2,163
656
(1,291)
(133)
(509)

(1,602)
(350)
(1,066)

35
837
668
(238)
(61)
(3,345)

2,160
–
56

37
848
629
(442)
(66)
(3,152)

1,602
–
(544)

Variable
capped
£m

–
–
–
(798)
–
–

–
400
(398)

–
–
–
(834)
–
–

–
350
(484)

Total
£m

35
3,344
1,143
(2,238)
(175)
(3,755)

–
–
(1,646)

37
3,011
1,285
(2,567)
(199)
(3,661)

–
–
(2,094)

Further information relating to interest rate risk in Sainsbury’s Bank is more fully described in the section on Sainsbury’s Bank financial risk factors below.

(i) Cash flow sensitivity for floating rate instruments
The Group considers that a 100 basis point movement in interest rates is a reasonable measure of volatility. The sensitivity of floating rate balances to a change
of 100 basis points in the interest rate (or such lesser amount as would result in a zero rate of interest) at the balance sheet date is shown below:

Change in floating rate +/-100bps

2016
Impact on
post-tax loss
£m
(7)/5

2016
Impact on
cash flow
hedge reserve
£m
3/(3)

2015
Impact on
post-tax profit
£m
(10)/11

2015
Impact on
cash flow
hedge reserve
£m
5/(4)

(ii) Cash flow sensitivity for variable capped rate liabilities
The Group holds £799 million of capped inflation-linked borrowings (2015: £834 million) of which £400 million (2015: £350 million) have been swapped into
fixed rate borrowings using inflation rate swaps maturing April 2017 to April 2018.

The Group considers that a 100 basis point movement in the RPI rate is a reasonable measure of volatility. The sensitivity of variable capped balances to a
change of 100 basis points in the RPI rate at the balance sheet date is shown below:

Change in floating rate +/-100bps

2016
Impact on
post-tax loss
£m
(3)/3

2016
Impact on
cash flow
hedge reserve
£m
6/(6)

2015
Impact on
post-tax profit
£m
(4)/4

2015
Impact
on cash flow
hedge reserve
£m
10/(10)

130

Financial Statements Notes to the financial statements continued

29 Financial risk management continued
Commodity risk
Commodity risk is the risk of increased costs arising from unexpected movements in commodity prices impacting the Group’s own use consumption of
electricity, gas and fuel. The Group’s Energy Price Risk Committee seeks to limit the impact by requiring forecast purchases of power and fuel to be hedged.

The Group hedges own use consumption of electricity and gas with forward purchases under flexible purchasing arrangements with its suppliers.
The Group uses financial derivatives to hedge fuel exposures on a layered basis using contracts for difference.

The Group considers a ten per cent movement in commodity prices a reasonable measure of volatility.

Change in the fair value of the power, diesel and gasoil price +/-10%

Capital risk management
The Group defines capital as total equity plus net debt.

2016
Impact on
cash flow
hedge reserve
£m
1/(1)

2015
Impact on
cash flow
hedge reserve
£m
2/(2)

The Board’s capital objective is to maintain a strong and efficient capital base to support the Group’s strategic objectives, provide optimal returns for
shareholders and safeguard the Group’s status as a going concern. There has been no change to capital risk management policies during the year.

The Board monitors a broad range of financial metrics including return on capital employed, balance sheet gearing and fixed charge cover.

The Board can manage the Group’s capital structure by diversifying the debt portfolio, adjusting the size and timing of dividends paid to shareholders,
recycling capital through sale and leaseback transactions, issuing new shares or repurchasing shares in the open market and flexing capital expenditure.

From time to time the Company purchases its own shares in the market for the purpose of issuing shares under the Group’s share option programmes;
however the Group does not operate a defined share buy-back plan.

The Board maintains an affordable dividend policy under which dividend cover is fixed at two times underlying earnings for 2015/16.

Part of the Group’s capital risk management is to ensure compliance with the general covenants included in the Group’s various borrowing facilities.
There have been no breaches of general covenants in the financial year ended 12 March 2016. There are currently no financial covenants.

Information relating to Sainsbury’s Bank capital risk management is detailed below.

Sainsbury’s Bank
The principal financial risks faced by Sainsbury’s Bank relate to liquidity and funding risk, counterparty credit risk (retail and wholesale) and market risk,
including interest rate risk.

Liquidity and funding risk
Liquidity and funding risk is the risk that the Bank is unable to meet its financial commitments as they are expected to fall due without an adverse impact on
funding costs or profitability. The Bank’s liquidity risk management framework complies with the standards set out by the Prudential Regulation Authority
(‘PRA’). The Bank has completed an Individual Liquidity Adequacy Assessment Process (‘ILAAP’) that demonstrates that the Bank understands the liquidity
risks it is running and has appropriate controls in place to mitigate them, including establishment of minimum levels of liquidity to be held. Limits are
informed by a number of stress scenarios that assess the survival period of the Bank. In meeting internal limits as well as PRA requirements, the Bank
maintains a portfolio of highly liquid assets that can be readily sold or form part of a sale or repurchase agreement to meet the Bank’s obligations to depositors
and other creditors. The portfolio is managed on a daily basis and within the framework as outlined in the ILAAP and by the PRA.

In addition, the Bank prepares both long-term and short-term forecasts to assess liquidity requirements. Short-term forecasting covers a 12 month period and
takes into account factors such as ATM cash management, investment maturities and customer deposit patterns and balances. A detailed funding plan is also
prepared and this provides a robust and stable funding base for the medium to long term, ensuring sufficient liquidity is in place to support the Bank’s business
plans. The funding plan details the Bank’s access to a range of funding sources, including contingent funding.

131

Financial Statements

29 Financial risk management continued
Counterparty credit risk
Counterparty credit risk is the risk of a financial loss arising from a retail customer or wholesale counterparty default or non-performance in respect of the
Bank’s holdings of cash and cash equivalents, derivative financial assets, deposits with banks, investments in marketable securities, trade and other receivables
and loans and advances to customers.

Credit risk in respect of retail lending customers is managed through automated credit decision techniques using both scorecards and policy rules for new
applications. In addition, behavioural scoring is used to assess the conduct of customers’ accounts on an ongoing basis. Underwriting is undertaken by
specialist teams in operational areas to complement these processes. The Retail Credit Risk Committee ensures that appropriate policies are established and
adhered to and this is subject to further oversight from the Board Risk Committee. Internal Audit teams carry out regular reviews of credit risk processes, and
policies are reviewed and re-approved on an annual basis.

The credit exposure relating to off balance sheet items was £317 million (2015: £319 million), being £77 million (2015: £79 million) of undrawn loan
commitments and £240 million (2015: £240 million) of Treasury Bills obtained under the Bank of England Funding for Lending Scheme (‘FLS’). Sainsbury’s
Bank had pledged the rights to a pool of Bank issued loans and advances to customers in exchange for FLS Treasury Bills which are accounted for off balance
sheet but are available as a source of liquidity to the Bank.

Credit quality per class of financial asset
Loans and advances to customers
Loans and advances to customers are summarised as follows:

Impaired
Past due but not impaired
Neither past due nor impaired
Gross
Less: allowance for impairment
Less: hedging fair value adjustment
Net book value

12 March 2016
Past due and impaired
Less than three months, but impaired
Past due three to six months
Past due six to 12 months
Past due over 12 months
Recoveries
Possession
Total gross impaired loans
Past due but not impaired
Past due less than three months but not impaired
Total gross past due but not impaired
Neither past due nor impaired
Not impaired
Total gross neither past due nor impaired
Total gross amount due

14 March 2015
Past due and impaired
Less than three months, but impaired
Past due three to six months
Past due six to 12 months
Past due over 12 months
Recoveries
Possession
Total gross impaired loans
Past due but not impaired
Past due less than three months but not impaired
Total gross past due but not impaired
Neither past due nor impaired
Not impaired
Total gross neither past due nor impaired
Total gross amount due

132

2016
£m
106
13
3,291
3,410
(79)
13
3,344

Unsecured
lending
£m

Secured
lending
£m

2
8
–
–
95
–
105

12
12

3,251
3,251
3,368

2
6
–
–
98
–
106

14
14

2,923
2,923
3,043

–
–
1
–
–
–
1

1
1

40
40
42

–
–
–
1
–
–
1

2
2

47
47
50

2015
£m
107
16
2,970
3,093
(87)
5
3,011

Total
£m

2
8
1
–
95
–
106

13
13

3,291
3,291
3,410

2
6
–
1
98
–
107

16
16

2,970
2,970
3,093

Financial Statements Notes to the financial statements continued
29 Financial risk management continued
Mortgages held over residential properties represent the only collateral held by the Bank for retail lending exposures. The fair value of collateral held for
impaired secured loans and secured loans past due but not impaired was £7 million (2015: £8 million).

Market risk
Market risk is the risk that the value of the Bank’s assets, liabilities, income or costs will fluctuate due to changes in market rates. The Bank’s market risk
framework includes Interest Rate Risk in the Banking Book (IRRBB) and Foreign Exchange Risk. The Bank does not have a trading book. Non-trading book
positions are measured and monitored using risk measures including stress tests and sensitivity analysis, taking into account current and expected future
business flows. Foreign exchange rate risk is not material.

Interest rate risk
The Bank predominantly offers lending and savings products with varying interest rate features and maturities. Unless managed appropriately, adverse
changes to interest rates could negatively impact the Bank’s economic value and net interest income and represent the main source of market risk in the Bank.

The main types of interest rate risk faced by the Bank are:

— Re-pricing risk: the risk arising from timing differences in the repricing and maturity of bank assets and liabilities (e.g. fixed rate personal loans funded by

instant access savings accounts).

— Yield curve risk: the risk arising from changes in the slope and shape of the yield curve.

— Basis risk: risk arising from imperfect correlation between key market rates (e.g. administered rate on savings products and treasury assets linked to LIBOR).

— Prepayment risk: the risk arising from the timing of customer prepayments which differ from planning and hedging assumptions.

— Pipeline risk: the risk of a customer drawing down, or not, a product at a rate which is unfavourable for the Bank.

— Volatility of earnings arising from non interest sensitive liabilities and capital.

Overall risk appetite for interest rate risk is set by the Board Risk Committee. Lower level limits are monitored by the Asset and Liability Committee (‘ALCO’) to
ensure that risk is maintained within the overall interest rate risk appetite of the Bank. Hedging strategies are implemented to ensure the Bank remains within
risk limits. Where possible, the Bank matches offsetting interest rate positions on the balance sheet to manage interest rate risk. The Bank manages the
interest rate risk net exposure by transacting interest rate swaps. The Bank uses market recognised software (QRM) through a third party vendor to assist in the
measurement and monitoring of interest rate risk.

Hedges are primarily transacted to manage the interest rate risk of the personal loan portfolio. The interest rate swaps pay a fixed rate of interest to manage
the re-pricing risk of the fixed rate personal loan portfolio.

The primary measures used by the Bank to capture interest rate risk include analysis of the impact of changes in interest rates on the market value of the
Bank’s assets and liabilities and on the Bank’s earnings.

Sainsbury’s Bank capital resources
The following table analyses the regulatory capital resources of Sainsbury’s Bank (before any Group adjustments), being the regulated entity, under both
transitional and end point measures of CRD IV for which there is no difference. CRD IV regulations are being phased in over a five-year period from 2013 to 2018:

Common Equity Tier 1 (CET 1) capital:
Ordinary share capital
Allowable reserves
Regulatory adjustments
Total Common Equity Tier 1 (CET 1) capital
Tier 1 capital

2016
£m

436
167
(118)
485
485

2015
£m

299
159
(104)
354
354

Regulatory capital is calculated under the Capital Requirements Regulations and Capital Requirements Directive (collectively known as CRD IV) as enacted in
the UK. Common Equity Tier 1 (CET 1) capital includes ordinary share capital, other reserves, losses and regulatory deductions. The Bank does not currently hold
any Tier 2 capital.

The movement of CET 1 capital during the financial year is analysed as follows:

At 1 March 2015/1 March 2014
Share capital issued
Verified profit attributable to shareholders1
Other reserve movements
Losses recognised
Increase in intangible assets
At 29 February 2016/28 February 2015

2016
£m
354
137
6
2
–
(14)
485

2015
£m
343
59
45
–
(25)
(68)
354

1. It is now standard industry practice to include annual profits in reserves for the period to which they relate, providing these have been verified prior to the date the financial statements are signed. Losses are
recognised as a deduction from CET 1 capital as they arise. £45 million included in the period to 28 February 2015 relates to Bank audited profits to December 2013 which were not recognised in regulatory
reserves for the financial statements in respect of that financial year, as was standard industry practice at that time.

133

Financial Statements
29 Financial risk management continued
Leverage ratio (unaudited)
The leverage ratio is defined as the ratio of Tier 1 capital to adjusted assets. The denominator represents the total non-risk weighted assets adjusted for certain
off balance sheet exposures, assets and regulatory deductions and provides a no-risk-weighted ‘backstop’ capital measure. The leverage ratio is planned to
become a Pillar 1 measure from 1 January 2018. The leverage ratio is calculated below as at 29 February 2016 – this represents both transitional and end point
CRD IV measures. The Bank’s leverage ratio of 9.8 per cent exceeds the minimum Basel leverage ratio of three per cent.

Components of the leverage ratio
Total assets as per published financial statements
Removal of accounting value of derivatives and securities financing transactions
Exposure value for derivatives and securities financing transactions
Off balance sheet exposures: unconditionally cancellable (10%)
Off balance sheet: other (100%)
Other adjustments

Tier 1 capital
Leverage ratio

2016
£m

4,499
–
6
336
260
(136)
4,965
485
9.8%

2015
£m

4,237
(1)
5
313
318
(104)
4,768
354
7.4%

Capital management
The Bank manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities.
During the period to 29 February 2016, the Bank has received planned injections of £137 million of ordinary share capital to support the forecast costs and
deductible intangible assets generated through the development of flexible banking platforms. Capital adequacy is monitored on an ongoing basis by senior
management, the ALCO, the Executive Risk Committee and the Board Risk Committee. The Bank’s submissions to the PRA in the year have shown that the
Bank has complied with all externally imposed capital requirements.

The Bank will disclose Pillar 3 information as required by the Capital Requirements Regulations and PRA prudential sourcebook on the J Sainsbury plc external
website in June 2016.

134

Financial Statements Notes to the financial statements continued2015
Liability
£m
(18)
(57)
(75)

Notional
£m

1,435

150
400
118
24

331
89
15
2,562

30 Financial instruments
The fair value of derivative financial instruments has been disclosed in the balance sheet as follows:

Non-current
Current
Total

2016
Asset
£m
17
51
68

Group

2016
Liability
£m
(69)
(43)
(112)

2015
Asset
£m
21
69
90

2015
Liability
£m
(38)
(75)
(113)

2016
Asset
£m
22
32
54

Company

2016
Liability
£m
(13)
(35)
(48)

2015
Asset
£m
33
44
77

The fair value and notional amount of derivatives analysed by hedge type are as follows:

Group
Fair value hedges

Interest rate swaps

Cash flow hedges

Interest rate swaps
Inflation rate swaps

Foreign exchange forward contracts
Commodity contracts
Derivatives not in a formal hedging
relationship

Interest rate swaps

Cross currency and foreign exchange swaps
Commodity contracts
Total

Company
Fair value hedges

Interest rate swaps

Cash flow hedges

Interest rate swaps

Derivatives not in a formal hedging
relationship

Interest rate swaps
Inflation rate swaps

Cross currency and foreign exchange swaps
Total

2016

2015

Asset

Liability

Asset

Liability

Fair value
£m

Notional
£m

Fair value
£m

Notional
£m

Fair value
£m

Notional
£m

Fair value
£m

–
–
20
–

30
–
–
68

620

–
–
453
–

386
–
–
1,459

(22)

2,291

(4)
(10)
(2)
(6)

(27)
(7)
(34)
(112)

100
400
156
21

327
71
15
3,381

–
–
26
–

41
2
–
90

733

–
–
268
–

391
17
–
1,409

(6)

(4)
(14)
(10)
(8)

(38)
(19)
(14)
(113)

2016

2015

Asset

Liability

Asset

Liability

Fair value
£m

Notional
£m

Fair value
£m

Notional
£m

Fair value
£m

Notional
£m

Fair value
£m

Notional
£m

–

30
10
–
54

206

–

386
400
–
992

–

(4)

(27)
(10)
(7)
(48)

–

100

327
400
71
898

–

41
14
2
77

211

–

391
400
17
1,019

–

(4)

(38)
(14)
(19)
(75)

–

150

331
400
89
970

Fair value hedges
Interest rate swaps
The Group holds a £206 million portfolio of interest rate swaps (2015: £211 million) to hedge a portion of fixed rate borrowings. Under the terms of the swaps,
the Group receives fixed rate interest and pays floating rate interest. The notional principal amount of one of the interest rate swaps amortises to £111 million
by April 2018.

Sainsbury’s Bank and its subsidiaries hold a £2,705 million portfolio of interest rate swaps accounted for as fair value hedges (2015: £1,957 million).
Interest rate swaps are transacted to hedge the Bank’s customer assets, fixed interest treasury instruments and non-interest bearing items (including reserves)
through a combination of pay and receive fixed swaps (£2,350 million and £355 million respectively (2015: £1,719 million and £238 million respectively)).
All derivatives are designated into effective fair value hedge accounting relationships.

For the year to 12 March 2016, the fair value movement in the Group’s interest rate swaps resulted in a charge to the income statement of £6 million
(2015: £4 million). The fair value movement in the underlying fixed rate borrowings and Sainsbury’s Bank loans and advances to customers resulted in a credit
to the income statement of £12 million (2015: £4 million).

135

Financial Statements

30 Financial instruments continued
Cash flow hedges
Interest rate swaps
The Group holds a £400 million (2015: £400 million) portfolio of inflation rate swaps to hedge a portion of the inflation linked secured loan due 2031. Under the
terms of the swaps, the Group receives annual RPI inflation (subject to a cap at five per cent and floor at nil per cent) and pays fixed rate interest.

The Group holds a £100 million (2015: £150 million) portfolio of interest rate swaps to hedge £100 million of a £200 million floating rate bank loan due 2019.
Under the terms of the swaps, the Group receives floating rate interest and pays fixed rate interest.

As at 12 March 2016, an unrealised loss of £13 million (2015: £18 million) is included in other comprehensive income in respect of the swaps in cash flow
hedges. This loss will be transferred to the income statement over the next three years.

Foreign exchange forward contracts
The Group holds a portfolio of foreign exchange forward contracts to hedge its future foreign currency trading liabilities. As at 12 March 2016 the Group had
forward purchased €127 million (2015: €153 million) and sold sterling with maturities from March 2016 to February 2017 (2015: March 2015 to January 2017)
and forward purchased US$763 million (2015: US$407 million) and sold sterling with maturities from March 2016 to June 2017 (2015: March 2015 to June 2016).

At 12 March 2016, an unrealised profit of £16 million (2015: £12 million) is included in other comprehensive income in respect of the forward contracts. This
profit will be transferred to the income statement over the next 15 months. During the year a credit to the income statement of £12 million was transferred
from the cash flow hedge equity reserve and included in cost of sales (2015: £13 million charge).

Commodity forward contracts
The Group holds a portfolio of commodity forward contracts to hedge its own use fuel consumption over the next 24 months.

As at 12 March 2016, an unrealised loss of £5 million (2015: £7 million) is included in other comprehensive income in respect of the commodity contracts.
This loss will be transferred to the income statement over the next 24 months.

Derivatives not in a hedge relationship
Some of the Group’s derivative contracts do not qualify for hedge accounting and are therefore not designated in a hedging relationship. In addition, where
gains or losses on a derivative contract economically offset the losses or gains on an underlying hedged item, the derivative is not designated as in a hedging
relationship.

Interest rate, cross currency and foreign exchange swaps
The Group holds a £327 million (2015: £331 million) portfolio of interest rate swaps at fair value through profit or loss to convert floating rate obligations into
fixed rates. Under the terms of the swaps the Group receives floating rate interest and pays fixed rate interest. Offsetting these swaps the Group holds a £386
million (2015: £391 million) portfolio of interest rate swaps at fair value through profit or loss, to convert fixed rate obligations into floating rate interest. Under
the terms of the swaps the Group receives fixed rate interest and pays floating rate interest.

The Group holds a £44 million (2015: £89 million) cross currency interest rate swap at fair value through profit or loss to convert floating rate borrowings
denominated in Euro into floating rate sterling borrowings. The Group holds a £27 million (2015: £17 million) foreign exchange swap to hedge a Hong Kong
Dollar intercompany loan due June 2016.

Commodity forward contracts
Commodity forward contracts at fair value through profit and loss relate to the Group’s long-term fixed price power purchase agreements with independent
producers.

Fair value
Set out below is a comparison of the carrying amount and the fair value of financial instruments that are carried in the financial statements at a value
other than fair value. The fair value of financial assets and liabilities are based on prices available from the market on which the instruments are traded.
Where market values are not available, the fair values of financial assets and liabilities have been calculated by discounting expected future cash flows at
prevailing interest rates. The fair values of short-term deposits, trade receivables, other receivables, overdrafts and payables are assumed to approximate
to their book values.

136

Financial Statements Notes to the financial statements continued

30 Financial instruments continued

At 12 March 2016
Financial assets
Amounts owed by Group entities
Amounts due from Sainsbury’s Bank customers1

Financial liabilities
Amounts due to Group entities
Loans due 20182
Loans due 2031
Bank overdrafts
Bank loans due 2016
Bank loans due 2019
Convertible bond due 2019
Obligations under finance leases
Amounts due to Sainsbury’s Bank customers and other banks
At 14 March 2015
Financial assets
Amounts owed by Group entities
Amounts due from Sainsbury’s Bank customers1

Financial liabilities
Amounts owed to Group entities
Loans due 20182
Loans due 2031
Bank overdrafts
Revolving credit facility due 2017
Bank loans due 2015
Bank loans due 2016
Bank loans due 2019
Convertible bond due 2019
Obligations under finance leases
Amounts due to Sainsbury’s Bank customers and banks

Group
Carrying
amount
£m

Group
Fair value
£m

Company
Carrying
amount
£m

Company
Fair value
£m

–
3,344

–
3,337

2,720
–

2,892
–

–
(780)
(799)
(3)
(39)
(199)
(418)
(175)
(3,755)

–
(824)
(896)
(3)
(39)
(199)
(473)
(175)
(3,757)

(817)
–
–
–
(39)
(199)
(418)
–
–

(871)
–
–
–
(39)
(199)
(473)
–
–

–
3,011

–
3,024

2,758
–

2,950
–

–
(873)
(834)
(9)
(120)
(86)
(35)
(200)
(410)
(199)
(3,661)

–
(950)
(1,012)
(9)
(120)
(86)
(35)
(200)
(475)
(199)
(3,661)

(5,201)
–
–
–
(120)
(86)
(35)
(200)
(410)
–
–

(5,278)
–
–
–
(120)
(86)
(35)
(200)
(475)
–
–

1. Included within a portfolio fair value hedging relationship with £2,705 million (2015: £1,957 million) of interest rate swaps.
2. Includes £206 million accounted for as a fair value hedge (2015: £211 million).

The fair value of financial assets as disclosed in the table above as at 12 March 2016 was £3,337 million (2015: £3,024 million). The fair value of the financial
assets has been calculated by discounting cash flows at prevailing interest rates and is within Level 2 of the fair value hierarchy. The fair value of financial
liabilities was £6,366 million (2015: £6,747 million). £473 million (2015: £475 million) has been determined using market values and is within Level 1 of the
fair value hierarchy. The remaining £5,893 million (2015: £6,272 million) has been calculated by discounting cash flows at prevailing interest rates and is
within Level 2 of the fair value hierarchy.

137

Financial Statements

30 Financial instruments continued
Fair value measurements recognised in the balance sheet
The following table provides an analysis of financial instruments that are recognised at fair value, grouped into Levels 1 to 3 based on the degree to which the
fair value is observable:

— Level 1 fair value measurements are derived from quoted market prices (unadjusted) in active markets for identical assets or liabilities at the balance sheet

date. This level includes listed equity securities and debt instrument on public exchanges;

— Level 2 fair value measurements are derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices). The fair value of financial instruments is determined by discounting expected cash flows at
prevailing interest rates; and

— Level 3 fair value measurements are derived from valuation techniques that include inputs for the asset or liability that are not based on observable market

–
–
203

–

–
–

–

Total
£m

35
146
204

Total
£m

37
145

Level 1
£m

Level 2
£m

Level 3
£m

35
–
–

–
146
1

–

(78)

(34)

(112)

Level 1
£m

Level 2
£m

Level 3
£m

37
–

–
145

–

(99)

(14)

(113)

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

–

(48)

–

Level 1
£m

Level 2
£m

Level 3
£m

–

(75)

–

(48)

Total
£m

(75)

data (unobservable inputs).

Group
At 12 March 2016
Available-for-sale financial assets
Interest bearing financial assets
Other financial assets
Investment securities
Financial assets
Derivative financial assets
Financial liabilities
Derivative financial liabilities

Group
At 14 March 2015
Available-for-sale financial assets
Interest bearing financial assets
Other financial assets
Financial assets
Derivative financial assets
Financial liabilities
Derivative financial liabilities

Company
At 12 March 2016
Available-for-sale financial assets
Interest bearing financial assets
Financial assets
Derivative financial assets
Financial liabilities
Derivative financial liabilities

Company
At 14 March 2015
Available-for-sale financial assets
Interest bearing financial assets
Financial assets
Derivative financial assets
Financial liabilities
Derivative financial liabilities

138

Financial Statements Notes to the financial statements continued30 Financial instruments continued
Reconciliation of Level 3 fair value measurements of financial assets and liabilities:

52 weeks to 12 March 2016
At 15 March 2015
In finance cost in the Group income statement
In other comprehensive income
At 12 March 2016

52 weeks to 14 March 2015
At 16 March 2014
In finance cost in the Group income statement
In other comprehensive income
At 14 March 2015

Available-for-
sale financial
assets
£m
145
–
1
146

Available-for-
sale financial
assets
£m
184
–
(39)
145

Commodity
derivatives
£m
(14)
(20)
–
(34)

Investment
Securities
£m
–
–
1
1

Commodity
derivatives
£m
3
(17)
–
(14)

Investment
Securities
£m
–
–
–
–

Total
£m
131
(20)
2
113

Total
£m
187
(17)
(39)
131

The available-for-sale financial assets relate to the Group’s beneficial interest in a property investment pool. The net present value of the Group’s interest in the
various freehold reversions owned by the property investment pool has been derived by assuming a property growth rate of 0.6 per cent per annum (2015: 0.8
per cent) and a discount rate of nine per cent (2015: nine per cent), (see note 15). The sensitivity of this balance to changes of one per cent in the assumed rate
of property rental growth and one per cent in the discount rate holding other assumptions constant is shown below:

Available-for-sale assets

2016
Change in
growth rate
+/- 1.0%
£m
15/(14)

2016
Change in
discount rate
+/- 1.0%
£m
(9)/10

2015
Change in
growth rate
+/- 1.0%
£m
16/(15)

2015
Change in
discount rate
+/- 1.0%
£m
(10)/11

The Group has entered into several long-term fixed price Power Purchase agreements with independent producers. Included within derivative financial
liabilities is £34 million (2015: £14 million) relating to these agreements. The Group values its Power Purchase agreements as the net present value of the
estimated future usage at the contracted fixed price less the market implied forward energy price discounted at the prevailing swap rate. The Group also makes
an assumption regarding expected energy output based on the historical performance and the producer’s estimate of expected electricity output. The
sensitivity of this balance to changes of 20 per cent in the assumed rate of energy output and 20 per cent in the implied forward energy prices holding other
assumptions constant is shown below:

Derivative financial instruments

2016
Change
in volume
+/- 20.0%
£m
(7)/7

2016
Change in
electricity
forward price
+/ - 20.0%
£m
13/(14)

2015
Change
in volume +/-
20.0%
£m
(3)/3

2015
Change in
electricity
forward price
+/ - 20.0%
£m
17/(18)

The Level 3 investment securities relate to the valuation of Sainsbury’s Bank’s share of Visa Europe Limited. The acquisition of Visa Europe Limited by Visa Inc.
was announced in November 2015 and is expected to complete around the second quarter of 2016. Under the terms of the acquisition, the Bank’s share of the
sale proceeds will comprise upfront consideration and preferred stock in Visa Inc. The preferred stock is convertible into Class A common stock, at a future date,
subject to the satisfaction of certain conditions and remains subject to potential reduction for certain litigation losses incurred by Visa Europe Limited.
Sainsbury’s Bank may also be entitled to additional cash consideration three years after the completion of the sale. The valuation recognised by Sainsbury’s
Bank is equal to its expected cash proceeds as indicated by Visa Europe Limited. No amounts have been recognised in respect of the preferred stock as a result
of the uncertainties referred to above. Similarly, no amount has been recognised in respect of the additional cash consideration payable three years post
completion as a result of a lack of available information to reliably measure that amount.

139

Financial Statements30 Financial instruments continued
Financial assets and liabilities by category
Set out below are the accounting classification of each class of financial assets and liabilities as at 12 March 2016 and 14 March 2015.

Loans and
receivables
£m

Available-
for-sale
£m

Fair value
through profit
or loss
£m

Derivatives
used for
hedging
£m

1,143
493
3,344
–
–
–
–
–
–
4,980

1,285
445
3,011
–
–
–
–
–
–
4,741

–
–
–
388
–
–
–
–
–
388

–
–
–
184
–
–
–
–
–
184

–
–
–
–
–
–
–
–
(38)
(38)

–
–
–
–
–
–
–
–
(28)
(28)

–
–
–
–
–
–
–
–
(6)
(6)

–
–
–
–
–
–
–
–
5
5

Loans and
receivables
£m

Available-
for-sale
£m

Fair value
through profit
or loss
£m

Derivatives
used for
hedging
£m

338
2,720
–
–
–
–
–
3,058

92
2,758
–
–
–
–
–
2,850

–
–
35
–
–
–
–
35

–
–
37
–
–
–
–
37

–
–
–
–
–
–
(4)
(4)

–
–
–
–
–
–
(14)
(14)

–
–
–
–
–
–
10
10

–
–
–
–
–
–
16
16

Other
financial
liabilities
£m

–
–
–
–
(2,945)
(223)
(2,190)
(3,755)
–
(9,113)

–
–
–
–
(2,935)
(260)
(2,506)
(3,661)
–
(9,362)

Other
financial
liabilities
£m

–
–
–
(849)
(40)
(616)
–
(1,505)

–
–
–
(5,220)
(87)
(764)
–
(6,071)

Total
£m

1,143
493
3,344
388
(2,945)
(223)
(2,190)
(3,755)
(44)
(3,789)

1,285
445
3,011
184
(2,935)
(260)
(2,506)
(3,661)
(23)
(4,460)

Total
£m

338
2,720
35
(849)
(40)
(616)
6
1,594

92
2,758
37
(5,220)
(87)
(764)
2
(3,182)

Group
At 12 March 2016
Cash and cash equivalents
Trade and other receivables
Amounts due from Sainsbury’s Bank customers
Available-for-sale financial assets
Trade and other payables
Current borrowings
Non-current borrowings
Amounts due to Sainsbury’s Bank customers and banks
Derivative financial instruments

At 14 March 2015
Cash and cash equivalents
Trade and other receivables
Amounts due from Sainsbury’s Bank customers
Available-for-sale financial assets
Trade and other payables
Current borrowings
Non-current borrowings
Amounts due to Sainsbury’s Bank customers and banks
Derivative financial instruments

Company
At 12 March 2016
Cash and cash equivalents
Trade and other receivables
Available-for-sale financial assets
Trade and other payables
Current borrowings
Non-current borrowings
Derivative financial instruments

At 14 March 2015
Cash and cash equivalents
Trade and other receivables
Available-for-sale financial assets
Trade and other payables
Current borrowings
Non-current borrowings
Derivative financial instruments

140

Financial Statements Notes to the financial statements continued31 Retirement benefit obligations
Retirement benefit obligations relate to a defined benefit scheme, the Sainsbury’s Pension Scheme (the ‘Scheme’), and an unfunded pension liability relating to
senior employees. The Scheme is governed by a Trustee board, and the assets of the Scheme are held separately from the Group’s assets. The Scheme is a
Registered pension plan with HMRC, subject to UK legislation with oversight from the Pensions Regulator. The governance of the Scheme is the responsibility of
the Trustee; the Trustee comprises 11 Directors – five selected from members, five appointed by the Company and one Independent Chairman. In accordance
with legislation, the Trustee consults with the Company regarding the Scheme’s investment strategy and agrees an appropriate funding plan with the Company.

The Scheme has three different benefit categories: Final Salary, Career Average and Cash Balance. For Final Salary and Career Average members, benefits at
retirement are determined by length of service and salary. For Cash Balance members, benefits are determined by the accrued retirement account credits.

The Scheme was closed to new employees on 31 January 2002 and closed to future benefit accrual on 28 September 2013. The assets of the Scheme are
valued at bid price and are held separately from the Group’s assets.

The Scheme was subject to a triennial actuarial valuation, carried out by Willis Towers Watson for the Trustee, as at 14 March 2015 on the projected unit basis.
The results of this valuation are expected to be finalised in June 2016.

The retirement benefit obligations at the year-end have been calculated by KPMG, as actuarial advisers to the Group, using the projected unit credit method
and based on adjusting the position at 17 March 2012 (being the date of the previous triennial valuation) for known events and changes in market conditions
as allowed under IAS 19, ‘Employee benefits’.

The unfunded pension liability is unwound when each employee reaches retirement and takes their pension from the Group payroll or is crystallised in the
event of an employee leaving or retiring and choosing to take the provision as a one-off cash payment.

Sainsbury’s Property Scottish Partnership
Further to the funding plan agreed with the Scheme’s Trustee on 17 June 2010, Sainsbury’s established the Sainsbury’s Property Scottish Partnership (the
‘Partnership’) with the Scheme. Under this arrangement, properties to a fair value of £256 million were transferred to the Partnership. On 25 March 2011,
further properties to a fair value of £501 million were transferred to the Partnership. On 26 February 2016, one property with a fair value of £13 million was
transferred out of the Partnership and substituted for a further four properties with a fair value of £68 million. All transfers in were effected via a 30-year sale
and leaseback arrangement.

The Scheme’s interest in the Partnership entitles it to an annual distribution for 20 years to 2030. The amount of this distribution is linked to the triennial
actuarial valuation and will therefore vary once every three years. The annual distribution in 2015/16 was £29 million and for 2016/17 it is expected to be
£29 million before any triennial changes. These contributions will be in addition to the Group’s normal cash contribution paid to the Scheme annually.
The properties transferred to the Partnership will revert to Sainsbury’s ownership in 2030 in return for a cash payment equal to the amount of any remaining
funding deficit in the Scheme at that time, up to a maximum of £600 million.

The Partnership is a structured entity, controlled by Sainsbury’s with its results consolidated by the Group. The Group’s balance sheet, IAS 19 deficit and income
statement are unchanged by the establishment of the Partnership. The investment held by the Scheme in the Partnership does not qualify as a plan asset for
the purposes of the Group’s consolidated financial statements and is therefore not included within the fair value of plan assets. The value of the properties
transferred to the Partnership remains included within the Group’s property, plant and equipment on the balance sheet. In addition, the Group retains full
operational flexibility to extend, develop and substitute the properties within the Partnership.

The amounts recognised in the balance sheet are as follows:

Present value of funded obligations
Fair value of plan assets

Present value of unfunded obligations
Retirement benefit obligations
Deferred income tax asset
Net retirement benefit obligations

2016
£m
(7,625)
7,235
(390)
(18)
(408)
19
(389)

2015
£m
(7,680)
6,988
(692)
(16)
(708)
57
(651)

The retirement benefit obligation and the associated deferred income tax balance are shown within different line items on the face of the balance sheet.

a) Income statement
The amounts recognised in the income statement are as follows:

Excluded from underlying profit before tax:

Interest cost on pension scheme liabilities1
Interest income on plan assets

Total included in finance costs (note 6)

Defined benefit pension scheme expenses
Total excluded from underlying profit before tax (note 3)

Total income statement expense

1. Includes interest of £1 million for the unfunded pension scheme (2015: £1 million).

2016
£m

(266)
244
(22)

(6)
(28)

(28)

2015
£m

(288)
257
(31)

(6)
(37)

(37)

141

Financial Statements

31 Retirement benefit obligations continued
b) Other comprehensive income
Remeasurement of the retirement benefit obligations has been recognised as follows:

(Loss)/return on plan assets, excluding amounts included in interest

Actuarial gains/(losses) arising from changes in:
Financial assumptions1
Experience
Total actuarial gains/(losses)
Total remeasurements

1. Includes £2 million loss for the unfunded pension scheme (2015: £2 million loss).

c) Valuations
The movements in the funded retirement benefit obligations are as follows:

As at the beginning of the year
Interest cost
Remeasurement gains/(losses)
Benefits paid
As at the end of the year

The movements in the fair value of plan assets are as follows:

As at the beginning of the year
Interest income on plan assets
Pension scheme expenses
Remeasurement (losses)/gains
Contributions by employer
Benefits paid
As at the end of the year

2016
£m
(16)

103
34
137
121

2016
£m
(7,680)
(266)
139
182
(7,625)

2016
£m
6,988
244
(6)
(16)
207
(182)
7,235

2015
£m
696

(735)
20
(715)
(19)

2015
£m
(6,855)
(287)
(713)
175
(7,680)

2015
£m
6,131
257
(6)
696
85
(175)
6,988

The Group’s expected contributions to the defined benefit scheme for the next financial year beginning 13 March 2016 are £209 million. The contributions in
both the current and next financial year include an exceptional contribution of £125 million in each year following the issue of the perpetual securities in July
2015. They also include the £49 million per annum agreed Recovery Plan contributions from the 2012 actuarial valuation. IFRIC 14 and the proposed
amendments have been considered and do not lead to any adjustments to the accounts on the basis that any future surplus arising can be realised upon
gradual settlement of the liabilities.

The major categories of plan assets as a percentage of total plan assets are as follows:

Equities
Government bonds
Corporate bonds
Property
Swap contracts
Other

2016
%
26
11
33
4
10
16
100

The fair value of plan assets split between those which have a quoted market price in an active market and those which are unquoted is as follows:

Equities
Government bonds
Corporate bonds
Property
Swap contracts
Other

2016
Quoted
£m
1,671
811
2,381
–
–
955
5,818

2016
Unquoted
£m
206
–
(38)
309
756
184
1,417

2016
Total
£m
1,877
811
2,343
309
756
1,139
7,235

2015
Quoted
£m
1,704
979
2,422
274
–
712
6,091

2015
Unquoted
£m
215
–
(21)
7
614
82
897

2015
%
27
14
34
4
9
12
100

2015
Total
£m
1,919
979
2,401
281
614
794
6,988

The Pension Scheme’s assets are allocated across different asset classes that include investment grade corporate bonds, government bonds, public global equities,
interest and inflation swap contracts, real estate, private equity partnerships and private debt. The majority of the Scheme’s assets are readily marketable.

142

Financial Statements Notes to the financial statements continued31 Retirement benefit obligations continued
d) Assumptions
The principal actuarial assumptions used at the balance sheet date are as follows:

Discount rate
Inflation rate – RPI
Inflation rate – CPI
Future salary increases
Future pension increases

2016
%
3.65
3.15
2.15
n/a

2015
%
3.50
3.00
2.00
n/a
1.90 – 3.00 1.80 – 2.85

The discount rate is based on the yield on AA-rated sterling corporate bonds appropriate to the term of the Scheme’s liabilities.

The life expectancy for the Scheme operated at the balance sheet date for a pensioner at normal retirement age (now 65 years for men and women), is as follows:

Male pensioner
Female pensioner

The life expectancy for the Scheme operated at the balance sheet date for a future pensioner at normal retirement age is as follows:

Male pensioner
Female pensioner

2016
years
22.7
25.5

2016
years
24.6
27.4

2015
years
22.7
25.4

2015
years
24.5
27.3

The base mortality assumptions are based on the SAPS tables, with adjustments to reflect the Scheme’s population, with future improvements based on the
CMI 2011 projection with a long-term rate of improvement of 1.25 per cent per annum.

The weighted average duration of the defined benefit obligation at the end of the reporting period is 21 years (2015: 21 years).

e) Sensitivities
An increase of 0.5 per cent in the discount rate would decrease the retirement benefit obligations by £741 million. A decrease of 0.5 per cent in the discount
rate would increase the retirement benefit obligations by £859 million.

An increase of 0.5 per cent in the inflation rate would increase the retirement benefit obligations by £506 million. A decrease of 0.5 per cent in the inflation rate
would decrease the retirement benefit obligations by £486 million. This sensitivity includes the effect of inflation on the Scheme’s pension increases.

An increase of one year to the life expectancy would increase the retirement benefit obligations by £243 million.

The sensitivities are based on management’s best estimate of a reasonably anticipated change. The sensitivities are calculated using the same methodology
used to calculate the retirement benefit obligation, by considering the change in the retirement benefit obligation for a given change in assumption. The net
retirement benefit obligation is the difference between the retirement benefit obligation and the fair value of plan assets. Changes in the assumptions may
occur at the same time as changes in the fair value of plan assets. There has been no change in the calculation methodology since the prior period.

f) Other disclosures
The Scheme exposes the Group to actuarial risks (such as longevity risk, inflation risk and interest rate risk) and investment risks (such as the risk of earning
insufficient returns, market risk, currency risk and counterparty risk). The Group is not exposed to any unusual, entity specific or Scheme specific risks.

The Trustee’s investment strategy is designed to meet its obligations and mitigate risk through diversification by asset class, by investment manager and
across counterparty banks. A framework governs the hedging of interest rate and inflation risk exposures and the hedging target for both is 60 per cent (2015:
60 per cent). Physical assets (including gilts and index linked gilts) and derivative instruments (including interest rate and inflation swaps) are the key hedging
instruments used. The target hedge ratio and the hedging framework are kept under review by the Trustee and the Company is consulted when changes are
proposed for either. The Trustee does not currently hedge longevity risk although prudent assumptions are made regarding anticipated longevity for the
purposes of the Actuarial Valuation and Recovery Plan. Approximately 70 per cent of the Scheme’s non-sterling asset exposure is hedged back to sterling using
forward currency contracts.

143

Financial Statements32 Share-based payments
The Group recognised £23 million (2015: £21 million) of employee costs (note 7) related to share-based payment transactions made during the financial year.
Of these, £nil (2015: £nil) were cash-settled.

National insurance contributions are payable in respect of certain share-based payments transactions and are treated as cash-settled transactions. At 12 March
2016, the carrying amount of national insurance contributions payable was £5 million (2015: £6 million) of which £nil (2015: £nil) was in respect of vested grants.

The Group operates a number of share-based payment schemes as set out below:

a) Savings-Related Share Option Scheme (Sharesave)
The Group operates a Savings-Related Share Option Scheme, which is open to all UK employees with more than three months’ continuous service. This is an
approved HMRC scheme and was established in 1980. Under Sharesave, participants remaining in the Group’s employment at the end of the three-year or
five-year savings period are entitled to use their savings to purchase shares in the Company at a stated exercise price. Employees leaving for certain reasons
are able to use their savings to purchase shares within six months of their leaving.

At 12 March 2016, UK employees held 19,667 five-year savings contracts (2015: 25,016) in respect of options over 22.0 million shares (2015: 22.6 million) and
46,452 three-year savings contracts (2015: 39,675) in respect of options over 36.5 million shares (2015: 32.4 million). A reconciliation of option movements is
shown below:

Outstanding at the beginning of the year
Granted
Forfeited
Exercised
Expired
Outstanding at the end of the year

Exercisable at the end of the year

2016
Number
of options
million
55.0
20.0
(13.0)
(3.0)
–
59.0

2016
Weighted
average
exercise price
pence
254
195
253
244
218
234

2015
Number
of options
million
48.3
23.5
(9.2)
(7.6)
–
55.0

2015
Weighted
average
exercise price
pence
279
213
288
247
261
254

7.6

277

5.8

253

The weighted average share price during the period for options exercised over the year was 266 pence (2015: 290 pence). The weighted average remaining
contractual life of share options outstanding at 12 March 2016 was 2.3 years (2015: 2.4 years).

Details of options at 12 March 2016 are set out below:

Date of grant
10 December 2009 (5 year period)
10 December 2010 (5 year period)
9 December 2011 (3 year period)
9 December 2011 (5 year period)
12 December 2012 (3 year period)
12 December 2012 (5 year period)
11 December 2013 (3 year period)
11 December 2013 (5 year period)
12 December 2014 (3 year period)
12 December 2014 (5 year period)
17 December 2015 (3 year period)
17 December 2015 (5 year period)

Date of expiry
31 August 2015
31 August 2016
31 August 2015
31 August 2017
31 August 2016
31 August 2018
31 August 2017
31 August 2019
31 August 2018
31 August 2020
31 August 2019
31 August 2021

Exercise
price
pence
273
297
238
238
267
267
332
332
213
213
195
195

Options
outstanding
2016
million
–
2.5
–
3.5
5.2
2.6
5.2
2.4
12.1
5.5
14.1
5.5
58.6

Options
outstanding
2015
million
2.5
2.8
3.5
4.1
6.4
3.1
6.7
2.9
15.8
7.2
–
–
55.00

Options granted during the year were valued using the Black-Scholes option-pricing model. No performance conditions were included in the fair value
calculations. The fair value per option granted during the year and the assumptions used in the calculation are as follows:

Share price at grant date (pence)
Exercise price (pence)
Expected volatility

Option life

Expected dividends (expressed as dividend yield %)
Risk-free interest rate

Fair value per option

– 3 year period (%)
– 5 year period (%)
– 3 year period (years)
– 5 year period (years)

– 3 year period (%)
– 5 year period (%)
– 3 year period (pence)
– 5 year period (pence)

144

2016
243
195
26.6
24.1
3.2
5.2
5.1
1.6
2.1
48
45

2015
265
213
21.9
21.2
3.2
5.2
5.6
1.6
2.1
43
41

Financial Statements Notes to the financial statements continued

32 Share-based payments continued
The expected volatility is based on the standard deviation of the Group’s share price for the period immediately prior to the date of grant of award, over the
period identical to the vesting period of the award, adjusted for management’s view of future volatility of the share price.

The resulting fair value is expensed over the service period of three or five years, as appropriate, on the assumption that 25 per cent of options will be cancelled
over the service period as employees leave the Sharesave Scheme.

b) Long-Term Incentive Plan 2006
Under the Long-Term Incentive Plan 2006, shares are conditionally awarded to the senior managers in the Company. The core awards are calculated as a
percentage of the participants’ salaries and scaled according to grades.

The award granted in 2013 is assessed against ROCE, cumulative underlying cash flow from operations and relative sales measured against the IGD Index,
with an Earnings Per Share gateway. The award granted in 2014 is assessed against ROCE, cumulative underlying cash flow from operations and relative
sales measured against the IGD Index. The award granted in 2015 is assessed against ROCE, cumulative underlying cash flow from operations less capital
expenditure, Earnings Per Share and cost savings. The core award can grow by up to four times, dependent on the level of performance. Straight-line vesting
will apply if performance falls between two points. Awards are structured as nil cost options.

Performance will be measured at the end of the three-year performance period. If the required level of performance has been reached, the awards vest and
50 per cent of the award will be released. Subject to participants remaining in employment for a further year, the balance will then be released one year after
the vesting date. Options granted to acquire the award of shares will expire two years from the vesting date. Dividends will accrue on the shares that vest in the
form of additional shares.

To achieve the maximum multiplier of four, the following criteria are required to be met:

Date of conditional award
16 May 2013
15 May 2014
14 May 2015

Targets to achieve maximum multiplier

Cumulative underlying cash flow
£6,500m
£6,750m
£5,150m

Return on capital employed %
12
12
12

Relative sales
Index+1% p.a.
Index+1% p.a.
–

Cost savings
–
–

EPS
–
–
£600m 30pence

A reconciliation of the number of shares conditionally allocated is shown below:

Outstanding at the beginning of the year
Conditionally allocated
Forfeited
Released to participants
Outstanding at the end of the year

The weighted average remaining contractual life of share options outstanding at 12 March 2016 was 1.7 years (2015: 1.5 years).

Details of shares conditionally allocated at 12 March 2016 are set out below:

Date of conditional award
21 June 2010
19 May 2011
17 May 2012
16 May 2013
15 May 2014
14 May 2015

2016
million
6.1
2.2
(2.2)
(0.7)
5.4

2016
million
–
0.2
–
1.4
1.7
2.1
5.4

2015
million
7.0
2.1
(0.8)
(2.2)
6.1

2015
million
0.2
0.7
1.6
1.6
2.0
–
6.1

Options to acquire the award of shares were valued using the Black-Scholes option-pricing model. No performance conditions were included in the fair value
calculations. The fair value per option granted during the year and the assumptions used in the calculation are as follows:

Share price at grant date (pence)
Option life (years)
Fair value per option (pence)

2016
276
4.2
276

2015
334
4.2
334

During the year, a total number of 1.4 million shares were exercised. The weighted average share price during the year for options exercised was 238 pence
(2015: 322 pence).

145

Financial Statements
32 Share-based payments continued
c) Deferred Share Award
The Deferred Share Award targets a diverse range of business critical financial and strategic scorecard measures. These are intended to reward the top 40
managers in the Company, including Executive Directors, for driving the short-term objectives that will directly lead to building the sustainable, long-term
growth of the Company. Awards are structured as nil cost options.

Share-based awards will be made to participants subject to performance against a basket of measures. At least 50 per cent of the award will be based on the
delivery of financial performance and returns to shareholders. The balance will be based on measures which will assess the Company’s performance relative to
its competitors as well as key strategic goals.

Performance against the target is measured over one financial year, but any shares awarded are deferred for a further two years to ensure that management’s
interests continue to be aligned with those of shareholders. The shares are subject to forfeiture if the participant resigns or is dismissed for cause prior to their
release date. Dividends accrue on the shares that vest in the form of additional shares.

A reconciliation of the number of shares granted over the year is shown below:

Outstanding at the beginning of the year
Granted
Lapsed
Exercised
Outstanding at the end of the year

The number of shares allocated at the end of the year is set out below:

16 May 2013
15 May 2014
14 May 2015

2016
million
2.5
1.2
(0.3)
(1.2)
2.2

2016
million
0.1
1.2
0.9
2.2

2015
million
2.6
1.5
–
(1.6)
2.5

2015
million
1.2
1.3
–
2.5

The weighted average remaining contractual life of share options outstanding at 12 March 2016 was 1.4 years (2015: 1.5 years).

d) Bonus Share Award
The bonus arrangements for our senior managers and supermarket store managers include corporate and personal performance targets. A profit gateway is in
place which means that a certain level of underlying profit before tax must be achieved before any bonus related to the corporate element of the bonus is released.

60 per cent of the bonus is paid in cash and 40 per cent converted into shares, which are automatically released after three financial years. The share element
of the bonus arrangement is called the Bonus Share Award. Bonus Shares are subject to forfeiture if the participant resigns or is dismissed for cause prior to
their release date. Dividends accrue on these shares and are released at the end of the three-year retention period. Our top 40 managers do not receive Bonus
Share Awards as they receive Deferred Share Awards.

A reconciliation of the number of shares granted over the year is shown below:

Outstanding at the beginning of the year
Granted
Exercised
Lapsed
Outstanding at the end of the year

The number of shares allocated at the end of the year is set out below:

17 May 2012
16 May 2013
15 May 2014
14 May 2015

The weighted average remaining contractual life of share options outstanding at 12 March 2016 was 1.1 years (2015: 1.2 years).

146

2016
million
10.2
3.7
(4.0)
(1.0)
8.9

2016
million
–
3.1
3.0
2.8
8.9

2015
million
7.5
3.9
–
(1.2)
10.2

2015
million
3.0
3.7
3.5
–
10.2

Financial Statements Notes to the financial statements continued
33 Operating lease commitments
The Group leases various retail stores, offices, depots and equipment under non-cancellable operating leases. The leases have varying terms, escalation clauses
and renewal rights.

Aggregate future minimum lease payments:
Within one year
In the second to fifth years inclusive
After five years

Further analysis of the Group’s future minimum lease payments after five years is as follows:

Aggregate future minimum lease payments:
Greater than five years but less than ten years
Greater than ten years but less than 15 years
After 15 years

2016
£m

614
2,245
7,209
10,068

2016
£m

1,866
1,281
4,062
7,209

2015
£m

585
2,171
7,040
9,796

2015
£m

1,897
1,319
3,824
7,040

The commercial terms of the Group’s operating leases vary, however they commonly include either a market rent review or an index linked rent review (with a
cap and collar). The timing of when rent reviews take place differs for each lease. The Group has pre-emption rights over a minor number of properties, which
provides the Group with the right of first refusal to purchase the property in the event the landlord chooses to sell. The option price payable for the asset in each
instance is normally referenced to current market value prevailing at the point of pre-emption.

For the purposes of calculating adjusted net debt, the total value of the Group’s capitalised operating lease commitments is £5,500 million (2015: £5,417 million).

The Group sublets certain leased properties:

Aggregate future minimum lease receipts:
Within one year
In the second to fifth years inclusive
After five years

2016
£m

35
119
124
278

2015
£m

34
120
123
277

34 Capital commitments
The Group has entered into contracts totalling £173 million (2015: £164 million) for future capital expenditure in relation to property, plant and equipment and
£6 million (2015: £13 million) for intangible assets not provided for in the financial statements.

The Company does not have any capital commitments (2015: £nil).

35 Financial commitments
Sainsbury’s Bank has off balance sheet financial instruments committing it to extend credit to customers of £77 million (2015: £79 million).

36 Contingent liabilities
The Group has a contingent liability for indemnities arising from the disposal of subsidiaries. No provision has been recognised on the basis that any potential
liability arising is not considered probable. It is not possible to quantify the impact of this liability with any certainty.

Along with other retailers, the Group is subject to claims in respect of pay rates across supermarket and distribution centre workers. There is also a potential
obligation in respect of holiday pay on voluntary overtime. The Company is keeping these matters under close review but considers the likelihood of payout to
be remote.

The Company has no contingent liabilities and has issued no guarantees under Companies Act 2006 Section 394A or 479C.

147

Financial Statements
37 Related party transactions
Group
a) Key management personnel
The key management personnel of the Group comprise members of the J Sainsbury plc Board of Directors and the Operating Board. The key management
personnel compensation is as follows:

Short-term employee benefits
Post-employment employee benefits
Share-based payments

2016
£m
7
1
4
12

Ten key management personnel had credit card balances with Sainsbury’s Bank (2015: nine). These arose in the normal course of business and
were immaterial to the Group and the individuals. Five key management personnel held saving deposit accounts with Sainsbury’s Bank (2015: three).
These balances arose in the normal course of business and were immaterial to the Group and the individuals.

b) Joint ventures and associates
Transactions with joint ventures and associates
For the 52 weeks to 12 March 2016, the Group entered into various transactions with joint ventures and associates as set out below.

Management services received
Management services provided
Income share received from joint ventures
Dividend and distributions received
Proceeds from repayment of loan to joint venture
Investment in joint ventures and associates
Rental expenses paid

Year-end balances arising from transactions with joint ventures and associates

Receivables
Other receivables
Loans due from joint ventures

Payables
Other payables
Loans due to joint ventures

2016
£m
(1)
4
33
46
–
(18)
(65)

2016
£m

28
3

(1)
(5)

2015
£m
10
1
9
20

2015
£m
(1)
–
17
70
17
(12)
(65)

2015
£m

37
2

–
(5)

c) Retirement benefit obligations
As discussed in note 31, the Group has entered into an arrangement with the Pension Scheme Trustee as part of the funding plan for the actuarial deficit in the
Scheme. Full details of this arrangement are set out in note 31 to these financial statements.

148

Financial Statements Notes to the financial statements continued
37 Related party transactions continued
Company
a) Subsidiaries
The Company enters into loans with its subsidiaries at both fixed and floating rates of interest on a commercial basis. Hence, the Company incurs interest
expense and earns interest income on these loans and advances. The Company also received dividend income from its subsidiaries during the financial year.
The amounts outstanding are unsecured and settled in cash.

Transactions with subsidiaries

Repayment of floating rate subordinated dated/undated loan capital from Sainsbury’s Bank1
Investment in Sainsbury’s Bank

Loans and advances given to, and dividend income received from subsidiaries
Loans and advances given
Loans and advances repaid by subsidiaries
Interest income received in respect of interest bearing loans and advances
Dividend income received

Loans and advances received from subsidiaries
Loans and advances received
Loans and advances repaid
Loan settlement in the year attributable to liquidations
Interest expense paid in respect of interest bearing loans and advances

1. The £60 million dated subordinated loan capital was repaid in December 2014.

Year-end balances arising from transactions with subsidiaries

Receivables
Loans and advances due from subsidiaries

Payables
Loans and advances due to subsidiaries

b) Joint ventures and associates
Transactions with joint ventures and associates
For the 52 weeks to 12 March 2016, the Company entered into transactions with joint ventures and associates as set out below.

Investment in joint ventures

Year-end balances arising from transactions with joint ventures and associates

Payables
Loans due to joint ventures

2016
£m
–
(137)

17
(122)
222
5,556

(299)
49
4,306
(47)

2015
£m
60
(59)

229
(45)
201
252

(275)
21
–
(56)

2016
£m

2015
£m

2,720

2,758

(817)

(5,201)

2016
£m
(15)

2016
£m

(5)

2015
£m
(12)

2015
£m

(5)

149

Financial Statements

38 Details of related undertakings
All companies listed below are owned by the Group and all interests are in the
ordinary share capital, except where otherwise indicated. All subsidiaries have
been consolidated.

a) Subsidiary undertakings

The Group holds a majority of the voting rights of the following undertakings:

Entity
Barleygold Limited
Bells Stores Limited
BLSSP (PHC 7) Limited
Braemar Castle Limited
Coolidge Investments Limited
Flint Castle Limited
Global Media Vault Limited
Holborn UK Investments Limited
J Sainsbury (Overseas) Limited
J Sainsbury Common Investment Fund Limited
J Sainsbury Distribution Limited
J Sainsbury Employee Share Ownership Trust
J Sainsbury Limited
J Sainsbury Pension Scheme Trustees Limited
J Sainsbury Holdings
J Sainsbury Trustees Limited
Jacksons Stores 2002 Limited
Jacksons Stores Limited
JS Finance Corporation
JS Information Systems Limited
JS Insurance Limited
JSD (London) Limited
L&B (No 26) Limited
Lochside Asset Purchaser No.1 plc
Lochside Asset Purchaser No1 Holdings Limited
Nash Court (Kenton) Limited
Portfolio Investments Ltd
Ramheath Properties Limited
RECO Property Limited
S.W. Dewsbury Limited
Sainsbury Bridgeco Holdco Limited
Sainsbury Holdco A Limited
Sainsbury Holdco B Limited
Sainsbury Propco A Limited
Sainsbury Propco B Limited
Sainsbury Propco C Limited
Sainsbury Propco D Limited
Sainsbury Property Investments Limited
Sainsbury’s Commercial Consulting (Dongguan)
Company Ltd
Sainsbury’s Asia (Shanghai) Limited
Sainsbury’s Asia Limited
Sainsbury’s Bank plc
Sainsbury’s Basingstoke Limited
Sainsbury’s Convenience Stores Limited
Sainsburys Corporate Director Limited
Sainsbury’s Entertainment Ltd
Sainsbury’s Holborn Property
Sainsbury’s Limited
Sainsbury’s Limited
Sainsbury’s Manor GP Limited
Sainsbury’s Manor II Property Limited
Sainsbury’s Manor Property Limited
Sainsbury’s Planet Limited
Sainsbury’s Supermarkets Ltd
Savacentre Limited
Stamford House (Jersey) Limited
Stamford House Investments Limited
Stamford Properties (Dorking) Limited
Stamford Properties Four Limited
Stamford Properties One Limited
Stamford Properties Three Limited
Stamford Properties Two Limited
Stockdale Land (Bicester) Limited
Tintagel Castle Limited
Town Centre Retail (Bicester) Limited

Country of
incorporation Interest
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
Ireland
100%
UK
100%
Ireland
100%
UK
100%
UK
100%
UK
100%
Ireland
UK
100%
Isle of Man 100%
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
UK
100%
China

Hong Kong
Hong Kong
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
Jersey
UK
UK
UK
UK
UK
UK
UK
UK
UK

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

Holding
Indirect
Direct
Indirect
Direct
Indirect
Direct
Indirect
Direct
Direct
Indirect
Direct
Indirect
Direct
Direct
Indirect
Indirect
Indirect
Direct
Indirect
Indirect
Direct
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Direct
Indirect
Direct
Direct
Direct
Direct
Indirect
Indirect
Direct
Direct
Direct
Indirect

Indirect
Indirect
Direct
Indirect
Direct
Indirect
Indirect
Indirect
Direct
Direct
Direct
Direct
Direct
Indirect
Direct
Direct
Direct
Direct
Indirect
Direct
Indirect
Direct
Direct
Indirect
Direct
Indirect

b) Associated undertakings
The Group has a participating interest in the following undertakings.

Country of
Entity
incorporation Interest
Arcus Engineering Limited
UK
Arcus FM Limited
UK
BL Sainsbury Superstores Limited
UK
Harvest 2 GP Limited
UK
UK
Harvest 2 Limited Partnership
Harvest Development Management Limited UK
UK
Harvest GP Limited
UK
Hedge End Park Limited
UK
Insight 2 Communication LLP
UK
Manor II Property Scottish Partnership
UK
Manor Property Scottish Partnership
UK
Manor Scottish Limited Partnership

Holding
Preference shares Indirect
Preference shares Indirect
Indirect
50%
Indirect
50%
Indirect
49.975%
Indirect
50%
Indirect
50%
Direct
50%
Indirect
50%
Indirect
0.01%
Indirect
0.01%
Indirect
0.01%

150

Entity
Mobile by Sainsbury’s Limited
Netto Limited
PXS Limited
Romford Developments Limited
Sainsbury’s Property Scottish Limited
Partnership
Sainsbury’s Property Scottish Partnership
Tamar Energy Limited

The Harvest Limited Partnership

Country of
incorporation Interest
UK
UK
UK
UK
UK

50%
50%
B class
50%
10%

UK
UK

33%
2,000,000
Investor shares
49.975%

Holding
Indirect
Direct
Indirect
Indirect
Indirect

Indirect
Indirect

Indirect

c) Trusts
The Group has an interest in the following undertakings.

Entity
J Sainsbury Employee Share Ownership Trust

Country of
incorporation Interest
100%
UK

Holding
Indirect

d) Undertakings other than subsidiaries and associated
undertakings
The direct or indirect holder of 100% of the voting interests in the following
undertakings is an associate of the Group.

Country of
Entity
incorporation Interest
B.L.C.T. (10775) Limited
100%
Jersey
B.L.C.T. (11546) Limited
100%
Jersey
B.L.C.T. (20720) Limited
100%
Jersey
B.L.C.T. (27255) Limited
100%
Jersey
B.L.C.T. (38775) Limited
100%
Jersey
B.L.C.T. (39150) Limited
100%
Jersey
B.L.C.T. (39214) Limited
100%
Jersey
B.L.C.T. (39215) Limited
100%
Jersey
BL Crawley (Unlimited)
100%
Jersey
BL Non Securitised 2012 1 Limited
100%
UK
BL Superstores (Funding) Limited
100%
UK
BL Superstores Finance PLC
100%
UK
BLS Non-Securitised 2012 2 Limited
100%
UK
BLSSP (Cash Management) Limited
100%
UK
BLSSP (Lending) Limited
100%
UK
BLSSP (PHC 1 2010) Limited
100%
UK
BLSSP (PHC 1 2012) Limited
100%
UK
BLSSP (PHC 1) Limited
100%
UK
BLSSP (PHC 10) Limited
100%
UK
BLSSP (PHC 11) Limited
100%
UK
BLSSP (PHC 12) Limited
100%
UK
BLSSP (PHC 14) Limited
100%
UK
BLSSP (PHC 16) Limited
100%
UK
BLSSP (PHC 17) Limited
100%
UK
BLSSP (PHC 18) Limited
100%
UK
BLSSP (PHC 2 2010) Limited
100%
UK
BLSSP (PHC 2) Limited
100%
UK
BLSSP (PHC 20) Limited
100%
UK
BLSSP (PHC 21) Limited
100%
UK
BLSSP (PHC 22) Limited
100%
UK
BLSSP (PHC 23) Limited
100%
UK
BLSSP (PHC 24) Limited
100%
UK
BLSSP (PHC 25) Limited
100%
UK
BLSSP (PHC 26) Limited
100%
UK
BLSSP (PHC 28) Limited
100%
UK
BLSSP (PHC 3) Limited
100%
UK
BLSSP (PHC 32) Limited
100%
UK
BLSSP (PHC 33) Limited
100%
UK
BLSSP (PHC 34) Limited
100%
UK
BLSSP (PHC 35) Limited
100%
UK
BLSSP (PHC 4) Limited
100%
UK
BLSSP (PHC 5) Limited
100%
UK
BLSSP (PHC 6) Limited
100%
UK
BLSSP (PHC 9) Limited
100%
UK
100%
BLSSP (PHC19) Limited
UK
100%
UK
BLSSP Property Holdings Limited
100%
British Land Superstores (Non-Securitised) Limited UK
100%
UK
Clarendon Property Company (Unlimited)
100%
UK
Harvest 2 Selly Oak Limited
100%
UK
Harvest Nominee No. 1 Limited
100%
UK
Harvest Nominee No. 2 Limited
100%
UK
Pencilscreen Limited
100%
UK
Selected Land and Property Company (Unlimited)
100%
UK
Ten Fleet Place (Unlimited)
100%
UK
Vyson (Unlimited)

e) Overseas branches
The Group has the following branches overseas.

Holding
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect

Entity
Sainsbury’s Asia Limited – Bangladesh Liaison Office
Sainsbury’s Commercial Consulting (Dongguan) Company Ltd
– Branch Office 1
Sainsbury’s Asia Limited – India Branch Office

Country
Bangladesh
China

India

Holding
Indirect
Indirect

Indirect

Financial Statements Notes to the financial statements continuedFive year financial record

Financial results (£m)
Underlying sales (including VAT, including fuel, including Sainsbury’s Bank)

25,829

26,122

26,353

25,632

24,511

2016

2015

2014

2013

2012

Underlying operating profit
Retailing
Financial services

Underlying net finance costs1
Underlying share of post-tax profit from joint ventures
Underlying profit before tax1,2

(Decrease)/increase on previous year (%)

Retail underlying operating margin (%)3

Earnings per share
Underlying basic (pence)2
(Decrease)/increase on previous year (%)
Proposed dividend per share (pence)4

Retail statistics for UK food retailing
Number of outlets at financial year-end
over 55,000 sq ft sales area
40,001 – 55,000 sq ft sales area
25,001 – 40,000 sq ft sales area
15,000 – 25,000 sq ft sales area
under 15,000 sq ft sales area

Sales area (000 sq ft)

Net increase on previous year (%)5

New stores5

Sales intensity (including Value Added Tax)5
Per square foot (£ per week)

635
65
700

(121)
8
587

720
62
782

(107)
6
681

(13.8)

(14.7)

2.74

3.07

24.2
(8.3)
12.1

26.4
(19.5)
13.2

107
135
142
116
874
1,374

106
132
143
115
808
1,304

873
6
879

(111)
30
798

5.3

3.65

32.8
6.5
17.3

101
127
146
116
713
1,203

831
–
831

(111)
38
758

6.5

3.57

30.8
9.6
16.7

94
123
147
118
624
1,106

789
–
789

(109)
32
712

7.1

3.54

28.1
6.0
16.1

81
123
152
115
541
1,012

23,202

22,819

22,160

21,265

20,347

1.7

3.0

106

4.2

104

4.5

101

6.5

17.88

18.24

18.93

19.27

19.47

1. Net finance costs pre-retail financing fair value movements, IAS 19 pension financing charge and one-off items that are material and infrequent in nature, but after accrued coupons on the perpetual

securities.

2. Profit/(loss) before tax from continuing operations before any gain or loss on the sale of properties, investment property fair value movements, impairment of goodwill, retail financing fair value movements,

IAS 19 pension financing charge, defined benefit pension scheme expenses, acquisition adjustments and one-off items that are material and infrequent in nature, but after accrued coupons on the
perpetual securities.

3. Retail operating profit margin based on retail sales excluding Value Added Tax, including fuel, excluding Sainsbury’s Bank.
4. Total proposed dividend to ordinary shareholders in relation to the financial year.
5. Includes all convenience stores and convenience acquisitions.

151

Financial Statements
Additional shareholder information

Additional shareholder information

Financial calendar 2016/17

Final dividend
Ex-dividend date
Record date
Last date for return of revocation of DRIP mandates
Payment date and DRIP share purchase

Other dates
Annual General Meeting – London
Interim results announced
Preliminary Results announced
Annual General Meeting – London

12 May 2016
13 May 2016
17 June 2016
8 July 2016

6 July 2016
9 November 2016
3 May 2017
5 July 2017

The interim dividend was paid on 4 January 2016.

Annual General Meeting (‘AGM’)
The AGM will be held at 11.00am on Wednesday, 6 July 2016 at QEII
Centre, Broad Sanctuary, Westminster, London SW1P 3EE. The Notice
of the Meeting and the proxy card for the meeting are enclosed with
this report.

Registrars
For information about the AGM, shareholdings, dividends and to
report changes to personal details, shareholders should contact:

Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: 0370 702 0106

Please remember to tell Computershare if you move house or change
bank details or if there is any other change to your account
information.

You can view and manage your shareholding online at www.
investorcentre.co.uk. You will require your 11 character Shareholder
Reference Number (‘SRN’) to log in. Your SRN starts with the letter C
or G and is followed by ten numbers. It can be found on share
certificates and dividend confirmations (formerly dividend tax
vouchers).

Dividends
Having your dividends paid directly into your bank or building
society account is a more secure way than receiving your dividend by
cheque. If you would prefer your dividends to be paid directly into
your bank or building society account further information is available
from Computershare Investor Services (address and telephone
number above). You will still receive a dividend confirmation
(formerly a dividend tax voucher) detailing each dividend to enable
you to complete your tax return to HMRC.

Shareholder communications
Company website
J Sainsbury plc Interim and Annual Reports, and results
announcements are available via the internet on our website at
www.j-sainsbury.co.uk. As well as providing share price data and
financial history, the site also provides background information about
the Company, regulatory and news releases, and current issues.

152

Shareholders can receive email notification of results and press
announcements as they are released by registering on the page
called ‘Email news service’ in the Investor section of the website.

Electronic shareholder communications
The Company encourages all shareholders to receive their shareholder
communications electronically in order to reduce our impact on the
environment. Shareholders can register their email address at www.
etreeuk.com/jsainsbury and for each new shareholder that does so we
will make a donation to the Tree for All campaign run by the
Woodland Trust. By registering with the eTree programme you will be
giving the Company permission to send all shareholder documents to
you via email with a link to a secure website.

Alternatively, the Company has set up a facility for shareholders to take
advantage of electronic communications. The service allows you to:
— view the Annual Report and Financial Statements on the day it is

published;

— receive electronic notification of the availability of future

shareholder information (you must register your email for this
service);

— check the balance and current value of your shareholding and

view your dividend history; and

— submit your vote online prior to a general meeting.

For more information, to view the terms and conditions, and to register
for the service, log on to www.j-sainsbury.co.uk/investor-centre, click
on ‘Shareholder Centre’ and then follow the instructions on screen.

Alternatively, register by visiting www.investorcentre.co.uk. For all
methods, you will require your 11 character Shareholder Reference
Number which can be found on your share certificate or latest dividend
confirmation.

Shareholder security
Shareholders are advised to be very wary of any unsolicited advice,
offers to buy shares at a discount or offers of free company annual
reports. If you receive any unsolicited investment advice:
— make sure you get the name of the person and organisation;
— check that they are properly authorised by the FCA before getting
involved by visiting www.fca.org.uk/firms/systems-reporting/
register; and

— report the matter to the FCA either by calling 0800 111 6768 or by
completing an online form at www.fca.org.uk/consumers/scams/
report-scam

Details of any share dealing facilities that the Company endorses will
be included in Company mailings.

More detailed information on this or similar activity can be found on
the FCA website www.fca.org.uk/consumers/scams

Investor relations
For investor enquiries please contact: Duncan Cooper, Head of
Investor Relations, J Sainsbury plc, Store Support Centre, 33 Holborn,
London EC1N 2HT.

Shareholder profiles
End of year information at 12 March 2016

Number of shareholders
Number of shares in issue

By size of holding

500 and under
501 to 1,000
1,001 to 10,000
10,001 to 100,000
100,001 to 1,000,000
Over 1,000,000

By category of shareholder

Individuals
Insurance companies
Banks and Nominees
Investment Trusts
Pension Funds
Other Corporate Bodies

2016
113,101
1,924,077,194

2015
116,509
1,919,433,342

Shareholders
%
2015
62.23
12.22
23.46
1.63
0.32
0.14
100.00

Shareholders
%
2015
91.26
0.06
8.33
0.03
0.01
0.31
100.00

2016
63.58
11.94
22.35
1.63
0.35
0.15
100.00

2016
92.82
0.06
6.85
0.03
0.01
0.23
100.00

2016
0.42
0.53
3.69
2.33
7.20
85.83
100.00

2016
5.67
0.03
92.10
0.04
0.00
2.16
100.00

Shares
%
2015
0.43
0.56
4.00
2.35
6.66
86.00
100.00

Shares
%
2015
5.84
0.03
91.74
0.01
0.01
2.37
100.00

Share dealing services
To buy or sell your J Sainsbury plc ordinary shares, please visit your
stockbroker or a high street bank who will usually be able to assist
you. Alternatively, you may consider using:
— The Share Centre Ltd who offer a postal dealing service and they
can be contacted at The Share Centre, PO Box 2000, Oxford Road,
Aylesbury, Buckinghamshire HP21 8ZB. Telephone: 01296 414141
or Freephone 08000 282812 and quote ‘Sainsbury’s’; or

— Computershare who offer a telephone and internet facility which
gives shareholders the opportunity to trade at a known price. The
telephone service is available from 8.00am to 4.30pm, Monday to
Friday, excluding bank holidays, on telephone number 0370 703
0084. The internet share dealing service gives shareholders the
option to submit instructions to trade online and more
information can be found by visiting www.computershare.com/
sharedealingcentre.

Further information and detailed terms and conditions are available
on request by calling either provider.

Dividend Reinvestment Plan (‘DRIP’)
The Company has a DRIP, which allows shareholders to reinvest their
cash dividends in the Company’s shares bought in the market
through a specially arranged share dealing service. No new shares are
allotted under this DRIP and approximately 29,210 shareholders
participate in it. Full details of the DRIP and its charges, together with
mandate forms, are available from the Registrars. Alternatively, you
can elect to join the DRIP by registering for Investor Centre at
www.investorcentre.co.uk.

Individual Savings Account (‘ISA’)
A corporate ISA is available from The Share Centre Ltd and offers a
tax efficient way of holding shares in the Company. For further
information contact: The Share Centre, PO Box 2000, Oxford Road,
Aylesbury, Buckinghamshire HP21 8ZB. Telephone: 01296 414141 or
freephone 08000 282812 and quote ‘Sainsbury’s’.

American Depository Receipts (‘ADRs’)
The Company has a sponsored Level I ADR programme for which
The Bank of New York Mellon acts as depositary.

The ADRs are traded on the over-the-counter (‘OTC’) market in the US
under the symbol JSAIY, where one ADR is equal to four ordinary
shares. All enquiries relating to ADRs should be addressed to:

BNY Mellon
Shareowner Services
PO Box 30170
College Station
TX 77842-3170

Toll Free Telephone # for domestic callers: 1-888-269-2377
International callers can call: +1-201-680-6825
Website: www.mybnymdr.com
Email: shrrelations@bnymellon.com

ShareGift
If you have only a small number of shares which would cost more for
you to sell than they are worth, you may wish to consider donating
them to the charity ShareGift (Registered Charity 1052686) which
specialises in accepting such shares as donations. The relevant stock
transfer form may be obtained from Computershare Investor Services
PLC. There are no implications for Capital Gains Tax purposes (no gain
or loss) on gifts of shares to charity and it is also possible to obtain
income tax relief. Further information about ShareGift may be
obtained on 020 7930 3737 or from www.sharegift.org.

153

Additional shareholder informationConsolidated Dividend Confirmations
The Company has adopted the Consolidated Dividend Confirmation
(‘CDC’) process in relation to dividend payments. This means that
those shareholders receiving their dividend direct into their bank
account will receive a CDC once a year detailing all payments made
throughout that year.

Registered office and advisers
Registered office
J Sainsbury plc
33 Holborn
London EC1N 2HT
Registered number 185647

Tax information – Capital Gains Tax (‘CGT’)
For CGT purposes, the market value of ordinary shares on 31 March
1982 adjusted for all capital adjustments was 91.99 pence and B
shares 10.941 pence.

Auditors
Ernst & Young LLP
1 More London Place
London SE1 2AF

Share capital consolidation
The original base cost of shares apportioned between ordinary shares
of 284/7 pence and B shares is made by reference to the market value
of each class of shares on the first day for which a market value is
quoted after the new holding came into existence. The market value
for CGT purposes of any share or security quoted on the Stock
Exchange Daily Official List is generally the lower of the two quotations
on any day plus one quarter of the difference between the values.

On Monday, 19 July 2004 the values were determined as follows:

New ordinary shares 257.5 pence
B shares 35 pence

General contact details
Share price information is available on the Company’s website, in the
financial press and the Cityline service operated by the Financial
Times (Telephone: 0906 003 3904).

For general enquiries about Sainsbury’s Finance call: 0500 405 060.

For any customer enquiries please contact our Customer Careline by
calling: 0800 636 262.

Solicitors
Linklaters LLP
One Silk Street
London EC2Y 8HQ

Stockbrokers
UBS
1 Finsbury Avenue
London EC2M 2PP

Morgan Stanley
25 Cabot Square
Canary Wharf
London E14 4QA

Cautionary statement
Certain statements included in this Annual Report are forward
looking and are therefore subject to risks, assumptions and
uncertainties that could cause actual results to differ materially from
those expressed or implied because they relate to future events.
These forward-looking statements include, but are not limited to,
statements relating to the Company’s expectations. Forward-looking
statements can be identified by the use of relevant terminology
including the words: ‘believes’, ‘estimates’, ‘anticipates’, ‘expects’,
‘intends’, ‘plans’, ‘goal’, ‘target’, ‘aim’, ‘may’, ‘will’, ‘would’, ‘could’ or
‘should’ or, in each case, their negative or other variations or
comparable terminology and include all matters that are not
historical facts. They appear in a number of places throughout this
Annual Report and include statements regarding our intentions,
beliefs or current expectations and those of our officers, Directors and
employees concerning, amongst other things, our results of
operations, financial condition, liquidity, prospects, growth, strategies
and the businesses we operate. Consequently, our actual future
financial condition, performance and results could differ materially
from the plans, goals and expectations set out in our forward-looking
statements. The Company undertakes no obligation to publicly
update any forward-looking statement, whether as a result of new
information, future events or otherwise.

154

Additional shareholder information ContinuedGlossary

Active Kids – Our nationwide scheme to
help inspire school children to take more
exercise and to eat more healthily. Launched
in 2005, Active Kids is open to all nursery,
primary and secondary schools as well as
Scouts and Girl Guides in the UK.
www.sainsburys.co.uk/activekids

Annual General Meeting (AGM) – This year
the AGM will be held on Wednesday 6 July
2016 at The Queen Elizabeth II Conference
Centre, Broad Sanctuary, Westminster,
London SW1P 3EE at 11.00am.

basics – Sainsbury’s entry level own-brand
range of products.

bps – Basis points.

Brand Match – Initiative using market-
leading technology guaranteeing price
match on the basket of comparable grocery
branded goods with Asda. Over 12,000
branded grocery lines are included and the
initiative works by offering customers who
buy ten or more unique items and at least
one branded product, a coupon at the till. We
even include promotions provided the same
number of products are bought. Maximum
value of coupons £10.

by Sainsbury’s – Core own label brand.

Click & Collect – Service which allows
customers to place general merchandise and
grocery orders online for collection in store.

CMBS – Commercial Mortgage Backed
Securities.

Collection – Sainsbury’s own-brand general
merchandising products.

Company – J Sainsbury plc.

Corporate Responsibility and
Sustainability (CR&S) – The need to act
responsibly in managing our impact on a
range of stakeholders: customers, colleagues,
investors, suppliers, the community and the
environment.

CPI – Consumer Price Index.

Dividend cover – Underlying profit after tax
from continuing operations attributable to
ordinary shareholders divided by total value
of dividends declared during the year.

Earnings Per Share (EPS) – Earnings
attributable to ordinary shareholders of the
parent divided by the weighted average
number of ordinary shares in issue during
the year, excluding those held by ESOP
Trusts, which are treated as cancelled.

Glossary

EBITDAR – Earnings before interest, tax,
depreciation, amortisation and rent.

ESOP Trusts – Employee Share Ownership
Plan Trusts.

Fairtrade – The Fairtrade label is an
independent consumer label that guarantees
a fair deal for marginalised workers and
small scale farmers in developing countries.
Producers receive a minimum price that
covers the cost of production and an extra
premium that is invested in the local
community.
www.fairtrade.org.uk

Fair value – The amount for which an asset
could be exchanged, or a liability settled,
between knowledgeable, willing parties in an
arm’s length transaction.

FTSE4Good – The FTSE Group, an indexing
company, runs the FTSE4Good index series to
measure the performance of companies that
meet corporate responsibility standards, and
to facilitate investment in those companies.
www.ftse.com/products/indices/
FTSE4Good

FVTPL – Fair value through profit or loss.
Method of valuing a financial instrument
where changes in fair value are recognised
directly in the income statement.

Gearing – Net debt divided by net assets.

Group – The Company and its subsidiaries.

IFRIC – International Financial Reporting
Interpretations Committee.

IFRSs – International Financial Reporting
Standard(s).

Income Statement – Formerly known as
the profit and loss account under UK GAAP.

Joint venture (JV) – A business jointly
owned by two or more parties.

Kantar Worldpanel (Kantar) – An
independent third party providing data
on the UK Grocery Market.

Live Well for Less – Sainsbury’s customer
commitment to continue to help people live
the life they want to live, with quality
products at fair prices.

Like-for-like sales – The measure of
year-on-year same store growth.

LTIP – Long Term Incentive Plan.

MSC – Marine Stewardship Council.

Nectar – One of the most popular loyalty
schemes in the UK, of which Sainsbury’s is
a partner.

Non-controlling interest – The equity in
a subsidiary not attributable, directly or
indirectly, to the Company.

OFT – Office of Fair Trading.

PRA – Prudential Regulation Authority.

Real discount rate – Discount rate less
inflation rate.

ROCE – Return on capital employed.

RPI – Retail Price Index.

Taste the Difference – Sainsbury’s
premium own-brand range of products.

Total Shareholder Return (TSR) – The
growth in value of a shareholding over a
specified period, assuming that dividends
are reinvested to purchase additional units of
the stock.

Tu – Sainsbury’s own label clothing range.

Underlying basic earnings per share –
Profit after tax from continuing operations
attributable to ordinary shareholders of the
parent before any profit or loss on the
disposal of properties, investment property
fair value movements, retailing financing fair
value movements, the financing element of
IAS 19 and defined benefit pension scheme
expenses, acquisition adjustments arising
from the Sainsbury’s Bank acquisition, and
one-off items that are material and
infrequent in nature, but after the coupons
on perpetual securities, divided by weighted
average number of ordinary shares in issue
during the year, excluding those held by
ESOP trusts, which are treated as cancelled.

Underlying cash flow from operations –
Underlying cash generated from operations
before net rent and cash payments to the
pension scheme.

Underlying operating profit – Underlying
profit before tax from continuing operations
before underlying net finance costs and
underlying share of post-tax profit or loss
from joint ventures.

Underlying profit before tax – Profit before
tax from continuing operations attributable to
ordinary shareholders of the parent before any
profit or loss on the disposal of properties,
investment property fair value movements,
retailing financing fair value movements,
the financing element of IAS 19 and defined
benefit pension scheme expenses, acquisition
adjustments arising from the Sainsbury’s
Bank acquisition, and one-off items that are
material and infrequent in nature, but after
the coupons on perpetual securities.

155

Notes

156

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