Wm Morrison Supermarkets plc Annual Report 2014

Plain-text annual report

Building Momentum Annual Report and Financial Statements 2014/15 Wm Morrison Supermarkets PLC Wm Morrison Supermarkets PLC Throughout the Directors’ report and Strategic report: (1) Unless otherwise stated, 2014/15 refers to the 52 week period ended 1 February 2015 and 2013/14 refers to the 52 week period ended 2 February 2014. 2014 and 2015 refer to calendar years. (2) Underlying proﬁt is deﬁned as proﬁt before impairment, onerous lease provisions and other similar items that do not relate to the Group’s principal activities on an ongoing basis, proﬁt/loss arising on disposal and exit of properties and sale of businesses and IAS 19 pension interest, at a normalised tax rate, as reconciled in note 1.4 of the Group ﬁnancial statements. Underlying operating proﬁt is operating proﬁt before impairment, onerous lease provisions and other similar items that do not relate to the Group’s principal activities and proﬁt/loss arising on disposal and exit of properties and sale of businesses. (3) LFL sales reﬂects the percentage change in year-on-year store sales (excluding VAT and fuel), removing the impact of new store openings and closures in the current or previous ﬁnancial year. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 1 Strategic report Morrisons overview Chairman’s review Our business model The market context Our strategy KPIs Review of the year Relationships Corporate responsibility Our risks Governance Corporate governance report Directors’ remuneration report Directors’ report 2 4 6 8 10 11 12 22 26 30 36 47 59 Financial statements Statement of Directors’ responsibilities Independent auditors’ report Consolidated statement of comprehensive income Consolidated balance sheet Consolidated cash ﬂow statement 61 62 71 72 73 Consolidated statement of changes in equity 74 General information Notes to the Group ﬁnancial statements Company balance sheet Company accounting policies 75 76 113 114 Notes to the Company ﬁnancial statements 117 Investor information Five year summary Supplementary information Investor relations and ﬁnancial calendar 127 129 130 Below: Online Annual report 2015 For more information visit: www.morrisons-corporate.com/ar2015 2 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Morrisons overview This is Morrisons “Morrisons has grown from a market stall to the UK’s fourth largest supermarket group.” Who we are We are a value-led grocer, British born and bred, focused on fresh food. High quality, fresh products are at the heart of everything we do. We have our own manufacturing production facilities that supply our stores to ensure that we sell only the best products. Our vertical integration gives us both control over the provenance of our supply chain and the ﬂexibility to meet the demands of customers. We have adapted to the changing demands of our customers by launching a multi-channel offer that gives the same great supermarket experience to customers in our convenience stores and online business. Key Supermarkets Morrisons M local Online coverage Distribution centres Manufacturing This data is based on internal reporting regions and excludes our store in Gibraltar. Fresh g Our vertically integrated d strong supply chain and strong ships supplier relationships reshest ensure only the freshest o produce is sold to our customers. Online Our online delivery service now covers nearly 50% of UK households. 95 42 115 15 110 66 79 2 114 28 Number of customers who visit stores per week 12.1M 60% of the fresh food we sell we make ourselves Online orders, over 1.1M Stores across UK, of which 153 are convenience stores 667 Number of colleagues, over 117,000 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 3 Building momentum... ...In the year ahead, we will further improve our customer offer through lowering prices, providing better service and great new products. We will be Morrisons. Making great quality fresh food in our factories and shops. Selling at low prices. Market Street is Morrisons. Our unique craftspeople – butchers, bakers, ﬁshmongers, greengrocers – are Morrisons. If we get all the everyday small details right, more customers will shop with us more often. And more customers mean more sales, which will ultimately mean more proﬁt to invest back into improving our customer offer even further... ...Building momentum by being Morrisons. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 4 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Chairman’s review Creating value “We need to put the customer at the heart of what we do.” Andrew Higginson Chairman I am delighted and honoured to be your new Chairman, a role I started in January having been with Morrisons as Deputy Chairman since last October. Following a successful handover period, my predecessor, Sir Ian Gibson, retired from Morrisons in January. On behalf of the Board, I wish to express our gratitude to Sir Ian for his very considerable contribution to the Company over the last eight years. Morrisons is a business I know well, having been a competitor for nearly 20 years – 15 years when I was at Tesco and, for over two years at Poundland. I got to know Morrisons even better in late-2014, ahead of joining and during my induction period. From my many visits to the shops, I could see that Morrisons still has many of the attributes and characteristics that made the business such a formidable competitor – great traders, a strong fresh offer, and a deserved reputation for offering good value. Morrisons is the most distinctive of the ‘Big 4’ supermarkets. We manufacture much of our fresh food and Morrisons Brand product – in Meat, Produce, Deli, Fish and Bakery – in factories that we own and operate ourselves. This is unique in the UK and gives Morrisons a ﬂexibility, speed-to-market, and provenance not available to our competitors. Market Street is also a distinct part of the Morrisons offer that helps set us apart. We have more qualiﬁed butchers, ﬁshmongers, bakers, and greengrocers than any of our competitors – they are the heart of the business and are what helps make Morrisons unique. On joining the business, the Board and I decided that we needed to build on these ﬁrm foundations and return the business to growth by improving trading momentum. This, we concluded, required a change in leadership, to see the business through the next three to ﬁve year period. I am delighted that David Potts joins us as our new CEO. He brings more than 40 years’ experience in grocery retailing and, having worked alongside him for 15 years, I know he will bring a focus on the customer, a track record of delivery, ﬂair, talent, and immense energy to his new role. He will lead our colleagues from the front, and with distinction. Dalton Philips was CEO for ﬁve years. He brought great personal qualities and values to his leadership of the business, having had to manage against a backdrop of considerable industry turmoil and change and we thank him for his contribution. The strategy, as laid out in March 2014, is broadly correct. We now need to up the pace, especially in our core supermarkets, to regain trading momentum. First and foremost this will be done via a relentless focus on the customer. We need to put the customer at the heart of what we do – a simple aim, but not easy to do well. However, it has traditionally been one of Morrisons strengths and, I believe, is engrained in our great colleagues across the business. We will free up resources from within the business to re-invest more in the customer proposition – price cuts, but also service and availability. We will work harder than before to restore Morrisons value offer and improve all the everyday small details of the customer shopping experience. Success measures will be simple – more customers buying more from us. More customers means more volume growth. Ultimately, more customers and more volume will lead to better LFLs and proﬁtability, but this will be a gradual improvement and, near-term, the focus is more on freeing up resources to invest in the customer proposition. Throughout, our primary focus will be on free cash ﬂow generation and optimising our capital structure. Highlights Cost savings achieved Final dividend Total stores opened in 2014/15 £224M 9.62p 68 of which 57 were convenience stores Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 5 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s In the last year we have made good progress in freeing up resources – cost savings and cash ﬂow – to invest in our customer offer. We remain optimistic that we will deliver on our targets for costs, working capital and debt. We also have a strong balance sheet and remain committed to a predominantly freehold property portfolio (currently 86% of supermarkets). We will maintain a tight control over capital expenditure, focusing our spend on our core supermarkets, to improve the shopping trip for our customers. This all provides good future cash ﬂow visibility, and enables us to commit to an annual dividend for our shareholders of not less than 5.0p per share for 2015/16. We expect the trading environment to continue to be tough in the year ahead. Although, lower energy prices may well drive lower commodity prices and slightly higher disposable income for customers. Our outlook assumes a period of price deﬂation as we reinvest back into the customer proposition. However, our destiny is in our own hands. It may take time, but it is this investment in customers that will improve every detail of the shopping trip, restore our fresh and value credentials, drive our trading momentum and, ultimately, return Morrisons to health. Andrew Higginson Chairman Below: Customer proposition We will free up resources from within the business to re-invest more in the customer proposition Governance highlights Board composition and membership • Our Board comprises ﬁve independent Non-Executive Directors and following the appointment of David Potts on 16 March 2015, two Executive Directors. • All Directors, stand for re-election annually at the AGM, except for Richard Gillingwater who steps down from the Board at the AGM. • The Board is committed to a clear division of responsibilities between the roles of Chairman and the CEO. • Phil Cox has been the Board’s Senior Independent Director since May 2013 and a Non-Executive Director since April 2009. • As Audit Committee Chairman, the Board is satisﬁed that Phil Cox has recent and relevant experience appropriate to his position. Board effectiveness • The Board contains the skills and experience necessary in light of the Group’s current activities and strategic direction. • The Directors have all attended an appropriate number of Board and Committee meetings. • The Board is satisﬁed that Non-Executive Directors commit sufficient time to the Group and contribute to its governance and operations. External auditor • During 2014/15 we conducted a tender process for the appointment of the external auditor. As a result, PricewaterhouseCoopers LLP (PwC) were formally appointed as our new statutory auditor at the 2014 AGM. • The Board has a clear policy on the engagement of the external auditor to supply non-audit services. Risk and control • The Board is satisﬁed with the effectiveness of internal control and that risk is being managed effectively across the Group. • The Group’s Internal Audit function perform periodic reviews of the key areas of our business. • Consideration has been given to ﬁnancial reporting matters with sufficient challenge provided to management relating to judgemental areas. 6 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Our business model What we do differently The Morrisons difference At Morrisons, we focus on fresh food. Our Market Street departments, and particularly our butchers, bakers, ﬁshmongers and greengrocers are skilled in a way no other supermarket in the UK can match, and are passionate about what they do. They prepare food the way our customers like it, and often to individual customer speciﬁcations. That focus on fresh food is present across the Group as well as in our new online and convenience businesses. Our focus on fresh is supported by our vertically integrated ‘farm to fork’ business model. Unlike any other major UK supermarket, we manufacture more than half of the fresh food we sell ourselves, operating our own abattoirs and food production factories as well as our own farm for research and development purposes. We also operate our own distribution network. Then we move them What we do We make things • We are the second largest fresh food manufacturer in the UK. • We own, operate and control a greater proportion of our fresh food supply chain than any other major grocery retailer in the UK. • Every day we make more than half of the fresh food we sell in store and online. • Our vertically integrated supply chain gives our customers assurance over the provenance, quality and safety of our food. • We buy direct from farmers and have the ability to process whole animals or crops, therefore we utilise more of what we buy with less wastage. • We employ qualiﬁed butchers, bakers, ﬁshmongers and greengrocers in store, allowing our customers to tailor quantities and cuts of meat and ﬁsh to suit their preferences. And we buy things • We pride ourselves on buying as much fresh food in the UK as we can – 100% of our Morrisons own brand fresh meat is British sourced, supporting British farmers. • We work with our suppliers through the Morrisons farming programme to ensure British farming remains competitive and sustainable. • We are committed to sustainable supply chains through purchasing our products ethically. • We have made our supply chain shorter by dealing direct with more of our suppliers. • We insist on high manufacturing standards from our suppliers to ensure the integrity and quality of our products. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 7 Direct control over our vertically integrated supply chain is a clear competitive advantage. It helps us to better manage materials and resources, allows us to minimise waste and costs, and makes it easier to react swiftly to changing customer demands. In addition, it gives us conﬁdence in the provenance and safety of our products. The Elliott report into the horsemeat scandal highlighted that Morrisons stood out in its supply chain integrity. To further reassure customers of our commitment to offering great value we have introduced our Match & More card during the year. This means price is never a reason for customers to shop elsewhere, and allows customers to focus on what is different, and better, about Morrisons. Above: Fresh food We focus on fresh food across the Group as well as in our new online and convenience businesses And sell them in our stores and online How we are different Fresh • From ﬁeld to fork in hours Controlling food provenance, safety and quality. Getting food onto our shelves fresher and faster. • Prepared by us Making more fresh food than any other supermarket. • Consistently excellent Delivering our fresh-focused customer experience in stores and online. • Monitoring to our standards Through our Ethical Trading Code and Manufacturing Standard. Value • Passing savings on to the customer Our vertical integration model allows us to take cost out of the supply chain to pass on to customers. • Honest, clear pricing Transparent promotions and clear shelf edge pricing are complemented by our Match & More guarantee. • Quality If a customer is not 100% satisﬁed, neither are we. We offer refunds and replacements on products prepared by us. • Reducing our waste Buying whole animals and crops direct from farmers and processing through our own operations eliminates needless waste. Service • Friendly customer service Our warm customer service provides enhanced perception, engagement and loyalty. • Skilled colleagues Our in-store skilled colleagues tailor portion sizes to suit customers’ personal preferences. • Availability In store, our operation allows us to react quickly and efficiently to customer needs, catering for local demand. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 8 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report The market context Challenging conditions The market Customer conﬁdence Consumer conﬁdence has started to recover in recent months, however, savvy shopping continues, with customers expecting, and seeking out, great value for money by shopping around. The reductions in oil prices and low interest rates are likely to sustain this growth in conﬁdence. However, real disposable income has a way to go to regain pre-2008 levels, and customers tell us that they are unlikely to return to old shopping patterns in the near term. Shopping around for the best value will continue. We saw a notable drop in food inflation through the year, and we expect downward pressure on prices to be a feature for some time. This shift in shopping behaviour, alongside societal trends such as an ageing population and more single person households, continues to result in customers making more frequent grocery shopping trips. Kantar Worldpanel has the average UK household making 4.9 grocery shops each week across all channels and formats. The days of a ‘once a week big shop’ are over, replaced with several trips and possibly one larger trip for the weekend. Consequently, the importance of fresh food continues to grow for customers. Market share and growth The 2008 recession enabled rapid growth of the ‘Discount Sector’ causing a structural shift in consumer behaviour as they searched for best value from multiple retailers. We have reacted to this shift by investing heavily in price during the year, starting with the ‘I’m Cheaper’ campaign. During October we launched Match & More, our new price match and points card. Combined market share Morrisons The rest of the big 4 Premium retailers Discounters Others Source: Kantar Worldpanel 52 week ending Till Roll data 2014/15 Customer conﬁdence Source: GfK NOP consumer conﬁdence Economic situation Personal ﬁnances 15 12 9 6 3 0 -3 -6 Feb 2014 Mar 2014 Apr 2014 May 2014 Jun 2014 Jul 2014 Aug 2014 Sep 2014 Oct 2014 Nov 2014 Dec 2014 Jan 2015 Feb 2015 Sales, Volume and RSP Growth in the Market YoY Growth % Sales Volumes RSP Source: Kantar Worldpanel 12 week rolling Total Grocery data % 2.8 2.2 1.6 1.0 0.4 -0.2 -0.8 -1.4 -2.0 Feb 2014 Mar 2014 Apr 2014 May 2014 Jun 2014 Jul 2014 Aug 2014 Sep 2014 Oct 2014 Nov 2014 Dec 2014 Jan 2015 Feb 2015 Shopper trends What customers want Unsurprisingly, customers continue to tell us that price remains the biggest driver of store choice. Importantly, they want more trust as too many retailers are putting prices up at the same time as shouting about prices they’ve put down. Research also shows that customers want more than just cheap prices. Other factors such as range, quality, ease of shop and service all play a part in a customer’s decision making process when choosing where to shop. Our strategy, set out on the following pages, addresses these trends. Alongside our price investment activity, we launched Match & More during the year, price matching Tesco, Sainsbury’s, Asda, Aldi and Lidl – ensuring that price is never a reason for customers to shop elsewhere and gives them the trust they demand, which has been very well received. We have seen an improvement in volume per basket with Match & More playing a part in this. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 9 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 10 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Our strategy Strategy overview Strategic objectives Invest We will invest £1bn over three years through: • Lowering prices on a permanent basis • Offering fewer but more impactful promotions • Making Morrisons own brand a competitive advantage • Continuing to improve quality and range • Making our stores easier and more pleasant places to shop • Rewarding customers through Match & More • Delivering focused, consistent customer communication Save Unlock £1bn of savings over three years1 allowing us to invest in our value proposition: • £300m improving our end-to-end supply operations • £200m indirect procurement and loss prevention • £500m promotional investment and sourcing What we did in 2014/15 What we did in 2014/15 Awards achieved for Morrisons products nearly 200 Launched Match & More Launched ‘I’m Cheaper’ campaign cutting 1, 1,200 products by an average 17% Improved customer experience in-store – removed trolley locks, extended opening hours Invested in chill chain to improve produce quality £20M Grow the core business and accelerate our presence in new channels Items on promotion reduced in second half of the year by Improved systems and focused on reducing shrinkage, waste and mark down costs and indirect procurement 10.6% £50M Range reduction – 10% SKU count reduced by 1ST phase of store restructure completed Plans to introduce sales-based ordering are on track Productivity savings delivered through our vertical integration, including transferring beef cutting and packing from stores to production sites £70M What we did in 2014/15 − Core New channels 60% of the fresh food that we sold, we made ourselves Over 13,000 skilled colleagues serving customers on Market Street UK households with access to our online proposition nearly 50% M local stores opened 57 Generate cash • Generate at least £2bn of free cash ﬂow over three years1 by adhering to strong ﬁnancial principles What we did in 2014/15 Reduced capital expenditure to £520M Improvement in working capital £206M Property disposals generated proceeds of £448M 1 The three year period comprises 2014/15, 2015/16 and 2016/17. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 11 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s We have identiﬁed measures that are important to the success of the Group’s ﬁnancial performance and operational excellence, and to our stakeholders, customers, suppliers and colleagues. These KPIs are summarised below and throughout the Strategic report, identiﬁable by a KPI logo. KPIs 2014/15 Quarterly Group LFL sales performance 2014/15 Quarterly number of transactions KPI KPI (5.7%) (7.1%) (7.6%) (6.3%) (2.6%) Q4* Q1 Q2 Q3 Q4 Definition LFL number of transactions, year-on-year change. Excludes online and convenience. * 2013/14 (1.4%) (3.6%) (5.0%) (3.3%) (1.9%) Q4* Q1 Q2 Q3 Q4 Definition LFL sales performance measures the percentage change in year-on-year sales (excluding VAT and fuel), removing the impact of new store openings and closures in the current or previous financial year. * 2013/14 2014/15 Quarterly LFL items on promotion 2014/15 Quarterly items per basket KPI KPI Definition Year-on-year change in the number of items on promotion. * 2013/14 6.0% (5.0%) (12.9%) (13.6%) (8.1%) Q4* Q1 Q2 Q3 Q4 Definition LFL items per basket, year-on-year change. Excludes online and convenience. * 2013/14 (6.9%) (5.9%) (3.2%) (2.4%) (0.1%) Q4* Q1 Q2 Q3 Q4 Colleague engagement Definition Colleague engagement is measured through our annual Climate surveys supplemented by our shorter Pulse surveys conducted every two months. Sales growth Definition Measures total store and online sales across the Group, excluding VAT and fuel. KPI Number of SKUs KPI 68.4% 72.9% 71.8% 75.6% Definition Number of product lines within our stores. * Q4 2013/14 number is for SKU count as at start of programme 24,500 23,600 22,400 22,150 21,950 2012 2013 2014 2015 Q4* Q1 Q2 Q3 Q4 KPI UK grocery market share KPI 4.0% 3.9% 1.8% (1.8%) (3.2%) 2010/11 2011/12 2012/13 2013/14 2014/15 Definition The Group’s percentage of retail sales in the UK grocery sector, as measured by Kantar Worldpanel at the end of January. 12.8% 12.8% 11.8% 11.4% 11.1% 2011 2012 2013 2014 2015 12 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Review of the year A strong platform “Investing in our customer proposition.” Trevor Strain Chief Financial Officer Introduction A year ago we took actions to invest in the customer proposition and make £1bn of cost savings over three years. I am pleased with some of the progress so far. We achieved or beat the components of our guidance for 2014/15 – on proﬁt, cash ﬂow, working capital and cost savings. I was particularly pleased that we generated £785m of free cash ﬂow1 and were cash ﬂow positive before disposals. Like-for-like sales decline slowed during the year. This was driven by volume KPIs such as items per basket and number of transactions, which showed particular progress towards the end of the second half. We will look to continue this volume momentum into 2015/16. However, as Andy says in the Chairman’s review, there is still much to do. We need to invest more in the customer in order to build trading momentum. Consistent with Morrisons transparent approach, there are disclosures on commercial income and depreciation in these ﬁnancial statements, which we believe provide added insight for shareholders. Within the results, there is property impairment and onerous lease charges of £1,273m, reﬂecting a prudent assessment of market conditions. Strategy All aspects of our strategy start with the customer. We will work harder to restore the Morrisons value offer and improve all the everyday small details of the in-store customer shopping experience. Initially success will be measured by winning back customers and encouraging them to spend more. 1 Free cash ﬂow is the movement in net debt adjusted for dividends. More customers will mean more volume growth, so KPIs such as number of transactions and items per basket remain important. Ultimately, more customers and more volume will lead to better LFLs and proﬁtability. The proposition Improving the Morrisons value offer starts with lower prices. We are committed to consistently lowering prices and keeping them low. In 2014/15, we invested a net £315m into our proposition, the majority of which was in price. We started in Q1 with a rolling programme of price cuts in Produce and Meat. In May, we launched the ‘I’m Cheaper’ campaign, cutting 1,200 Morrisons own brand products and branded everyday products by an average of 17%, and we followed these with more cuts in June. During October, we launched Match & More, our new price match and points card which provides a unique price guarantee against Aldi and Lidl, as well as Tesco, Sainsbury’s and Asda. In February 2015, we reduced the price of 130 high volume everyday lines by an average of 22%. We are just one year into our plan, and are determined to keep lowering prices for customers. During 2015/16 and 2016/17, we are targeting almost £800m more cost savings, the majority of which we expect to invest back into the customer proposition. As well as low, consistent and transparent pricing, we are focusing on fewer but more impactful promotions. This will help make our business simpler for customers, and cheaper for us to operate. Good progress was made during 2014/15. The number of weekly items on promotion fell by 10.6% year-on-year in the second half of the year. Below: ‘I’m Cheaper’ campaign Our rolling programme of major price cuts launched in May 2014 Highlights Full year dividend Closing net debt Underlying earnings per share 13.65p +5% £2,340M -17% 10.9p -53% Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 13 Below: Match & More We launched our Morrisons card in October 2014 Below: Match & More app Our app allows customers to monitor their points, create shopping lists and become aware of offers Overall, year-on-year promotional participation was down 200bps in the second half of the year, which was 340bps better than the +140bps in Q4 2013/14. We intend to keep simplifying and improving promotions for customers. During 2015/16, our communication to customers will prioritise our low prices, great promotions and fresh food strengths. We will also begin to leverage the new Match & More data in many ways across our business, including more personalised offers for customers. As well as everyday low prices, we will also focus on other key attributes of the Morrisons brand – Market Street and the provenance provided by our food production facilities. Not all supermarkets are the same. Morrisons is the most distinct of the ‘Big 4’. We manufacture much of our fresh food and Morrisons own Brand – in Meat, Produce, Deli, Fish and Bakery – in factories that we own and operate ourselves in the UK. This is unique and gives Morrisons a ﬂexibility, speed-to-market, and provenance not available to our competitors. Market Street is also a distinct and vibrant part of the Morrisons offer that helps set us apart. Our people are different too – we have more qualiﬁed butchers, ﬁshmongers, bakers, and other craftspeople than any of our competitors – they are the heart of the business and are what helps make Morrisons unique. Morrisons own brand is a big opportunity, especially where we can leverage our manufacturing capabilities. Our Morrisons own brand sourcing team is beginning to make real progress in the areas of product development, reducing complexity and removing duplication. During the period, we developed hundreds of products, with some very good results. The progress we are making on Morrisons own brand is being independently recognised. We won nearly 200 product awards during 2014/15, over three times the number for 2013/14. At the same time, we continued to make our ranges simpler and more relevant for customers. During the year, we reduced Morrisons own brand SKUs in some of our categories by over 20%, with an average reduction across all categories of more than 10%. During 2015/16, we will continue to reﬁne our Morrisons own brand offer, with the focus on improving the value we offer customers and product innovation. We will continue to leverage our fresh and Market Street credentials, and will utilise Match & More by tailoring more points to our Morrisons brand offer. Saving to invest The investment in our value proposition is being funded by a £1bn three-year self-help programme. This is an ambitious plan, however many cost savings are initiatives that other retailers have beneﬁtted from for some time, and will be accessed as we develop our IT infrastructure. We remain conﬁdent that, with these opportunities ahead, we will deliver our £1bn plan. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Own brand redesign, increased tea sales by nearly +20% 14 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Review of the year A strong platform continued Above: Loss prevention We have focused on ways to reduce loss from stores by improving product protection on high risk lines End−to−end operations £70m of savings were delivered during the period, and we conﬁrm our three-year target of £300m. During 2014/15, we announced plans to restructure our in-store teams to make them more efficient, with clearer lines of responsibility and fewer layers of management. The changes are currently in progress. This will not affect the number of colleagues in customer-facing roles. As planned, we are increasingly leveraging our manufacturing capabilities by moving many non-customer-facing, non-value added, in-store tasks to our manufacturing businesses. Most of these tasks are invisible to our customers and have freed-up our skilled in-store colleagues to serve customers better. During the period, we moved production of almost 120 beef and pork lines from in-store to our manufacturing facilities, which has led to longer shelf life with less waste and higher sales. For example, sales of our Signature Beef range are up 100% year-on-year since we started cutting and skin- packing the product in our meat processing plants. With more of our butchers’ time freed up to do what they do best – serve customers – counter sales are up by more than 10%. There are several similar initiatives planned for 2015/16, many of which are opportunities around our unique Market Street and manufacturing capabilities. For example, lamb will follow beef and pork in beneﬁtting from moving some production to our manufacturing facilities, and our counters will become even more of a focus for our unique butchers’ skills. Our plans for the introduction of sales-based ordering (SBO) are well on track. The ﬁrst category, Frozen, will go live soon, with a phased roll-out across the range over coming quarters. Both during implementation and once operational, we expect signiﬁcant cost savings and stock reduction opportunities. Several competencies that we are building ahead of SBO are already beginning to beneﬁt the business and our customers. For example, we have recently introduced Availability Champions to over 400 stores, giving colleagues extra responsibility in key product areas to ensure best levels of customer service and product display. We are also working in-store to optimise labour scheduling and better phasing of promotions. Within the supply chain, we are working on initiatives such as improving warehouse operations, increasing shelf-ready packaging and improving the processes around replenishment management. We will continue to introduce initiatives that improve efficiency and productivity throughout 2015/16, whilst at the same time enhancing the customer offer. Indirect procurement and loss prevention £50m of savings were delivered during the period, and we conﬁrm our three-year target of £200m. During the period we saved an annualised £9m in packaging costs across various in-store and manufacturing initiatives. Energy consumption initiatives and different buying strategies saved in excess of £15m. Left: Vertical integration This gives us unique opportunities to drive efficiencies On our ﬁrst online anniversary, we delivered our 1,000,000th order Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 15 Promotional investment and sourcing £104m of savings were delivered during the period, and we conﬁrm our three-year target of £500m. As highlighted above, we made substantial progress in reducing the number of weekly items on promotion and promotional participation, two KPIs that we now measure and report externally every quarter. Another KPI, number of SKUs, also moved very favourably during the year, with a reduction of more than 2,500 SKUs (over 10%). Range reduction and streamlined promotions remains a key future cost saving opportunity, as are the related areas of reﬁning our marketing spend and utilising Match & More data. New channels We are pleased with our ﬁrst year online. From a standing start and ﬁrst delivery in January 2014, we exited 2014/15 with around £200m of annualised sales and near-50% coverage of all UK households, in line with our ambitious initial targets. On our ﬁrst online anniversary, we delivered our one millionth order. Alongside our partner Ocado, we started to operate out of Dordon, initially servicing Warwickshire and Yorkshire. During the year, we began distributing from spokes in Leeds, Manchester, North London, Sheffield, Merseyside and Bristol. Although our growth is strong, we are most pleased with our consistently high levels of customer service. We continued to achieve industry-leading customer service metrics throughout our ﬁrst year. Even during the busiest week of the year pre-Christmas, Morrisons on-time delivery was 97.5% and product substitutions were just 1.4%. During 2015/16, we will open at least one additional spoke. Our focus will be on increasing our delivery density within our extensive and highly populated existing coverage area. We will also trial other methods of customer delivery. For M local, we opened 57 stores and closed six underperforming stores during the period, bringing the total to 153. Convenience is a channel that we expect will continue to grow in future. Over recent years, we have been working to grow M local at pace in order to quickly gain critical mass and learn. However, for stores now in their second year, we are not yet seeing the level of trading performance we had anticipated. We will slow new openings signiﬁcantly, and review the M local proposition and approach to site selection rather than pursue store number and turnover targets. We will update our future M local plans once the review is complete. In July, we announced the sale of Kiddicare. The exit from the business is now almost complete. All but two of the ten leases have been assigned. As reported at the interims, proﬁt on disposal was £4m. Below: Doorstep freshness check Our online grocery business also showcases our expertise and experience in fresh food, including a doorstep freshness check and virtual craftsmen S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s e s i w e g a m I : o t o h P 16 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Review of the year A strong platform continued Financial results Summary income statement Turnover Operating loss1 Net ﬁnance costs Loss before tax Underlying proﬁt before tax2 Underlying earnings per share2 2014/15 £m 16,816 (694) (98) (792) 345 10.9p 2013/14 £m 17,680 (94) (82) (176) 719 23.1p 1 Included here is £2m (2013/14: £1m) share of proﬁt from joint venture. 2 The comparative has been restated to reﬂect the amended underlying earnings deﬁnition described in note 1.4 in the ﬁnancial statements. Operating proﬁt Operating loss Underlying adjustments: – Impairment and onerous lease provisions – Proﬁt/loss on disposal and exit of properties – Proﬁt arising on disposal of Kiddicare.com Limited Underlying operating proﬁt1 2014/15 £m (696) 1,273 (131) (4) 442 2013/14 £m (95) 903 (9) − 799 1 The comparative has been restated to reﬂect the amended underlying earnings deﬁnition described in note 1.4 to the ﬁnancial statements. Turnover Total turnover during the period was £16.8bn, down 4.9% year-on-year. Store and online turnover of £13.0bn, excluding fuel, was down by 3.2%, which comprised a like-for-like (LFL) decrease of 5.9% (including a contribution of 0.6% from online) and 2.7% from new stores. Fuel sales fell by 10.2% to £3.6bn, with deﬂation a key feature as we passed the lower oil prices on to customers. Items excluded from underlying proﬁt We consider that underlying operating proﬁt and underlying proﬁt before tax are useful measures to understand underlying trends and performance of our business. Adjustments are made to reported proﬁt ﬁgures to remove items that do not form part of the Group’s principal activities. Underlying operating proﬁt, which excludes impairment and property disposal proﬁts, was £442m, with underlying operating margin down around 1.9% pts year-on-year as anticipated. This is primarily due to our investment in the customer proposition. Operating loss, including impairment and property disposal proﬁts, was £696m. Net ﬁnance costs were £98m, up £16m on last year reﬂecting a changed debt proﬁle (we have raised £900m of bonds over the last 24 months) and less capitalised interest as a result of the reduced development programme. One-off costs were £68m (2013/14: nil), comprising Kiddicare trading losses, restructuring costs, and the launch costs of the Match & More card. New business development (NBD) costs for online and convenience were £71m (2013/14: £66m). Group like-for-like (LFL) sales performance 0.9% 1.8% (2.1%) (2.8%) (5.9%) KPI 2010/11 2011/12 2012/13 2013/14 2014/15 Definition LFL sales performance measures the percentage change in year-on-year sales (excluding VAT and fuel), removing the impact of new store openings and closures in the current or previous financial year. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 17 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Underlying proﬁt Summary cash ﬂow Cash generated from operations before onerous capital payments Onerous capital payments Cash generated from operations Proceeds from sale of plant, property and equipment and sale of businesses Capital expenditure Dividends paid Equity retirement Purchase of own shares Proceeds from issue of shares Tax and interest Other non-cash movements Net cash ﬂow Opening net debt Closing net debt 2014/15 £m 1,044 (74) 970 450 (520) (308) − (8) − (92) (15) 477 (2,817) (2,340) 2013/14 £m 1,031 − 1,031 34 (1,086) (283) (53) – 28 (309) 2 (636) (2,181) (2,817) As we planned, there has been a signiﬁcant improvement in the Group’s net cash ﬂow, which was better by over £1.1bn year-on-year. Free cash ﬂow, i.e. adjusting for dividends, was £785m. The Group generated operating cash ﬂow before onerous capital payments of £1,044m, slightly up year-on-year despite both lower proﬁt and the tough trading conditions that impacted all UK food retailers. There has been a rigorous focus on working capital improvement which is ongoing. The business is now very focused day-to-day on stock, debt and terms. Operating working capital improved by £206m driven by various factors including four days less stock cover. Importantly this has been achieved without impacting our on-shelf availability. Our supply chain ﬁnance initiative is also up and running and progressing well. Further working capital beneﬁts will come in years two and three of the overall programme, as initiatives such as sales-based ordering start to land. We remain on track for a target of £600m working capital improvement over three years. There was an outﬂow for onerous capital payments in the year of £74m. Capital expenditure fell by over 50%, to £520m, from £1,086m for 2013/14, as we cut back on new store expansion and there was no repeat of last year’s online launch expenditure. Overall, post-dividend and pre-property disposal proceeds, Morrisons was £42m cash ﬂow positive. Property disposals were £448m, with property proﬁts of £131m, net of £19m costs associated with the closure of ten superstores and six convenience stores announced in the ﬁnal quarter of 2014/15. Reported loss before tax Underlying adjustments: – Impairment and onerous lease provisions – Proﬁt/loss arising on disposal and exit of properties – Proﬁt on disposal of Kiddicare.com Limited – Net pension interest (income)/cost Underlying proﬁt before tax1 Underlying proﬁt margin1 2014/15 £m (792) 1,273 (131) (4) (1) 345 2.1% 2013/14 £m (176) 903 (9) − 1 719 4.1% 1 The comparative has been restated to reﬂect the amended underlying earnings deﬁnition described in note 1.4 to the ﬁnancial statements. Underlying proﬁt before tax reduced to £345m, compared to £719m for 2013/14, (or £785m as reported under the previous deﬁnition, which excluded £66m of NBD costs). Underlying basic earnings per share (EPS) reduced by 53% to 10.9p (2013/14: 23.1p) reﬂecting the decrease in underlying proﬁt. Impairment and onerous lease provisions Morrisons tests for property impairment each year by comparing every store’s recoverable amount to its book value. The recoverable amount is the higher of value in use and market value less cost to sell. Where book value is greater than the recoverable value, the asset is impaired. Having applied the above methodology the Group has recognised an impairment and onerous lease provision of £1,273m in the year. There are two key drivers of this impairment charge. Firstly, a change in some forward-looking assumptions, including performance, and an increase in the discount rate. Secondly, a prudent assessment of market value. After impairment, the loss before tax was £792m (2013/14: loss of £176m). Underlying proﬁt before tax (£M) KPI 869 935 901 719 345 2010/11 2011/12 2012/13 2013/14* 2014/15 Definition Measures the normal underlying business performance. Profits are adjusted to remove non-recurring exceptional costs, property transactions and IAS 19 pension interest. A reconciliation of underlying profit is provided in note 1.4 of the Group financial statements. * 2013/14 has been restated to reﬂect the changes to the deﬁnition of underlying earnings described in note 1.4. 18 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Review of the year A strong platform continued Net debt As a result of the above Group net debt fell £477m to £2,340m, from £2,817m at the end of 2013/14. This represents a £1.1bn improvement in cash ﬂow year-on-year, and free cash ﬂow pre-dividend of £785m. During 2014/15, we issued a 15-year (2029) £300m bond (4.75% coupon), and replaced our £1.2bn revolving credit facility with a ﬁve-year £1.35bn facility, which means we now have £350m of debt maturities over the next three years compared to around £2bn 12 months ago. At the year end debt level, there is headroom of over £1.1bn versus the Group’s committed facilities. Tax Morrisons has always been committed to ensuring that we pay our fair share of tax, and that this tax is paid in the territory in which our activities are based. The management of our tax affairs is focused on ensuring that we pay the tax we are obliged to pay in accordance with the law and that our tax affairs are consistent with our broader corporate objectives. We regard this as being important in protecting our reputation and brand, and have a tax management framework which ensures that the needs of all of our stakeholders are considered. In 2014/15 the Group was in a net corporation tax refund position of £10m (2013/14: £220m payment), reﬂecting reduced underlying proﬁts, impairment of assets and overpayment of corporation tax in earlier years. The Group is committed to paying all of its taxes in full and on time. It is a major contributor across a wide range of UK taxes. In 2014/15, Morrisons made net payments of £1,025m to the UK government of which £458m was borne by Morrisons and the remaining £557m was collected on behalf of our colleagues, customers and suppliers. Morrisons participate in the ‘Total Tax Contribution’ PwC Survey for the 100 Group of Finance Directors. In the year to January 2014 (the most recent for which ﬁgures are available), our total taxes borne ranked 10th amongst the survey participants. Summary balance sheet Fixed assets and investments Working capital Provisions and tax Net pension liability Net debt Net assets 2014/15 £m 8,023 (1,324) (726) (39) (2,340) 3,594 2013/14 £m 9,299 (1,104) (675) (11) (2,817) 4,692 Pensions The triennial pension valuation was completed in July 2014. At the time of the previous triennial valuation in 2010, the pension schemes were almost fully funded, and that position is virtually unchanged, with the funding deﬁcit as at April 2013 falling to £40m and the schemes being over 97% funded. In January 2015, we announced a proposal, to harmonise our various pension schemes. We have reached an agreement in principle with the Trustees of the two CARE Schemes to close them to future accrual, subject to the outcome of consultation with current scheme members. The Group’s proposal is that scheme members’ accrued beneﬁts will be frozen (subject to inﬂationary revaluation), and that future beneﬁts will no longer accrue in these schemes. Following this agreement the Group has entered into a Consultation with scheme members on 23 February 2015. The Group expects that the consultation process will conclude during May 2015. Subject to the outcome of the consultation, any changes would become effective in early July 2015. The ﬁnancial effect of closing these schemes to future accrual would be to reduce the Group’s exposure to future volatility and increases in pension liabilities and costs. Underlying basic earnings per share KPI 23.0p 25.6p 27.3p 23.8p 10.9p 2010/11 2011/12 2012/13 2013/14* 2014/15 Definition The EPS measure uses underlying profit, divided by the weighted average number of shares in issue at the year end date. A calculation is provided in note 1.5.2 of the Group financial statements * 2013/14 has been restated to reﬂect the changes to the deﬁnition of underlying earnings described in note 1.4 Net debt (£M) KPI 817 1,472 2,181 2,817 2,340 2010/11 2011/12 2012/13 2013/14 2014/15 Definition The Group’s overall debt position at the year end. A summary of net debt is provided in note 6.4 of the Group financial statements Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 19 Dividend The ﬁnal dividend has been increased to 9.62p. It will be paid on 10 June 2015 to shareholders on the register on 8 May 2015. This brings the full year dividend to 13.65p, an increase of 5% in line with the commitment made last year (2013/14: 13.00p). Space At 2 February 2014 New stores1 Store closures At 1 February 2015 Number of core stores Number of convenience stores Total number of stores Total area in square feet (000) Number of petrol ﬁlling stations 1 Net of replacements. 503 102 605 14,233 328 11 57 68 510 6 − (6) (6) 514 153 667 (11) 14,732 − 334 We opened 11 new supermarkets (356,000 square feet) and 57 M locals (154,000 square feet) during the year. We also closed six underperforming M locals, and announced a proposal to close ten smaller supermarkets in 2015. Key balance sheet metrics Interest cover Net debt/EBITDA Gearing ROCE 2014/15 £m 5 times 2.6 65% 5.6% 2013/14 £m 10 times 2.4 60% 8.2% Return on capital employed (ROCE) fell to 5.6% from 8.2% in 2013/14, primarily due to the fall in proﬁt. Enhanced disclosure Commercial income The industry context around commercial income has changed signiﬁcantly in recent months. Morrisons notes that the Financial Reporting Council (FRC) has urged companies to provide clarity in this area, and the Board considers greater transparency appropriate. Commercial income is a deduction from cost of sales and is not consistently deﬁned. Our deﬁnition comprises marketing contributions from suppliers and volume-based rebates. It does not include promotional funding, as these are mechanical deductions from costs, and are triggered as units are sold or purchased with no subjectivity or judgement applied. For most marketing contributions and volume-based rebates, there is also little or no subjectivity or judgement. However, we have chosen to provide full income statement and balance sheet disclosures. For 2014/15, commercial income was £425m (2013/14: £396m). By its nature, a proportion of commercial income will only become billable towards the end of the year. We expect the majority to be collected during Q1 of the next ﬁnancial year. Depreciation In previous years, fully depreciated assets have been retained in the Group’s ﬁxed asset register. In order to provide greater understanding of the annual depreciation charge, these have been removed from both cost and accumulated depreciation. At balance sheet date, fully depreciated assets were £1,656m. This additional disclosure provides assurance to the users of the ﬁnancial statements that our underlying depreciation charge is in line with our stated depreciation policy. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Return on capital employed (ROCE) KPI 10.4% 10.4% 9.8% 8.2% 5.6% Capital investment (£M) KPI 592 901 1,016 1,086 520 2010/11 2011/12 2012/13 2013/14 2014/15 Definition ROCE is a relative profit measure showing the return generated from investments in assets Prior years restated for 14x multiplier of lease commitments and adjusted for the change in underlying profit definition 2010/11 2011/12 2012/13 2013/14 2014/15 Definition Measured as additions to property, plant and equipment, investment properties, intangible assets and investments 20 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Review of the year A strong platform continued Financial strategy Capital allocation framework Morrisons adheres to strong ﬁnancial principles through a capital allocation framework. Our overall capital allocation framework is unchanged. We are committed to an investment grade credit rating. In the current food retail market, a strong investment grade rating is not considered realistic near-term, despite our predominantly freehold supermarket estate and strong free cash ﬂow. Our ﬁrst priority is to invest to support the store estate and infrastructure and reduce costs. Secondly we will seek to maintain debt ratios that support our target of an investment grade credit rating. Third, we will invest in proﬁtable growth opportunities. Fourth, we will pay dividends and, ﬁnally, any surplus capital will be returned to shareholders. Shareholder returns For 2015/16, the total annual dividend will be not less than 5p per share. The Board believes that this reﬂects an appropriate balance between our commitment to the capital allocation framework, the investment in building trading momentum and the importance of dividends to our shareholders. Beyond 2015/16, the dividend policy will be determined and communicated as appropriate by the Board and new CEO. Morrisons is committed to generating strong operational free cash ﬂow. For the medium-term, the priority will be to further reduce the level of debt. Cash ﬂow and working capital All components of our free cash ﬂow generation plans are progressing well, and we remain on track to generate £2bn operating free cash ﬂow by 2016/17 including a £600m improvement in working capital. Capital expenditure During 2015/16, we expect capital expenditure to fall further to around £400m, as previously guided. This will comprise fewer new convenience store openings than initially planned, with more capital allocated to maintaining and updating the core estate. As announced, in future we will only add new core supermarkets to the space pipeline in exceptional circumstances. This guidance excludes any additional capital we may commit to a new online facility. In addition, we expect £100m of onerous property payments during 2015/16. Property disposals Morrisons values the ﬂexibility and control associated with a predominantly freehold property portfolio. While maintaining that approach, over the last year we have managed our property portfolio more actively than in the past in order to release some cash and improve shareholder returns. Over the remaining two years of the plan, we will continue towards our three-year target of £1bn of property disposals, and are committed to the freehold component of our supermarket estate remaining above 80%, which is by far the highest ratio in the sector. The sale and leaseback element of the programme is mostly complete, and future focus will be on property development opportunities and non-core disposals. ROCE We remain committed to ROCE as a KPI, and remain focused on growing future returns and optimising our capital base. Summary Over the coming years we are committed to investing in the customer proposition and improving trading momentum. We will continue to reduce costs, maintain rigorous capital discipline and focus on all aspects of cash ﬂow to enable a good platform to build that momentum. Approval of the Strategic Report Pages 2 to 33 of the Annual report form the Strategic report. The Strategic report was approved by the Board on 11 March 2015 and signed on its behalf by Mark Amsden Company Secretary 11 March 2015 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 21 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 22 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Relationships Our colleagues and partners Awards 2014/15 Our people “We continue to focus on getting the right people in the right place at the right time to support our customers’ needs and to deliver our strategy. We are working to ensure that our colleagues are really engaged in working for Morrisons, and that our leaders are the best they can be. We will make sure that all our colleagues are absolutely clear on what a great job looks like at Morrisons, so that every one of our team is completely focused on delivering for customers.” Emily Lawson, Group Human Resources Director How are our colleagues supporting our strategy? Match & More As part of launching our new Match & More card, we invested time to train Checkout Operators, Customer Services Assistants, petrol station teams and those stepping into temporary front of house ‘Ambassador’ roles. As a result, colleagues have been able to conﬁdently and proactively explain our new Match & More proposition to our customers. Opening hours As part of our plans to make our stores easy to shop we have increased our opening hours in 246 stores. Our customers told us that they wanted to shop with us up to two hours earlier and two hours later than our previous opening hours. Changes to working patterns were made on a purely voluntary basis with colleagues offering to change their shifts to support our new opening hours. Store management teams We are simplifying accountability and ensuring decisions are taken at the right level in stores by changing the store management structure, allowing us to better serve our customers and operate more efficiently. We have consulted with our colleagues on the structure itself and on the restructure process, and will have completed the restructure in all 514 of our supermarket stores by Spring 2015. A comprehensive training programme is in place to support the store leadership team in their new roles including topics such as leading change and engaging leadership. Continuous improvement In our manufacturing division we have invested in continuous improvement methods by training all managers in problem solving techniques, and over 200 colleagues are involved in the Business Improvement Techniques Apprenticeship scheme, which has delivered signiﬁcant efficiency gains across our sites. We have also introduced a structured and standardised approach to site meetings, which has improved the quality of daily performance discussions. Highlights Employee stability1 People progressing from the shop ﬂoor to more senior positions in 2014/15 Percentage of colleagues who participated in the engagement surveys Colleague Engagement Index: How engaged are colleagues? 90.4% 2014: 88.05% 1,650 2014: 1,292 79% 2014: 93% 75% 2014: 72.9% 1 Total number of active colleagues with one or more years’ service divided by the total number of active colleagues one year earlier. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 23 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s How have we supported our colleagues to help create value during the year? Engagement During 2014/15 we’ve focused on making a sustained change from ‘doing engagement’ to ‘being engaging’. Three key initiatives have underpinned our engagement plans: 1. We’re building the skills of our leaders. 775 leaders have already started our new leadership programme, which includes training on managing change, as well as engaging leadership. 2. We’re giving colleagues a stronger voice. We’ve made it much easier for our colleagues to share their feedback via the engagement survey, a colleague Facebook page and an internal social media platform for colleagues. 3. We’re focusing on engagement. From our annual climate survey we identiﬁed ﬁve action themes where we needed to take sustained, decisive action to improve. These are sponsored by senior leaders. Colleague training During the year we invested in a new training facility to support central functions such as trading and marketing. Our training approaches build both speciﬁc technical skills required to do the job, and broader leadership skills. Our training this year included the following: • Mastercraft – our annual competition, which tests the specialist knowledge and practical skills of colleagues, was bigger and better this year. The competition included colleagues from our eight craft trades – butchers, bakers, ﬁshmongers, cheesemongers, wine advisers, ﬂorists, cake shop and produce. • Craft qualiﬁcations – 187 colleagues completed a Level 2 Craft Apprenticeship in Butchery and Bakery which includes visits to our abattoir for our butchery apprentices. In total over 800 colleagues completed apprenticeships last year. • e-Learning in stores and at home – we’ve set up brand new e-learning zones in every store. We’ve also given colleagues access to some training modules from their own devices so they can learn when and where they want to. • Animal welfare – colleagues at our Colne, Spalding and Turriff abattoirs became the ﬁrst in England to be awarded the new Welfare of Animals at the Time of Killing (WATOK) qualiﬁcation. Talent development We continue to build our talent pipeline from within, through a variety of programmes accessible at all levels of the business. • Graduates – this year we recruited 72 graduates and have 136 graduate trainees completing programmes across the organisation. • Sponsored degrees – 17 colleagues started studying for their sponsored degree with Bradford University School of Management, our third cohort of the programme, and we continue to deliver our Foundation Degrees to colleagues within retail, logistics and supply chain through our university partners. • Future business leaders – this year we have launched our refreshed Future Business Leaders Programme for colleagues making the transition to senior management roles. The programme is designed to build our internal senior succession pipeline, and includes a placement within a local charity. Colleague retention 90.4% of our colleagues have been with us for more than a year, a rise of around 2% versus last year. Set against our overall headcount reduction of 5.3%, this demonstrates our ongoing commitment to retain experienced colleagues alongside new talent whilst continuing our drive for a more cost effective and ﬂexible workforce. Incentives We offer a highly attractive benefits package, including enhanced maternity packages, store discount cards, a share in company proﬁts and our annual long service award. Colleagues can also participate in the Company share save scheme. We will further strengthen our beneﬁts offering with the introduction of ﬂexible beneﬁts such as discounted childcare vouchers in early 2015/16, with additional benefits being made available to colleagues later in the year. Wellness and health enhancement We have introduced support to identify and help those colleagues most at risk of long term health issues such as mental health and musculoskeletal conditions, and have reviewed and revised our health surveillance programme to ensure colleagues are monitored via the latest health screening technology. In addition this year we initiated a new approach to helping colleagues build resilience, a much-requested area of support from colleagues. Human rights and diversity We pride ourselves on being a diverse organisation. We respect the human rights of all individuals as well as the communities in which we work and are committed to providing a workplace free from harassment and offering equal opportunities for promotion and advancement. During 2014/15, Morrisons employed 53,272 men and 66,506 women. In addition, 101 of our senior managers and ﬁve of our Board Directors were men, while 33 of our senior managers and two of our Board Directors were women. This year we have continued work to ensure our workforce is representative of the communities we serve. We have agreed a three year diversity strategy which operates across all our talent activities, and will focus on addressing the identiﬁed gaps in our Below: Mastercraft competition Celebrates colleagues’ achievements 24 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Relationships Our colleagues and partners continued Above: Our farming programme We run our own farming programme investing £2m into the research and development of sustainable British farming. pipeline, will ensure a balanced slate for all senior promotion and hiring decisions, and adopt a standard, externally veriﬁed assessment process so that our talent is assessed on an unbiased basis. Our suppliers Our love of food means we search the globe to source the best quality produce for our customers. We have worked hard to shorten the supply chain to ensure our food reaches our shelves in the freshest possible condition. For example we are currently making a major investment in our ﬁsh processing facility at Grimsby which will enable us to further extend product shelf life by 24 hours. However we also never forget we are British. 100% of our Morrisons branded fresh beef, lamb, pork, chicken, milk and eggs, and many of our fresh fruit and vegetables, are sourced in the UK. As a leading fresh food manufacturer and a major British retailer we work with local farmers to create shorter, more efficient supply chains. This ensures greater control over supply chain traceability, quantity and quality, and reduces risk. Buying British also reduces food miles, adds to the national economy, strengthens agricultural industries and supports our rural communities. British farming and its long term viability is essential to our business. To help ensure it remains competitive we run our own farming programme, investing £2m into the research and development of sustainable British farming. Whilst the produce we supply must be right for customers today, we must also do this in a way which protects the supply for future generations. We work closely with our suppliers to encourage and promote responsible practices throughout the supply chain helping to ensure sustainable supply. We actively listen to our suppliers and we are a participant in the Advantage survey, a comprehensive and independent survey of over 400 suppliers’ views on the status of their relationship with major grocery retailers in the UK. We take actions based on supplier feedback. We continue to focus on simplifying our payment processes and have successfully launched a competitive supply chain ﬁnancing option during the year. We are pleased with the take-up which has exceeded our expectations. Our M Partner scheme, which was introduced in 2013, continues to develop. We have partnered with more than 20 of our largest suppliers. We are working with them to improve our customer proposition through shared insight, maximising the efficiency in our supply chains and promoting more regular dialogue at all levels of our respective organisations. We also understand the importance of relationships, for smaller suppliers, where we have focused on having simpler, clearer processes. We are working on sharing corporate and events calendars, and the enhanced promotional opportunities through our ground breaking Match & More scheme, to enable more efficient and productive arrangements with suppliers. We work with our trading partners to ensure mutual commercial growth and responsible and fair trading terms, and in accordance with the applicable regulations including the Grocery Supply Code of Practice. The Groceries Supply Code of Practice The Groceries Supply Code of Practice (GSCOP) (the ‘Code’) applies to all grocery retailers with an annual turnover in excess of £1bn. Essentially the Code creates certain speciﬁc rights and obligations that regulate our trading relationship with suppliers. We actively engage with the relevant regulatory bodies, the Office of the Groceries Code Adjudicator (GCA) and the Competition & Markets Authority (CMA), to build best practice in relation to the Code. Over the course of the year we provided information for both the GCA and CMA on a range of areas of interest across the sector including contract formation, deliveries into our depots, forecasting and supplier charges. Alongside other retailers, we agreed with the GCA to create a new reciprocal policy on proﬁt recovery charges to help address industry-wide concerns over historic claims for income made by retailers and suppliers. This was positively received by the GCA and promoted at the GCA’s ﬁrst annual conference in June 2014. Speciﬁcally related to Morrisons, the GCA requested details for charges requested of suppliers who were offered multi-channel sales in stores, online and convenience. The GCA published a case study on the review which, in relation to the substantive issue of multi-channel participation, concluded that Morrisons was not in breach of the Code (Part 9). We undertook an enhanced annual training programme for all supplier-facing colleagues. This involved a bespoke face to face presentation for all buyers and relevant trading colleagues and a follow up e-learning module. We also undertook a further detailed review of relevant processes utilising our Internal Audit team. Actions were identiﬁed for continued process improvement including the establishment of an additional compliance and monitoring function within the trading division. Enquiries from suppliers on Code related matters were dealt with in accordance with the regulations. Any matter not resolved directly is escalated to the relevant Category Director and, if requested, to our Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 25 appointed Code Compliance Officer (CCO). Additional guidance and advice is provided by the Group’s legal function. During 2014/15 we have successfully worked with suppliers to resolve the majority of complaints that have arisen with reference to the provisions of the Code. In summary 18 new complaints were made by suppliers and then notiﬁed to our CCO. In total, 14 of those were withdrawn or resolved directly with the relevant supplier during the course of the year. Routine reports and updates are provided to our Corporate Compliance and Responsibility Committee and Management Board on all aspects of the Code including developments about its operation or regulation. We formally report details of activity over the year and speciﬁc complaints made by the suppliers to our CCO to the GCA and the CMA at the ﬁnancial year end. Members of our PLC Board have also met with the GCA in recognition of the importance of achieving best practice in supplier relationships and maintaining level focus. Contact details and further information can be found at www.morrisons.co.uk/gscop Our communities Investing in a new and more signiﬁcant presence in postcodes across the UK, means we also have to work with and invest in the communities we serve. Beyond protecting our local licence to operate, community engagement and investment engages existing and future customers, generates customer loyalty, colleague engagement, and trust in our brand. In 2014/15, our award winning Let’s Grow campaign that engages schools with growing fruit and vegetables distributed a record amount of vouchers to customers. We also recognise the importance of community engagement and have developed a programme that supports local community charitable causes. In 2014/15, we raised over £2.2m for our national charity partner Sue Ryder, our in-store Community Champions also gave 200,000 hours to local community activity. We are also working hard to ensure our recruitment process supports applicants from across the community and can up-skill people once they are part of the business. Our shareholders See page 46 of our Governance section of the Annual report for information on how we have engaged with our shareholders this year. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Reducing emissions Group GHG Emissions for year ending 31 December Emission source 2005 Baseline Year 2014 Prior Year 2015 Current Year Change vs. Baseline Combustion of fuel and operation of facilities Natural Gas 102,470 148,122 146,911 +43.4% Haulage 139,847 97,294 109,990 (21.3%) Business Miles 4,511 4,217 3,643 (19.2%) Fugitive Emissions Refrigerant 455,929 190,793 105,173 (76.9%) Energy purchased for own use Electricity 798,596 697,309 756,595 (5.3%) Other Staff Travel Waste Total Intensity ratio: kg CO2e per ft2 GIA 37,282 36,730 35,081 21,606 24,162 (35.2%) 22,197 (39.6%) 1,575,365 1,194,422 1,168,671 (25.8%) 50.4 31.3 29.5 (41.5%) Methodology The information above is taken from our Group Carbon Footprint, prepared by SKM Enviros on our behalf since 2007. We have reported for the calendar year 1 January to 31 December for all years in order to remain consistent with these reports. We have used UK Government’s Environmental Reporting Guidance (2013 version) to prepare these numbers, and the latest emissions factors from DEFRA/DECC’s GHG Conversion Factors for Company Reporting. The report includes all major sources of carbon emissions from the operation of the Group’s supermarkets, manufacturing and distribution sites and operation of its haulage ﬂeet. Some minor exemptions are: Subsidiaries and joint ventures • Bos Bros – Dutch vegetable packer that deals with energy locally; • Wm Morrison (HK) Ltd – Hong Kong office that deals with energy locally; • The Morrisons Farm at Dumfries House Ltd – joint-venture that deals with energy locally; and • Wm Morrison Bananas Ltd – a subsidiary that is operated by the minority shareholders Global Ripeners Limited. Sites • A number of distribution sites are operated by third parties who are responsible for the energy and carbon, including Dordon, Birstall, Feltham, Bury, Willand, Droitwich, Clipper, Northﬂeet, Bathgate and Bunzl. Sources • Fuel oil – only four sites have fuel oil, which is estimated to account for less than 0.1% of the total footprint. Below: Let’s Grow Since the start of our Let’s Grow programme we have given away over £20m of equipment 26 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Corporate responsibility Responsible retailing Our priorities What we’ve done in 2014/15 1 2 3 4 5 Responsible buying Healthy lifestyles 100% UK wild caught and landed seafood is from Responsible Fishing Scheme vessels 1BN calories removed from our Italian ready meal range 100% British own brand fresh meat sold in our stores Change4Life partner Our People Colleague stability 90.4% 94% colleague participation in the annual engagement survey Own brand suppliers that are Sedex members 100% 26 pledges signed in the Government’s Public Health Responsibility Deal Over 780,000+ training days delivered Environmental management Carbon footprint reduction Waste to landﬁll reduction KPI KPI Deﬁnition Includes energy, waste, refrigeration and transport for our stores, offices, manufacturing and packing facilities. 15% 19% 24% 26% Deﬁnition Measured as waste from our stores that we are unable to recycle or have processed. 5.6% 3.2% 2.0% 2.2%* 2012 2013 2014 2015 2012 2013 2014 2015 Supporting communities £2.2M raised for charity partner Sue Ryder 200,000 hours given to local community activity through our in-store Community Champions Providing food waste tips via our social media channels to 0.5 million followers * 2015 ﬁgure is at 2 November 2014. End of year ﬁgure will be published in 2014/15, Corporate Responsibility Review later in the year. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 27 CR The full Corporate Responsibility review 2014/15 will be available for you to download at www.morrisons.co.uk/cr later in the year Why it matters What we will do next • Sustainable supply chains • Traceability and control • Securing the best suppliers • Risk management • Quality • Brand integrity • Product quality and value • Customer beneﬁt • Colleague choice and productivity • Reﬂects social need • Positive social value • Customer service • Attracting talent • More engaged colleagues • Retention and attendance • Productivity • Greater resilience • Resource efficiency • Increased productivity • Asset management • Cost management to drive affordability • Integrity • Community acceptance • Future customers • Colleague feel good factor • Giving something back • Trust • Further investment in applied farm research. • We will only source Roundtable on Sustainable Palm Oil (RSPO) certiﬁed mass balance or fully segregated palm oil for all own brand products. • All wood and wood derived products will be FSC or equivalent. • Focus on inherent higher risk supply base through monitoring and auditing. • Continued delivery of the Government’s Public Health Responsibility Deal commitments. • Continue with Market Street deals on fresh produce. • Extend calorie labelling at the point of choice for products made and prepared in-store. • Revive and further improve healthy product ranges in line with the re-launch of our chilled meal solutions. • Build a skilled workforce that supports the broader UK economy. • Monitor, measure and improve colleague conditions and workplace experience across the Group. • Monitor and measure the diversity of our workforce. • Develop and deliver an ‘unconscious bias’ programme to assist our managers in the recruitment of a diverse workforce. • Support WRAP’s delivery of Courtauld Commitment III. • Deliver 30% reduction by 2020 in our operational carbon emissions (2005 baseline). • Reduce waste direct to landﬁll in stores and manufacturing. • Make sure edible food that we can use never goes to waste. • Deliver 20% reduction in operational water consumption by 2020 (2012 baseline). • Enhance effective community engagement through stores’ Community Champions. • Raise more funds for Sue Ryder, providing support and care for people with life-changing illnesses. • Greater encouragement for stores and communities to become more involved with Let’s Grow schools gardening campaign. • Through our pre-employment programme ‘Our Club’ we’re helping to get people who have been disadvantaged in society into work. 28 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 29 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 30 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Our risks Managing our risks Recognising the effect of uncertainty on our business means that we are in a better position to achieve our objectives, respond to emerging risks and create opportunities. The realisation of our business strategy depends on our ability to make sound, risk-informed decisions. Managing risk and uncertainty is an integral part of doing business. Now more than ever, we manage increasing uncertainty as we continue to expand into new channels, and transform our business systems and processes to respond to rapid changes in our industry. We maintain a business wide understanding of our key risks and how to manage them. This assists in delivering our promises to customers and shareholders. Risk is managed via our choice of business strategy, underpinned by our culture and values. The annual and on-going elements of our risk management framework are embedded within the business. These support the identiﬁcation and effective management of risks across the business. We continue to conduct activity to increase colleague awareness of risk and risk appetite, and to further embed a risk management culture in the business. Read more on the risk management process in the Audit Committee report on page 43. Risk management framework Top down Board of Directors The Board is responsible for establishing a robust and appropriate risk management framework. It has primary responsibility for setting the overall Group strategy which informs the setting of objectives across the business and is widely communicated. It is also responsible for risk governance and overseeing the risks associated with the Group’s activities to ensure that they align with our risk appetite. The Board approves the Group Risk Register. Audit Committee Management Board Supports the Board in monitoring risk exposure against our risk appetite. Reviews the effectiveness of our risk management and internal control systems, including the Risk and Internal Audit function. Agrees the Internal Audit plan and audit scope which is designed to provide assurance over principal risks. Provides challenge to operational management through its review of cross-functional risks and considers key risks reported in functional risk registers. During the year it conducted a full bottom up exercise to refresh the Group Risk Register with assistance from Risk and Internal Audit. Each Board member certiﬁes annually that functional risk registers (following the process set out below) have been refreshed, and that action plans are in place, where necessary. Risk and Internal Audit Operational Management Bottom up Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 31 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s The risk management process Plans for 2015/16 The risk management process is applied to all identified risks. It allows us to understand, evaluate and take appropriate action in relation to our risks. Operational management within the business bear most of the responsibility for risk management. Following the identiﬁcation and measurement of risks, depending on our risk appetite, we either accept the risks or take action to reduce, transfer or mitigate them. Significant effort is placed on risk management activities within each function. This includes ensuring the control frameworks are designed to address risks, are embedded properly within day-to-day procedures, and that monitoring and reporting takes place. Key activity and developments during 2014/15 include: • full refresh of the Group Risk Register by the Management Board; • creation and review of Risk Registers for new business areas; • more frequent review of cross-functional risks at Management Board level, for example, risks relating to health and safety and data protection; and • functional Risk Register reviews. We will continue to develop and build on our existing risk management framework, and align with recent changes to the UK Corporate Governance Code. Our priorities for 2015/16 include: • formalising key risk indicators for Group risks and commencing regular reporting of these; and • reviewing and updating the Internal Audit activity plan following the Group Risk Register refresh. The refresh of the Group Risk Register in the year has resulted in some changes from those risks disclosed last year. Speciﬁcally external market, competitor proposition, supply chain and data are now reported as separate risks following industry and market events in the year. Previously these were included in business strategy, trading optimisation, customer proposition and regulation. Space optimisation has been removed as a separate risk with capital discipline being included in the ﬁnancial strategy risk. The risks have been split into two categories based on how the Board review and manage the risks. High Impact, Low Likelihood (HILL) risks: those which have a low inherent likelihood but which, if they did occur, could have a major impact. These are typically managed by policies and procedures which are reviewed and tested by the Board on an annual basis. Strategic risks: those which would impact the successful execution of the Group’s strategy. These are reviewed by the Board on a more frequent basis as the risk level can alter based on the actions taken by us or in the market. Each principal risk has been mapped to the relevant key strategic priorities. All strategic risks are owned by at least one member of the Management Board. Process level risks are not seen as principal risks for the Group. These risks are managed by operational management. The movement of each risk at a gross level and the mitigations in place to manage the risk are also disclosed. 32 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Strategic report Our risks Principal risks and uncertainties The Board has identiﬁed those risks which it sees as most signiﬁcant HILL risks Strategic risks S GI S I Food and product safety Risk If we fail to deliver excellent standards of hygiene and safety in our products, there is potential to harm our customers and damage our business reputation. Our business focuses on fresh food and we have a vertically integrated business model; therefore, food safety and the integrity of our supply chain are of paramount importance. Mitigation • Strict standards and monitoring processes established to manage food safety risks throughout the Group and supply chain; • ISO 22000 accreditation of food manufacturing businesses; • Regular supplier assessments undertaken to ensure adherence to standards; and • Food Safety Steering Group, the Board and Management Board provide oversight of operational activities. Business strategy Risk The Board understands that if the strategy and vision of the business are not properly formulated, communicated or implemented, then the long term aims of the Group may not be met and the business may suffer and benefits may not be delivered to stakeholders. Financial strategy Risk The main risks are the availability of funding and management of cash flow to meet business needs. Major business interruption Risk Our distribution and systems infrastructures are fundamental to ensuring the normal continuity of trading, whether that is via our stores or online. If a major incident occurred to this infrastructure or another key facility, this could have a detrimental impact on our ability to operate effectively. Data security Risk The Group believes it is essential that the security of customer, colleague, supplier and company confidential data is maintained securely. A major breach of information security could have a significant impact on the reputation of the business. Mitigation • Detailed recovery plans exist for sites and systems; • Investment in remote IT disaster recovery site and regular testing of recovery plans; • Adherence to a stringent process for evaluating new suppliers/ third parties; • Contingency arrangements confirmed for key suppliers; and • A Crisis Management Group is in place to deal with any unplanned or unforeseen events. S GI Mitigation • The Group has a number of information security policies and procedures in place; • The Information Management Steering Group has the responsibility for looking at data management practices, policies, awareness and training; and • Ongoing monitoring, reporting and mediation of vulnerabilities is in place. Mitigation • We have a clear strategy based on four pillars of save, invest, grow and cash generation; • Engagement with a wide group of stakeholders to ensure the strategy remains current; • Communication of strategy via numerous channels; • Clear link between strategic targets and business plans to drive implementation; and • Close Board monitoring of business performance. S GI C Mitigation • The Group’s treasury function is responsible for the forward planning and management of funding. They report to the Treasury Committee and operate within clear policies and procedures which are reviewed and audited; and • Progress against the financial strategy is regularly reviewed and monitored by the Management Board. S I G C Key Save Invest Grow Generate cash No change Increase to residual risk Decrease to residual risk Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 33 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Colleague engagement and development Competitor proposition and price I S GI Risk We are a people business and our colleagues are key to being able to fulfil our promises. If we fail to retain, develop and motivate our colleagues, we will not provide the quality of service that our customers expect. Development of new channels and delivery of strategic objectives increases the risk of being able to attract specific talent. The change in leadership will need to be managed to ensure colleague engagement is maintained. Mitigation • Competitive employment policies, remuneration and benefits packages are established and regularly reviewed; • Signiﬁcant investment in training and development, including Morrisons Academy; • Regular talent reviews and refresh of succession plans to meet the future needs of the business; • Colleague engagement surveys undertaken to understand and respond to colleague concerns; and • Plan to manage leadership change in place. Risk The UK grocery market continues to be extremely competitive. The impact of competitor proposition and pricing changes could affect the performance of the Group in terms of sales, costs and operations. There is also a risk that supplier failure or a change in supplier pricing could have operational or financial consequences for the Group. Mitigation • Competitor pricing positions and market trends are reviewed on a weekly basis. We also review and actively manage our own key price points, sales proposition, and promotional and marketing campaigns; and • Credit checks and monitoring of suppliers are conducted. We also maintain open and regular dialogue with suppliers. External market forces IT systems upgrade C S GI Risk Economic changes including changes in the value of the Group’s pension schemes and commodity fluctuations could impact the Group’s profitability and balance sheet strength. Mitigation • The Group’s pension liabilities are monitored by the Treasury Committee with a clear investment strategy in place. In February 2015 we announced the start of consultation to close the Group’s defined benefit schemes to future accrual which will help reduce this risk; and • Commodity prices are reviewed and monitored each week. The Group has clear policies around hedging of commodity risks and seeks to hedge exposure where possible. Risk We have replaced and upgraded systems in our business to provide industry-leading software capability. We continue to roll out new systems and decommission legacy IT systems. We are aware of the risks and potential for delays and increased costs associated with delivering successful IT systems change. Mitigation • We partner with some of the world’s leading technology companies for key projects; • Project management methodology is applied to all IT projects and programmes; and • Regular reviews are undertaken by Risk and Internal Audit and other specialists to provide assurance over significant IT projects and programmes delivering into the business. Supply chain management and integrity Regulation S GI S GI Risk Recent issues in the sector regarding the integrity and sourcing of food include the discovery of horsemeat substituted for beef in 2013. Our vertical integration model and focus on supply chain integrity means that these have not impacted Morrisons, as highlighted in the Elliott report (July 2014). However, it remains a risk that management is focused on and continues to monitor. Mitigation • Morrisons manufactures a large proportion of the fresh food it sells, contracting directly with farmers and growers; • Thorough checks are in place at all our own production facilities as well as those who produce for us; and • We have visibility over all own brand suppliers’ ethical and responsible business practices through Sedex. Risk The Group operates in an environment governed by strict regulations including competition, employment, health and safety, and regulations over the Group’s products. In all cases, the Board takes its responsibilities very seriously and recognises that breach of regulation can lead to reputational and financial damages to the Group. Mitigation • An established governance framework including compliance monitoring and reporting is in place; • There are clear accountabilities and processes in place for the monitoring of regulatory developments and the compliance with existing regulation; • Processes are in place for delivering training to impacted colleagues in relation to regulation; and • The internal legal department provides advice and guidance. 34 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 35 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 36 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Corporate governance report Chairman’s governance statement Introduction from Andrew Higginson I am pleased to introduce on behalf of the Board, Morrisons Corporate governance report for the ﬁnancial year 2014/15. As noted in previous reports, the Board believes that how the business does something is just as important as what it does. Morrisons values are embedded in our corporate governance policies and principles and cascaded throughout the organisation. Maintaining high standards of corporate governance is a priority of the Board. Our corporate governance compliance statement has been reviewed and updated during the year and will continue to be reviewed on a regular basis to ensure that we meet best practice standards in corporate governance. During the year, a number of our colleagues have undertaken a comprehensive training programme on effective Board reporting. This has resulted in improvements in the quality of papers presented to our Board and Committees, assisting effective decision making and enabling meetings to run more efficiently. The Board has made a number of site visits to supermarkets and convenience stores during the year to observe and engage with the business at an operational level. The October Board meeting was held at Morrisons online customer fulﬁlment centre in Dordon and included a tour of the distribution centre, enabling the Board to observe the online operation ﬁrst hand. CEO succession Dalton Philips stepped down as CEO on 16 February 2015. We have recently announced the appointment of David Potts as our new CEO. We will expect him to build on the positive foundations and to return the business to growth. Board effectiveness Following the external review of Board effectiveness in 2013/14, we have undertaken an internal evaluation of the effectiveness of the Board and its Committees this year. The evaluation required each member of the Board to complete a comprehensive questionnaire. The results are summarised on page 39. Although the evaluation did not highlight any particular areas of concern, there are a number of development actions which we plan to take during 2015/16 to further strengthen the effectiveness of the Board. I am satisﬁed that the Board is performing effectively and contains an appropriate mixture of skills, experience and independence. I also consider that each of the Non-Executive Directors is able to commit an appropriate amount of time in fulﬁlling their role and responsibilities on the Board effectively. Diversity We recognise the importance of diversity across our colleague base, and the Board itself, in delivering an effective blend of knowledge, skills and experience. Although with two female members (28% of total composition), the Board complies with its policy requirement to maintain formal representation at not less than 20%, there is an aspiration to increase this to at least 30%. In addition, steps are being taken towards increasing diversity across our colleague base as a whole. Further detail on our diversity policy is provided on page 23. Good corporate governance is an essential part of running our business effectively, in the interests of our shareholders and other stakeholders. We will continue to develop our governance policies and processes in line with good practice thereby enabling our team to best utilise their skills in effectively implementing business strategy. Andrew Higginson Chairman Corporate governance statement The Board considers that its corporate governance policies and procedures are appropriate and that the Group has been fully compliant with the 2012 UK Corporate Governance Code (the Code) throughout the ﬁnancial year 2014/15 and to the date of this Annual report. The Code is available on the Financial Reporting Council’s website (www.frc.org.uk). The Board’s Corporate governance compliance statement sets out how the Group complies with each of the provisions of the Code and is available in the investor relations section of the Group’s website, www.morrisons-corporate.com. The Board acknowledges the changes to the Code that were announced in September 2014 and will apply to the Company from the 2015/16 ﬁnancial year. These changes will be an area of focus for the Board and the relevant committees over the next year and the Company will report on compliance against the revised Code in the 2015/16 Annual report. Below: Compliance statement The full Compliance statement can be found at: www.morrisons-corporate.com Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Committee key Nomination Committee Remuneration Committee 37 N R Board of Directors Andrew Higginson Chairman Trevor Strain Chief Financial Officer Corporate Compliance and Responsibility Committee C Audit Committee A Philip Cox CBE Senior Independent Director and Chairman of the Audit Committee N R C N R A Andrew joined the Group as Deputy Chairman and Chairman Elect in October 2014 and became Chairman in January 2015. Andrew is currently the Chairman of N Brown Group Plc, a Non-Executive Director of Woolworth Holdings Limited (South Africa), McCurrach UK Limited and the RFU (Rugby Football Union). Andrew was previously the Chairman of Poundland Group Plc, Senior Independent Director of BSkyB Plc and an Executive Director at Tesco Plc for 15 years. Trevor joined the Group in June 2009 as Commercial and Operations Finance Director. In June 2011 he became Finance Director Corporate and took responsibility for the Company’s productivity programmes. Trevor joined the Board as Chief Financial Officer on 10 April 2013. Upon Dalton Philips’ departure as CEO on 16 February 2015, Trevor, on an interim basis, took over Dalton’s executive responsibilities and chairs the Management Board. Prior to joining Morrisons he worked for Tesco in a number of roles until his appointment as UK Property Finance Director in 2006 and subsequently UK Planning and Reporting Finance Director. Trevor began his career with Arthur Andersen and is a member of the Institute of Chartered Accountants in England and Wales. Philip joined the Group as a Non-Executive Director in April 2009. He was appointed as the Senior Independent Director in May 2013. Philip is a Non-Executive Director and Chairman Elect of Drax Group Plc and Non-Executive Director of PPL Corporation. He was a Non-Executive Director at Wincanton Plc from 2001 to 2009, having chaired their Audit Committee from 2001 to 2008 and was Chair of their Remuneration Committee from 2008. He was also a Non-Executive Director of Meggitt Plc until January 2015. His previous Board positions were as Chief Financial Officer and then Chief Executive Officer of International Power Plc and Chief Financial Officer at Siebe Plc. Richard Gillingwater CBE Non-Executive Director Penny Hughes CBE Chairman of the Corporate Compliance and Responsibility Committee Johanna Waterous CBE Chairman of the Remuneration Committee N R C A N R C A N R C A Richard joined the Group as a Non-Executive Director in March 2013. Richard is currently the Chairman of Henderson Group Plc, Deputy Chairman and Chairman Elect of SSE Plc and the Senior Independent Director of Hiscox Ltd and Helical Bar Plc. He is stepping down from the Board of Hiscox Ltd in May 2015. He was previously the Dean of Cass Business School, CEO and then Chairman of the Shareholder Executive and Joint Head of Global Corporate Finance at BZW. He has been the Chairman of CDC Group and a Non-Executive Director of P&O, Debenhams, Tomkins, Qinetiq Group and Kidde. In light of Richard’s forthcoming appointment as Chairman of SSE Plc, he does not intend to seek re-election as a Non-Executive Director of the Company and will therefore stand down from the Board at the AGM in June 2015. Penny joined the Group as a Non-Executive Director in January 2010. Penny is currently a Non-Executive Director of The Royal Bank of Scotland Plc and a Trustee of the British Museum. Penny’s previous experience includes ten years with Coca-Cola GB and Ireland and various Non-Executive roles including Body Shop International Plc, GAP Inc, Reuters Plc, Skandinaviska Enskilda Banken, Trinity Mirror Plc, Vodafone Plc, Home Retail Group Plc and Cable and Wireless Worldwide Plc. Johanna joined the Group as a Non-Executive Director in February 2010. She is currently the Senior Independent Director of RSA Group Plc and of Rexam Plc. Her previous experience includes 22 years with McKinsey & Co, London, as Head of the Retail Practice in Europe and latterly as Co-Leader of the ﬁrm’s Global Marketing & Sales Practice. Johanna is a Trustee of the Royal Botanic Gardens, Kew Foundation and of Kew Enterprises Ltd. Previous board roles include Chairman of Tate Enterprises, from 1998 to 2006 and a Non-Executive Director of Shoppers Drugmart in Canada. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 38 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Corporate governance report continued Leadership Structure of the Board and its Committees Chairman Key objectives: Governance of the Board PLC Board Key objectives: Overall conduct of the business and strategy setting Management Board Audit Committee Corporate Compliance and Responsibility Committee Remuneration Committee Nominations Committee PLC Board Members1 Key objective Responsibilities Andrew Higginson2, Trevor Strain, Philip Cox, Richard Gillingwater, Penny Hughes, Johanna Waterous, Sir Ian Gibson3, Dalton Philips3 Overall conduct of the business and strategy setting. • Development and approval of the strategy and key policies of the Group; • Management of culture and values; • Monitoring of progress towards achieving all Board objectives; • Monitoring of ﬁnancial performance, critical operational issues and risks by reviewing of performance against strategy, objectives, business plans and budgets; • Formal approval of the Group’s Risk Register; • Approval of all communications to shareholders, including the Annual report and ﬁnancial statements, half-yearly ﬁnancial report and interim management statements; • Approval of changes to the Group’s capital structure, external ﬁnancial reports, major expenditure; and • Membership of the Board on recommendation of the Nomination Committee. 1 All Non-Executive Directors are independent. 2 Appointed 1 October 2014. 3 D Philips stepped down from the Board on 16 February 2015 and Sir Ian Gibson retired in January 2015. Throughout the year, the majority of the Board consisted of independent Non-Executive Directors. Sir Ian Gibson retired from the Board and its committees on 22 January 2015. Dalton Philips stepped down as CEO on 16 February 2015. Board responsibilities The formal schedule of matters reserved for the Board remains unaltered from 2013/14 and is set out in the Corporate governance compliance statement which can be found in the investor relations section of the Group’s website, www.morrisons-corporate.com. The Board is committed to a clear division of responsibilities between the Chairman and the CEO. This has been reviewed and updated by the Board during the year and is also set out in the Corporate governance compliance statement. During the year, Sir Ian Gibson stepped down as a member of the Public Interest Body of PwC before the decision to recommend PwC for appointment as Group auditors. Andrew Higginson stepped down as Chairman of Poundland Group Plc following the announcement of his appointment as Deputy Chairman and Chairman Elect of the Company in July 2014. Following the announcement that Dalton Philips would step down as CEO on 16 February 2015, it was also announced that Trevor Strain would chair the Management Board and assume Dalton’s executive responsibilities with Andrew Higginson, spending more time in the business in the interim period until the new CEO was appointed. David Potts will join the Board as CEO on 16 March 2015. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 39 Board committees The decisions delegated by the Board to its Committees and the activities of those Committees during the ﬁnancial year 2014/15 are described within each Committee’s report below. The Corporate governance compliance statement contains the terms of reference of the Committees which have recently been updated in line with the guidance notes issued by ICSA in 2013 and to take into account changes agreed by the Board during the year. Senior Independent Director Philip Cox has been the Board’s Senior Independent Director since May 2013. Philip has been a Non-Executive Director of Morrisons since April 2009 and has acquired extensive knowledge of the Group’s business and its activities. The Senior Independent Director provides shareholders with an alternative contact to the Chairman, the CEO and the CFO. Board activities in 2014/15 The Board’s focus in this ﬁnancial year was: • review of results and forecasts and approval of regulatory announcements; • the conduct of the business in accordance with its values; • review of the development of the online business and convenience stores; • review of the recommendation from the Nomination Committee in respect of the appointment of Andrew Higginson; • review of the performance of the CEO and the decision to search for a successor; • review of the governance structure and activities of the subcommittees of the Board; • review of the annual business plan and monthly updates from the Management Board regarding its delivery; and • review of the 2015/16 budget and commercial plans regarding our core supermarkets, including productivity savings required to invest in the core offer. Attendance at meetings Board Nomination Remuneration Audit Andrew Higginson1 Trevor Strain Philip Cox Richard Gillingwater Penny Hughes Johanna Waterous Dalton Philips2 Sir Ian Gibson3 3/3 11/11 11/11 11/11 11/11 11/11 11/11 11/11 2/2 – 7/7 7/7 7/7 7/7 7/7 7/7 1/1 – 6/6 5/6 6/6 6/6 – 6/6 – – 7/7 6/7 7/7 7/7 – − 1 Appointed to the Board on 1 October 2014. Appointed to the CCR Committee in November 2014, the Nomination Committee in December 2014 and to the Remuneration Committee in January 2015. 2 Dalton Philips stepped down as CEO on 16 February 2015. 3 Sir Ian Gibson retired from all Boards and Committees on 22 January 2015. CCR 2/2 – – 4/5 5/5 5/5 5/5 5/5 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Effectiveness Non−Executive Directors The Non-Executive Directors bring a varied range of skills and experience to the Group. Details of their experience outside the Group are set out in their respective biographies on page 37. The Board is satisﬁed that all Non-Executive Directors, including the Non-Executive Chairman, remain independent according to the deﬁnition contained in the Code. The criteria used to determine independence are set out in the Corporate governance compliance statement, which can be found in the investor relations section of the Group’s website, www.morrisons-corporate.com. The minimum time commitment expected of the Non-Executive Directors is 12 days per year, together with attendance at the AGM, Board away days and site visits, plus adequate preparation time. The Board is satisﬁed that each of the Non-Executive Directors commits sufficient time to the business of the Group and contributes to the governance and operations of the Group. This has been conﬁrmed by the Board effectiveness evaluation referred to below. The Chairman arranges regular discussions between all the Non-Executive Directors (including himself) as a group. During the year, the Non-Executive Directors met a number of times without management present to discuss the performance of the business and management, and the wider economic, commercial and social environment in which the Group operates. Board evaluation The Board arranges for its own performance, and that of its committees and Directors, to be reviewed annually. This is usually facilitated by an external agency every three years with the most recent external review taking place last year. In 2014/15, the Board’s effectiveness, and that of its committees, was the subject of an internal review led by the Chairman and the Company Secretary. The evaluation required each member of the Board to complete a comprehensive questionnaire covering the following key areas: • overall Board and committee effectiveness; • the work of the Board, including the approach to control, risk, strategy and transactions, and the regulatory environment; • organisation and conduct of Board meetings; • timing and content of Board papers; • maximising its use of time; • Board and senior management succession; • training and awareness; • effectiveness of advisers; and • overall Director performance. Responses were collated by the Company Secretary and discussed with the Chairman. The review concluded that the Board operates well and cohesively. The agreement to move to fewer Board meetings but more two day meetings (as recommended last year) will come into full effect in 2015/16 and it was acknowledged that this should provide more opportunity for site visits (Company and competitor) and spending time with customers to understand their views. 40 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Corporate governance report continued The length and tone of Board papers will also be the subject of focus during 2015/16 with a view to further improvement and ensuring that papers provide insightful and quality data in a concise manner. The performance of the Chairman is evaluated annually by the Directors. Appraisals of the Non-Executive Directors’ performance are conducted by the Chairman following discussion with Board members. Executive Directors are included in the Group’s performance appraisal process, which includes setting clear and measurable objectives and reviewing performance against those objectives on a bi-annual basis. The Chairman and Non-Executive Directors are responsible for monitoring and reviewing the performance of the CEO, who in turn is responsible for monitoring the performance of the CFO. Membership As described earlier in this report, the Board has been strengthened by the appointment of Andrew Higginson as Chairman and, as announced on 25 February 2015, the appointment of David Potts as CEO who further enhances the relevant experience and skills on the Board. The Nomination Committee considers that the Board and Management Board contain the skills and experience necessary in light of the Group’s current activities and strategic direction. Re−election of Directors All the Directors submit themselves for re-election at the AGM to be held on 4 June 2015, with the exception of Richard Gillingwater who will step down at the AGM. After reviewing the outcome of performance evaluation, the Board conﬁrms that the contributions made by the Directors offering themselves for re-election at the AGM in June 2015 continue to be effective and that the Company should support their re-election. Directors’ interests The interests of the Executive and Non-Executive Directors of the Company and their immediate families in the shares of the Company, along with share options, are contained in the Directors’ remuneration report set out on pages 47 to 58. At no time during the year did any of the Directors have a material interest in any signiﬁcant contract with the Company or any of its subsidiaries. Management Board Members Key objectives Responsibilities Dalton Philips1, Trevor Strain, Mark Amsden, Neal Austin, Nick Collard, Martyn Fletcher, Mark Harrison, Martyn Jones, Emily Lawson, Casper Meijer, Gordon Mowat2, Nigel Robertson Implementation of strategy and actions in respect of ﬁnancial planning and performance; day-to-day management of operations. • Development and implementation of strategy; • Oversight of: – ﬁnancial performance, reporting and control; – risk management; and – operational improvement programmes; • Review and supervision of operational activities; • Making recommendations to the Board in respect of: – budgets and long term plans; – dividend levels; – ad-hoc events; and • Succession planning for senior management. 1 Dalton Philips stepped down as CEO on 16 February 2015. 2 Appointed October 2014 as replacement for Terry Hartwell. Management Board activities in 2014/15 The Management Board’s focus in this ﬁnancial year was: • implementation of the price investment strategy; • launch of the Match & More card; • up-streaming of manufacturing capabilities; • streamlining and modernisation of the management structure in stores; • targeted implementation of the food online offer into different regions; • the continuing roll out of M local convenience stores network including acquisition of appropriate sites; • oversight of major systems development including its roll out into stores; • new in-store standard KPIs; • response to trading results via implementation and adaptation of the commercial strategy, including promotional strategy; • periodic review of performance against strategic objectives; • review of the Group’s weekly and periodic trading results and market conditions; • determination of principal risks for the Group; • new leadership framework; • review of customer proposition and relaunch of Morrisons own brand products; • approval of capital budgets; • enhanced colleague engagement process and review colleague engagement scores; and • the conduct and management of the business in accordance with its values. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 41 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s A Transformation Steering Committee was set up during the year to ensure that the right level of focus is placed on delivering transformation projects in the business. All operational members of the Management Board are members of the Transformation Steering Committee. The main purposes of the Committee are: • to sign off all strategic business cases which underpin transformation; • to agree timing of implementation; and • to manage change coherently around the customer experience. Audit Committee report Members Key objectives Philip Cox (Chair), Richard Gillingwater, Penny Hughes, Johanna Waterous Effective governance of ﬁnancial reporting, internal controls and risk management systems; review of signiﬁcant accounting judgements, assumptions and estimates; management of the relationship and appointment of the external auditor; monitoring and review of the effectiveness of the Group’s Risk and Internal Audit function. Responsibilities The Board has delegated to the Audit Committee the responsibility for reviewing on its behalf and making recommendations to the Board as to: • the integrity of ﬁnancial reports, including reviewing signiﬁcant ﬁnancial reporting issues and considering how these issues have been addressed; • whether the Annual report is fair, balanced and understandable; • the effectiveness of the Group’s internal control and risk management system; • the effectiveness of the Risk and Internal Audit function; and • the independence and appointment of the external auditor and approval of their fees. Audit Committee Chairman The Board is satisﬁed that Philip Cox has recent and relevant ﬁnancial experience appropriate to his position as Chairman of the Audit Committee. Philip is a Fellow of the Institute of Chartered Accountants in England and Wales and has previously held a number of senior ﬁnance positions including Chief Financial Officer of International Power Plc and Siebe Plc. Audit Committee activities in 2014/15 During the year the Committee has: • considered the appropriateness of the Group’s Annual report and ﬁnancial statements and Half-yearly report; • reviewed the effectiveness of the internal controls and the work of the Risk and Internal Audit function, including approval of the Internal Audit plan and discussion on key risks (described in more detail on pages 30 to 33); • considered systems design, implementation and related project management in respect of changes to the Group’s ﬁnancial reporting systems and processes; • conducted a full tender of external audit service and recommended the appointment of PwC (described in more detail on page 44); and • discussed the new Governance Code and reporting requirements. In respect of ﬁnancial reports, the Committee’s focus was: • the accounting judgements made by management that could have a signiﬁcant effect on the Group’s ﬁnancial results; • oversight of IT changes affecting ﬁnancial systems and controls; • the clarity of disclosure of ﬁnancial information; and • whether the Annual report, taken as a whole, is fair, balanced and understandable – the Directors’ statement on this can be found on page 61 of this Annual report. Financial reporting matters The Audit Committee discussed the following ﬁnancial reporting matters: Commercial income Commercial income remains an area of focus for the Audit Committee. Commercial income is inconsistently deﬁned. It is a deduction from the cost of purchase and it is recognised in accordance with signed supplier agreements. Subjectivity and judgement is therefore minimised. This is an area which is currently not directly covered by accounting standards and there is no prescriptive disclosure best practice. The Financial Reporting Council (FRC) recently urged the Boards of retailers and suppliers to provide greater clarity in this area. It is important to the Board that the Group takes the initiative and brings clarity and transparency to commercial income and so is providing increased disclosure on controls, on the quantum earned in the income statement and the balance sheet position. Despite most of this income being subject to no or little subjectivity or judgement we have chosen to provide full disclosure – see note 1.6 in the ﬁnancial statements. Our deﬁnition of commercial income includes marketing and advertising funding and volume based rebates. Some commentators include promotional funding in commercial income. We consider such funding as a mechanical deduction from the purchase cost, triggered immediately by Morrisons realising a sale, or a purchase, with no judgement or subjectivity applied. We do not therefore include promotional funding in our deﬁnition of commercial income. In addition to disclosing the quantum of commercial income in the income statement, we have also disclosed the quantum of commercial income included in debtors and accrued commercial income at the balance sheet date – see notes 5.3 and 5.4 in the ﬁnancial statements. By its nature a proportion of commercial income will only become billable to suppliers at or near the reporting period end. However we expect the majority of commercial income outstanding at 1 February 2015 to be collected by the end of the ﬁrst quarter of the new ﬁnancial year. In considering the appropriateness of commercial income recognised in the year and the ﬁnancial position at the year end, the Committee has reviewed in detail reports from management outlining the accounting judgements and the control environment. 42 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Corporate governance report continued In reviewing the assumptions made by management, the Audit Committee challenged and understood the key assumptions and judgements including: • commercial income accrued but not invoiced at half year and year end; and • recoverability of outstanding invoices. The Audit Committee considered the effectiveness of the operation of key controls as set out below, through review of management’s work and that of Internal Audit. The Committee considered the frequency of the operation of controls, the size of samples and challenged management on how controls could be further improved. The controls in operation provide assurance over: • completeness of supplier agreement documentation; • accuracy of income recognition in line with agreed policies and the supplier agreements; and • recoverability of commercial income. Controls in operation for promotional funding and commercial income 1. Periodic review of control KPIs by Senior Management which is focused on conﬁrming promotional funding and commercial income has been recognised appropriately in line with policy. The review includes an assessment of the following: • accrued income that has not been invoiced following the end of a promotional period; • ageing proﬁle of invoices raised that are outstanding from suppliers; and • credit notes raised after the period end. 2. Segregation of duties between trading teams who negotiate with suppliers and the ﬁnance function that approve the recognition of income. 3. All accrued amounts above set thresholds are checked to supplier documentation. 4. Sample compliance checks are performed for invoices over set thresholds plus an additional random sample. These checks include: • ensuring compliance with supplier terms and agreements; and • reviewing the timing of invoicing following completion of a promotional period. 5. Internal Audit performs a review of a sample of supplier agreements, checking the appropriateness of recognition. Their focus is on key areas of judgement including multi-year contracts and accrued income which has not yet been invoiced. The scope of work includes checking that income is recognised in line with the supplier agreement. Promotional funding speciﬁc controls Type of deduction Description Speciﬁc process and controls Promotional funding Customer Investment by way of promotions, partially funded by suppliers for speciﬁc products, or multi- purchases, such as buy one get one free. Agreed supplier terms are recorded on systems which generate accruals and recognise the funding mechanically based on these terms and sales volume data fed from the till system. There is no judgement or estimation involved. The system also automatically generates invoices to suppliers each week, or at the end of a promotional cycle. Commercial income speciﬁc controls by type of income Type of deduction Description Speciﬁc process and controls Marketing and advertising funding Examples include income in respect of in-store marketing and point of sale, as well as funding for advertising. All supplier agreements are logged once a contract is signed. The details recorded include the agreed activity, timeframe, performance criteria and amounts. Income is then only recognised and invoiced conditional on satisfying speciﬁed criteria in the supplier agreements. Volume−based rebates Income driven by achieving volume targets set by the supplier for speciﬁc products over speciﬁc periods. Agreed supplier terms are recorded in systems which generate accruals and recognise commercial income automatically based on these terms. Details entered into the system are validated by an independent team. Income is recognised through the year based on forecasts for expected sales or purchase volumes, informed by current performance, trends, and the terms of the supplier agreement. Income is invoiced throughout the year in accordance with the speciﬁc supplier terms. Supplier conﬁrmations are obtained half-yearly, including at year end, to conﬁrm volume performance and therefore that the appropriate level of rebate is being accrued. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 43 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Impairment of property, plant and equipment, intangible assets and onerous property commitments The Group has a policy of assessing impairment on an annual basis, or where changes in circumstances result in a risk of impairment. The impairment review includes non-ﬁnancial assets, principally the Group’s property portfolio, IT assets not in use and goodwill. There are a number of assumptions used in the impairment reviews including discount rates, growth rates and the market value of the properties. The Group considers that structural changes in the market have intensiﬁed in the year. This coupled with others in the sector cutting space forecasts and capital spending has led to a further decline in the market value of supermarkets. This has resulted in an additional impairment charge of £1,273m being recognised this year against trading stores and onerous leases. Further details of the assumptions used are set out on page 89. Management has presented a number of papers to the Audit Committee setting out the judgements and assumptions underpinning the impairment reviews. The Committee has understood management’s view on all the assumptions including the market valuations of the stores. It has also reviewed the methodology and approach to obtaining forecast store cash ﬂows, which remain consistent with the prior year. In addition, for leasehold arrangements where the expected future beneﬁts from a store are less than the future lease commitment, the Committee has reviewed the judgements required in recognising an onerous lease provision. The Audit Committee discussed the sensitivity of key assumptions along with their impact on the impairment and onerous lease provision charge in the year. The Committee challenged the assumptions and is satisﬁed they are appropriate. IT systems The Group is in the process of upgrading and developing its core systems, the cost of which is a material element of capital expenditure for the current year. These upgrades have enabled a number of the Group’s plans to be executed during the year including the launch of the Match & More card and other promotional tools. As well as the risk of impairment considered above the Committee has considered the nature of costs being capitalised to ensure they are capital in nature. It has also regularly reviewed progress against system implementation plans which has included engaging external consultants to give the Committee independent assurance. The Committee is satisﬁed that costs have been capitalised in line with the Group’s policy. Stock Stock remains a material balance in the Group’s ﬁnancial statements. It is held in multiple locations and a system upgrade is in the process of being implemented to consolidate the legacy stock systems. Judgement is required in determining provisions for shrinkage and other stock provisioning. The policies and procedures for stock accounting, reporting and provisioning have been reviewed by the Audit Committee as part of the annual policy review which includes external benchmarking and sensitivity analysis where appropriate. Changes to stock count procedures, including the appointment of independent third party counters, have been implemented in the year. The Committee receives updates on stock count results throughout the year. Internal control and risk management The Board has overall accountability for ensuring that risk is effectively managed across the Group. Risks are reviewed by the Management Board for all functions annually and results are brought to the Board. On behalf of the Board the Audit Committee has responsibility for reviewing the effectiveness of internal control including ﬁnancial, operational and compliance controls. In order to do this, as a matter of course in any one year, the Committee: • receives and agrees appropriate actions in response to regular reports from the Risk and Internal Audit function on: – the status of internal control and risk management systems across the Group; – the department’s ﬁndings, annual plan and the resources available to it to perform its work; and – any concerns expressed by colleagues about possible malpractice or wrongdoing; • reviews ﬁnancial whistle-blowing reports from colleagues; • reviews the external auditor’s management letters on internal ﬁnancial control; • seeks reports from senior management on the effectiveness of the management of key risk areas; and • monitors the adequacy and timeliness of management’s response to identiﬁed audit issues. The main features of the Group’s internal control and risk management systems relating to the accuracy and reliability of ﬁnancial reporting, including the process for preparing consolidated accounts, are: • recruitment of suitably qualiﬁed and experienced ﬁnance colleagues; • segregation of duties, clear lines of accountability and delegation of authority; • policies and procedures that cover ﬁnancial planning and reporting, preparation of ﬁnancial information, and capital expenditure; • a robust period end review process including review and commentary from process owners; • a tiered review process for external ﬁnancial reports involving internal stakeholders from relevant areas of the business; • information and data security policies and procedures; and • self certiﬁcation by each section of the business. The Audit Committee has undertaken a review of effectiveness of internal control areas during the ﬁnancial year. No signiﬁcant failings of internal control were identiﬁed during these reviews, limited weaknesses were identiﬁed, none of which are signiﬁcant. Clear action plans are in place to address the weaknesses and are captured as part of functional risk registers with deﬁned management responsibility. 44 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Corporate governance report continued The Audit Committee has completed its review of the effectiveness of the Group’s systems of internal control during the ﬁnancial year and up to the date of the report. In accordance with the requirements of the revised Turnbull guidance on Internal Control published by the FRC, it conﬁrms that ‘no signiﬁcant failings of internal control were identiﬁed in the review for 2014/15’. The Committee holds meetings with the auditor without management present. The purpose of these meetings is to understand the auditor’s views on the control and governance environment and management’s effectiveness within it. To fulﬁl its responsibilities in respect of the independence and effectiveness of the external auditor, the Committee reviewed: External audit tender As noted in last year’s report, following the FRC recommendation to put the external audit out to tender at least every ten years, the Audit Committee conducted a tender process for the external audit appointment during 2014/15. The tender process was initiated in January 2014 and concluded in April 2014. The Audit Committee recommended the appointment of PwC as external auditor. The Board accepted this recommendation and PwC were formally appointed at the 2014 AGM. The audit tender team was created and led by the Chair of the Audit Committee and comprised the Group CFO, Director of Risk and Internal Audit, the Group Financial Controller and Procurement. Six ﬁrms were invited to tender, two of which were ‘mid-tier’ audit ﬁrms. Four audit ﬁrms reached the ﬁnal stage of the tender process. In arriving at the short-list for the ﬁnal stage the process involved: meetings with and presentations to senior ﬁnance, IT and procurement colleagues, and formal responses to the Request For Proposal (RFP). The feedback from the meetings as well as the RFP responses were reviewed in detail by the audit tender team and summarised for the Audit Committee. The audit tender team plus one of the NEDs held meetings with each of the short-listed ﬁrms during which the ﬁrms presented their proposed audit approach. This was followed by a ‘question and answer’ session, including questions on matters of accounting. Following each meeting the Group discussed the presentation both in content and team, the view presented, answers to questions and the strengths and weaknesses of each team. At the end of all of the meetings the audit tender team had an extensive debate about all of the ﬁrms that had been shortlisted. The summary of these assessments was presented to the Audit Committee, who after further discussion felt that PwC had shown a greater understanding of Morrisons and through their proposed audit approach would be able to drive greater challenge of processes and controls, which would beneﬁt the Group. The Committee would like to thank all of the ﬁrms that participated and speciﬁcally to KPMG for their contribution to the Group over the years. Effectiveness and independence of the external auditor Due to the change in auditor during the year, the Committee has considered the effectiveness of both KMPG and PwC for the periods in which they were auditor. In making this assessment the Audit Committee has considered the information presented by the auditors, management responses to the auditor’s ﬁndings, including any adjustments and the level of non-audit fees. • the terms, areas of responsibility, duties and scope of work of the external auditor as set out in the engagement letter; • the audit work plan for the Group; • the detailed ﬁndings of the audit, including a discussion of any major issues that arose during the audit; • the letter from the external auditor conﬁrming its independence and objectivity; and • the audit fee and the extent of non-audit services provided during 2014/15. In the period from the start of the year to the AGM, KPMG provided non-audit work, primarily to provide the Board with independent assurance in respect of IT systems replacement. Prior to their appointment as auditor PwC provided a number of non-audit services, including advisory services to the Remuneration Committee. PwC resigned from this post on appointment as statutory auditors but have continued to provide non-audit services. In the year the ratio of audit to non-audit services was 1:0.5, see note 1.6 in the Annual report. The Committee believes that this non-audit activity carried out by the statutory auditors is subject to safeguards to avoid a threat to the auditor’s independence or objectivity. These safeguards comprise separate teams for audit versus non-audit work. The Board has a policy on the engagement of the external auditor to supply non-audit services, which is available in the Corporate governance compliance statement set out in the investor relations section of the Group’s website at www.morrisons-corporate.com. Going concern The Directors’ assessment of the Group and the Company’s ability to continue as a going concern is based on cash ﬂow forecasts for the Group and the committed borrowing and debt facilities of the Group. These forecasts include consideration of future trading performance, working capital requirements, retail market conditions and the wider economy. The Group remains able to borrow cash at competitive rates, as evidenced by the issue of a £300m bond in July 2014 and the reﬁnancing of the £1.35bn revolving credit facility in September 2014. The Group has negotiated, and has available to it, committed, competitive facilities that will meet the Group’s needs in the short and medium term. The principal risks that the Group is challenged with have been set out on pages 32 to 33, along with how the Directors mitigate these risks in the current economic climate. After reviewing the Group’s ﬁnancial forecasts, the Directors are conﬁdent that the Company and the Group have adequate ﬁnancial resources available to continue in operational existence for the foreseeable future. Accordingly, the going concern basis is adopted in the preparation of these ﬁnancial statements. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 45 Corporate Compliance and Responsibility (CCR) Committee Members Key objectives Penny Hughes (Chair), Andrew Higginson1, Dalton Philips2, Mark Amsden, Richard Gillingwater, Martyn Jones, Johanna Waterous Development and implementation of the Group’s policies on corporate compliance and corporate responsibility. Reviewing and ensuring compliance with these policies and ethical and governance standards. Responsibilities Oversight that the business is doing the right thing in areas of corporate responsibility including: • ethical trading; • food safety; • health and safety; • environmental and competition compliance; • GSCOP; and • governance and reputation. Generally ensuring that the Company is acting as a good corporate citizen. 1 Appointed November 2014. 2 D Philips stepped down from the Board and its committees on 16 February 2015. CCR activities in 2013/14 The Committee’s focus in this ﬁnancial year was a review of: • cyber and IT security risk; • health and safety incidents and actions taken and progress of health and safety initiatives; • energy strategy and carbon reduction measures; • ethical trading; • food safety and improvements; • food integrity and testing; • GSCOP compliance including training and results of internal reviews; and • non-ﬁnancial whistle-blowing reports. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Remuneration Committee report The report from the Remuneration Committee is contained in the Directors’ remuneration report on pages 47 to 58. Nomination Committee report Members Key objectives Responsibilities Andrew Higginson (Chair)1, Dalton Philips2, Philip Cox, Penny Hughes, Richard Gillingwater, Johanna Waterous Advice to the Board on Board and senior management appointments and succession planning; monitoring of the composition of the Board and its committees. • Evaluating the current and required mixture of skills and experience on the Board; and • Sourcing and selecting candidates. 1 Appointed December 2014. 2 D Philips stepped down from the Board and its Committees on 16 February 2015. Nomination Committee’s activities in 2013/14 Selection process The Nomination Committee is responsible for succession planning and the recommendation of Director appointments to the Board. The Committee considers the size and composition of the Board on an ongoing basis. The Committee will consider the skills of outgoing and remaining Board members to assess any gaps and develop a candidate proﬁle. The Board uses external search consultancies to source suitable candidates. The Committee recommends appointments on merit against the criteria applied in developing the candidate proﬁle and taking into account the mix of skills, experience and diversity on the Board. Appointment of Chairman and Chairman Elect Following the announcement by Sir Ian Gibson of his intention to retire in 2015, the Nomination Committee appointed a sub-committee comprising Philip Cox, Richard Gillingwater, Penny Hughes, Johanna Waterous and Dalton Philips, with responsibility for sourcing and selecting his successor. The sub-committee used an external search agency, MWM Consulting, in identifying a short list of candidates with the requisite skills and experience for the role. The sub-committee interviewed each of the candidates shortlisted and recommended the appointment of Andrew Higginson to the Nomination Committee and the Board. His appointment was announced on 29 July 2014. Andrew stepped down as Chairman of Poundland Group Plc in order to manage his other time commitments outside Morrisons and thereby ensure he is able to devote an appropriate amount of time in fulﬁlling his current role and future role as Chairman of the Company. Andrew succeeded Sir Ian Gibson as Chairman in January 2015. MWM Consulting is also used by the Company in the search and selection process for other senior hires. This agency has no connection to the Group other than its provision of recruitment services. 46 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Corporate governance report continued Induction All Directors are provided with a comprehensive, formal and tailored induction to the business. Prior to his appointment to the Board in October 2014, Andrew Higginson spent a month in the business to commence the induction programme which continued following his formal appointment. The programme was designed to provide Andrew with a comprehensive introduction to the business and included the following: • review of Board/Committee minutes and supporting papers for recent meetings; • meeting with the Company Secretary to provide a brieﬁng on Board/ Committee processes and procedures and governance structure; • store and other site visits; and • meetings with senior management. CEO succession Following the decision to search for a new CEO, the Committee discussed and approved a job role and appointed Ridgeway Partners to assist in identifying a long list of candidates with the requisite skills and experience for the role. After an extensive and international search, four candidates were shortlisted and interviewed by the Board resulting in the appointment of David Potts who will join the Board as CEO on 16 March 2015. Diversity Diversity has been a particular area of focus during 2014/15. The Board recognises the benefits of a diverse colleague base across the Group and is supportive of initiatives within the business to improve diversity at all levels. The Company sought to increase female representation in the senior management group (SMG) to at least 30% by the end of 2014. Although positive progress has been made, this target has not yet been achieved and the Board recognises that more work is needed in this area. Recruitment and promotion policies have been reviewed with a view to attracting candidates with a wide range of backgrounds and experience and ensuring that the best individual for the role is appointed. Speciﬁc targets have not been set as it is considered that they may drive the wrong behaviours. However, guidelines are in place to ensure that the long list for any particular vacancy at management level includes a balanced proﬁle of candidates. Progress on the diversity agenda is measured through regular talent reviews. Although there is particular focus on the SMG, these reviews also consider the ethnicity, gender, age and length of service mix lower down the organisation. At the end of the 2014/15 ﬁnancial year the Board included two women members, 28% of its total composition. The Board’s policy is that female representation should be maintained at not less than 20% and aspires that this should be higher than 30%. This policy will continue to be considered as part of the Nomination Committee’s regular review of the Board’s composition and skills. Diversity will continue to be a key topic on the Nomination Committee agenda in 2015/16. Other areas of focus The Committee also spent time reviewing succession planning for both the Board and Management Board as well as of the talent pool for levels below Management Board. Relations with shareholders The Board is committed to communicating our strategy to analysts, investors and shareholders on a regular basis through a planned programme. The Investor Relations programme includes: • formal presentations of full and half year results; • interim management statements; • regular meetings between institutional investors, the CEO, the CFO and the Investor Relations team in the UK and the US following the full and half year results; • regular meetings between the Chairman and major shareholders to discuss any aspect of the Group or its governance arrangements; • attending key investor conferences; • communication between the Chairman of the Remuneration Committee and major shareholders on remuneration policy and signiﬁcant changes in remuneration arrangements; • responding to enquiries from shareholders and analysts through the Investor Relations team; and • dedicated shareholder and investor sections on the website. In addition, the Investor Relations team provides a regular update to the Board and feedback from meetings held between executive management and institutional shareholders. The Group’s brokers seek independent feedback from analysts and investors following the full and half year results meetings which is reported to the Board. Matters dealt with elsewhere in the Strategic report The way that the Group generates value and the Board’s strategy for delivering the Group’s objectives are described in the Business model on pages 6 to 7, and the Strategy section on pages 10 to 15. Annual General Meeting All Executive Directors and Non-Executive Directors attend the AGM unless unable to do so due to circumstances outside of their control. Notice of the 2015 AGM of the Company is to be sent to shareholders with an accompanying letter from the Chairman. The AGM will be held at the Company’s headquarters at Gain Lane in Bradford on 4 June 2015. Format of the meeting: • a summary presentation of results is provided before the Chairman deals with the formal business; • all shareholders present can question the Chairman, Chairmen of the Committees and the Board during the meeting and informally afterwards; • the Board encourages participation of individual investors at the AGM; and • following the meeting, details of the voting on the resolutions will be made available on the website www.morrisons-corporate.com/ Investor-centre/generalmeetings/ The Directors recommend shareholders vote in favour of each resolution, believing them to be in the best interests of the Group. Shareholders will be notiﬁed of the availability of the Annual report and ﬁnancial statements on the website unless they have elected to receive a printed version. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 47 Directors’ remuneration report How we are rewarded S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Annual statement by the Chairman of the Remuneration Committee Remuneration principles and alignment to strategy Dear Shareholder On behalf of the Remuneration Committee and the Board, I am pleased to present the Directors’ remuneration report for the ﬁnancial year 2014/15. Last year, we completed a strategic review of our remuneration framework and engaged extensively with major institutional shareholders and investor representative bodies on the key changes. The framework was set out in the remuneration policy which was approved by shareholders at the 2014 AGM. No changes are proposed at this year’s AGM. We listen to feedback on the report and continue to strive to improve the transparency and clarity on executive pay. For example, this year we have sought to provide a greater level of disclosure on our bonus outcomes so that shareholders can better understand how the Committee links pay to performance. In this introductory statement, I have set out the principles and key features of our executive remuneration framework, a summary of the out-turns in respect of 2014/15 performance, and how we intend to approach remuneration in 2015/16, including the remuneration arrangements for recent Board changes. We will be seeking shareholder approval for this report at the AGM on 4 June 2015. The UK food retail sector is currently going through an unprecedented period of uncertainty and change. As described in detail on pages 10 to 15 of this Annual report, the Board has developed a robust strategy for our business to address these challenges, the execution of which is in the best interests of all of our stakeholders. Our remuneration framework is based on the following key principles: • The structure of our incentives is designed to align with the delivery of the short and long term objectives set out in our strategy, which also aligns with the creation of sustainable long term shareholder value. • We encourage a strong and rigorous performance culture through a remuneration package heavily weighted towards performance-related pay, with stretching performance targets calibrated to appropriately reﬂect the challenging environment. • Pay must be positioned competitively in our key talent markets to ensure we can attract people of the calibre needed to execute the strategy for shareholders. 48 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Directors’ remuneration report How we are rewarded continued Key features of our framework Salary • Market competitive ﬁxed remuneration reﬂecting skills and expertise. Beneﬁts and pension Annual bonus • Market competitive beneﬁts package. • Executive Directors may receive a maximum cash pension allowance of 25% of salary. • Maximum opportunity 200% of salary. • Performance-related remuneration based on targets aligned to our annual ﬁnancial and operational strategic objectives. For 2015/16: Underlying PBT 50% Strategic measures 30% Personal performance 20% LTIP 50% of any bonus deferred for three years. • • Malus and clawback apply. • An opportunity to earn Morrisons shares based on performance against key strategic metrics over a three year performance period. • Normal award level 240% of salary. • Awards made in 2014 were subject to the following performance measures: Free cash ﬂow 50% Underlying EPS 30% Total sales 20% • Malus and clawback apply. Shareholding guidelines • 200% of salary. Incentive out−turns for 2014/15 The annual bonus targets set by the Committee at the start of the year were built around the objectives which the business set and communicated within the context of the current environment for the UK food retail sector. The out-turns for the Executive Directors for 2014/15 reﬂect that the business has delivered on a substantial portion of these objectives for the year. The underlying PBT performance was in line with the target level set and the strategy communicated to the market at the beginning of the year. Against the strategic scorecard, the business achieved against its operating cash ﬂow, online service and cost savings targets. Overall this resulted in annual bonus awards of 60% and 62% of maximum for Dalton Philips and Trevor Strain. Growth in EPS over the performance period for the 2012/15 LTIP fell below the threshold target and as a result LTIP awards will not vest for a third consecutive year. The remuneration received by the Executive Directors in respect of 2014/15 is summarised in the table below. Further detail can be found on pages 50 to 56. Salary £850k £490k Beneﬁts/ Pension Bonus £239k £1,010k £602k £118k LTIP £0k £0k Total £2,099k £1,210k Dalton Philips Trevor Strain Board changes Stepping down of former CEO Dalton Philips stepped down as CEO on 16 February 2015. He received a contractual payment in respect of salary, beneﬁts and pension for the unworked portion of his 12 month notice period, paid in instalments and subject to mitigation. Taking into account his contribution to the business through a period of signiﬁcant industry change, as well as the importance of ensuring a smooth transition, the Committee determined that Dalton was a good leaver for the purposes of his incentive awards. He was awarded a bonus in respect of 2014/15 performance and will receive the deferred shares in respect of performance in the 2011/12 ﬁnancial year. He will also remain eligible for unvested 2013 and 2014 LTIP awards, subject to performance and reduced pro-rata for time. His 2012 LTIP award has lapsed. Full details are set out on page 53. Appointment of new CEO David Potts will be appointed as CEO on 16 March 2015. His base salary will be £850,000 which is the same as his predecessor. His annual bonus maximum and LTIP will be within the policy approved by shareholders. His ﬁrst LTIP award will be 300% of salary which is intended to provide an immediate performance driver and alignment with shareholders. Thereafter LTIP awards will revert to the normal level of 240%. To support his immediate start with the business following appointment, he will also receive relocation expenses. There will be no buyout awards. Deputy Chairman and Chairman Elect Andrew Higginson commenced his induction with the Company on 1 September 2014 and joined the Board as Deputy Chairman and Chairman Elect on 1 October 2014. He became Chairman following Sir Ian Gibson’s retirement on 22 January 2015 on an annual base fee of £400,000. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 49 Decisions for 2015/16 Structure of this report The remainder of the report is split into the following sections: • Policy summary. This section (pages 50 to 51) presents an extract from the Policy Table (as approved by shareholders in 2014) for information purposes. It also includes details of our new clawback provisions. • Implementation for 2015/16. This section (page 52) sets out how we intend to operate the policy for 2015/16. • Outcomes for 2014/15. This section (pages 53 to 58) describes the implementation of our policies in 2014/15, including the ‘single ﬁgure of remuneration’, supporting narrative for our bonus and long term outcomes, and additional supporting disclosures. Johanna Waterous Chairman of the Remuneration Committee Base salary In reviewing the salary for Trevor Strain, the Committee took into account the considerable progress made in his role as CFO in the two years since his appointment, his substantial contribution to the business in this time of transition, and current positioning against market data. The Committee determined that it was appropriate to increase his salary with effect from 2 February 2015 to £525,000, representing an increase of 7%. Annual bonus The Committee adjusted the weightings of the annual bonus measures to reﬂect the strategic objectives for the year. The weighting for the strategic scorecard (which this year will focus on just two strategic priorities – like-for-like sales and cost reduction) has been increased to 30%. Consequently, the weighting for underlying PBT has decreased from 60% to 50%. The weighting given to ﬁnancial measures is therefore 80% of the total bonus. LTIP We plan to make LTIP awards in April 2015 following the announcement of results, in line with the normal grant cycle for the Company. The Committee considers that the new CEO should have an incentive interest in Morrisons shares from the earliest opportunity ensuring that his interests are aligned to shareholders. The performance targets for the 2015 LTIP award should be aligned with Morrisons strategy and be meaningful and robust. In this transitional period, the Committee believes that it is important to allow David Potts time to assess the business and provide his input into the formation of the long term business plan under his leadership. We therefore intend to wait until the outcome of this process before setting targets for the 2015 award, and we will revert to shareholders at this time. We expect this to be by the time of the interim results announcement in September. Holding period The Committee reviewed the potential use of a post vesting holding period for the LTIP and concluded that the combination of a three year performance period and substantial shareholding guidelines created sufficient long term alignment with shareholders. The Committee will continue to monitor practice in this area. Clawback In line with the revised UK Corporate Governance Code, from 2015/16, we will be introducing clawback provisions into our annual bonus and LTIP plans, to supplement the malus arrangements already in place. Full details of the malus/clawback provisions are set out on page 51. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s The Group is required to prepare a Directors’ remuneration report for the 52 weeks ended 1 February 2015. The report has been prepared in accordance with the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. 50 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Directors’ remuneration report Directors’ remuneration policy – extract Our Directors’ remuneration policy was approved at the 2014 AGM held on 5 June 2014 and applies from that date. An extract of the remuneration policy table from last years Directors’ remuneration policy report, is re-produced below for information only. The full Directors’ remuneration policy report is contained on pages 61 to 66 of the 2013/14 Annual report which is available in the investor relations section of the Group’s website, www.morrisons-corporate.com. Remuneration policy table Executive Directors Element and how it supports strategy Base salary The Committee’s policy is to set base salaries competitively to attract and retain the best talent, which is critical to the Group’s success and delivery of the strategy. Base salary is part of a total remuneration package which rewards stretching performance aligned to the Group’s strategy. Beneﬁts The Company provides a market competitive beneﬁts package for Executive Directors to support in the ability to recruit and retain the best talent. Performance measures and period Not applicable. Operation Base salaries are set by the Committee on appointment and then normally reviewed annually. In setting and reviewing salary levels, the Committee considers the responsibilities of the role, progression in the role, individual performance (including any change in responsibilities), skills, experience and pay levels and structure throughout the Group. The Committee also has regard to rates for similar roles in comparator companies, both in FTSE 100 retailers and UK-based companies of a similar size and complexity, but seeks to avoid the automatic ratcheting effects of following benchmark levels of salary. Opportunity Salary increases will ordinarily be in line with salary increases across the Group. The Committee may award increases above this level where this is warranted due to a change in the scope or responsibilities of the role, to reﬂect progression in the role (e.g., staged increases for a recent appointment) or to remain competitive in the market. Current base salary levels are disclosed on page 52. Executive Directors are entitled to a car allowance (or other car beneﬁt), transport costs, private health provision, life assurance, an allowance towards the cost of independent ﬁnancial advice, normal staff discount entitlement and, in certain cases, a telephone allowance. Executive Directors are also entitled to participate in the all employee share save schemes (and any other all employee share plan which the Company may operate) on the same terms as all other UK-based employees. The Committee reviews beneﬁt provision from time- to-time and retains ﬂexibility to add or remove beneﬁts if necessary to ensure that beneﬁt provision remains market competitive or to meet the operational needs of the business (for example through the payment of relocation expenses). Not applicable. The maximum car allowance is currently £24,000. The cost to the Company of providing other beneﬁts depends on the nature of the beneﬁt and can vary from year to year. Beneﬁt provision will be maintained at a level which is competitive. Pension beneﬁts The Company provides a market competitive retirement provision for Executive Directors which is aligned with retirement beneﬁts available throughout the Group. Executive Directors are entitled to membership of the Group’s cash balance pension arrangement known as the Morrisons Retirement Saver Plan. Individuals contribute 5% of capped base salary and all new eligible employees are automatically enrolled into this arrangement. A 10% cash salary supplement in lieu of Company pension contributions applies on base salary above the capped amount. A cash alternative to pension provision is provided where the Group’s standard pension provision is not appropriate, for example, where an Executive Director has reached the Lifetime Allowance. Executive Directors may elect to receive this cash salary supplement in lieu of pension of broadly the same value as would accrue on an annual basis in the pension plan. The Morrisons Retirement Saver Plan guarantees a value of the cash balance in the plan of 24% of pensionable pay (assuming retirement at age 65 years) adjusted for inﬂation capped at 2% p.a. A maximum 10% cash salary supplement applies above capped base salary. Where an Executive Director receives a cash salary supplement only, the maximum supplement payable is 25% of salary. Not applicable. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 51 Remuneration policy table continued Executive Directors Element and how it supports strategy Annual bonus Annual bonus awards are designed to incentivise and reward achievement of the Group’s short term ﬁnancial and strategic objectives and personal performance objectives. Compulsory deferral is designed to encourage retention and further align the interests of the Executive Directors with shareholders. LTIP Awards under the LTIP are designed to incentivise and reward achievement of the Group’s long term strategic objectives and creation of value for shareholders through execution of the strategy. Opportunity The maximum bonus potential for Executive Directors is 200% of base salary. The number of shares subject to the deferred award is determined by reference to the bonus and the share price on the date of award. The maximum annual individual award level under the plan is 300% of salary. The current annual award level for Executive Directors is 240% of salary. Operation Bonus awards are made annually subject to a mix of ﬁnancial and non-ﬁnancial performance measures. Achievement of each performance element is assessed independently and the level of payout is determined by the Committee after the end of the relevant ﬁnancial year. 50% of any bonus payable is paid in cash with the other 50% deferred in shares under the deferred share bonus plan, normally for a period of three years. The Committee has discretion to allow a higher level of deferral. Dividend equivalents accrue over the vesting period and are paid at the time of vesting on the number of shares that vest. Awards are made annually subject to performance measures set by the Committee, which are aligned with business strategy and the Group’s stated KPIs. Achievement of each element is assessed independently. Awards will normally vest three years after the award is made. The Committee retains discretion to introduce a holding period which would apply after the award has vested. Dividend equivalents accrue over the performance period and are paid at the time of vesting on the number of shares that vest. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Performance measures and period Annual bonus awards are subject to the following performance measures: • 60% is based on underlying proﬁt before tax performance; • 20% is linked to achievement of a number of strategic corporate scorecard measures; and • 20% is linked to achievement of personal objectives. The measures and weightings are set by the Committee on an annual basis and each element is assessed independently at the end of each year. Achievement of threshold performance will result in a payout of 20% of the underlying proﬁt element (i.e., 12% of the maximum bonus potential). Achievement of one of the strategic corporate scorecard measures or one of the personal objectives is regarded as threshold performance for that element. Deferred share awards are not subject to any further performance conditions. Awards will normally vest three years after the date of award but may be forfeit if the individual leaves employment before the vesting date. LTIP awards are subject to the following performance measures: • 50% is based on cumulative free cash ﬂow; • 30% is based on underlying earnings per share (EPS); and • 20% is based on total sales. Achievement of threshold performance will ordinarily result in vesting of 25% of each element with 100% vesting for maximum performance. However, the Committee has discretion to reduce the level of vesting at threshold. A return on capital employed (ROCE) underpin applies to the vesting of the total LTIP award. LTIP awards granted prior to 2014 are subject to the following performance measures: • 75% is based on growth in underlying EPS relative to RPI; and • 25% is based on like-for-like non-fuel sales relative to the Institute of Grocery Distribution (IGD) index. Achievement of threshold performance will result in vesting of 25% of each element with 100% vesting for maximum performance. No award can vest under the like-for-like sales element unless the threshold EPS target has been met. For all awards, the Committee has the discretion to adjust the vesting calculations as set out in the notes to the policy table below. Clawback and malus Following changes to the UK Corporate Governance Code announced in September 2014, the Committee agreed to incorporate clawback into the Company’s incentive plans in addition to the existing malus provisions in the Company’s DSBP and LTIP. The cash element of the annual bonus and vested LTIP awards may be clawed back in the following circumstances: • material misstatement of results; • gross misconduct; • reputational damage; and/or • performance assessment error. Clawback provisions will apply for three years following payment of a cash bonus (malus already applies to the deferred share element for a three year period) and two years following vesting of an LTIP award (i.e. ﬁve years from grant). The ﬁrst awards which will be subject to the clawback provisions are annual bonus plan awards made in respect of 2015/16 (paid in early 2016) and any LTIP awards granted in the 2015/16 ﬁnancial year. Malus provisions (which also apply in respect of earlier awards) apply in certain circumstances which include ﬁnancial misstatement or similar acts that bring the business in disrepute. 52 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Directors’ remuneration report Implementation of remuneration policy in 2015/16 Base salary LTIP The LTIP awards for David Potts and Trevor Strain for 2015 will be 300% and 240% of salary respectively. David Potts’ 2015 award is intended to provide an immediate performance driver and alignment with shareholders. Thereafter LTIP awards will revert to the normal level of 240%. It is intended to make LTIP awards in April 2015 following the announcement of 2014/15 results, in line with the normal grant cycle for the Company. The Committee considers that the new CEO should have an incentive interest in Morrisons shares from the earliest opportunity ensuring that his interests are aligned to shareholders. The performance targets for the 2015 LTIP award should be aligned with Morrisons strategy and be meaningful and robust. In this transitional period the Committee believes that it is important to allow David Potts time to assess the business and provide his input into the formation of the long term business plan under his leadership. We therefore intend to wait until the outcome of this process before setting targets for the 2015 award, and we will revert to shareholders at this time. We expect this to be by the time of the interim results announcement in September. Chairman and Non−Executive Director fees Base fees and fees for Committee chairmanship and membership are unchanged for 2015/16 at £60,000, £20,000 and £4,000 (per Committee) respectively. The fee for the Senior Independent Director is also unchanged at £20,000. Andrew Higginson joined the Board as Deputy Chairman and Chairman Elect in October 2014 with a base fee of £200,000. On succeeding Sir Ian Gibson as Chairman, his base fee became £400,000. Annual base salaries for the Executive Directors are set out below: D Philips1 D Potts2 T Strain 2015/16 2014/15 £850,000 £850,000 £525,000 £850,000 − £489,600 1 D Philips stepped down as CEO on 16 February 2015. 2 D Potts will be appointed as CEO on 16 March 2015. Trevor Strain was promoted to the role of CFO in April 2013 on a base salary below that of his predecessor. In reviewing his salary for 2015, the Committee took into account the considerable progress made in the CFO role in the two years since his appointment, his substantial contribution to the business in this time of transition, and current positioning against market data. The Committee determined that it was appropriate to increase his salary with effect from 2 February 2015 to £525,000, representing an increase of 7%. The Committee believes that further increases may be required to appropriately reﬂect his progress and contribution but prefers for such increases to be staged over time. Beneﬁts and pension The Executive Directors will receive beneﬁts and a pension salary supplement in line with the current Policy. David Potts and Trevor Strain receive a pension salary supplement of 25% and 24% of base salary, respectively. David Potts will receive relocation beneﬁts to support his immediate start with the business following appointment. Annual bonus The structure of the bonus, including maximum potential (200% of salary) and the requirement to defer 50% of any bonus in shares under the DSBP, is in line with Directors’ remuneration policy (extract set out on page 51). The performance measures and weightings for the Executive Directors are as follows: Underlying proﬁt before tax Strategic scorecard Personal objectives Weightings (% of maximum bonus opportunity) 50% 30% 20% Underlying proﬁt before tax targets are set by reference to internal budgets. Scorecard measures for 2015/16 will focus on strategic objectives in the areas of like-for-like sales growth (20%) and cost reduction (10%). Personal objectives will underpin the strategic objectives. Detail on the performance targets has not been disclosed as this information is regarded by the Directors as commercially sensitive and of value to competitors beyond the end of the performance period. Dalton Philips will not be eligible for any bonus in respect of 2015/16. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 53 Directors’ remuneration report Annual report on remuneration S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Audited information Single total ﬁgure of remuneration The table below sets out the single total ﬁgure of remuneration and breakdown for each Director for 2014/15 and the comparative ﬁgure for 2013/14. 2014/15 Salary/fees £000 Beneﬁts1 £000 Annual bonus £000 LTIP £000 Pension beneﬁts2 £000 Total £000 Salary/fees £000 Beneﬁts1 £000 2013/14 Annual bonus £000 LTIP/ restricted share award £000 Executive Directors D Philips T Strain4 Non-Executive Directors I Gibson A Higginson7 P Cox R Gillingwater P Hughes J Waterous 850 490 4636 94 108 76 92 92 28 28 1,0105 6025 – – – – – – – – – – – – – – – – – – – – 213 118 2,101 1,238 850 415 26 23 –3 1825 – – – – – – 463 94 108 76 92 92 375 – 99 668 85 88 2 – – – – – – – – – – – – – – – – – – – Pension beneﬁts £000 Total £000 213 92 1,089 712 – – – – – – 377 – 99 66 85 88 1 Taxable beneﬁts for the Executive Directors include a car allowance (or other car beneﬁt), transport costs, private health provision, life assurance and, in certain cases, a telephone allowance. The Executive Directors are eligible for an allowance towards the cost of independent ﬁnancial advice. The Chairman and Deputy Chairman have use of a car and driver for Company business and receive private health provision. All Directors receive the Company’s normal staff discount entitlement which is not taxable. The value of Sharesave awards granted in 2014/15 is also included in this ﬁgure. 2 D Philips received a salary supplement equal to 25% of base salary during the year. T Strain received a salary supplement of 24% of base salary during the year. 3 D Philips declined to be considered for an annual bonus in 2013/14. 4 T Strain was appointed to the Board on 10 April 2013. The comparative ﬁgures disclosed for 2013/14 for salary, taxable beneﬁts, annual bonus and pension beneﬁts are for the period following appointment to the Board. 5 50% of the annual bonus is deferred in shares for a period of three years. There are no performance conditions attached. For D Philips, the 2014/15 bonus was paid in cash. 6 Sir Ian Gibson stepped down at the Board meeting on 22 January 2015. The ﬁgure disclosed includes a payment in lieu of notice of 3 months (£93,750) payable under his letter of appointment dated 30 September 2010. During this period, Sir Ian Gibson agreed to be available to carry out activities on behalf of the Group. 7 A Higginson was appointed to the Board on 1 October 2014. The ﬁgure disclosed includes fees in respect of his induction period (including legal costs) which commenced on 1 September 2014. 8 R Gillingwater was appointed to the Board on 1 March 2013. The ﬁgure disclosed for 2013/14 for salary is for the period following appointment to the Board. CEO arrangements on loss of office Dalton Philips stepped down as CEO on 16 February 2015. Dalton’s notice period commenced on 13 January 2015 and he was paid his normal base salary and contractual beneﬁts up to the date of cessation on 16 February 2015. In accordance with his contractual entitlements, Dalton will receive phased payments in lieu of base salary, pension supplement and beneﬁts for the remainder of his 12 month notice period. These payments are being made in instalments and are subject to mitigation. The Remuneration Committee carefully considered the circumstances of Dalton’s departure, taking into account his contribution to the business through a period of signiﬁcant industry change, as well as the importance of ensuring a smooth transition. Against that background, the Committee agreed to exercise its discretion to treat Dalton as a good leaver for the purposes of his incentive awards in accordance with the remuneration policy approved by shareholders at the 2014 AGM. As a good leaver, the Committee agreed that: • Dalton would remain eligible for an annual bonus in respect of 2014/15. Performance against the applicable performance conditions is set out on page 51. • Dalton will not be eligible for a bonus in respect of 2015/16. • Dalton’s 237,592 deferred shares (including dividend equivalents) will vest in full in March 2015 in accordance with the rules of the DSPB. These relate to his annual bonus in respect of 2011/12. • The unvested LTIP awards granted to Dalton in 2013 and 2014 will vest on the normal vesting date (three years from the date of grant) subject to achievement of the applicable performance conditions and a time pro-rata reduction. The maximum number of shares under award after reduction for time pro-rating are 2013: 550,999 and 2014: 269,696. As noted elsewhere in this report, the performance conditions for the 2012 award were not met and this award therefore lapsed. 54 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Directors’ remuneration report Annual report on remuneration continued Annual bonus The chart below summarises the performance measures and weightings for the annual bonus for the Executive Directors in respect of 2014/15. A summary of performance in each area and bars which illustrate the performance against the performance ranges are also provided for each measure. Performance in the range % of max achieved Weighting Below Threshold Target Maximum CEO CFO Underlying PBT Strategic scorecard – Convenience – Online – Operating cash-ﬂow – Cost savings – Like-for-like sales Personal Total (% of max) 60% 20% 2.5% 2.5% 5% 5% 5% 20% 60% 0% 50% 100% 40% 24% 70% 60% 80% 62% Additional commentary on this performance is provided below: • Underlying PBT. The target range was built around the objectives which the business set and communicated at the start of the year. Performance was at the target level. • Strategic scorecard. For 2014/15, the strategic scorecard focused on delivery against key elements of the strategy for the year, with targets set in the context of the strategic plan and the current retail environment, and included both ﬁnancial and operational elements. Further discussion of performance in these areas is set out on pages 10 to 20 of the Annual report. Key highlights include: operating cash ﬂow which delivered strong performance above the maximum target set, good progress on cost savings initiatives and on target operational achievement in the roll out of online capability. Performance in convenience was below expectations resulting in no payout for this element. • Personal. The personal measures are speciﬁc to the individual and were designed to support the delivery of our key ﬁnancial and strategic objectives. The Directors consider the speciﬁc details of the performance targets to contain commercially sensitive information linked to the Company’s strategic priorities and internal budgets, which would be potentially valuable to competitors beyond the end of the ﬁnancial year. The disclosure of such information could therefore damage the Company’s competitive position and shareholder value and is therefore not considered appropriate. 50% of any bonus payable is deferred in shares under the DSBP which vest three years after the date of award. Dividend equivalents will accrue and be paid on the shares that vest. These deferred shares are normally forfeited if the individual leaves the Company before they vest. Dalton Philips’ bonus for 2014/15 was paid in cash under the terms of his settlement agreement. LTIP awards Awards granted under the LTIP in April 2012 are scheduled to vest in April 2015. The performance period relating to these awards ends on 1 February 2015. Details of the performance conditions and the extent to which they have been satisﬁed are set out below: Weighting Threshold performance required Maximum performance required1 Actual outcome Actual LTIP vesting (% of maximum) Performance condition Underlying earnings per share (EPS) growth Like-for-like non-fuel sales relative to the Institute of Grocery Distribution (IGD) index2 LTIP vesting (% of maximum) 75% 25% EPS growth of RPI +4% p.a. Matching IGD index over the three year period EPS growth of RPI +10% p.a.1 Outperformance of IGD index by at least 2% over the three year period3 EPS growth below threshold of RPI +4% p.a. Below IGD index over three year period 0% 0% 0% 1 Vesting is on a straight-line basis between points (RPI + 4%, 5%, 9% and 12%). 2 No award can vest under the like-for-like sales element unless the threshold EPS target has been met. 3 Vesting is on a straight-line basis between threshold and maximum. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 55 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Share awards granted in 2014/15 The table below sets out the share awards made to the Executive Directors during 2014/15 under the Company’s LTIP. No further awards were made during the year. Grant date Award type Basis on which award made Face value of award (£)1 Percentage of award vesting at threshold performance D Philips T Strain 20 June 2014 Conditional award 225% of salary 1,912,500 20 June 2014 Conditional award 225% of salary 1,101,600 25% 25% Performance period end date Performance conditions 31 January 2016 See table below 31 January 2016 See table below 1 The face value in the table above has been calculated by multiplying the maximum number of shares that could vest by the average share price used to determine the number of shares awarded. The average share price used was £1.909 and this was calculated over a period of ﬁve business days prior to the date of grant. The table below sets out the performance conditions attached to the awards made during the year. These awards were granted in June 2014 following shareholder approval of remuneration policy at the 2014 AGM. Measure Weighting (% of maximum award) Targets Cumulative free cash ﬂow 50% Underlying earnings per share (EPS) 30% Total sales (excluding fuel and VAT) 20% 25% of the free cash ﬂow element vests for achieving cumulative free cash ﬂow of £1bn over the three year performance period 100% vests for achieving cumulative free cash ﬂow of £2bn over the three year performance period1 25% of the underlying EPS element vests for achieving underlying EPS of 17p for the ﬁnancial year 2016/17 100% vests for achieving underlying EPS of 23p for the ﬁnancial year 2016/171 25% of the total sales element vests for achieving total sales of £14bn for the ﬁnancial year 2016/17 50% vests for achieving total sales of £14.4bn for the ﬁnancial year 2016/17 100% vests for achieving total sales of £15bn for the ﬁnancial year 2016/172 1 Vesting is on a straight-line basis between threshold and maximum. 2 Vesting is on a straight-line basis between points. The Committee will take account of the Group’s ROCE over the performance period. If the Committee is not satisﬁed with ROCE performance over the period it will retain discretion to adjust outcomes downward. For the free cash ﬂow measure, the Committee has set maximum and minimum ‘guardrails’ for maintenance expenditure and cumulative net proceeds from property sales over the performance period. When considering vesting against the free cash ﬂow measure, the Committee will review and adjust as appropriate in the event of operation outside the agreed parameters. The Committee will disclose these parameters and any decision taken to adjust outcomes retrospectively in the relevant Annual report on remuneration. It should be noted that decisions in relation to material property sales and expenditure on maintenance and infrastructure are taken by the Board as a whole. For the revenue targets, as set out in the Directors’ Remuneration Policy, the Committee will retain the discretion to adjust the targets in the event of material disposals or store closures during the performance period which were not taken into account in setting the target range. The Committee has discretion to adjust these calculations for material exceptional events or actions (which may include strategic changes to capital expenditure approved by the Board and material acquisitions or disposals) which were not in the contemplation of the Committee at the time the targets were set and which might otherwise materially distort the outcome, in order to ensure that vesting of the LTIP is an accurate and fair reﬂection of performance. If the Committee exercises its discretion to amend the calculation, a full disclosure of the reason for the amendment and an explanation of the impact will be given in the relevant Annual report on remuneration. Payments to past Directors and loss of office payments Sir Ian Gibson received a payment of £93,750 in lieu of notice of three months payable under his letter of appointment dated 30 September 2010. During this period, Sir Ian Gibson agreed to be available to carry out activities on behalf of the Group. No other payments (including loss of office payments) have been made during 2014/15 to any individual who was previously a Director of the Company. 56 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Directors’ remuneration report Annual report on remuneration continued Statement of Directors’ shareholding The Company has share ownership guidelines for Executive Directors of 200% of salary. Under the guidelines, Executive Directors are expected to retain 50% of vested share awards (net of tax), including shares from the deferred element of the annual bonus, until the guideline is reached. Shares held under the DSBP (calculated on a post-tax basis) which are subject only to a continuing service requirement will be included in assessing the level of shareholding. The shareholding guideline should be reached within ﬁve years of appointment to the Board. The Company has share ownership guidelines for Non-Executive Directors of 50% of base fees. This guideline should be reached within three years of appointment to the Board or three years after the date of adoption of the policy for incumbent Directors. Dalton Philips has fully complied with the shareholding requirement in respect of the share awards that have vested since he was appointed in March 2010. No share awards have vested for Trevor Strain since his appointment to the Board. Trevor Strain does not yet meet the 200% shareholding guideline but is within the ﬁve year period allowed to build up his shareholding. Dalton Philips stepped down as CEO on 16 February 2015. Directors’ shareholdings – Executive Directors Executive Directors D Philips T Strain Shareholding requirement (% salary) Shareholding as at 1 February 20151 (% salary)2 Shares owned outright Deferred shares not subject to performance Share save options not subject to performance LTIP shares subject to performance3 Total interests in shares 200% 200% 98% 26% 337,919 39,341 237,592 50,180 5,487 5,487 1,836,2514 988,276 2,417,249 1,083,284 1 Includes shares held under the DSBP on an after tax basis. 2 For the purpose of calculating the shareholding as a percentage of salary, the share price of £1.799 as at 30 January 2015 (the last trading day of the ﬁnancial year ended 1 February 2015) has been used (other than for shares purchased in the market which are valued at the acquisition price). 3 834,523 shares and 411,281 shares represent LTIP awards granted to D Philips and T Strain respectively in April 2013 which are due to vest in April 2016. 75% of the awards are linked to underlying earnings per share (EPS) growth targets (25% of this element vests at growth of RPI +1% p.a. and 100% vests at growth of RPI +10% p.a.). 25% of the awards are linked to like-for-like non-fuel sales relative to the Institute of Grocery Distribution (IGD) index (25% of this element vests for matching the index; 80% vests for outperforming the index by at least 0.8% and 100% vests for outperforming the index by at least 2% over the three year period). Vesting is on a straight-line basis between each of the points. No award can vest under the like-for-like sales element unless the threshold EPS target has been met. 1,001,728 shares and 576,995 shares represent LTIP awards granted to D Philips and T Strain respectively in June 2014 which are due to vest in June 2017. Performance targets for those awards are disclosed in the section headed ‘Share awards granted in 2014/15’. 4 Following his departure on 16 February 2015, the remaining LTIP shares subject to performance for Dalton Philips are 820,695 as at 11 March 2015. Directors’ shareholdings – Non−Executive Directors All Non-Executive Directors are still within the three year period allowed to build up their shareholding. Shareholdings as at 1 February 2015 are set out in the table below. P Cox A Higginson I Gibson1 R Gillingwater P Hughes J Waterous 1 Sir Ian Gibson retired on 22 January 2015. The shareholding shown is as at that date. There have been no changes in the Directors’ interests since the year end. 1 February 2015 Total (owned outright) 25,000 266,209 127,750 19,695 9,848 20,216 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 57 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Unaudited information Performance graph and table The graph below shows the Company’s total shareholder return (TSR) compared with the TSR of the FTSE 100 and FTSE food and drug retailers indices over the six year period to 1 February 2015. These indices have been selected as being appropriate in giving a broad equity view and the Company is a constituent of both indices. Change in remuneration of CEO compared to Group employees The table below sets out the change in total remuneration paid to the CEO from 2013/14 to 2014/15 and the average percentage change from 2013/14 to 2014/15 for employees of the Group as a whole. FTSE 100 FTSE all share food and drug retailers Morrisons D Philips All Group employees2 % increase in element between 2013/14 and 2014/15 Salary and fees Taxable beneﬁts 0% 2% 0% 2% Annual bonus n/a1 130%3 1 D Philips declined to be considered for an annual bonus in 2013/14. 2 Reﬂects the change in average pay for all Group employees employed in both the ﬁnancial year 2013/14 and the ﬁnancial year 2014/15. 3 Represents the increase in the average bonus payout for eligible employees. Relative importance of spend on pay The table below sets out the total spend on remuneration in the 2014/15 and 2013/14 ﬁnancial years compared with distributions to shareholders. Value of a £100 holding £ 250 200 150 100 50 0 2009 2010 2011 2012 2013 2014 2015 (£m) The table below sets out the total remuneration ﬁgure for the CEO over the same six year period, valued using the methodology applied to the single total ﬁgure of remuneration. Chief Executive 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 Total spend on remuneration for all Group employees Proﬁt distributed by way of dividends and share buyback 2014/15 £1,970m 2013/14 Difference £1,972m (£2m) £308m £336m (£28m) – 3,3281 2,502 1,089 1,089 2,101 The Committee and its advisers 304 – – – – During the year, the following individuals were members of the Remuneration Committee: Total remuneration (£000s) Annual bonus payment (% of maximum opportunity) LTIP vesting level achieved (% of maximum opportunity) Dalton Philips Marc Bolland 1,159 Dalton Philips Marc Bolland Dalton Philips Marc Bolland – – – 0%2 70% 90% 0% 0% 60% – – – – – – – – 0% 0% – – – 0% – 1 Total remuneration includes value of unrestricted share award over 319,401 shares and restricted share award over 120,965 shares granted on recruitment. 2 Marc Bolland was not treated as a good leaver and therefore did not receive a bonus in 2009/10. Name of Director J Waterous (Chairman) P Cox I Gibson R Gillingwater A Higginson P Hughes Membership From 1 Feb 2010 1 Apr 2009 1 Sept 2007 1 Mar 2013 22 Jan 2015 1 Jan 2010 To To date To date To date To date To date To date The CEO, the Group Human Resources Director and other HR representatives also attend meetings (other than where their own remuneration is being discussed) by invitation. The Company Secretary acts as secretary to the Committee. 58 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Directors’ remuneration report Annual report on remuneration continued PricewaterhouseCoopers LLP (PwC) stepped down as advisers to the Committee following the decision to appoint them as auditor to the Group. Total fees for advice provided to the Committee during 2014/15 prior to them stepping down were £28,400. Following a competitive tender process, the Committee appointed Deloitte LLP (Deloitte) in July 2014 to provide independent external advice on market practice and Executive and Non-Executive remuneration. Fees are agreed by the Committee according to services provided. Total fees paid during 2014/15 to Deloitte for advice and assistance in relation to remuneration matters were £79,250. Deloitte are also engaged from time-to-time to provide a range of unrelated human resource consulting services and advice on tax and accounting. The Chairman of the Committee monitors such engagements on an ongoing basis to ensure that there is no impact on Deloitte’s independence as adviser to the Committee. Deloitte and PwC are members of the Remuneration Consultants Group and signatories to its Voluntary Code of Conduct. The Committee is satisﬁed that the advice received during the year from both PwC and Deloitte is objective and independent. Allen & Overy LLP provided legal advice to the Committee on the leaving arrangements for the Chairman and CEO. Fees paid for this advice during 2014/15 totalled £14,080. Allen & Overy LLP also provide other legal advice and services to the Group. Statement of voting at 2014 AGM The table below shows the voting outcome at the June 2014 AGM for approval of the 2013/14 Remuneration report and Remuneration policy respectively. For as a % of votes cast Votes for Votes against Against as a % of votes cast Abstentions 1,381,444,825 89.10 169,058,218 10.90 40,652,834 1,142,938,356 73.46 412,940,651 26.54 35,276,870 Remuneration report Remuneration policy The Committee recognises that Morrisons has a diverse mix of shareholders who can have different views on a range of issues, including executive remuneration. In advance of the approval of the remuneration policy at the 2014 AGM, the Committee consulted widely with institutional shareholders and investor representative bodies and received broad support from those consulted. While the level of support for the Remuneration Policy indicates some shareholder concerns, the Committee also notes that the majority of Morrisons top 20 shareholders voted in favour of the Policy. Where shareholders vote against our remuneration resolutions, the Committee is committed to listening to them and engaging with them to understand their concerns as part of an ongoing dialogue. Johanna Waterous Chairman of the Remuneration Committee 11 March 2015 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 59 Directors’ report Statutory disclosures The following disclosures have been included elsewhere within the Annual report and are incorporated into the Directors’ report by reference. Disclosure Financial instruments Financial risk management Future developments Dividend Greenhouse gas emissions Corporate governance report Directors of the Company Employee involvement Going concern Page 103 to 104 103 2 to 33 82 25 36 to 46 37 22 to 23 44 Political donations No political donations were made, which is Group policy. Forward−looking statements The Strategic report and Directors’ report are prepared for the members of the Company and should not be relied upon by any other party or for any other purpose. Where the Strategic report and Directors’ report include forward-looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of the Annual report. Consequently, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward-looking statements and information. The liabilities of the Directors in connection with the Strategic report, the Directors’ remuneration report and the Directors’ report shall be subject to the limitations and restrictions provided by the Companies Act 2006. Borrowing powers The Articles of Association of the Company restrict the borrowings of the Company and its subsidiary undertakings to a maximum amount equal to twice the share capital and consolidated reserves. Relating to beneﬁcial owners of shares with ‘information rights’ Beneﬁcial owners of shares who have been nominated by the registered holder of those shares to receive information rights under section 146 of the Companies Act 2006 are required to direct all communications to the registered holder of their shares rather than to the Company’s registrar, Capita Registrars, or to the Group directly. Directors’ and Officers’ liability insurance The Company maintains insurance cover for the protection of Directors and senior management from personal liabilities and costs which may arise in the course of fulﬁlling their duties. The Company also agreed during the year to provide an indemnity to the Non-Executive Directors for such liabilities and costs to the fullest extent permitted by law. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Substantial shareholdings The company has been notiﬁed by the following shareholders (excluding Directors) that they have interests in 3% or more of the total voting rights in the Company. The shares relate to the number informed by the shareholders on the notiﬁcation rather than the current share register: Black Rock Inc Schroeders plc Majedie Asset Management Limited Silchester International Investors LLP Brandes Investment Partners, LP Amerprise Financial Inc First Eagle Investment Management, LLC Invesco Limited Andrea Shelley Eleanor Kernighan Zurich Financial Services As at 1 February 2015 As at 11 March 2015 Number of shares % of share capital Number of shares % of share capital 122,022,032 119,757,406 5.23 122,022,032 5.13 119,757,406 5.23 5.13 118,752,647 5.09 118,752,647 5.09 117,553,329 5.04 117,553,329 5.04 117,121,738 5.02 117,121,738 5.02 116,763,649 5.00 116,763,649 5.00 114,296,273 111,082,524 92,869,309 92,182,396 4.90 114,296,273 4.76 111,082,524 3.98 92,869,309 3.95 92,182,396 4.90 4.76 3.98 3.95 81,286,130 3.48 81,286,130 3.48 The percentage appearing above is the percentage that number represents of the issued share capital of the Company as at 1 February 2015 and 11 March 2015 respectively. Additional shareholder information Additional information for shareholders is required by the implementation of the EU Takeover Directive into UK law. Pursuant to section 992 of the Companies Act 2006, the Company is required to disclose certain additional information. Such disclosures, which are not covered elsewhere in this report, include the following paragraphs. The disclosures set out below are in some cases a summary of the relevant provisions of the Company’s Articles of Association and the relevant full provisions can be found in the Articles which are available for inspection at the Company’s registered office. Appointment and powers of Directors Directors are appointed by ordinary resolution at a general meeting of ordinary shareholders. The Directors have the power to appoint a Director during the year, but any person so appointed must be put up for appointment at the next AGM. Subject to its Articles of Association and relevant statutory law, and to such direction as may be given by the Company in general meeting by special resolution, the business of the Company shall be managed by the Directors, who may exercise all powers of the Company which are not required to be exercised by the Company in general meeting. 60 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Governance Directors’ report Statutory disclosures continued Articles of Association Distributions The Company’s Articles of Association may only be amended by a special resolution at a general meeting of shareholders. Share capital The authorised and called-up share capital of the Company, together with details of shares allotted and cancelled during the year, are shown in note 6.5 of the Group ﬁnancial statements. At the AGM of the Company held in June 2012, a special resolution was passed to renew the authority given at the AGM held in June 2011 for the purchase by the Company of up to 248,797,066 ordinary shares representing approximately 10% of the issued ordinary share capital at that time. During the prior period, the Company purchased 20,338,000 of its own shares pursuant to that authority, which expired at the close of the 2013 AGM. During the period, 41,962 (2014: 8,811,865) ordinary shares were issued to employees exercising share options, along with a further nil (2014: 2,770,220) out of the Group’s treasury shares and 3,031,234 out of the Group’s trust shares. Share capital and rights attaching to the Company’s shares Under the Company’s Articles of Association, any share in the Company may be issued with such rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise as the Company may from time-to-time by ordinary resolution determine (or, in the absence of any such determination, as the Directors may determine). At a general meeting of the Company, every member has one vote on a show of hands and, on a poll, one vote for each share held. The notice of general meeting speciﬁes deadlines for exercising voting rights either by proxy or present in person in relation to resolutions to be passed at a general meeting. No member is, unless the Board decides otherwise, entitled to attend or vote either personally or by proxy at a general meeting, or to exercise any other right conferred by being a shareholder if they or any person with an interest in shares has been sent a notice under section 793 of the Companies Act 2006 (which confers upon public companies the power to require information with respect to interests in their voting shares) and they or any interested person failed to supply the Company with the information requested within 14 days after delivery of that notice. The Board may also decide that no dividend is payable in respect of those default shares and that no transfer of any default shares shall be registered. These restrictions end seven days after receipt by the Company of a notice of an approved transfer of the shares or all the information required by the relevant section 793 notice, whichever is the earlier. The Directors may refuse to register any transfer of any share which is not a fully paid share, although such discretion may not be exercised in a way which the Financial Conduct Authority regards as preventing dealings in the shares of the relevant class or classes from taking place on an open or proper basis. The Directors may likewise refuse to register any transfer of a share in favour of more than four persons jointly. The Company is not aware of any other restrictions on the transfer of shares in the Company other than certain restrictions that may from time-to-time be imposed by laws and regulations (for example, insider trading laws). The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or voting rights. As noted in the Annual report and ﬁnancial statements for the year ended 2 February 2014, the Directors were advised that certain distributions (including share repurchases) carried out in the years ended 3 February 2013 and 2 February 2014 were made otherwise than in accordance with the Companies Act 2006. At a general meeting of the Company’s shareholders, held on 6 March 2015, a resolution was passed which ratiﬁed the payment of the relevant dividends, authorised the re-execution of the relevant share repurchases and removed any right for the Company to pursue shareholders or Directors for the repayment of the relevant funds. The overall effect of this resolution being passed is to return all parties to the position that they would have been in had the relevant distributions been made in accordance with the Companies Act 2006. Other disclosures The Company is not party to any signiﬁcant arrangements which take effect, alter or terminate upon a change of control of the Company following a takeover bid. The Company does not have any employee share schemes where the shares to which the scheme relates have rights with regard to the control of the Company which are not exercisable by employees. Equal opportunities for all Integral to a high performing culture is the concept of equal opportunity for all colleagues, which we offer regardless of race, colour, nationality, ethnic origin, gender (including gender reassignment), marital or civil partnership status, disability, religion or belief, sexual orientation, age or trade union membership. This includes applications for employment made by people with disabilities, which are given full and fair consideration. Respect underpins our behaviour towards all disabled candidates, as well as colleagues who have a disability or become disabled in any way during the course of their employment. A full assessment of the individual’s needs is undertaken and we will make reasonable adjustments to the work environment or practices in order to help people with disabilities. All candidates and colleagues are treated equally in respect of recruitment, promotion, training, pay and other employment policies and conditions. The decisions we make are based on relevant merits and abilities. Health and safety policy It is the Group’s intention, so far as is reasonably practicable, to ensure the health, safety and welfare of all its employees, customers and visitors to its premises. In order to achieve this, a comprehensive health and safety manual is in place for each division of the Company and subsidiary companies within the Group. Each health and safety manual contains the policy and procedures for complying with the Health and Safety at Work Act 1974, including the provision, based on risk assessment, of safe working practices for all work activities across the Group. The Group’s health and safety policy is approved by the Management Board. The Group has adopted the national targets set by the Health and Safety Commission for the reduction of workplace accidents and work-related ill health, and is on course to meet or exceed these targets. Health and safety performance is monitored to ensure continuous improvement in all areas. By order of the Board Mark Amsden Company Secretary 11 March 2015 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 61 Directors’ report Statement of Directors’ responsibilities in respect of the Annual report and ﬁnancial statements The Directors are responsible for preparing the Annual report, the Directors’ remuneration report and the Group and Company ﬁnancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Company ﬁnancial statements for each ﬁnancial period. Under that law they are required to prepare the Group ﬁnancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and applicable law and have elected to prepare the Company ﬁnancial statements in accordance with UK Generally Accepted Accounting Practice (UK Accounting Standards and applicable law). 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 Company and of their proﬁt or loss for that period. In preparing each of the Group and Company ﬁnancial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • for the Group ﬁnancial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • for the Company ﬁnancial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Company 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 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 its ﬁnancial statements and Directors’ remuneration report comply with the Companies Act 2006, and as regards the Group ﬁnancial statements, Article 4 of the IAS Regulations. 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. The Directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Disclosure of information to auditors The Directors who held office at the date of approval of this Directors’ report conﬁrm that, so far as they are each aware, there is no relevant audit information of which the Group’s auditor is unaware; and each Director has taken all steps that he or she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the Group’s auditor is aware of that information. Assessment of whether the Annual report is fair, balanced and understandable As required by the Code, the Directors conﬁrm that they consider that the Annual report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. When arriving at this position the Board was assisted by a number of processes including the following: • the Annual report is drafted by appropriate senior management with overall coordination by the Chief Financial Officer to ensure consistency across sections; • an extensive veriﬁcation process is undertaken to ensure factual accuracy; and • comprehensive reviews of drafts of the report are undertaken by members of the Management Board and other senior management; and the ﬁnal draft is reviewed by the Audit Committee prior to consideration by the Board. Responsibility statement We conﬁrm that to the best of our knowledge: • the ﬁnancial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the Company and its subsidiaries included in the consolidation as a whole; and • the Strategic report includes a fair review of the development of the business and the position of the Company and its subsidiaries included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s By order of the Board Mark Amsden Company Secretary 11 March 2015 62 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Independent auditors’ report to the members of Wm Morrison Supermarkets PLC Report on the Group ﬁnancial statements Our opinion In our opinion: • Wm Morrison Supermarkets PLC’s Group ﬁnancial statements and Company ﬁnancial statements (the “ﬁnancial statements”) give a true and fair view of the state of the Group’s and of the Company’s affairs as at 1 February 2015 and of the Group’s loss and cash ﬂows for the 52 week 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 Company ﬁnancial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; 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 Wm Morrison Supermarket PLC’s ﬁnancial statements comprise: • the consolidated and Company balance sheet as at 1 February 2015; • the consolidated statement of comprehensive income for the 52 week period then ended; • the consolidated cash ﬂow statement for the 52 week period then ended; • the consolidated statement of changes in equity for the 52 week period then ended; and • the notes to the ﬁnancial statements, which include a summary of signiﬁcant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report and Financial Statements (“Annual Report”), rather than in the notes to the ﬁnancial statements. These are cross-referenced from the ﬁnancial statements and are identiﬁed as audited. The ﬁnancial reporting framework that has been applied in the preparation of the Group ﬁnancial statements is applicable law and IFRSs as adopted by the European Union. The ﬁnancial reporting framework that has been applied in the preparation of the Company ﬁnancial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Our audit approach Overview Materiality • Overall Group materiality: £17.25m which represents 5% of underlying proﬁt before tax. Underlying proﬁt before tax is deﬁned in note 1.4 to the ﬁnancial statements on page 78. Materiality Audit scope • We conducted the majority of our audit work in the UK, with a small amount of work undertaken by a component auditor in the Isle of Man. A separate PwC component audit team undertook work on the UK Manufacturing subsidiaries. • Taken together, the territories and functions where we performed our audit work accounted for 99% Audit scope of Group revenues. Areas of focus Areas of focus • Commercial income and promotional funding • Impairment of property, plant and equipment • Onerous lease provisions and onerous property commitments • Capitalisation and impairment of intangible assets • Stock valuation Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 63 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s The scope of our audit and areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). We designed our audit by determining materiality and assessing the risks of material misstatement in the ﬁnancial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of signiﬁcant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identiﬁed as “areas of focus” in the table below. We have also set out how we tailored our audit to address these speciﬁc areas in order to provide an opinion on the ﬁnancial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identiﬁed by our audit. Area of focus How our audit addressed the area of focus Commercial income and promotional funding Refer to note 1.1 (Accounting policies), page 75 (Critical accounting estimates and judgements) and notes 1.6, 5.2, 5.3 and 5.4. The Group has two categories of commercial income: marketing and advertising funding and volume based rebates on purchases. Commercial income is recognised as a deduction from cost of sales and is earned over the period of the contractual agreements with individual suppliers, as disclosed in the Group’s accounting policy on page 76. The total income recognised in a year is therefore based on the expected entitlement earned up to the balance sheet date under each supplier agreement. The Group separately recognises promotional funding on promotions that are partially funded by suppliers. Promotional funding is an automated deduction from cost of sales, triggered when a sale is recognised. The funding is recognised when the transaction occurs in accordance with the terms of supplier agreements. The amount receivable is wholly based on sales volumes achieved, multiplied by rates agreed with each supplier up-front. We focused on commercial income because of the signiﬁcance of the amounts to the Group’s gross proﬁt, the signiﬁcant number of transactions and agreements in place with suppliers covering a range of periods and the industry- wide focus on this area of accounting. We focused on promotional funding for the same reasons, although we acknowledge that the level of judgement and subjectivity in the calculations is negligible because of the level of automation. The amount to be recognised in the income statement for commercial income requires management to apply judgement based on the contractual terms in place with each of its suppliers together with estimates of amounts the Group is entitled to where transactions span the ﬁnancial period-end. The relative level of judgement in each of the categories of commercial income and promotional funding is considered below: Our audit work in respect of commercial income and promotional funding comprised a combination of controls testing, substantive testing of a sample of income and funding recognised during the period, testing of amounts recognised in the balance sheet and an assessment of the Group’s disclosures in this area. Each element of our work is considered in more detail below. Controls testing Our controls work encompassed understanding, evaluating and testing management’s key controls in respect of the recognition of both commercial income and promotional funding. These key controls included the monitoring of invoices raised and the accuracy of conﬁrmations from suppliers. We found no signiﬁcant deﬁciencies in these key controls, and our testing of management’s key system controls contributed to our evidence in determining whether commercial income and promotional funding had been recorded appropriately and in the correct period. Income statement testing We requested conﬁrmations directly from suppliers, in respect of a sample of commercial income and promotional funding. This sample included 141 different suppliers covering 342 individual transactions. The conﬁrmations received allowed us to evaluate whether commercial income or promotional funding had been appropriately recognised in the period, as well as assessing the validity of accruals made at the period-end. We found three exceptions, all of which were manual input errors and not areas of judgement. Two of these exceptions resulted in an under recognition of promotional funding of £34,000 and one resulted in an over recognition of promotional funding of £20,000, giving a net position of £14,000 under recognition. We also analysed commercial income and promotional funding recognised each month and compared it to the previous period to identify whether there were any unusual trends in the amounts or timing of commercial income and promotional funding recognised in each period. We also considered management’s own Key Performance Indicators in this analysis. No unusual trends were identiﬁed. Balance sheet testing We wrote to a further sample of suppliers, and obtained independent evidence of the value and timing of commercial income and promotional funding to evaluate that it had been recognised in the correct period. We also agreed the accrued income to evidence of post-year end cash receipt, or offset from trade creditors, where relevant. We performed cut-off procedures and credit note testing to provide further evidence to support the timing of the recognition of both commercial income and promotional funding. Cut-off work involved testing a sample of commercial income and promotional funding recognised both pre and post the period-end and evaluating by reference to documentation from suppliers that the timing of recognition was appropriate. 64 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Independent auditors’ report to the members of Wm Morrison Supermarkets PLC continued Area of focus How our audit addressed the area of focus Our credit note testing focused on credit notes raised after the period-end in order to identify any instances of commercial income or promotional funding being subsequently reversed. We did not identify any exceptions from this work. We tested the recoverability of invoiced commercial income and promotional funding (unsettled balances included within trade debtors in note 5.3 to the ﬁnancial statements and where the Group does not have the right of offset against trade creditors). We assessed the ageing of both outstanding commercial income and promotional funding debtors together with understanding the details of any disputes, and obtained explanations from management to assess whether any provisions were appropriate. No exceptions were noted. Disclosures We read the disclosures within the Annual Report in respect of commercial income and promotional funding and, based on our work, determined that they are consistent with accounting standards and the recent guidance on the reporting of complex supplier arrangements issued by the Financial Reporting Council. Commercial income − marketing and advertising funding This income is varied with regards to the nature and timing of the activity to which it relates, and is recognised in accordance with written agreements with suppliers. This income involves a signiﬁcant number of agreements and its recognition requires limited judgement or estimation by management in determining the amount that the Group is entitled to. Our focus was therefore on assessing whether a written agreement for the marketing and advertising funding existed, whether the relevant marketing or advertising had taken place and whether the income recognised was recorded in the appropriate period. Commercial income − volume based rebates Volume based rebates are driven by the Group achieving purchase volume targets set by individual suppliers for speciﬁc products over a pre-determined period. There is therefore judgement involved in estimating the volume of purchases, particularly where rebate agreements span a ﬁnancial period-end. In order to narrow this judgement, management endeavours to structure agreements to coincide with the Group’s ﬁnancial period-end, thereby reducing or eliminating the degree of estimation. In instances where the rebate agreement does not fully coincide with the period-end the key judgement that we focused on was the estimate of commercial income to be accrued at the period-end. Promotional funding Promotional funding covers in-store promotions which are partially funded by suppliers. Funding is automatically recognised as goods are sold. The degree of judgement is limited because the amount receivable is wholly based on sales volumes achieved, multiplied by rates agreed with each supplier up-front. Our focus was therefore on whether a written agreement for the promotional funding existed, whether the relevant promotion had taken place, and whether the funding recognised was recorded in the appropriate period. Impairment of Property, Plant and Equipment We obtained, understood and evaluated management’s impairment models. Refer to note 3.1 (Accounting policies), page 75 (Critical accounting estimates and judgements) and note 3.3 (Tangible assets). At 1 February 2015 management assessed the Group’s property, plant and equipment for an indication of impairment. The UK grocery retail market continues to evolve rapidly, with customers’ purchasing habits adapting to include convenience store and online offerings, and this has adversely impacted the market values of traditional supermarket freehold stores. As such, the Group has faced an environment where market values for retail space have declined. Our audit procedures included a detailed evaluation of the Group’s budgeting procedures (upon which forecasts are based) and an assessment of the principles of management’s discounted cash ﬂow models. We tested the mathematical accuracy of the calculations derived from each forecast model and assessed key inputs in the calculations such as revenue growth and discount rate, by reference to management’s forecasts, data external to the Group and our own expertise. We focused on these key assumptions because small subjective changes can have a material impact on the value in use assessment and any resultant impairment charge. We found, based on our audit work, that the key assumptions used by management were supportable and appropriate in light of the current environment. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 65 Area of focus How our audit addressed the area of focus Management considers each store to be a cash generating unit (“CGU”) and has calculated the recoverable amount of each CGU as the higher of value in use and fair value less costs of disposal. The value in use is based on discounted future cash ﬂow forecasts over which the Directors make judgements on certain key inputs including, for example, discount rates and long term growth rates. The fair value less costs of disposal is estimated by the Directors based on their knowledge of individual stores and the markets they serve, likely demand from grocers or other retailers in the event those stores were for sale and is further informed by a valuation performed by a third party valuer. The key judgements made by management in this fair value calculation relate to the estimated rental values and the yields of the stores. We focused on this area because of these judgemental factors, the signiﬁcant carrying value of freehold property and the size of management’s impairment charge of £1,113m in the year. Onerous lease provisions and onerous property commitments Refer to note 5.1 (Accounting policies), page 75 (Critical accounting estimates and judgements) and note 5.5. Accounting standards require management to assess the Group’s leasehold stores to identify where the expected future beneﬁts from a store are less than the future lease commitments, indicating that an onerous lease provision is required. Under IAS 37 ‘Provisions, contingent liabilities and contingent assets’ such a provision is made for the unavoidable costs of the contract, deﬁned in the standard as the “least net cost of exit.” We focused on this area because of the judgements required to be made by management in identifying those stores requiring an onerous lease provision and the assumptions used in the models, such as the discount rate and those used in developing the associated cash ﬂow forecasts. Management has determined their own view of estimated rental values and yields for each store which are the key assumptions used in their calculation of market values. Management derived these assumptions having considered available information such as industry data on market conditions, offers recently received for properties and information from an independent third party valuer. We evaluated management’s supporting information, including the third party valuation, and assessed this for reasonableness using our own property expertise, with a particular focus on the assumptions and methodology used and obtained third party evidence and market data to corroborate the assumptions. We determined that the valuations performed by management are reasonable. We note that models used by management are sensitive to changes in key assumptions such as rental values and yields, revenue growth and discount rate which, if not achieved, could reasonably be expected to give rise to further impairment charges in the future. We also evaluated the competency, qualiﬁcations, experience and objectivity of management’s property valuation experts. In addition, we evaluated the adequacy of the disclosures made in note 3.3 of the ﬁnancial statements, including those regarding the key assumptions and sensitivities to changes in such assumptions. We compared the disclosures against the requirements of IAS 36 ‘Impairment of assets’ and found them to be consistent. Having considered the possibility of impairment in the value of freehold properties (see above), we also challenged management’s calculations in respect of leasehold stores where the estimated future beneﬁts are not expected to exceed the future lease commitments, resulting in an onerous lease. We obtained management’s models and considered the accuracy and completeness of key data by agreeing inputs such as store locations and lease expiry dates for a sample of stores to the original signed lease agreements, noting no issues. We evaluated the Group’s budgeting procedures (upon which forecasts are based) and assessed the principles of the Group’s discounted cash ﬂow model. We tested the mathematical accuracy of the calculation derived from each forecast model and assessed key inputs in the calculations such as revenue growth and discount rate, by reference to management’s forecasts, data external to the Group and our own expertise. The discount rate used is consistent with the Group’s cost of debt and the requirements of IAS 37, which speciﬁes that the rate should be ‘liability speciﬁc’. We also considered the disclosures made in note 5.5 to the ﬁnancial statements and determined that they are consistent with the requirements of accounting standards. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 66 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Independent auditors’ report to the members of Wm Morrison Supermarkets PLC continued Area of focus How our audit addressed the area of focus Capitalisation and impairment of intangible assets Refer to note 3.2 (Accounting policies) and page 75 (Critical accounting estimates and judgements). The Group balance sheet includes capitalised intangible assets of £520 million, of which £496 million relates to software development costs incurred in connection with the Group’s IT systems transformation project, details of which are shown on page 87 of the Annual Report. The Group has developed a signiﬁcant amount of its own software and systems which is used in the business. We focused on this area because of the signiﬁcance of the costs capitalised and the fact that there is judgement involved in assessing whether the criteria, set out in accounting standards, required for capitalisation of such costs have been met, including the likelihood of the project delivering sufficient future economic beneﬁts. Where the costs incurred are internally generated (for example employee costs) there is further judgement required in the calculation, such as the amount of time spent on the projects. In light of the development of new software and systems, we also focused on whether the carrying value of existing capitalised software or systems was impaired. We obtained a breakdown of each individual internal development project capitalised in the period and reconciled this to the amounts recorded in the general ledger, identifying no signiﬁcant reconciling differences. We tested a sample of costs capitalised in the period to assess whether these had been appropriately treated in line with the Group’s accounting policy and accounting standards, most notably IAS 38 ‘Intangible assets’. We also met with management responsible for particular costs to obtain explanations and an understanding of the projects the costs related to. This enabled us to independently assess whether project costs met the criteria for capitalisation as set out in accounting standards. We found the explanations obtained from management to be consistent with our understanding of developments in the business and supported management’s assessment that the costs met the relevant capitalisation criteria. Where external third party contractors were used, we agreed the hours and charge out rates to the invoices issued by the contractor, and assessed whether the costs were directly related to a capital project. To determine whether internal employee costs were directly attributable to projects, we obtained listings of hours worked on individual projects for the employment costs capitalised. We selected a sample of the individual hours recorded and obtained an understanding of the work performed by the employee. We also checked that the hours charged equated to the value of costs capitalised by comparing the proportion of costs capitalised to the employee’s salary, without exception. We challenged management as to whether the development of new software or systems superseded or impaired any of the existing assets on the balance sheet. We also applied our own understanding of both new and existing projects and considered whether, in our view, any existing software is no longer in use or whether its life had been shortened by development activity. We found no such items. In performing this testing, we also re-visited the assumptions made by management in the prior period and compared them to actual outcomes in the current period, with no signiﬁcant variances being identiﬁed by our work. We performed analytical procedures on the amortisation charge to assess compliance with the Group’s accounting policy, and determined that the charge incurred in the period was in-line with this policy. Overall we found that the costs capitalised were supportable and consistent with the requirements of accounting standards for capitalising such costs. No material impairment of the intangible assets was identiﬁed from our work. We also considered whether the disclosures made in note 3.2 to the ﬁnancial statements met the requirements set out in accounting standards and noted no issues. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 67 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Area of focus Stock valuation Refer to note 5.1 (Accounting policies), page 75 (Critical accounting estimates and judgements) and note 5.2. The valuation of stock was focused on because of the nature of the judgements made by management when assessing the level of provisions required. As disclosed in note 5.1 to the ﬁnancial statements, provisions are held against stock for estimated losses related to shrinkage and obsolescence as well as a deduction for unearned commercial income (as the stock related to that commercial income and promotional income has yet to be sold). As stock is counted by the Group on a cyclical basis, rather than in full at the period-end date, the shrinkage provision at 1 February 2015 contains a degree of estimation. How our audit addressed the area of focus We attended stock counts throughout the period at a sample of the Group’s supermarkets, convenience stores, distribution centres and manufacturing locations. In addition to performing sample test counts, we assessed the effectiveness of the count controls in operation at each site. We also evaluated the results of other cycle counts performed by management and third parties throughout the period to assess the level of count variances. We tested the shrinkage assumptions determined by the count procedures by comparing them to historical data. The historical data included the results of the last three counts at each location, and our analytical procedures did not identify any signiﬁcant unusual ﬂuctuations in the data. The obsolescence provision is calculated by applying a judgemental percentage to the period-end stock levels, with this judgement being informed by historical data on the levels of obsolescence as well as management’s view of the current stock proﬁle and age. We assessed this provision by assessing the accuracy of the historical data and the explanations provided by management on the current proﬁle, noting no issues. We tested the unearned commercial income deduction by performing a recalculation using the proﬁle of period-end stock and the trends of commercial income historically received, with no issues noted. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the ﬁnancial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The Group’s accounting process is structured around a group ﬁnance function at its head office in Bradford. Within the head office, supporting ﬁnance functions exist for each of the key business operating areas (Group, Supermarkets (including Manufacturing) and Property), and these report to the Group ﬁnance team as appropriate. The Group also maintains local ﬁnance teams at each of its key Manufacturing sites. Other than group reporting from a component audit team from a PwC member ﬁrm in the Isle of Man auditing speciﬁc account balances only, and from a component team from the UK ﬁrm auditing the complete ﬁnancial information of a UK Manufacturing subsidiary, both of which operated under our instructions, all work was conducted in the UK by the same audit team. Our work also included, in this our ﬁrst year as the Group’s auditors, a review of the predecessor auditor working papers. Where the work was performed by the component auditor, we determined the level of involvement we needed to have in their audit work to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group ﬁnancial statements as a whole. As part of our year-end audit procedures, we held detailed discussions with the Isle of Man and UK Manufacturing component audit teams, including holding a detailed planning meeting with them and attending the audit clearance meeting with management by conference call (Isle of Man) or in person (UK Manufacturing). Materiality The scope of our audit was inﬂuenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the ﬁnancial statements as a whole. Based on our professional judgement, we determined materiality for the ﬁnancial statements as a whole as follows: Overall group materiality £17.25m How we determined it 5% of underlying proﬁt before tax (deﬁned in note 1.4 to the ﬁnancial statements on page 78). Rationale for benchmark applied We applied this benchmark because, in our view, this is the most relevant metric against which the performance of the Group is most commonly measured. We agreed with the Audit Committee that we would report to them all individual misstatements identiﬁed during our audit above £875,000, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. 68 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Independent auditors’ report to the members of Wm Morrison Supermarkets PLC continued Going concern Under the Listing Rules we are required to review the Directors’ statement, set out on page 44, in relation to going concern. We have nothing to report having performed our review. As noted in the Directors’ statement, the Directors have concluded that it is appropriate to prepare the ﬁnancial statements using the going concern basis of accounting. The going concern basis presumes that the Group and the Company have adequate resources to remain in operation, and that the Directors intend them to do so, for at least one year from the date the ﬁnancial statements were signed. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s and Company’s ability to continue as a going concern. Other required reporting Consistency of other information Companies Act 2006 opinions In our opinion: • the information given in the Strategic Report (on pages 2 to 33) and the Directors’ Report (on pages 59 to 61) for the ﬁnancial period for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements; and • the information given in the Corporate Governance Statement set out on pages 36 to 46 with respect to internal control and risk management systems and about share capital structures is consistent with the ﬁnancial statements. ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: • 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 and the Company acquired in the course of performing our audit; or We have no exceptions to report arising from this responsibility. – otherwise misleading. • the statement given by the Directors on page 61, in accordance with provision C.1.1 of the UK Corporate Governance Code (“the Code”), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s and Company’s performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company acquired in the course of performing our audit. We have no exceptions to report arising from this responsibility. • the section of the Annual Report on page 41, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report arising from this responsibility. Adequacy of information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • the 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 • We have no exceptions to report arising from this responsibility. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 69 Directors’ remuneration Directors’ remuneration report − Companies Act 2006 opinion In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Other Companies Act 2006 reporting Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration speciﬁed by law are not made. We have no exceptions to report arising from this responsibility. Corporate governance statement Under the Companies Act 2006 we are required to report to you if, in our opinion, a corporate governance statement has not been prepared by the Company. We have no exceptions to report arising from this responsibility. Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company’s compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report having performed our review. Responsibilities for the ﬁnancial statements and the audit Our responsibilities and those of the Directors As explained more fully in the Statement of Directors’ Responsibilities set out on page 61, the Directors are responsible for the preparation of the ﬁnancial statements and for being satisﬁed that they give a true and fair view. Our responsibility is to audit and express an opinion on the ﬁnancial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of ﬁnancial statements involves An audit involves obtaining evidence about the amounts and disclosures in the ﬁnancial statements sufficient to give reasonable assurance that the ﬁnancial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the Group’s and 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. We primarily focus our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the ﬁnancial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the ﬁnancial and non-ﬁnancial information in the Annual Report to identify material inconsistencies with the audited ﬁnancial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Steve Denison (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Leeds 11 March 2015 (a) The maintenance and integrity of the Wm Morrison Supermarkets PLC website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the ﬁnancial statements since they were initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. 70 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 71 Consolidated statement of comprehensive income 52 weeks ended 1 February 2015 Revenue Cost of sales Gross proﬁt Other operating income Proﬁt/loss on disposal and exit of properties and sale of businesses Administrative expenses Operating loss Finance costs Finance income Share of proﬁt of joint venture (net of tax) Loss before taxation Analysed as: Underlying proﬁt before tax Impairment and onerous lease provisions Proﬁt/loss on disposal and exit of properties Proﬁt arising on disposal of Kiddicare.com Limited Net pension interest income/(cost) Taxation Loss for the period attributable to the owners of the Company Other comprehensive (expense)/income Items that will not be reclassiﬁed to proﬁt or loss: Remeasurement of deﬁned beneﬁt pension schemes Tax on deﬁned beneﬁt pension schemes Items that may be reclassiﬁed subsequently to proﬁt or loss: Cash ﬂow hedging movement Tax on cash ﬂow hedging movement Other comprehensive (expense)/income for the period, net of tax Note 1.2 1.4, 4.6 1.6 6.2 6.2 4.3 1.4 1.4 1.4, 4.6 8.2 2.2 8.2 2.3 2.3 2015 £m 16,816 (16,055) 761 78 135 (1,670) (696) (105) 7 2 (792) 345 (1,273) 131 4 1 (792) 31 (761) (31) 6 (25) (9) 2 (7) (32) S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2014 £m 17,680 (16,606) 1,074 81 9 (1,259) (95) (87) 5 1 (176) 719 (903) 9 – (1) (176) (62) (238) 11 (8) 3 – (1) (1) 2 Total comprehensive expense for the period attributable to the owners of the Company (793) (236) Earnings per share (pence) – basic – diluted 1.5 1.5 (32.63) (32.63) (10.23) (10.23) 72 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Consolidated balance sheet 1 February 2015 Assets Non-current assets Goodwill and intangible assets Property, plant and equipment Investment property Net pension asset Investment in joint venture Investments Current assets Stock Debtors Derivative ﬁnancial assets Cash and cash equivalents Non-current assets classiﬁed as held-for-sale Liabilities Current liabilities Creditors Short term borrowings Derivative ﬁnancial liabilities Current tax liabilities Non-current liabilities Borrowings Derivative ﬁnancial liabilities Deferred tax liabilities Net pension liabilities Provisions Net assets Shareholders’ equity Share capital Share premium Capital redemption reserve Merger reserve Retained earnings and hedging reserve Total equity attributable to the owners of the Company The notes on pages 75 to 112 form part of these ﬁnancial statements. Note 3.2 3.3 3.5 8.2 4.3 4.4 5.2 5.3 7.3 6.4 3.4 5.4 6.3 7.3 6.3 7.3 2.3 8.2 5.5 6.5 6.5 6.6 6.6 6.6 2015 £m 2014 £m 520 7,252 68 4 68 31 7,943 658 239 6 241 1,144 84 1,228 (2,221) (11) (18) (23) (2,273) (2,508) (50) (415) (43) (288) (3,304) 3,594 234 127 39 2,578 616 3,594 458 8,625 119 – 66 31 9,299 852 316 1 261 1,430 – 1,430 (2,272) (553) (10) (38) (2,873) (2,480) (36) (430) (11) (207) (3,164) 4,692 234 127 39 2,578 1,714 4,692 The ﬁnancial statements on pages 71 to 112 were approved by the Board of Directors on 11 March 2015 and were signed on its behalf by: Trevor Strain Chief Financial Officer Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 73 Consolidated cash ﬂow statement 52 weeks ended 1 February 2015 Cash ﬂows from operating activities Cash generated from operations Interest paid Taxation received/(paid) Net cash inﬂow from operating activities Cash ﬂows from investing activities Interest received Investment in joint venture Proceeds from the sale of property, plant and equipment and businesses Purchase of property, plant and equipment and investment property Purchase of intangible assets Net cash outﬂow from investing activities Cash ﬂows from ﬁnancing activities Purchase of own shares for cancellation Purchase of own shares for trust Proceeds from exercise of share options, including issues from treasury shares New borrowings Net repayment of revolving credit facility Repayment of other borrowings Dividends paid to equity shareholders Net cash (outﬂow)/inﬂow from ﬁnancing activities Net decrease in cash and cash equivalents Cash and cash equivalents at start of period Cash and cash equivalents at end of period Reconciliation of net cash ﬂow to movement in net debt in the period Net decrease in cash and cash equivalents Cash outﬂow from decrease in debt Cash inﬂow from increase in borrowings Other non-cash movements Opening net debt Closing net debt Note 5.6 6.5 6.5 6.5 1.8 6.4 Note 6.4 2015 £m 970 (106) 10 874 4 – 450 (385) (135) (66) – (8) – 296 (256) (550) (308) (826) (18) 258 240 2015 £m (18) 806 (296) (15) (2,817) (2,340) S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2014 £m 1,031 (91) (220) 720 2 (66) 34 (835) (185) (1,050) (53) – 28 790 (100) (57) (283) 325 (5) 263 258 2014 £m (5) 157 (790) 2 (2,181) (2,817) 74 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Consolidated statement of changes in equity 52 weeks ended 1 February 2015 Current period At 3 February 2014 Loss for the period Other comprehensive (expense)/income: Cash ﬂow hedging movement Pension remeasurement Tax in relation to components of other comprehensive income Total comprehensive expense for the period Purchase of trust shares Employee share option schemes: Share-based payments Dividends Total transactions with owners At 1 February 2015 Prior period At 4 February 2013 Loss for the period Other comprehensive income/(expense): Pension remeasurement Tax in relation to components of other comprehensive income Total comprehensive expense for the period Shares purchased for cancellation Employee share option schemes: Issue of shares and utilisation of treasury shares Share-based payments Dividends Total transactions with owners At 2 February 2014 Attributable to the owners of the Company Note Share capital £m Share premium £m Capital redemption reserve £m Merger reserve £m Hedging reserve £m Retained earnings £m 234 – 127 – – – – – – – – – 234 – – – – – – – – 127 39 – – – – – – – – – 39 2,578 – (15) – 1,729 (761) – – – – – – – – 2,578 (9) – 2 (7) – – – – (22) – (31) 6 (786) (8) 11 (308) (305) 638 8.2 2.3 6.5 1.7 1.8 Total equity £m 4,692 (761) (9) (31) 8 (793) (8) 11 (308) (305) 3,594 Note Share capital £m Share premium £m Capital redemption reserve £m Merger reserve £m Hedging reserve £m Retained earnings £m Total equity £m Attributable to the owners of the Company 8.2 2.3 6.5 6.5 1.7 1.8 235 – 107 – – – – (2) 1 – – (1) 234 – – – – 20 – – 20 127 37 – – – – 2 – – – 2 39 2,578 – (14) – 2,287 (238) 5,230 (238) – – – – – – – – 2,578 – (1) (1) – – – – – (15) 11 11 (8) (235) (53) 7 6 (283) (323) 1,729 (9) (236) (53) 28 6 (283) (302) 4,692 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 75 General information S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Company information New IFRS and amendments to IAS and interpretations Wm Morrison Supermarkets PLC is a public limited company incorporated in the United Kingdom under the Companies Act 2006 (Registration number 358949). The Company is domiciled in the United Kingdom and its registered address is Hilmore House, Gain Lane, Bradford, BD3 7DL, United Kingdom. There are a number of standards and interpretations issued by the IASB that are effective for ﬁnancial statements after this reporting period, including IFRS 9 Financial instruments and IFRS 15 Revenue from contracts with customers, both of which are effective for annual periods beginning on or after 1 January 2017. Basis of preparation The ﬁnancial statements have been prepared for the 52 weeks ended 1 February 2015 (2014: 52 weeks ended 2 February 2014) in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Standards Interpretation Committee (IFRS IC) interpretations as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. IFRS and IFRS IC interpretations are issued by the International Accounting Standards Board (the IASB) and must be adopted into European Union law, referred to as endorsement, before they become mandatory under the IAS Regulation. The ﬁnancial statements have been prepared on a going concern basis. The Directors’ assessment of going concern has been considered within the Corporate governance report on page 44. The ﬁnancial statements are presented in pounds sterling, rounded to the nearest million, except in some instances, where it is deemed relevant to disclose the amounts up to two decimal places. They are drawn up on the historical cost basis of accounting, except as disclosed in the accounting policies set out within these ﬁnancial statements. The presentational currency of the Group is sterling. The Group’s accounting policies have, unless otherwise stated, been applied consistently to all periods presented in these ﬁnancial statements. Accounting reference date The accounting period of the Group ends on the Sunday falling between 29 January and 4 February each year. The following amendments to standards are mandatory for the ﬁrst time for the ﬁnancial period ended 1 February 2015: IFRS 10 Consolidated ﬁnancial statements IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 required management to exercise judgement to determine which entities are controlled and therefore are required to be consolidated. The Group has applied IFRS 10 retrospectively in accordance with the transition provisions of IFRS 10. There is no material impact on the Group as a result of applying this standard. IFRS 11 Joint arrangements Under IFRS 11, investments in joint arrangements are classiﬁed either as joint operations or joint ventures, depending on the contractual rights and obligations each investor has rather than the legal structure of the joint arrangement. Before 2 February 2014, the Group’s interest in its jointly controlled entity, MHE JVCo Limited, was accounted for using the equity method. Under IFRS 11, the jointly controlled entity has been assessed to be a joint venture and so the equity method continues to be appropriate. The Group is in the process of assessing the impact that the application of these standards and interpretations will have on the Group’s ﬁnancial statements. Basis of consolidation Subsidiaries are all entities over which the Group has control. The Group controls an entity when it has power over an entity, 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. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date the control ceases. The ﬁnancial statements of subsidiaries used in the consolidation are prepared for the same reporting period as the parent Company and are based on consistent accounting policies. Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated on consolidation. As described in note 4.6, the Group disposed of its investment in Kiddicare.com Limited on 11 July 2014. This subsidiary has been deconsolidated from that date. Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange at the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currency are retranslated at the rates of exchange at the balance sheet date. Gains and losses arising on retranslation are included in the income statement for the period. Critical accounting judgements and estimates The judgements that have the most signiﬁcant effect on the amounts recognised in these ﬁnancial statements, and sources of estimation uncertainty that have a signiﬁcant risk of resulting in material adjustment to carrying amounts in the next ﬁnancial year are: • Commercial income (note 1.1, 1.6, 5.2, 5.3, 5.4); • Impairment of property, plant and equipment, and intangible assets and onerous property commitments (note 1.4, 3.1, 3.2, 3.3); • IT systems (note 3.2); • Stock (note 5.1, 5.2); and • Taxation (note 2.1, 2.2, 2.3). These are also described within the Corporate governance report on page 41 to 43. 76 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements 52 weeks ended 1 February 2015 1 Performance in the period 1.1 Accounting policies Revenue recognition Sale of goods in−store and online, and fuel Revenue from the sale of goods in-store and online comprises cash from customers and excludes VAT. It is net of returns, colleague discounts, coupons, vouchers, Match & More points earned in-store and online and the free element of multi-save transactions. Sale of fuel is recognised net of VAT and Match & More points earned on fuel. Revenue is recognised when transactions are completed in-store, or, in the case of food online, when goods are accepted by the customer on delivery. Other sales Other revenue includes income from concessions and commissions based on the terms of the contract, and manufacturing sales made direct to third party customers recognised on despatch of goods. Revenue collected on behalf of others is not recognised as revenue, other than the related commission. Sales are recorded net of VAT and intra-group transactions. Match & More and other initiatives The fair value of Match & More and other initiatives is determined to be the value to the customer of the points issued, adjusted for factors such as the expected redemption rate. Given Match & More was launched in the year the Group will continue to assess the appropriateness of the rates against actual redemptions going forward. The fair value is treated as a deduction from revenue at the time the points are issued, and is deferred until the rewards are redeemed by the customer in a future sale. Cost of sales Cost of sales consists of all costs of the goods being sold to the point of sale, net of promotional funding and commercial income, and includes property, manufacturing, warehouse and transportation costs. Store depreciation, store overheads and store-based employee costs are also allocated to cost of sales. Promotional funding Promotional funding refers to investment in the customer offer by suppliers by way of promotion. The calculation of funding is mechanical and system generated based on a funding level agreed in advance with the supplier. Funding is recognised as units are sold and invoiced in accordance with the speciﬁc supplier agreement. Funding is recorded effectively as a direct adjustment to the cost price of the product in the period. Funding is invoiced and collected through the year, shortly after the promotions have ended. Commercial income Commercial income is recognised as a deduction from cost of sales, based on the expected entitlement that has been earned up to the balance sheet date for each relevant supplier contract. The Group only recognises commercial income where there is documented evidence of an agreement with an individual supplier. The types of commercial income recognised by the Group, and the recognition policies are: Type of commercial income Description Recognition Marketing and advertising funding Volume-based rebates Examples include income in respect of in-store marketing and point of sale, as well as funding for advertising Income earned by achieving volume or spend targets set by the supplier for speciﬁc products over speciﬁc periods Income is recognised over the period as set out in the speciﬁc supplier agreement. Income is invoiced once the performance conditions in the supplier agreement have been achieved. Income is recognised through the year based on forecasts for expected sales or purchase volumes, informed by current performance, trends, and the terms of the supplier agreement. Income is invoiced throughout the year in accordance with the speciﬁc supplier terms. In order to minimise any risk arising from estimation, supplier conﬁrmations are also obtained to agree the ﬁnal value to be recognised at year end, prior to it being invoiced. Uncollected commercial income at the balance sheet date is classiﬁed within the ﬁnancial statements as follows: • Creditors: A large proportion of the Group’s trading terms state that income due from suppliers will be netted against amounts owing to that supplier. Any outstanding invoiced commercial income relating to these suppliers at the balance sheet date will be included within trade payables. • Debtors: Where the trading terms described above do not exist, the Group classiﬁes outstanding commercial income within trade debtors. Where commercial income is earned and not invoiced to the supplier at the balance sheet date, this is classiﬁed within accrued commercial income. • Stock: The carrying value of stock is adjusted to reﬂect unearned elements of commercial income as the stock has not yet been sold. This income is subsequently recognised in cost of sales when the product has been sold. In order to provide users of the accounts with greater understanding in this area additional income statement and balance sheet disclosure is provided in notes 1.6, 5.2, 5.3 and 5.4 to the ﬁnancial statements. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 77 1 Performance in the period continued 1.1 Accounting policies continued Other operating income Other operating income primarily consists of income not directly related to in-store and online grocery retailing and mainly comprises rental income from investment properties and income generated from recycling of packaging. Proﬁt/loss on disposal and exit of properties Proﬁt/loss from the disposal and exit of properties includes gains and losses on disposal of property assets and other costs incurred by the Group following a decision to dispose, close or no longer purchase properties. Where the Group disposes of a property, this disposal transaction is accounted for upon unconditional exchange of contracts. Gains and losses are determined by comparing sale proceeds with the asset’s carrying amount and are presented net of costs associated with disposal. 1.2 Revenue analysis Sale of goods in stores and online Fuel Total store-based and online sales Other sales Total revenue 1.3 Segmental reporting Like−for−like sales 12,639 3,521 16,160 – 16,160 Other 360 55 415 241 656 2015 Total £m 12,999 3,576 16,575 241 16,816 2014 Total £m 13,434 3,984 17,418 262 17,680 The Group’s principal activity is that of retailing, derived solely from the UK. The Group is not reliant on any major customer for 1% or more of revenues. The Group is required to determine and present its operating segments based on the way in which ﬁnancial information is organised and reported to the chief operating decision-maker (CODM). The CODM has been identiﬁed as the Management Board as it is this Board that makes the key operating decisions of the Group, is responsible for allocating resources and assessing performance. Key internal reports received by the CODM, primarily the management accounts, focus on the performance of the Group as a whole. The operations of all elements of the business are driven by the retail sales environment and hence have fundamentally the same economic characteristics. All operational decisions made are focused on the performance and growth of the retail outlets and the ability of the business to meet the supply demands of the stores. The Group has considered the overriding core principles of IFRS 8 as well as its internal reporting framework, management and operating structure. In particular, the Group considered its retail outlets, the fuel resale operation, the manufacturing entities and multi-channel operations. The Directors’ conclusion is that the Group has one operating segment, that of retailing. Reconciliations of reportable segment revenues, proﬁt or loss, assets and liabilities and other material items Performance is measured by the CODM based on underlying proﬁt before tax as reported in the management accounts. Management believes that this underlying proﬁt measure is the most relevant in evaluating the results of the Group to its peers. This information and the reconciliation to the statutory position can be found in note 1.4. In addition, the management accounts present a Group balance sheet containing assets and liabilities. This balance sheet is as shown within the Consolidated balance sheet. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 78 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 1 Performance in the period continued 1.4 Underlying proﬁt The deﬁnition of underlying proﬁt has been amended to include new business development costs as they are considered to be ongoing activities and part of the Group’s underlying business. The underlying proﬁt reconciliation for the comparative period presented below has been restated to reﬂect this change. This has resulted in a decrease in post-tax underlying proﬁt from amounts previously reported last year of £49m (pre-tax: £66m). The amendment of the deﬁnition has resulted in the following changes to underlying proﬁt in the comparative period: Restated underlying proﬁt New business development costs Underlying proﬁt as previously reported Pre−tax £m 719 66 785 2014 Post−tax £m 537 49 586 The Directors consider that the underlying proﬁt and underlying adjusted earnings per share measures referred to in the results provide useful information for shareholders on underlying trends and performance. The adjustments are made to reported loss to (a) remove impairment, onerous lease provisions, or other similar items that do not relate to the Group’s principal activities on an ongoing basis; (b) remove proﬁt/loss arising on disposal and exit of properties and sale of businesses; (c) apply a normalised tax rate of 26.1% (2014: 25.3%); and (d) remove the impact of pension interest volatility. Loss after tax Add back: tax (credit)/charge for the period1 Loss before tax Adjustments for: Impairment and onerous lease provisions1 Proﬁt/loss arising on disposal and exit of properties1,2 Proﬁt on disposal of Kiddicare.com Limited (note 4.6)1 Net pension interest (income)/cost (note 8.2)1 Underlying proﬁt before tax Normalised tax charge at 26.1% (2014: 25.3%)1 Underlying proﬁt after tax Underlying earnings per share (pence) – basic (note 1.5.2) – diluted (note 1.5.2) 2015 £m (761) (31) (792) 1,273 (131) (4) (1) 345 (90) 255 10.93 10.89 Restated 2014 £m (238) 62 (176) 903 (9) – 1 719 (182) 537 23.08 22.99 1 Adjustments marked1 increase post-tax underlying earnings by £1,016m (2014: increase £775m), as shown in the reconciliation of earnings disclosed in note 1.5.2. 2 Included within proﬁt/loss arising on disposal and exit of properties is a charge of £19m relating to the closure of ten stores and six convenience stores. The adjustments above are classiﬁed within the Consolidated statement of comprehensive income on the following lines: • impairment and onerous lease provisions adjustment has been included within administrative expenses; • proﬁt/loss arising on disposal and exit of properties and proﬁt on disposal of Kiddicare.com Limited are classiﬁed within proﬁt/loss arising on disposal and exit of properties and sale of businesses; and • net pension interest (income)/expense is classiﬁed within ﬁnance income/costs in the Consolidated statement of comprehensive income. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 79 1 Performance in the period continued 1.4 Underlying proﬁt continued 2014/15 impairment Impairment and onerous lease provisions in 2014/15 consist of £1,273m in relation to trading stores, of which £1,116m is impairment, £118m is onerous lease provisions, £30m relates to onerous commitments and £9m relates to lease premiums. 2013/14 impairment Impairment and onerous lease provisions in 2013/14 consisted of £379m in relation to trading stores, £319m in relation to the property pipeline (which consists of undeveloped land), £163m in respect of Kiddicare and £42m of other costs. The trading stores’ costs of £379m consisted of £330m impairment and £49m onerous leases. Pipeline costs of £319m included impairment of £90m and a further £229m in respect of onerous leases and capital contracts. Charges in respect of Kiddicare consisted of £24m of goodwill, £12m brand, £70m impairment and £57m onerous lease provisions. Other impairments of £42m principally included £27m write off of the costs incurred in the development of our own food online offer which was no longer required as a result of our arrangement with Ocado. 1.5 Earnings per share Basic earnings per share (EPS) is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. For diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. The Company has two (2014: two) classes of instrument that are potentially dilutive: those share options granted to employees where the exercise price is less than the average market price of the Company’s ordinary shares during the period and contingently issuable shares under the Group’s long term incentive plans (LTIP). 1.5.1 Basic and diluted EPS (unadjusted) Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below: Unadjusted EPS Basic EPS Loss attributable to ordinary shareholders Effect of dilutive instruments Share options and LTIPs1 Diluted EPS Earnings £m Weighted average number of shares millions 2015 EPS pence Earnings £m Weighted average number of shares millions 2014 EPS pence (761) 2,332.5 (32.63) (238) 2,327.0 (10.23) – (761) – 2,332.5 – (32.63) – (238) – 2,327.0 – (10.23) 1 The effect of dilutive instruments would improve basic EPS as total earnings is a loss of £761m (2014: loss of £238m). Diluted EPS cannot exceed basic EPS, therefore the diluted EPS disclosed above has been adjusted so that it equals basic EPS. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 80 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 1 Performance in the period continued 1.5 Earnings per share continued 1.5.2 Underlying EPS Basic EPS is adjusted to more accurately show underlying business performance. The reconciliation of the earnings used in the calculations of underlying earnings per share (restated) is set out below: Underlying EPS (restated)1 Basic EPS Loss attributable to ordinary shareholders Adjustments to determine underlying proﬁt (note 1.4) (restated)1 Effect of dilutive instruments Share options and LTIPs Diluted EPS (restated)1 Earnings £m Weighted average number of shares millions 2015 EPS pence Earnings £m Weighted average number of shares millions 2014 EPS pence (761) 2,332.5 (32.63) (238) 2,327.0 (10.23) 1,016 255 – 255 – 2,332.5 9.0 2,341.5 43.56 10.93 (0.04) 10.89 775 537 – 537 – 2,327.0 9.0 2,336.0 33.31 23.08 (0.09) 22.99 1 Underlying EPS measures have been restated to reﬂect the change in deﬁnition of underlying earnings as described in note 1.4. 1.6 Operating loss The following items have been included in arriving at operating loss: Employee costs (note 1.7) Depreciation and impairment: – Property, plant and equipment (note 3.3) – Investment property (note 3.5) – Impairment of property, plant and equipment (note 3.3) Amortisation and impairment (note 3.2) – Intangible assets – Impairment of goodwill and intangible assets Operating lease rentals: – Land and buildings – Other – Sublease receipts Value of stock expensed 2015 £m 2014 £m 1,970 1,972 315 2 1,113 70 3 87 16 (6) 12,875 336 5 457 53 89 71 12 (7) 13,437 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 81 1 Performance in the period continued 1.6 Operating loss continued Value of stock expensed In order to provide context on commercial income earned in the period, each is shown below as a percentage of the value of stock expensed (VSE) before commercial income is deducted. Commercial income: Marketing and advertising funding Volume-based rebates Total commercial income 1 See additional disclosure in notes 5.2, 5.3 and 5.4. £m 291 134 425 2015 % of VSE 2.2 1.0 3.2 Auditor remuneration During the period PricewaterhouseCoopers LLP (2014: KPMG Audit Plc), the Group’s auditor, provided the following services: Audit services Fees payable to the Group’s auditor for the audit of the Group and the Company ﬁnancial statements Other services Fees payable to the Group’s auditor and its associates for other services: – the audit of the Group’s subsidiaries pursuant to legislation – services relating to taxation – other services £m 280 116 396 2015 £m 0.4 0.2 – 0.3 0.9 2014 % of VSE 2.0 0.9 2.9 2014 £m 0.4 0.2 0.1 0.1 0.8 The Board has a policy on the engagement of the external auditor to supply non-audit services, which is available in the Corporate governance compliance statement set out in the investor relations section of the Group’s website at www.morrisons-corporate.com. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 1.7 Employees and Directors Employee beneﬁt expense for the Group during the period Wages and salaries Social security costs Share-based payments Other pension costs 2015 £m 2014 £m 1,755 118 11 86 1,970 1,787 121 6 58 1,972 82 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 1 Performance in the period continued 1.7 Employees and Directors continued Average monthly number of people, including Directors Stores Manufacturing Distribution Centre 2015 No. 2014 No. 104,047 7,497 5,731 2,503 119,778 111,199 7,320 5,996 2,888 127,403 Directors’ remuneration A detailed analysis of Directors’ remuneration, including salaries, bonuses and long term incentives, and the highest paid Director, is provided in the Single total ﬁgure of remuneration table, in the audited section of the Directors’ remuneration report, which forms part of these ﬁnancial statements (page 53). There are no Executive Directors (2014: none) who have retirement beneﬁts accruing under any of the Group’s deﬁned beneﬁt pension schemes. Senior management remuneration The table below shows the remuneration of senior managers. It excludes members already included in the Directors’ remuneration report. Senior managers are considered to be key management personnel in accordance with the requirements of IAS 24 ‘Related party disclosures’, and senior manager in the context of gender disclosures required by the Companies Act 2006. Senior managers Wages and salaries Social security costs Share-based payments Other pension costs 1.8 Dividends Amounts recognised as distributed to equity holders in the period: Interim dividend for the period ended 1 February 2015 of 4.03p (2014: 3.84p) Final dividend for the period ended 2 February 2014 of 9.16p (2013: 8.31p) 2015 £m 37 5 2 2 46 2015 £m 94 214 308 2014 £m 27 4 3 1 35 2014 £m 90 193 283 The Directors propose a ﬁnal dividend in respect of the ﬁnancial period ending 1 February 2015 of 9.62p per share which will absorb an estimated £225m of shareholders’ funds. Subject to approval at the AGM, it will be paid on 10 June 2015 to shareholders who are on the register on 8 May 2015. The dividends paid and proposed during the year are from cumulative realised distributable reserves of Wm Morrison Supermarkets PLC. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 83 2 Taxation The focus of the Group’s approach to tax affairs is to ensure compliance with the relevant laws of the territories in which the Group operates. Almost all of the Group’s stores and sales are in the UK, therefore the majority of taxes are paid in the UK. The Group takes a compliance-focused approach to its tax affairs, and has a transparent relationship with the UK and overseas tax authorities and interacts with HMRC on a regular basis. The Group’s tax policy provides a governance framework with all related risks and stakeholder interests taken into consideration. The tax policy is approved by the Board, with updates on tax compliance and governance matters being provided to the Audit Committee. The Group operates a small number of branches and subsidiary companies outside of the UK based in the following overseas jurisdictions: • The Netherlands: The Group has manufacturing operations in the Netherlands as part of its produce supply chain. Local corporation taxes of £1.9m were paid during 2015 (2014: £2.2m); • Hong Kong: Offices in Hong Kong were established in 2011 and source many of the Group’s non-food products. Local corporation taxes of £0.4m were paid during 2015 (2014: £0.3m); and • Isle of Man, Jersey and Guernsey: The Group’s insurance company is based in the Isle of Man for regulatory reasons, and property assets with a net book value of £44m are held in Jersey and Guernsey as a result of historic acquisitions. All proﬁts in each of these jurisdictions are subject to UK tax. 2.1 Accounting policies Current tax The current income tax charge is calculated on the basis of the tax laws in effect during the period and any adjustments to tax payable in respect of previous periods. Taxable proﬁt differs from the reported proﬁt for the period as it is adjusted both for items that will never be taxable or deductible, and temporary differences. Current tax is charged to proﬁt or loss for the period, except when it relates to items charged or credited directly in other comprehensive income or equity in which case the current tax is reﬂected in other comprehensive income or equity as appropriate. Deferred tax Deferred tax is recognised using the balance sheet method. Provision is made for temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and the amounts used for taxation purposes. No deferred tax is recognised for temporary differences that arise on the initial recognition of goodwill or the initial recognition of assets and liabilities that are not a business combination and that affects neither accounting nor taxable proﬁts. Deferred tax is calculated based on tax law that is enacted or substantively enacted at the reporting date and provided at rates expected to apply when the temporary differences reverse. Deferred tax is charged or credited to proﬁt for the period except when it relates to items charged or credited directly to other comprehensive income or equity, in which case the deferred tax is reﬂected in other comprehensive income or equity as appropriate. Deferred tax assets are recognised to the extent that it is probable that taxable proﬁt will be available against which the asset can be utilised. Deferred tax assets recognised are reviewed at each reporting date as judgement is required to estimate the availability of future taxable income. Deferred tax assets and liabilities are offset where amounts will be settled on a net basis as there is a legally enforceable right to offset. Accruals for tax contingencies require management to make judgements and estimates of the probable outcome of tax compliance issues. All accruals are included in current liabilities. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2.2 Taxation 2.2.1 Analysis of (credit)/charge in the period Current tax – UK corporation tax – overseas tax – adjustments in respect of prior periods Deferred tax – origination and reversal of timing differences – adjustments in respect of prior periods – impact of change in tax rate Tax (credit)/charge for the period 2015 £m 71 4 (99) (24) 1 (8) – (7) (31) 2014 £m 153 5 (46) 112 (12) 30 (68) (50) 62 84 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 2 Taxation continued 2.2 Taxation continued 2.2.2 Tax on items charged in other comprehensive expense and equity Remeasurements arising in the pension scheme (of which rate change is £nil (2014: £6m)) Cash ﬂow hedges Total tax on items included in other comprehensive income and equity Analysis of items charged to other comprehensive income and equity: Deferred tax (note 2.3) 2.2.3 Tax reconciliation The reconciliation below shows how the tax credit of £31m has arisen on loss before tax of £792m. 2015 £m (6) (2) (8) (8) The tax for the period is higher (2014: higher) than the standard rate of corporation tax in the UK of 21.3% (2014: 23.2%). The differences are explained below: Loss before taxation Loss before taxation at 21.3% (2014: 23.2%) Effects of: Expenses not deductible for tax purposes Disallowed depreciation on UK properties Deferred tax on Safeway acquisition assets Proﬁt on property transactions Impairment and onerous lease provisions not deductible for tax Effect of change in tax rate Other Adjustments in respect of prior periods Tax (credit)/charge for the period 2015 £m (792) (169) 3 28 (22) (4) 240 – – (107) (31) 2014 £m 8 1 9 9 2014 £m (176) (41) 4 35 (5) 1 154 (68) (3) (15) 62 Factors affecting current and future tax charges The Group’s tax charge has reduced from the prior year. The reduction in the current tax charge reﬂects the lower underlying proﬁt, whilst elements of the asset impairments announced by the Group are also deductible for tax purposes. The Group also beneﬁted from adjustments in respect of prior periods for which the liability has now been settled with HMRC. The Group’s deferred tax liabilities have also reduced year on year, primarily as a result of impairments reducing the carrying value of property assets for which the Group provides for deferred tax. Legislation to reduce the rate of corporation tax to 20% was included in the Finance Act 2013. The 20% rate will apply from April 2015. Deferred tax is already provided at 20%. There has not been any indication of any further changes in the rate of corporation tax from 20%. 2.3 Deferred tax Deferred tax liability Deferred tax asset Net deferred tax liability 2015 £m (462) 47 (415) 2014 £m (472) 42 (430) IAS 12 ‘Income taxes’ permits the offsetting of balances within the same tax jurisdiction. All of the deferred tax assets are available for offset against deferred tax liabilities. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 85 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2 Taxation continued 2.3 Deferred tax continued The movements in deferred tax (liabilities)/assets during the period are shown below: Current period At 3 February 2014 Credited/(charged) to loss for the period Credited to other comprehensive income and equity At 1 February 2015 Prior period At 4 February 2013 Credited/(charged) to loss for the period Charged to other comprehensive income and equity At 2 February 2014 3 Operating assets 3.1 Accounting policies Property, plant and equipment £m Pensions £m Other short term temporary differences £m (456) 28 – (428) (519) 63 – (456) 2 – 6 8 5 5 (8) 2 24 (21) 2 5 43 (18) (1) 24 Total £m (430) 7 8 (415) (471) 50 (9) (430) Intangible assets Goodwill Goodwill arising on a business combination is not amortised but is reviewed for impairment on an annual basis or more frequently if there are indicators that it may be impaired. Goodwill is allocated to cash generating units that will beneﬁt from the synergies of the business combination for the purpose of impairment testing. Brands Brands acquired through a business combination are recognised at their fair value at the acquisition date and amortised to proﬁt or loss on a straight- line basis over their estimated useful economic life. During the year the Group disposed of £15m of fully written down brands relating to Kiddicare. Software development costs Costs that are directly attributable to the creation of identiﬁable software, which meet the development asset recognition criteria as laid out in IAS 38 ‘Intangible assets’ are recognised as intangible assets. Direct costs include consultancy costs, the employment costs of internal software developers and borrowing costs. All other software development and maintenance costs are recognised as an expense as incurred. Software development assets are held at historic cost less accumulated amortisation and impairment, and are amortised over their estimated useful lives (3 to 10 years) on a straight-line basis. Licences Separately acquired pharmaceutical licences and software licences are recognised at historic cost less accumulated amortisation and impairment. Those acquired in a business combination are recognised at fair value at the acquisition date. Pharmaceutical licences and software licences are amortised over their useful lives (3 to 10 years) on a straight-line basis. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Costs include directly attributable costs such as borrowing costs and employment costs of those people directly working on the construction and installation of property, plant and equipment. 86 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 3 Operating assets continued 3.1 Accounting policies continued Depreciation rates Depreciation rates used to write off cost less residual value on a straight-line basis are: Freehold land Freehold buildings Leasehold land Leasehold buildings Plant, equipment, ﬁxtures and vehicles Assets under construction 0% 2.5% Over the lease period Over the shorter of lease period and 2.5% 10% to 33% 0% Depreciation expense is primarily charged in cost of sales with an immaterial amount in administration expenses. Investment property Property held to earn rental income is classiﬁed as investment property and is held at cost less accumulated depreciation and impairment. The depreciation policy is consistent with that described for property above. Non−current assets classiﬁed as held−for−sale Non-current assets are classiﬁed as held-for-sale if their carrying amount is to be recovered principally through a sale transaction, rather than continuing use within the Group, and the sale is considered highly probable. The sale is expected to complete within one year from the date of classiﬁcation and the assets are available for sale in their current condition. Non-current assets held-for-sale are stated at the lower of carrying amount and fair value less costs to dispose and are not depreciated. Lessor accounting – operating leases Assets acquired and made available to third parties under operating leases are recorded as property, plant and equipment or investment property and are depreciated on a straight-line basis to their estimated residual values over their estimated useful lives. Operating lease income is credited on a straight-line basis to the date of the next rent review. Finance leases Assets funded through ﬁnance leases are capitalised as property, plant and equipment and depreciated over their useful economic life or lease term, whichever is shorter. The amount capitalised is the lower of the fair value and the present value, calculated using the interest rate implicit in the lease, of the future minimum lease payments. The obligations to pay future rentals are included within liabilities. Rental payments are apportioned between the ﬁnance charge and the outstanding obligation so as to produce a constant rate of ﬁnance charge on the remaining balance. Impairment of non−ﬁnancial assets Intangible assets with indeﬁnite lives, such as goodwill, and those in construction that are not yet being amortised, are tested for impairment annually. Other non-ﬁnancial assets are tested if events or changes in circumstances indicate that the carrying amount may not be recoverable. Testing is performed at the level of a cash generating unit (CGU) in order to compare the CGU’s recoverable amount against its carrying value. An impaired CGU is written down to its recoverable amount, which is the higher of value in use or its fair value less costs to dispose. In assessing value in use, the estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the asset. The Group considers that each of its stores is a CGU, which together form a grocery group of CGUs supported by corporate assets such as head office and vertically integrated suppliers. Impairment losses are reversed if there is evidence of an increase in the recoverable amount of a previously impaired asset, but only to the extent that the recoverable amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised. Impairment losses relating to goodwill are not reversed. Any reversal of impairment losses would be excluded from underlying earnings. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 87 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 3 Operating assets continued 3.2 Goodwill and intangible assets Current period Cost At 3 February 2014 Additions Interest capitalised Disposals Fully written down assets At 1 February 2015 Accumulated amortisation and impairment At 3 February 2014 Charge for the period Impairment Disposals Fully written down assets At 1 February 2015 Net book amount at 1 February 2015 Goodwill £m Brands £m Software development costs £m Licences £m 34 – – (24) – 10 24 – – (24) – – 10 15 – – (15) – – 15 – – (15) – – – 577 121 9 (30) (44) 633 147 63 2 (30) (44) 138 495 40 5 – – (12) 33 22 7 1 – (12) 18 15 Total £m 666 126 9 (69) (56) 676 208 70 3 (69) (56) 156 520 Included within software development costs are assets under construction of £153m (2014: £175m). In previous years, fully depreciated assets have been retained in the Group’s ﬁxed asset register and included in the table above. In order to provide greater understanding of the Group’s annual depreciation charge in the current year, these assets have been removed from both cost and accumulated depreciation. Goodwill The goodwill arose on the acquisition of Flower World Limited (£3m) and Farmers Boy (Deeside) Limited (£7m). Impairment testing of goodwill Goodwill of £10m is allocated to the grocery group of CGUs. This group of CGUs has been tested for impairment via the value in use calculation described in note 3.3. The growth rate applied to the period after ﬁve years is 2% (2014: 2%). Software development costs The cumulative interest capitalised included within software development costs is £36m (2014: £27m). The cost of internal labour capitalised is not material for separate disclosure. Prior period Cost At 4 February 2013 Additions Interest capitalised At 2 February 2014 Accumulated amortisation and impairment At 4 February 2013 Charge for the period Impairment At 2 February 2014 Net book amount at 2 February 2014 Goodwill £m Brands £m Software development costs £m Licences £m 34 – – 34 – – 24 24 10 15 – – 15 2 1 12 15 – 406 164 7 577 49 46 52 147 430 26 14 – 40 15 6 1 22 18 Total £m 481 178 7 666 66 53 89 208 458 Included within the above is £51m of assets that were fully depreciated. These assets have been removed within the current year disclosure. 88 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 3 Operating assets continued 3.2 Goodwill and intangible assets continued Prior year impairment of software development costs, goodwill and brand As explained in note 1.4, the 2013/14 impairment included £27m write off of the investment in the development of Morrisons own food online offer. Also included is £24m of goodwill which arose on acquisition of Kiddicare, £24m of software development assets, principally relating to Kiddicare, and £12m relating to the Kiddicare brand. A discount rate of 6.5% and a nil growth rate after ﬁve years were applied in the value in use calculation underpinning this impairment loss. These assets have subsequently been disposed of in the current year following the sale of Kiddicare.com Limited (note 4.6). 3.3 Property, plant and equipment Current period Cost At 3 February 2014 Additions at cost Interest capitalised Transfers to investment properties Transfers to assets held-for-sale Disposals Fully written down assets At 1 February 2015 Accumulated depreciation and impairment At 3 February 2014 Charge for the period Impairment Transfers to investment properties Transfers to assets held-for-sale Disposals Fully written down assets At 1 February 2015 Net book amount at 1 February 2015 Freehold land £m Freehold buildings £m Leasehold land and buildings £m Plant, equipment, ﬁxtures & vehicles £m 4,046 53 – – (104) (6) – 3,989 211 – 449 – – – – 660 3,329 4,519 107 2 (4) (237) (18) (39) 4,330 1,264 116 302 (3) (50) (14) (39) 1,576 2,754 1,112 22 – – (44) (7) (28) 1,055 355 27 214 – (14) (6) (28) 548 507 1 Total £m 12,350 388 2 (4) (413) (48) (1,600) 10,675 3,725 315 1,113 (3) (90) (37) (1,600) 3,423 7,252 2,673 206 – – (28) (17) (1,533) 1,301 1,895 172 148 – (26) (17) (1,533) 639 662 Assets under construction included above 5 8 13 27 The Group has performed its annual assessment of its depreciation policies and asset lives and deemed them to be appropriate. No changes have been made to asset lives during the year. In previous years, fully depreciated assets have been retained in the Group’s ﬁxed asset register and included in the table above. In order to provide greater understanding of the Group’s annual depreciation charge in the current year, these assets have been removed from both cost and accumulated depreciation. Included within the above are leasehold land and buildings held under ﬁnance lease with a cost of £319m (2014: £308m) and accumulated depreciation of £22m (2014: £19m). The cost of ﬁnancing property developments prior to their opening date has been included in the cost of the asset. The cumulative amount of interest capitalised in the total cost above amounts to £271m (2014: £269m). Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 89 3 Operating assets continued 3.3 Property, plant and equipment continued Impairment The Group considers that each store is a separate cash generating unit (CGU) and therefore considers every store for an indication of impairment annually. The Group calculates each store’s recoverable amount and compares this amount to its book value. The recoverable amount is determined as the higher of ‘value in use’ and ‘fair value less costs of disposal’. If the recoverable amount is less than the book value, an impairment charge is recognised based on the following methodology: ‘Value in use’ is calculated by projecting individual store pre-tax cash ﬂows over the remaining useful life of the store, based on forecasting assumptions. The methodology used for calculating future cash ﬂows is to: • use the actual cash ﬂows for each store in the current year; • allocate a proportion of the Group’s central costs to each store on an appropriate basis; • project each store’s cash ﬂows over the next ﬁve years by applying forecast sales and cost growth assumptions; • project cash ﬂows beyond year ﬁve for the remaining useful life of each store by applying a long term growth rate; and • discount the cash ﬂows using a pre-tax rate of 9.0% (2014: 6.5%). The discount rate takes into account the Group’s weighted average cost of capital. ‘Fair value less costs of disposal’ is estimated by the Directors based on their knowledge of individual stores and the markets they serve and likely demand from grocers or other retailers. The Directors also obtain valuations by store prepared by independent valuers and consider these in carrying out their estimate of fair value less cost of disposal for the purposes of testing for impairment. In determining their valuation, the independent valuers assume an expected rent and yield for each store based on the quality of the asset, local catchment and the store being occupied by a supermarket tenant with a similar covenant to Morrisons. In order to reﬂect recent changes in market conditions, in particular the very signiﬁcant decrease in demand from major grocery retailers for supermarket space, the Directors consider it appropriate for the purpose of testing for impairment to revise downwards the rent and yield assumptions in the independent valuation to reﬂect the following factors on a store by store basis: • Whether a major grocery operator might buy the store, taking into consideration whether they are already located near the store, and whether the store size is appropriate for their business model, and then if not; • Assessing whether a smaller store operator might buy the store, in which case the value has been updated to reﬂect the Directors’ assessment of the yield which would be achievable if such an operator acquired the store, and then if not; • Assessing whether a non-food operator might buy the store, in which case the value has been updated to reﬂect the Directors’ assessment of the yield which would be achievable if such an operator acquired the store. Having applied the above methodology and assumptions, the Group has recognised an impairment charge of £1,116m (tangible assets: £1,113m and intangible assets: £3m) during the year (2014: £459m). An increase of 1% in the discount rate would result in an additional impairment charge of £70m. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 90 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 3 Operating assets continued 3.3 Property, plant and equipment continued Prior period Cost At 4 February 2013 Additions at cost Interest capitalised Transfer to investment properties Disposals At 2 February 2014 Accumulated depreciation and impairment At 4 February 2013 Charge for the period Impairment Transfer to investment properties Disposals At 2 February 2014 Freehold land £m Freehold buildings £m Leasehold land and buildings £m Plant, equipment, ﬁxtures & vehicles £m 3,994 57 – (5) – 4,046 98 – 113 – – 211 4,211 308 10 (8) (2) 4,519 972 109 183 2 (2) 1,264 1,009 103 – – – 1,112 180 35 140 – – 355 757 Total £m 11,554 807 10 (13) (8) 12,350 2,938 336 457 2 (8) 3,725 2,340 339 – – (6) 2,673 1,688 192 21 – (6) 1,895 Net book amount at 2 February 2014 3,835 3,255 778 8,625 Assets under construction included above 112 43 2 79 236 Included within the above is £1,161m (of which £1,097m relates to plant and equipment) of assets that were fully depreciated. These assets have been removed within the current year disclosure. As described in note 1.4, the impairment from the prior year related to costs incurred on stores the Group no longer intended to open, trading stores and assets of the Kiddicare business. 3.4 Non−current assets classiﬁed as held−for−sale At start of period Transfers from property, plant and equipment at net book value Transfers from investment property at net book value Additions Disposals At end of period 2015 £m − 323 51 3 (293) 84 2014 £m − − – − − − Assets transferred from property, plant and equipment had a cost of £413m and accumulated depreciation of £90m. Assets transferred from investment property had a cost of £77m and accumulated depreciation of £26m. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 91 3 Operating assets continued 3.5 Investment property Cost At start of period Additions Transfers from property, plant and equipment Transfers to assets held-for-sale Disposals At end of period Accumulated depreciation and impairment At start of period Charge for the period Transfers from/(to) property, plant and equipment Transfers to assets held-for-sale Disposals At end of period Net book amount at end of period 2015 £m 183 1 4 (77) (3) 108 64 2 3 (26) (3) 40 68 Included in other operating income is £21m (2014: £26m) of rental income generated from investment properties. At the end of the period the fair value of investment properties, including those held in assets held-for-sale, was £200m (2014: £230m). Investment properties are valued by independent surveyors on a vacant possession basis using observable inputs (fair value hierarchy Level 2). 3.6 Operating leases – lessor The Group has non-cancellable agreements with tenants with varying terms, escalation clauses and renewal rights. The future minimum lease income is as follows: Within one year More than one year and less than ﬁve years After ﬁve years 3.7 Capital commitments Contracts placed for future capital expenditure not provided in the ﬁnancial statements (property, plant and equipment and intangible assets) 2015 £m 26 85 114 225 2015 £m 149 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2014 £m 189 3 13 – (22) 183 66 5 (2) – (5) 64 119 2014 £m 30 99 140 269 2014 £m 179 92 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 4 Interests in other entities 4.1 Accounting policies Joint ventures 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. Joint ventures are accounted for under the equity method and are initially recognised at cost. The consolidated ﬁnancial statements include the Group’s share of the proﬁt or loss and other comprehensive income of the equity accounted investees, from the date that joint control commences until the date that joint control ceases. Investments Investments comprise investments in equity instruments held for long term investment. They are measured at fair value through other comprehensive income, where the fair value can be measured reliably. Where the fair value of the instruments cannot be measured reliably, for example, when there is variability in the range of estimates, the investments are recognised at cost less accumulated impairment losses. Business combinations The acquisition method is used to account for business combinations. Consideration is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group, including the fair value of any contingent consideration arrangement. Acquisition related costs are expensed as incurred. Identiﬁable assets acquired, and liabilities and contingent liabilities assumed, are measured initially at their fair values at the acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. Goodwill is the excess of consideration transferred, plus any non-controlling interest and the fair value of any previous equity interest in the acquiree, over the fair value of the identiﬁable net assets acquired. In the event that this excess is negative the difference is recognised directly in proﬁt for the period. Disposal of subsidiaries When the Group ceases to have control over a subsidiary, any retained interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount recognised in proﬁt or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or ﬁnancial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassiﬁed to proﬁt or loss. 4.2 Principal subsidiaries The Group has taken advantage of the exemption under section 410(2) of Companies Act 2006 by providing information only in relation to subsidiary undertakings whose results or ﬁnancial position, in the opinion of the Directors, principally affect the ﬁnancial statements. All of the companies below are registered in England and Wales and the principal area of trading is the United Kingdom. All equity holdings are in ordinary shares. Subsidiaries of Wm Morrison Supermarkets PLC Farmers Boy Limited Neerock Limited Wm Morrison Produce Limited Safeway Limited Optimisation Developments Limited Subsidiaries of other Group companies Safeway Stores Limited Principal activity Equity holding % Manufacturer and distributor of fresh food products Fresh meat processor Produce packer Holding company Property development Grocery retailer 100 100 100 100 100 100 In addition to the above, the Company has a number of other subsidiary companies, particulars of which will be annexed to the next annual return. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 93 4 Interests in other entities continued 4.2 Principal subsidiaries continued This includes the following overseas subsidiaries: Overseas subsidiaries of the Group Bos Bros Fruit and Vegetables BV Safeway Stores (Gibraltar) Pension Trustees Limited RP (No. 37) Limited Stalwart Investments Limited Freehold Investments Limited Lease Securities Limited Maypole Limited Wm Morrison (HK) Limited Farock Insurance Limited 4.3 Joint ventures Country of registration Netherlands Gibraltar Jersey Jersey Jersey Jersey Guernsey Hong Kong Isle of Man Principal activity Equity holding % Manufacturer and distributor of fresh food products Dormant Property development Property holding company Property holding company Property holding company Holding company Acquirer of non food products Insurance captive 100% 100% 100% 100% 100% 100% 100% 100% 100% The Group and Ocado Group plc are sole investors in a company (MHE JV Co), which owns the plant and equipment at the Dordon Customer Fulﬁlment Centre (CFC) (see note 4.5). Each party owns 50% of the equity of MHE JV Co and decisions regarding MHE JV Co require the unanimous consent of both parties. The Directors have considered the impact of IFRS 11 Joint arrangements, applicable this ﬁnancial year, and determined that the Group continues to jointly control MHE JV Co. MHE JV Co Current assets Non-current assets Current liabilities Net assets Proﬁt 2015 £m 24 117 (5) 136 4 2014 £m 17 118 (17) 118 2 The Company is also part of a joint venture, with The Great Steward of Scotland Dumfries House Trust, in respect of The Morrisons Farm at Dumfries House Limited, whose principal activity is to farm 859 acres of agricultural land located on the Dumfries House Estate near Cumnock in Ayrshire, Scotland. The Farm’s results are immaterial to the Group. 4.4 Investments Equity investments at cost 2015 £m 31 2014 £m 31 The equity investments held for long term investment represents the Group’s 10% stake in Fresh Direct Inc, a US internet grocer. The investment was made on 9 March 2011, and at that point, the Group made available to Fresh Direct a $15m 8% unsecured seven year loan facility. The facility is undrawn at the balance sheet date. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 94 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 4 Interests in other entities continued 5 Working capital and provisions 4.5 Business combinations 5.1 Accounting policies Stock Stock represents goods for resale and is measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale. Cost is calculated on a weighted average basis and comprises purchase price, import duties and other non-recoverable taxes, reduced by promotional funding and commercial income and a provision for estimated losses relating to shrinkage and markdowns. Losses relating to shrinkage in stores are based on historical losses veriﬁed by physical stock counts conducted by an independent third party. Provision is made for obsolete and slow moving items. Trade and other debtors Trade and other debtors are initially recognised at fair value, which is generally equal to face value, and subsequently held at amortised cost. Provision is made when there is objective evidence that the Group will not be able to recover balances in full, with the charge being included in administrative expenses. Cash and cash equivalents Cash and cash equivalents for cash ﬂow purposes includes cash-in-hand, cash-at-bank and bank overdrafts. In the balance sheet, bank overdrafts that do not have right of offset are presented within current liabilities. Cash held by the Group’s captive insurer, Farock Insurance Company Limited, is not available for use by the rest of the Group as it is restricted for use against the speciﬁc liability of the captive. As the funds are available on demand, they meet the deﬁnition of cash in IAS 7 ‘Cash ﬂow statements’. Trade and other creditors Trade and other creditors are initially recognised at fair value, which is generally equal to face value of the invoices received, and subsequently held at amortised cost. Trade creditors are presented net of commercial income due when the Group’s trading terms state that income from suppliers will be netted against amounts owing to that supplier. Provisions Provisions are created where the Group has a present obligation as a result of a past event, where it is probable that it will result in an outﬂow of economic beneﬁts to settle the obligation, and where it can be reliably measured. For petrol ﬁlling station decommissioning costs this is when the ﬁlling station is ﬁrst constructed and for dilapidations on leased buildings, when the lease is entered into. Provisions for onerous leases are recognised when the Group believes that the unavoidable costs of meeting the lease obligations exceed the economic beneﬁts expected to be received under the lease. The amounts provided are based on the Group’s best estimate of the least net cost of exit. Where material, these estimated outﬂows are discounted to net present value using a pre-tax rate that reﬂects current market assumptions. The unwinding of this discount is recognised as a ﬁnancing cost in the income statement. In the 52 weeks ended 1 February 2015 there have been no business combinations. 52 weeks ended 2 February 2014 On 24 July 2013 Wm Morrison Produce Limited acquired 51% of the equity of Global Ripeners Limited, a company within Global Paciﬁc group, for £4m cash consideration. This acquisition further expands the Group’s manufacturing capability in a key product, bananas. Global Paciﬁc has retained 49% of the issued share capital. As part of the transaction a put and call option has been put in place between the Group and Global Paciﬁc. As a result of the nature of these options, Global Ripeners Limited has been treated as a 100% subsidiary from acquisition, with the stake of Global Paciﬁc being treated as debt. The fair value of the Group’s commitment in relation to the 49% shareholding at the date of acquisition is £4m. No goodwill arose on this acquisition and plant and machinery of £4m has been recognised in the Group. Global Ripeners Limited had £4m of cash on acquisition. On 31 July 2013, Global Ripeners Limited changed its name to Wm Morrison Bananas Limited. Investment in food online On 25 July 2013, Morrisons entered into an agreement with Ocado to provide operational and distribution services in relation to Morrisons online grocery offering. As part of the agreement, Morrisons acquired a Customer Fulﬁlment Centre (CFC) in Dordon, which is leased back to Ocado under an operating lease. This acquisition has been effected via the purchase of 100% of the equity of Last Mile Developments Limited (LMD), which is controlled by, and becomes a subsidiary of, the Group. The Directors have considered the application of IFRS 3 Business Combinations to this acquisition and concluded that it is not in the scope of this standard. LMD is a single-asset leasing vehicle with no strategic processes and so does not meet the deﬁnition of a business. Consequently, the cash consideration paid of £81m has been allocated to Property in the Consolidated balance sheet and Cash ﬂow statement in the prior year. The Directors have considered the impact of IFRS 10 Consolidated ﬁnancial statements, applicable this ﬁnancial year, and determined that the Group continues to control LMD on application of that standard. On 14 August 2013, LMD changed its name to Firsdell Limited. In addition, Morrisons entered into a joint venture agreement with Ocado (see note 4.3) and invested £30m in the technology required to operate an online grocery business, which is recognised in the Group’s software intangibles (see note 3.2). 4.6 Disposals relating to the Kiddicare business A charge of £163m (comprising the write off of goodwill £24m, brand £12m, asset impairment £70m and onerous lease provisions £57m) was made last year in respect of the Kiddicare business. On 11 July 2014, the Group disposed of Kiddicare.com Limited to Endless LLP receiving consideration of £2m for the sale of the shares. This resulted in a proﬁt on disposal of £4m. This proﬁt is one-off in nature and so has been excluded from reported underlying proﬁt. As at the year end, seven of the ten leases relating to Kiddicare had been assigned and two leases had been exchanged but not yet completed. One of these two leases was subsequently assigned in February 2015. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 95 5 Working capital and provisions continued 5.2 Stock Finished goods Included in ﬁnished goods is a deduction for unearned elements of commercial income as the stock has not been sold. 5.3 Debtors Trade debtors: – Commercial income trade debtors – Accrued commercial income – Other trade debtors Less: provision for impairment of trade debtors Prepayments and accrued income Other debtors The ageing analysis of trade debtors is as follows: Neither past due nor impaired Past due but not impaired: Not more than three months Greater than three months Impaired debt S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2014 £m 852 2014 £m 21 20 147 (8) 180 116 20 316 2014 £m 176 1 3 8 188 2015 £m 658 2015 £m 10 37 136 (5) 178 51 10 239 2015 £m 178 – – 5 183 As at 1 February 2015 and 2 February 2014, trade debtors that were neither past due nor impaired related to a number of debtors for whom there is no recent history of default. The other classes of debtors do not contain impaired assets. As of 5 March 2015, £7m of the £10m commercial income trade debtor balance had been settled and £21m of the £37m accrued commercial income balance had been invoiced and settled. 5.4 Creditors – current Trade creditors Less: commercial income due, offset against amounts owed Other taxes and social security payable Other creditors Accruals and deferred income As of 5 March 2015, £83m of the £96m commercial income due above had been offset against payments made. 2015 £m 1,493 (96) 1,397 96 241 487 2,221 2014 £m 1,568 (132) 1,436 58 315 463 2,272 96 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 5 Working capital and provisions continued 5.5 Provisions At 3 February 2014 Charged to proﬁt for the period Utilised/released during the period Unwinding of discount At 1 February 2015 Onerous lease provision £m Other property provisions £m 176 118 (42) 6 258 31 − (2) 1 30 Total £m 207 118 (44) 7 288 Part of onerous leases relate to sublet and vacant properties, with commitments ranging from one to 58 years. The provision is revised regularly in response to market conditions. During the year, £118m has been charged to onerous lease provisions in respect of the impairment detailed in note 1.4. The utilisation of onerous lease provisions this year mostly relates to the assignment of Kiddicare leases. The majority of other property provisions relate to a petrol ﬁlling station decommissioning reserve for the cost of decommissioning petrol tanks, and provision for dilapidations on leased buildings, for the cost of restoring the asset to its original condition. 5.6 Cash generated from operations Loss for the period Net ﬁnance costs Taxation (credit)/charge Share of proﬁt of joint venture Operating loss Adjustments for: Depreciation and amortisation Impairment Proﬁt arising on disposal and exit of properties and sale of businesses Adjustment for non-cash element of pension charges Other non-cash charges Decrease/(increase) in stocks1 Decrease/(increase) in debtors1 (Decrease)/increase in creditors1 Increase in provisions1 Cash generated from operations 2015 £m (761) 98 (31) (2) (696) 387 1,116 (135) (5) 14 180 77 (76) 108 970 2014 £m (238) 82 62 (1) (95) 393 547 (9) 2 4 (71) (25) 154 131 1,031 Total working capital (the sum of items marked 1 above) is £289m in the year. This includes £157m as a result of the current year impairment and onerous leases charge (see note 1.4) and is net of £74m of onerous capital payments in the year. When adjusted to exclude these items, the working capital inﬂow is £206m. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 97 6 Capital and borrowings 6.1 Accounting policies Borrowings Interest-bearing loans and overdrafts are initially recorded at fair value, net of attributable transaction costs. Subsequent to initial recognition, any difference between the redemption value and the initial carrying amount is recognised in proﬁt for the period over the period of the borrowings on an effective interest rate basis. Borrowing costs All borrowing costs are recognised in the Group’s proﬁt for the period on an effective interest rate basis except for interest costs that are directly attributable to the construction of buildings and other qualifying assets, which are capitalised and included within the initial cost of the asset. Capitalisation commences when both expenditure on the asset and borrowing costs are being incurred, and necessary activities to prepare the asset for use are in progress. In the case of new stores, this is generally once planning permission has been obtained. Capitalisation ceases when the asset is ready for use. Interest is capitalised at the effective rate incurred on borrowings before taxation of 5% (2014: 5%). Capitalised interest is included within interest paid in cash ﬂow from operating activities. Leases Leases in which substantially all the risks and rewards of ownership are retained by the lessor are classiﬁed as operating leases; all other leases are classiﬁed as ﬁnance leases. Property leases are analysed into separate components for land and buildings and tested to establish whether the components are operating leases or ﬁnance leases. Rental payments on operating leases in which the Group is lessee are taken to proﬁt for the period on a straight-line basis over the life of the lease. Sale and leaseback of properties The accounting treatment of the sale and leaseback depends upon the substance of the transaction (by applying the lease classiﬁcation principles described above). For sale and operating leasebacks, the assets are sold at fair value, and accordingly the proﬁt or loss from the sale is recognised immediately in the Statement of comprehensive income. A number of new property operating leases have been entered into in the year ended 1 February 2015 (see property commitments note 6.8). When forming the conclusion of operating lease classiﬁcation, consideration was given to the key lease classiﬁcation indicators of IAS 17. The leases are typically for a 25 year period. The Directors have reviewed the remaining useful lives for these particular properties and concluded they are signiﬁcantly longer than the period of the lease. As disclosed on page 88 a review of the useful economic lives of each of the property, plant and equipment categories has been performed in the year with no changes made. Other key indicators considered in reaching an operating lease classiﬁcation were the present value of the minimum lease payments and the ownership clauses in the contracts upon expiry of the lease. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 98 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 6 Capital and borrowings continued 6.1 Accounting policies continued Share capital Ordinary shares are classiﬁed as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company’s equity share capital, the consideration paid, including directly attributable incremental costs, is deducted from retained earnings until the shares are cancelled. On cancellation, the nominal value of the shares is deducted from share capital and the amount is transferred to the capital redemption reserve. Own shares held The Group has employee trusts for the granting of Group shares to executives and members of the employee share plans. Shares in the Group held by the employee share trusts are presented in the balance sheet as a deduction from retained earnings. The shares are deducted for the purpose of calculating the Group’s earnings per share. Net debt Net debt is cash and cash equivalents, long term cash on deposit, bank and other current loans, bonds, private placement loan notes and derivative ﬁnancial instruments (stated at current fair value). 6.2 Finance costs and income Interest payable on short term loans and bank overdrafts Interest payable on bonds Interest capitalised Total interest payable Provisions: unwinding of discount Other ﬁnance costs Net pension interest cost (section 8) Finance costs Bank interest received Amortisation of bonds Net pension interest income (section 8) Finance income Net ﬁnance cost 6.3 Borrowings The Group had the following current borrowings and other ﬁnancial liabilities: Current Bank overdraft Short term borrowings £150m Sterling bonds 6.50% August 2015 2015 £m (10) (96) 11 (95) (7) (3) – (105) 5 1 1 7 (98) 2015 £m 1 10 – 11 2014 £m (12) (86) 17 (81) (3) (2) (1) (87) 3 2 – 5 (82) 2014 £m 3 400 150 553 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 99 6 Capital and borrowings continued 6.3 Borrowings continued The Group had the following non-current borrowings and other ﬁnancial liabilities: Non-current £200m Sterling bonds 6.00% January 2017 £200m Sterling bonds 6.12% December 2018 £400m Sterling bonds 4.625% December 2023 £400m Sterling bonds 3.50% July 2026 £300m Sterling bonds 4.75% July 2029 $250m US private placement loan notes (USPP) 4.4% November 2026 €700m Euro bond 2.25% June 2020 Total non-current bonds and loan notes Revolving credit facility 2015 £m 2014 £m 201 202 397 421 291 164 518 2,194 314 2,508 201 203 397 390 – 149 568 1,908 572 2,480 Borrowing facilities Borrowings are denominated in sterling, US dollars and euros, and bear ﬁxed interest rates, with the exception of the revolving credit facility which bears ﬂoating interest rates. All borrowings are unsecured. In July 2014, the Group issued a £300m sterling bond at a ﬁxed interest rate of 4.75% expiring in July 2029. This is part of the Group’s £3bn Euro Medium Term Note programme. In September 2014 the Group entered into a new ﬁve year syndicated committed revolving credit facility of £1.35bn, replacing the £1.2bn facility that was due to mature in March 2016. The revolving credit facility incurs commitment fees at market rates and drawdowns bear interest at a spread above LIBOR. In the event of default of covenants on the bank facility, the principal amounts and any interest accrued are repayable on demand. At the balance sheet date, the Group has £1,180m (2014: £775m) of undrawn, ﬂoating, committed borrowing facilities available in respect of which all conditions present had been met. Maturity of borrowings The table below summarises the maturity proﬁle of the Group’s borrowings based on contractual, undiscounted payments, which include interest payments. As a result, amounts shown below do not agree to the amounts disclosed on the balance sheet for borrowings. Creditors (note 5.4) are excluded from this analysis. Where borrowings are subject to a ﬂoating rate, an estimate for interest has been made. Less than one year One to two years Two to three years Three to four years Four to ﬁve years More than ﬁve years 2015 £m 100 290 78 277 386 2,145 2014 £m 647 88 858 69 268 1,805 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 100 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 6 Capital and borrowings continued 6.3 Borrowings continued Fair values The fair value of the sterling and euro denominated bonds is measured using closing market prices (level 1). The fair value of the USPP is estimated by comparing the interest rate to market rates available to the Group at the balance sheet date (level 2). The fair values of borrowings included in level 2 are based on the net present value of the anticipated future cash ﬂows associated with these instruments using rates currently available for debts on similar terms, credit risk and remaining maturities. These compare to carrying values as follows: Total bonds: non-current and current Total loan notes: non-current Amortised cost £m 2,030 164 2,194 2015 Fair value £m 2,115 175 2,290 Amortised cost £m 1,909 149 2,058 2014 Fair value £m 1,959 171 2,130 The fair value of other items within current and non-current borrowing equals their carrying amount, as the impact of discounting is not material. 6.4 Analysis of net debt Cash and cash equivalents per balance sheet Bank overdrafts Cash and cash equivalents per cash ﬂow Foreign exchange forward contracts Other ﬁnancial assets Short term borrowings and current bonds Forward foreign exchange contracts Energy price contracts Current ﬁnancial liabilities Bonds Private placement loan notes Revolving credit facility Cross-currency contracts and interest rate swaps Energy price contracts Non-current ﬁnancial liabilities Net debt Note 6.3 7.3 6.3 7.3 7.3 6.3 6.3 6.3 7.3 7.3 2015 £m 241 (1) 240 6 6 (10) (6) (12) (28) (2,030) (164) (314) (45) (5) (2,558) (2,340) 2014 £m 261 (3) 258 1 1 (550) (4) (6) (560) (1,759) (149) (572) (34) (2) (2,516) (2,817) Cash and cash equivalents include restricted balances of £21m (2014: £37m) which is held by Farock Insurance Company Limited. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 101 6 Capital and borrowings continued 6.5 Called−up share capital Current period At 3 February 2014 and 1 February 2015 Prior period At 4 February 2013 Shares cancelled net of options exercised At 2 February 2014 Number of shares millions Share capital £m Share premium £m 2,335 234 127 2,346 (11) 2,335 235 (1) 234 107 20 127 Total £m 361 342 19 361 The total authorised number of ordinary shares is 4,000 million shares (2014: 4,000 million shares) with a par value of 10p per share (2014: 10p per share). All issued shares are fully paid. There were 41,962 shares issued pursuant to the exercise of options (2014: 8,811,865) for an aggregate consideration of £0.1m (2014: £21m). During the 52 weeks to 2 February 2014, the Group acquired 20,338,000 of its own shares for cancellation as part of the equity retirement programme for consideration of £53m. The equity retirement programme completed in March 2013 and the Group did not acquire any of its own shares for cancellation in the 52 weeks ended 1 February 2015. The holders of ordinary shares are entitled to receive dividends as declared from time-to-time and are entitled to one vote per share at the meetings of the Company. Trust shares Included in retained earnings is a deduction of £6m (2014: £5m) in respect of own shares held at the balance sheet date. This represents the cost of 2,907,374 (2014: 1,938,608) of the Group’s ordinary shares (nominal value of £0.3m (2014: £0.2m)). These shares are held in a trust and were acquired by the business to meet obligations under the Group’s employee share plans using funds provided by the Group. The market value of the shares at 1 February 2015 was £5m (2014: £5m). The trust has waived its right to dividends. These shares are not treasury shares as deﬁned by the London Stock Exchange. During the period the Group acquired 4,000,000 of its own shares to hold in trust for consideration of £8m, and utilised 3,031,234 trust shares to satisfy awards under the Group’s employee share plans. Treasury shares During the 52 weeks ended 1 February 2015 the Group received nil proceeds (2014: £7m) in respect of treasury shares utilised to satisfy share options exercised by employees during the period. At 1 February 2015, no treasury shares remain (2014: nil). Issue of new shares The Group issued 41,962 (2 February 2014: 8,811,865) new shares to satisfy options exercised by employees during the period. Proceeds received on exercise of these shares amounted to £0.1m (2014: £21m). S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 6.6 Reserves Capital redemption reserve Merger reserve Hedging reserve Retained earnings Total 2015 £m 39 2,578 (22) 638 3,233 2014 £m 39 2,578 (15) 1,729 4,331 102 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 6 Capital and borrowings continued 6.6 Reserves continued Capital redemption reserve The capital redemption reserve at the start of the period related to 389,631,561 of the Company’s own shares which it purchased on the open market for cancellation between 31 March 2008 and 8 March 2013 at a total cost of £1,081m. Merger reserve The merger reserve represents the reserve in the Company’s balance sheet arising on the acquisition in 2004 of Safeway Limited. In the opinion of the Directors, this reserve is not distributable and accordingly it will be carried forward as a capital reserve. Hedging reserve This represents the gains and losses arising on derivatives used for cash ﬂow hedging. 6.7 Capital management The Group deﬁnes the capital that it manages as the Group’s total equity and net debt balances, as well as its lease commitments. The Group’s capital management objectives are to safeguard its ability to continue as a going concern providing returns to shareholders via optimising debt and equity balances, maintaining an investment grade credit rating and having adequate liquidity headroom. The Group manages its capital structure by issuing new debt or shares. During the current ﬁnancial year, net debt has reduced by £477m, reﬂecting strong operating cash ﬂow, reduced capital expenditure and £448m of property disposals. Additional funding of £300m has been obtained through the Group’s bond programme, whilst the Group’s syndicated revolving credit facility has been renewed and extended to £1.35bn. The overall impact of this additional funding has been an increase in the average maturity period of the Group’s debt. Throughout the year, the Group has comfortably complied with the gearing and ﬁxed charge cover covenants attaching to its revolving credit facility, and the USPP. 6.8 Operating leases – lessee The Group has outstanding commitments for future minimum lease payments under non-cancellable operating leases. The leases have varying terms, escalation clauses and renewal rights, and fall due as follows: Within one year More than one year and less than ﬁve years After ﬁve years The movement in the property lease commitments within one year is summarised below: Property operating lease commitment within one year At 3 February 2014 Impact of disposal programme Leases on new stores Other At 1 February 2015 2015 Vehicles, plant and equipment £m 15 28 – 43 Property £m 108 411 1,520 2,039 Property £m 77 292 934 1,303 2014 Vehicles, plant and equipment £m 11 25 – 36 £m 77 15 14 2 108 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 103 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 7 Financial risk and hedging 7.1 Accounting policies Derivative ﬁnancial instruments and hedge accounting Derivatives are transacted to mitigate ﬁnancial risks that arise as a result of the Group’s operating activities and funding arrangements. At the inception of a hedge, the Group documents the relationship between the hedging instrument and the hedged item, the risk management objective and strategy for undertaking the hedge. The Group assesses whether the hedging instrument is highly effective in offsetting changes in fair values or cash ﬂows of the hedged item at inception and it also assesses whether the hedge has been and will continue to be effective on an ongoing basis. All derivatives are initially recognised at fair value and are also measured at fair value at each reporting date. Derivatives with positive fair values are recognised as assets and those with negative fair values as liabilities. They are also categorised as current or non-current according to the maturity of each derivative. All gains or losses arising due to changes in the fair value of derivatives are recognised in proﬁt or loss except when the derivative qualiﬁes for cash ﬂow hedge accounting. Cash ﬂow hedges The Group designates derivatives into a cash ﬂow hedge where they have been transacted to hedge a highly probable forecast transaction or a particular risk associated with an asset or liability. The effective portion of the change in the fair value of the derivatives, that are designated into cash ﬂow hedge relationships, are recognised in other comprehensive income. Cumulative gains or losses on derivatives are reclassiﬁed from other comprehensive income into proﬁt or loss in the period when the transaction occurs. Any ineffective portion of the gain or loss on the derivative is immediately recognised in proﬁt or loss. Fair value hedge The Group designates derivatives into a fair value hedge relationship when they hedge the Group’s exposure to changes in the fair value of a recognised asset or liability, or a ﬁrm commitment. The change in fair value of the hedged asset or liability that is attributable to the hedged risk is recognised in proﬁt for loss or the period as well as the gain or loss from changes in the fair value of the derivative. 7.2 Financial risk management The Group has a centralised treasury function which manages funding, liquidity and other ﬁnancial risk in accordance with the Board approved treasury policy. The objective of the policy and controls that are established are to mitigate the risk of an adverse impact on the performance of the Group as a result of its exposure to ﬁnancial risks arising from the Group’s operations and its sources of ﬁnance. It is the Group’s policy not to engage in speculative trading of ﬁnancial instruments. The Board retains ultimate responsibility for treasury activity and is involved in key decision making. A Treasury Committee is established to provide governance and oversight to treasury activity within delegated authority limits and formally reports to the Audit Committee. Foreign currency risk The majority of purchases made by the Group are denominated in sterling, however some trade purchases are made in other currencies, primarily the euro and US dollar. The Group’s objective is to reduce short term proﬁt volatility from exchange rate ﬂuctuations. It is Group policy that a minimum of 80% of committed and highly probable exposures within the next six months are hedged and at least 40% of exposures in the following six months. At the balance sheet date, the Group had hedged 84% of its exposure within the next six months (2014: 84%). Cross-currency interest rate swaps are used to mitigate the Group’s currency exposure arising from payments of interest and principal in relation to foreign currency funding, including the US dollar private placement (USPP) loan notes and the euro denominated bond. At the reporting date, the sensitivity to a reasonable possible change (+/– 10%) in the US dollar and euro exchange rates would equate to a £7m post tax proﬁt or loss exposure in relation to the euro and £5m in relation to the US dollar, for the unhedged forecast foreign currency exposures over the next 12 months. The impact on other comprehensive income would be £20m. Liquidity risk The Group policy is to maintain a balance of funding borrowings across a range of maturities and a sufficient level of committed headroom to meet obligations. The Group ﬁnances its operations using a diversiﬁed range of funding providers including banks, bondholders, and USPP noteholders. A central cash forecast is maintained by the treasury function who monitor the availability of liquidity to meet business requirements and any unexpected variances. The treasury function seek to centralise all surplus cash balances to minimise the level of gross debt. Short term cash balances, together with undrawn committed facilities, enable the Group to manage its day to day liquidity risk. Any short term surplus is invested in accordance with the approved investment policy. The Treasury Committee compares the committed liquidity available to the Group against the forecast requirements and policy headroom. Interest rate risk The Group’s long term policy is to protect itself against adverse movements in interest rates by maintaining at least 60% of its total borrowings at ﬁxed interest rates. As at the balance sheet date 79% (2014: 62%) of the Group’s borrowings are at ﬁxed rate. Whilst still applying the policy described above, from time-to-time the Group enters into ﬁxed-to-ﬂoating interest rate swaps to achieve the appropriate proportion of ﬁxed versus ﬂoating rate borrowings. Credit risk As a retailer, the majority of the Group’s revenue is received in cash at the point of sale and therefore credit risk is not considered signiﬁcant to the Group. Some credit risk does arise from cash and cash equivalents, deposits with banking groups and exposures from other sources of income such as commercial income and tenants of investment properties. The Group has established appropriate credit veriﬁcation procedures in respect of ﬁnancial institutions. Limits on the total exposure to any counterparty or Group of connected counterparties are established within treasury policy taking into account credit ratings. Compliance with limits is regularly monitored. There are no signiﬁcant concentrations of credit risk within the Group. Commodity price risk The Group manages the risks associated with the purchase of electricity, gas and diesel consumed by its activities (excluding fuel purchased for resale to customers) by entering into hedging contracts to ﬁx prices for expected consumption. 104 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 7 Financial risk and hedging continued 7.2 Financial risk management continued The Group has adopted a capital at risk model for hedging its fuel and power consumption. The Treasury Committee reviews the Group’s exposure to commodity prices and ensures it remains within policy limits. A change of +/– 10 % in the market value of the commodity price at the balance sheet date would affect other comprehensive income by £9m (2014: £10m). 7.3 Derivative ﬁnancial assets and liabilities Derivative ﬁnancial assets Current Foreign exchange contracts 2015 £m 6 6 2014 £m 1 1 All derivatives are categorised as level 2 instruments. Level 2 fair values for simple, over-the-counter derivatives are calculated by using benchmark, observable market interest rates to discount future cash ﬂows. Derivative ﬁnancial liabilities Current Foreign exchange contracts Energy price contracts Non-current Cross-currency swaps and interest rate swaps Energy price contracts Maturity analysis of derivatives Derivatives settled on a gross basis Cross-currency swaps – cash ﬂow hedges – Outﬂow – Inﬂow Interest rate swaps – fair value hedges – Outﬂow – Inﬂow Forward contracts – cash ﬂow hedges – Outﬂow – Inﬂow Derivatives settled on a net basis Energy price contracts – cash ﬂow hedges – Outﬂow 2015 £m 2014 £m 6 12 18 45 5 50 4 6 10 34 2 36 2014 £m 2015 £m < 1 year £m 1 – 5 years £m 5 + years £m < 1 year £m 1 – 5 years £m 5 + years £m (25) 19 (3) 7 (215) 210 (80) 77 (11) 28 – – (12) (4) (823) 756 (18) 46 – – – (25) 20 (3) 7 (232) 212 (10) (99) 78 (11) 28 – – – (830) 793 (22) 56 – – – The amounts disclosed in the table above are the contractual undiscounted derivative cash ﬂows and therefore differ to those in the balance sheet. 7.4 Hedging activities Cash ﬂow hedges At 1 February 2015 and 2 February 2014, the Group held US dollar cross-currency swaps designated as cash ﬂow hedges. Prior to this, the cross-currency swaps were designated as fair value hedges against the commitment to issue the USPP. At 1 February 2015, the Group also held euro cross-currency swaps designated as cash ﬂow hedges. The notional principal amount of the outstanding cross-currency swaps at 1 February 2015 was $250m (2014: $250m) and €700m (2014: €700m). Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 105 7 Financial risk and hedging continued 7.4 Hedging activities continued The energy price contracts and foreign currency derivatives shown in note 7.3 are also designated as cash ﬂow hedges. The cash ﬂows hedged will occur within 12 months of the balance sheet date. Fair value hedges Proﬁts recognised on ﬁxed-to-ﬂoating interest rate swaps designated in fair value hedges are £31m (2014: loss of £4m). The change in fair value of the underlying hedged item was a loss of £31m (2014: gain of £4m). 8 Pensions 8.1 Accounting policies A deﬁned contribution scheme is a pension scheme under which the Group pays ﬁxed contributions into a separate entity and provides no guarantee as to the quantum of retirement beneﬁts that those contributions will ultimately purchase. A deﬁned beneﬁt scheme is one that is not a deﬁned contribution scheme. Deﬁned beneﬁt schemes Pension scheme assets are valued at market rates. Pension scheme obligations are an estimate of the amount required to pay the beneﬁts that employees have earned in exchange for current and past service, assessed and discounted to present value using the assumptions shown in note 8.4.1. The net pension liability or asset recognised in the Consolidated balance sheet is the net of the schemes’ assets and obligations, which are calculated separately for each scheme. The Group has a right to recognise the net pension asset in the Retirement saver plan (RSP). Current service cost is treated as an operating cost in the Consolidated statement of income and Statement of cash ﬂows and is part of underlying earnings. Net interest income/expense is calculated by applying the discount rate on liabilities to the net pension liability or asset (adjusted for cash ﬂows over the accounting period) and is recognised in ﬁnance income/costs and excluded from underlying earnings. Expenses incurred in respect of the management of scheme assets are included in Other comprehensive income as a reduction in the return on scheme assets. Other scheme expenses are recognised in proﬁt or loss as an operating expense. Remeasurements comprise actuarial gains and losses on the obligations and the return on scheme assets (excluding interest). They are recognised immediately in Other comprehensive income. Amounts shown within section 8 are before any adjustments for deferred taxation. 8.2 Deﬁned beneﬁt schemes: summary and description The Group operates three deﬁned beneﬁt retirement schemes (together ‘the Schemes’) providing beneﬁts based on a beneﬁt formula that depends on factors including the employee’s age and number of years of service. The Morrison and Safeway Schemes provide pension beneﬁts based on either the employee’s compensation package or career average revalued earnings (CARE) (the ‘CARE Schemes’). The CARE Schemes are generally not open to new members. The RSP is a cash balance scheme, which provides a lump sum beneﬁt based upon a deﬁned proportion of an employee’s annual earnings, which is revalued each year in line with inﬂation. The position of each scheme at 1 February 2015 is as follows: S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Net position (liability)/asset: CARE schemes RSP Combined net position 2015 £m (43) 4 (39) At the year end, schemes in surplus have been disclosed within assets on the balance sheet and schemes in deﬁcit have been disclosed within liabilities. In the prior year a net position was disclosed within liabilities since the surplus was considered immaterial. The disclosures below show the details of the schemes combined: Balance sheet: Fair value of scheme assets Present value of obligations Net pension (liability)/asset 2015 CARE £m 4,047 (4,090) (43) 2015 RSP £m 87 (83) 4 2014 CARE £m 3,055 (3,068) (13) 2014 £m (13) 2 (11) 2014 RSP £m 39 (37) 2 106 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 8 Pensions continued 8.2 Deﬁned beneﬁt schemes: summary and description continued Consolidated statement of comprehensive income Current service cost – recognised in cost of sales Current service cost – recognised in administrative expenses Administrative costs paid by Schemes – recognised in administrative expenses Curtailment gain Net interest on net pension asset/liability – ﬁnance (income)/costs Total expense charged to statement of comprehensive income Statement of other comprehensive income: Remeasurements in other comprehensive income charge/(credit) 2015 CARE £m 39 4 3 (1) – 45 31 2015 RSP £m 33 4 1 – (1) 37 – 2014 CARE £m 24 8 3 – 1 36 (11) 2014 RSP £m – – – – – – – The Schemes are registered schemes under the provisions of Schedule 36 of the Finance Act 2004 and the assets are held in legally separate, trustee- administered funds. The Board of each Scheme is required by law to act in the best interest of the Scheme participants and is responsible for setting the investment, funding and governance policies of the fund. A representative of the Group attends Trustee Investment Committee meetings in order to provide the Group’s view on investment strategy, but the ultimate power lies with the Trustees. The Deed and Rules of the Morrison Scheme gives the Trustees the power to set contributions. In the Safeway Scheme and the RSP this power is given to the Group, subject to regulatory override. The latest full actuarial valuations have been carried out as at 1 April 2013 for the Safeway Scheme and 5 April 2013 for the Morrison Scheme and the RSP. The results of these valuations for the CARE Schemes have been used and updated for IAS 19 ‘Employee beneﬁts’ purposes for the period to 1 February 2015 by a qualiﬁed independent actuary. For the RSP, an actuarial valuation for the purposes of IAS 19, based on member data as at 1 February 2015, has been completed by an independent actuary. The Schemes expose the Group to inﬂation risk, interest rate risk and market investment risk. In addition, the CARE Schemes expose the Group to longevity risk. 8.3 Scheme assets Assets of the Schemes generate returns and ultimately cash that is used to satisfy the Schemes’ obligations. They are not necessarily intended to be realised in the short term. The Trustees of each Scheme invest in different categories of asset and in different allocations amongst those assets, according to the investment principles of that Scheme. Currently, the investment strategy of the CARE Schemes is to maintain a balance of approximately 40% equities and 60% bond-like investments. RSP investments are currently based primarily in equities. There are no direct investments in the parent Company’s own shares or property occupied by any member of the Group. Fair value of Scheme assets: Equities (quoted) Corporate bonds (quoted) Government bonds (quoted) Liability driven investments (unquoted) Cash (quoted) Total 2015 CARE £m 1,401 1,109 – 1,534 3 4,047 2015 RSP £m 84 – – – 3 87 2014 CARE £m 1,289 891 6 863 6 3,055 2014 RSP £m 39 – – – – 39 Liability driven investments (LDI) The policy in the CARE Schemes is to limit investment risk and to manage the liabilities in order to reduce ﬂuctuations in the Schemes’ funding levels. This is achieved through the use of ‘liability driven investments’ (LDI), whose main goal is to have sufficient assets to meet all current and future liabilities as they fall due. LDI involves the use of derivatives such as swaps and other investment instruments. There are no annuities or longevity swaps. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 107 8 Pensions continued 8.3 Scheme assets continued The movement in the fair value of the Schemes’ assets over the period was as follows: Fair value of scheme assets at start of period Recognition of RSP scheme assets Interest income Return on scheme assets excluding interest Employer contributions Employee contributions Beneﬁts paid Administrative expenses Fair value of scheme assets at end of period 2015 CARE £m 3,055 – 137 879 46 1 (68) (3) 4,047 2015 RSP £m 39 – 3 9 39 2 (4) (1) 87 2014 CARE £m 2,839 – 137 96 34 10 (58) (3) 3,055 2014 RSP £m – 39 – – – – – – 39 The Group has previously entered into a pension funding partnership structure under which it has contributed interests in a Scottish Limited Partnership (‘SLP’) valued at £90m (as at 31 January 2013) to the CARE schemes. The CARE Schemes’ interests in the SLP reduce the respective deﬁcits on a funding basis, although the agreements do not affect the position directly on an IAS 19 accounting basis because the investments held by the CARE Schemes do not qualify as assets for IAS 19 purposes. As partners in the SLP, the CARE Schemes are entitled to receive a share of the proﬁts of the SLP twice a year for 20 years. The proﬁts shared with the Schemes are reﬂected in the Group ﬁnancial statements as pension contributions. The SLP made a cash contribution of £6.6m during the year ending 1 February 2015, and will make annual contributions of £6.6m for a further 18 years. 8.4 Present value of obligations The movement in the deﬁned beneﬁt obligation over the period was as follows: S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Deﬁned beneﬁt obligation at start of period Recognition of RSP deﬁned beneﬁt obligation Current service cost Interest expense Actuarial loss – demographic assumptions Actuarial loss – ﬁnancial assumptions Actuarial gain – experience Curtailment gain Employee contributions Beneﬁts paid Deﬁned beneﬁt obligation at end of period 2015 CARE £m (3,068) – (43) (137) (21) (889) – 1 (1) 68 (4,090) 2015 RSP £m (37) – (37) (2) – (16) 7 – (2) 4 (83) 2014 CARE £m (2,859) – (32) (138) – (118) 31 – (10) 58 (3,068) 2014 RSP £m – (37) – – – – – – – – (37) The durations of the deﬁned beneﬁt obligations at the end of the 2015 reporting period are: RSP 20 years; Morrisons CARE 27 years; Safeway CARE 26 years. The weighted average duration of all three schemes is 26 years. 108 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 8 Pensions continued 8.4 Present value of obligations continued 8.4.1 Signiﬁcant actuarial assumptions The following are the principal actuarial assumptions at the reporting date (expressed as weighted averages): Financial assumptions Discount rate applied to scheme liabilities (% p.a.) Inﬂation assumption (RPI) (% p.a.) Life expectancies Longevity in years from age 65 for current pensioners Male Female Longevity in years from age 65 for current members aged 45 Male Female 2015 CARE 3.10% 3.10% 2015 CARE 22.6 24.0 24.8 26.4 2015 RSP 3.10% 3.10% 2015 RSP n/a n/a n/a n/a 2014 CARE 4.50% 3.50% 2014 CARE 22.3 23.2 24.7 25.6 2014 RSP 4.40% 3.50% 2014 RSP n/a n/a n/a n/a Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with published statistics. The mortality tables used at both year ends 2014 and 2015 are the S1PMA/S1PFA-Heavy tables (males/females) based on year of birth. Following analysis completed as part of the 2013 actuarial valuations a scaling factor of 110% was applied to the mortality tables used in the Morrison Scheme as at 1 February 2015. Amongst the UK population, there is a continuing trend for a generation to live longer than the preceding generation, and this has been reﬂected in the longevity assumption as at 2 February 2014 by adopting 80%/60% (males/females) of the ‘long cohort’ longevity projections and also incorporating a minimum annual rate of improvement in longevity of 1.25% p.a. For the 2015 year end, and in line with the 2013 actuarial valuations this projection was updated to use the CMI 2012 rates with an annual rate of improvement of 1.5% p.a. Related actuarial assumptions (expressed as weighted averages) Rate of increases in salaries (% p.a.) Rate of increase of pensions in payment: RPI inﬂation capped at either 2.5% p.a. or 5% p.a. (% p.a.) Pre-retirement revaluation for active members (% p.a.) Rate of increase of pensions in deferment: CPI inﬂation capped at either 2.5% p.a. or 5% p.a. (% p.a.) CPI inﬂation (% p.a.) 2015 CARE 3.10% 2015 RSP 2.30% 2014 CARE 3.50% 2.10%/3.10% 3.10% – 1.80% 2.30%/3.50% 3.50% 2014 RSP 3.50% – 2.10% −/2.30% 2.30% 2.30%/− 2.30% −/2.70% 2.70% 2.50%/− 2.70% 8.4.2 Sensitivity analysis on signiﬁcant actuarial assumptions The following table summarises the impact on the deﬁned beneﬁt obligation at the end of the reporting period if each of the signiﬁcant actuarial assumptions listed above were changed, in isolation, assuming no other changes in market conditions at the accounting date. In practice any movement in assumptions could be accompanied by a partially offsetting change in asset values, and the corresponding overall impact on the net asset/(liability) is therefore likely to be lower than the amounts below in a number of scenarios. Extrapolation of the sensitivities shown may not be appropriate. Discount rate applied to Scheme obligations Inﬂation assumption (RPI and associated assumptions) Longevity +/– 0.1% pa +/– 0.1% pa +/– one year 2015 CARE £m −/+ 99 +/− 89 + 159 2015 RSP £m −/+ 2 +/− 1 – 2014 CARE £m –/+ 73 +/– 64 +/− 94 2014 RSP £m –/+ 1 +/− 1 – Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 109 8 Pensions continued 8.5 Funding The CARE Schemes and the RSP are funded schemes to which both employees and the Group contribute. The Morrison Scheme is entirely funded by the parent Company and the Safeway Scheme is funded by Safeway Limited and its subsidiaries. The Group’s subsidiaries participate in the RSP. There is no contractual agreement or stated policy for charging the net deﬁned beneﬁt cost between the parent Company and its subsidiaries. The contribution of each participating subsidiary to the RSP is calculated in proportion to the number of employees that are members of the RSP. The current best estimate of Group contributions to be paid for the accounting period commencing 2 February 2015 is £92m. This estimate includes amounts payable from the SLP and salary sacriﬁced contributions from employees. 8.6 Proposed closure of CARE schemes to future accrual During January 2015, the Group reached an agreement in principle with the Trustees of the CARE Schemes to close them to future accrual, subject to the outcome of consultation with current scheme members. The Group’s proposal is that scheme members’ accrued beneﬁts will be frozen (subject to inﬂationary revaluation), and that future beneﬁts will no longer accrue in these schemes. Following this agreement the Group has entered into a consultation with scheme members on 23 February 2015. The Group expects that the consultation process will conclude during May 2015. Subject to the outcome of the consultation, any changes would become effective in early July 2015. The ﬁnancial effect of closing these schemes to future accrual would be to reduce the Group’s exposure to future volatility, and increases in pension liabilities and costs. 9 Share−based payments 9.1 Accounting policy Share−based payments The Group issues equity-settled share-based payments to certain employees in exchange for services rendered by them. The fair value of the share- based award is calculated at the date of grant and is expensed on a straight-line basis over the vesting period with a corresponding increase in equity. This is based on the Group’s estimate of share options that will eventually vest. This takes into account movement of non-market conditions, being service conditions and ﬁnancial performance, if relevant. The fair value of share options is measured by use of a binomial stochastic model. The expected life used in the model has been adjusted, based on management’s best estimate, for effects of non-transferability, exercise restrictions and behavioural considerations. The charge in the period for share-based payments was £11m (2014: £6m). 9.2 Share save schemes The Share save scheme began in May 2000 and all employees (including Executive Directors) are eligible once the necessary service requirements have been met. The scheme allows participants to save up to a maximum of £250 each month for a ﬁxed period of three years. Options are offered at a discount of 20% to the mid-market closing price on the day prior to the offer and are exercisable for a period of six months commencing after the end of the ﬁxed period of the contract. The exercise of options under this scheme is subject only to service conditions. The schemes that launched in May 2011 and subsequently are under the new scheme rules approved by the shareholders in June 2010. The fair value of options granted, and the inputs used to determine it are as follows: S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Grant date Share price at grant date Fair value of options granted Exercise price Dividend yield Annual risk free interest rate Expected volatility* 20 May 2014 13 May 2013 14 May 2012 17 May 2011 £2.10 £11.6m £1.64 6.21% 1.00% 18.3% £2.92 £8.1m £2.25 4.17% 0.45% 16.8% £2.79 £9.1m £2.36 3.69% 0.53% 19.4% £3.01 £11.5m £2.28 3.2% 1.65% 24.2% * The volatility measured at the standard deviation of expected share price returns is based on statistical analysis on weekly share prices over the past 3.37 years prior to the date of grant. 110 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 9 Share−based payments continued 9.2 Share save schemes continued The requirement that the employee has to save in order to purchase shares under the Share save plan is a non-vesting condition. This feature has been incorporated into the fair value at grant date by applying a discount to the valuation obtained from the binomial stochastic option pricing model. The discount is determined by estimating the probability that the employee will stop saving based on expected future trends in the share price and employee behaviour. Movement in outstanding options Outstanding at start of period Granted Exercised Forfeited Outstanding at end of period Exercisable at end of period Share options exercised in the ﬁnancial period Share options outstanding at the end of the period Range of exercise prices Weighted average remaining contractual life 9.3 Long term incentive plans 2015 Weighted average exercise price in £ per share Options thousands Weighted average exercise price in £ per share 2.30 1.64 2.28 2.16 1.85 2.28 42,993 41,208 (42) (33,374) 50,785 56 2015 2.34 2.25 2.37 2.32 2.30 2.37 Weighted average share price at date of exercise £ 2.14 Number of shares thousands Weighted average share price at date of exercise £ 2.73 42 2015 2014 Options thousands 43,660 18,901 (11,578) (7,990) 42,993 36 2014 Number of shares thousands 11,578 2014 £1.64 to £2.36 2.5 years £2.25 to £2.37 2.0 years In May 2007, a discretionary LTIP for the beneﬁt of certain employees was introduced. The awards have no exercise price and accrue the value of dividends over the vesting period. LTIP grants issued before 2013 are subject to the performance conditions, as stated below. Since 2013, the performance conditions apply to Management Board members only. Senior employees eligible for LTIPs have to satisfy a service condition only. Given the size of the Management Board, the fair value of the LTIP grants assumes no leavers. The leavers assumptions below relate to the senior employees only. Awards normally vest three years after the original grant date, provided the relevant performance criteria have been met. The fair value of awards granted and the inputs used to determined it are as follows: Grant date Share price at grant date Assumed leavers (Senior employees only) Performance criteria (Management Board only) Fair value of share awards 16 Oct 2014 20 Jun 2014 22 Apr 2014 17 Oct 2013 22 Apr 2013 15 Oct 2012 13 Apr 2012 1 Oct 2011 £1.57 7% − £1.91 − − £2.02 7% 55% £0.9m £3.0m £16.7m £2.79 8% 50% £2.80 8% 50% £1.5m £18.8m £2.75 5% 65% £2.91 5% 65% £1.5m £28.1m £3.02 5% 77% £1.4m Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 111 9 Share−based payments continued 9.3 Long term incentive plans continued Movement in outstanding share awards Outstanding at start of period Granted Forfeited Outstanding at end of period Exercisable at end of period 2015 2014 Share awards thousands Share awards thousands 10,444 10,484 (2,135) 18,793 – 24,630 7,267 (21,453) 10,444 – The weighted average remaining contractual life of the share awards is 2.6 years (2014: 2.0 years). 9.4 One−off share awards As part of the package for certain senior management, restricted share awards may be granted. These are primarily designed to replace the value of share scheme awards forfeited from the previous employer. Vesting of these awards is subject only to service conditions. The fair value of awards granted and the inputs used to determined it are as follows: Grant date Share price at grant date Assumed leavers Fair value of share awards granted 2015 £2.12 – £0.4m 2014 – – – There are 165,358 share awards outstanding at the end of the period (2014: nil). The movement during the period is entirely the result of options being granted. The weighted average remaining contractual life of the share awards is 1.1 years (2014: nil years). 9.5 Restricted share award Following the non vesting of the 2011 and 2012 LTIP, a decision was made to replace the LTIP for those colleagues below Management Board with restricted share awards. This scheme is not subject to ﬁnancial performance measures. The awards vest subject to a requirement to remain in employment for a certain period; half the awards vest after one year and the remaining half after two years. The fair value of awards granted and the inputs used to determined it are as follows: S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Grant date Share price at grant date Assumed leavers Fair value of share awards granted 1 Vested in April 2014. 2 Vests April 2015. Movement in outstanding share awards Outstanding at start of period Granted Exercised Lapsed Outstanding at end of period 22 April 20131 22 April 20132 17 October 2013 £2.80 8% £7.1m £2.80 8% £7.1m £2.79 8% £0.6m 2015 2014 Share awards thousands Share awards thousands 4,926 − (2,453) (133) 2,340 – 4,926 – – 4,926 112 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Group ﬁnancial statements continued 52 weeks ended 1 February 2015 9 Share−based payments continued 9.6 Deferred share bonus plan Certain members of senior management participate in the deferred share bonus plan under which 33% to 50% of any bonus payable is deferred in shares for three years from the date the deferred share award is made. Dividend equivalents accrue over the vesting period, to be paid when the shares vest. Vesting of these share awards is subject only to service conditions. The fair value of awards granted and the inputs used to determine it: Grant date Share price at grant date Assumed leavers Exercise price Fair value of share awards granted Movement in outstanding share awards Outstanding at start of period Granted Exercised Outstanding at end of period 2014/15 scheme 2013/14 scheme £2.10 0% £nil £0.6m – – – – 2015 2014 Share awards thousands Share awards thousands 937 286 (408) 815 1,424 – (487) 937 The weighted average remaining contractual life of the share awards is 0.8 years (2014: 0.8 years). 10 Other 10.1 Related party transactions As identiﬁed on page 60 of the Directors’ report, the Directors were advised during the year that certain distributions made in the years ended 3 February 2013 and 2 February 2014 were not in accordance with the Companies Act 2006. The resolution referred to in this section of the Directors’ Report also meets the criteria of a related party transaction under IAS 24. The matter has been resolved through the ﬁling of a circular with the UK Listings Authority on 10 February 2015 and a general meeting of the Company’s shareholders on 6 March 2015. The Group’s other related party transactions in the period include the remuneration of the senior managers (note 1.7), and the Directors’ emoluments and pension entitlements, share awards and share options in the audited section of the Remuneration report, which forms part of these ﬁnancial statements. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 113 Wm Morrison Supermarkets PLC – Company balance sheet 1 February 2015 Fixed assets Intangible assets Tangible assets Investments Investment in joint venture Current assets Stock Derivative ﬁnancial assets Debtors – amounts falling due within one year Cash at bank and in hand Creditors – amounts falling due within one year Net current assets/(liabilities) Total assets less net current assets/(liabilities) Creditors – amounts falling due after more than one year Provisions for liabilities Net assets – excluding pension asset Net pension asset Net assets – including pension asset Capital and reserves Called-up share capital Share premium Capital redemption reserve Merger reserve Hedging reserve Proﬁt and loss account Total shareholders’ funds Note 11.3.1 11.3.2 11.5 11.4 11.6 11.7 11.8 11.9 11.10 11.12 11.13 11.13 11.13 11.13 11.13 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2015 £m 2014 £m 26 2,866 3,470 68 6,430 420 6 2,290 − 2,716 (2,011) 30 3,541 3,470 66 7,107 543 1 2,824 99 3,467 (4,291) 705 (824) 7,135 6,283 (2,346) (2,320) (279) (185) 4,510 12 4,522 234 127 39 2,578 (22) 1,566 4,522 3,778 9 3,787 234 127 39 2,578 (15) 824 3,787 The accounting policies on pages 114 to 117 and notes on pages 117 to 126 form part of these ﬁnancial statements. The ﬁnancial statements on pages 113 to 126 were approved by the Board of Directors on 11 March 2015 and were signed on its behalf by: Trevor Strain Chief Financial Officer 114 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Wm Morrison Supermarkets PLC – Company accounting policies 52 weeks ended 1 February 2015 11 Company ﬁnancial statements 11.1 Accounting policies Basis of preparation These separate ﬁnancial statements of Wm Morrison Supermarkets PLC (the Company) have been prepared on a going concern basis under the historical cost convention, except as disclosed in the accounting policies set out below, and in accordance with applicable accounting standards under UK GAAP and the Companies Act 2006. As noted in the annual report and ﬁnancial statements for the year ended 2 February 2014, the Directors were advised that certain distributions (including share repurchases) carried out in the years ended 3 February 2013 and 2 February 2014 were made otherwise than in accordance with the Companies Act 2006. At a general meeting of the Company’s shareholders, held on 6 March 2015, a resolution was passed which ratiﬁed the payment of the relevant dividends, authorised the re- execution of the relevant share repurchases and removed any right for the Company to pursue shareholders or directors for the repayment of the relevant funds. The overall effect of this resolution being passed is to return all parties to the position that they would have been in had the relevant distributions been made in accordance with the Companies Act 2006. The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company’s ﬁnancial statements. Accounting reference date The accounting period of the Company ends on the Sunday falling between 29 January and 4 February each year. Revenue recognition Sale of goods in−store and online, and fuel Revenue from the sale of goods in-store and online comprises cash from customers and excludes VAT. It is net of returns, colleague discounts, coupons, vouchers, Match & More points earned in-store and online and the free element of multi-save transactions. Sale of fuel is recognised net of VAT and Match & More points earned on fuel. Revenue is recognised when transactions are completed in-store, or, in the case of online sales, when goods are accepted by the customer on delivery. Other sales Other revenue includes income from concessions and commissions based on the terms of the contract. Revenue collected on behalf of others is not recognised as turnover, other than the related commission. Sales are recorded net of value added tax. Match & More and other initiatives The fair value of Match & More and other initiatives is determined to be the value to the customer of the points issued, adjusted for factors such as the expected redemption rate. Given Match & More was launched in the year the Company will continue to assess the appropriateness of the rates against actual redemptions going forward. The fair value is treated as a deduction from revenue at the time the points are issued, and is deferred until the rewards are redeemed by the customer in a future sale. Cost of sales Cost of sales consists of all costs to the point of sale including property, manufacturing, warehouse and transportation costs. Store depreciation, store overheads and store-based employee costs are also allocated to cost of sales. Other operating income Other operating income primarily consists of income not directly related to grocery retailing and mainly comprises rental incomes and income generated from recycling of packaging. Rental income arising from operating leases is accounted for on a straight-line basis to the date of the next rent review. Investments Investments in subsidiary undertakings and joint ventures Investments in subsidiary undertakings and joint ventures are stated at cost less provision for impairment. Investments in equity instruments All equity instruments are held for long term investment and are measured at fair value, where the fair value can be measured reliably. Where the fair value of the instruments cannot be measured reliably, the investment will be recognised at cost less accumulated impairment losses in accordance with FRS 26 ‘Financial instruments: recognition and measurement’. Any impairment is recognised immediately in profit or loss. Tangible assets Tangible assets are stated at cost less accumulated depreciation and accumulated impairment losses. Costs include directly attributable costs. Annual reviews are made of estimated useful lives and material residual values. Depreciation The policy of the Company is to provide depreciation at rates that are calculated to write off the cost less residual value of tangible ﬁxed assets on a straight-line basis. The rates applied are: Freehold land Freehold buildings Leasehold improvements Plant, equipment, ﬁxtures and vehicles Software development costs 10% to 33% Assets under construction 0% 0% 2.5% Over the shorter of lease period and 2.5% 10% to 33% Fixed assets are reviewed for indications of impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. This is performed for each income generating unit, which in the case of a supermarket is an individual retail outlet. If there are indications of possible impairment, then a test is performed on the asset affected to assess its recoverable amount against carrying value. An impaired asset is written down to its recoverable amount, which is the higher of value in use or its net realisable value. In assessing value in use, the estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the asset. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 115 11 Company ﬁnancial statements continued 11.1 Accounting policies continued If there is indication of an increase in fair value of an asset that had been previously impaired, then this is recognised by reversing the impairment, but only to the extent that the recoverable amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised for the asset. Software development costs Costs that are directly attributable to the creation of identiﬁable software, which meet the development asset recognition criteria as laid out in FRS 15 ‘Tangible ﬁxed assets’ are recognised as tangible assets. Direct costs include consultancy costs, the employment costs of internal software developers and borrowing costs. All other software development and maintenance costs are recognised as an expense when incurred. Software development assets are held at historical cost less accumulated depreciation and impairment, and are depreciated over their estimated useful lives (3 to 10 years) on a straight-line basis. Financial instruments Trade and other debtors Trade and other debtors are initially recognised at fair value, which is generally equal to face value, and subsequently held at amortised cost. Provision is made when there is objective evidence that the Company will not be able to recover balances in full, with the charge being recognised in the proﬁt and loss account. Balances are written off when the probability of recovery is assessed as being remote. Cash at bank and in hand Cash at bank and in hand includes cash-in-hand, cash-at-bank and bank overdrafts. In the balance sheet, bank overdrafts that do not have a right of offset are presented within current liabilities. Trade and other creditors Trade and other creditors are initially stated at fair value, which is generally equal to face value, and subsequently held at amortised cost. Borrowings Borrowings are initially recorded at fair value, net of attributable transaction costs. Subsequent to initial recognition, any difference between the redemption value and the initial carrying amount is recognised in proﬁt for the period over the period of the borrowings on an effective interest rate basis. Derivative ﬁnancial instruments Derivative ﬁnancial instruments are initially measured at fair value, and are remeasured at fair value through proﬁt or loss, except where the derivative qualiﬁes for hedge accounting. Cash ﬂow hedges A cash ﬂow hedge mitigates the Company’s exposure to variability in cash ﬂows attributable either to a recognised asset or liability or a highly probable forecasted transaction. The Company has cross-currency swaps and energy price contracts designated as cash ﬂow hedges. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s The effective part of any movement in the fair value of the derivative is recognised in the statement of total recognised gains and losses (STRGL) and presented in the hedging reserve within equity. Ineffectiveness is immediately recognised in proﬁt for the period, energy price contracts within cost of sales and cross-currency swaps within ﬁnance income/costs. Cumulative gains or losses on derivatives held in the hedging reserve are reclassiﬁed into proﬁt for the period when the transaction occurs. Fair value hedges A fair value hedge mitigates the Company’s exposure to changes in fair value of a recognised asset or liability or a ﬁrm commitment. The change in fair value of the hedged asset or liability that is attributable to the hedged risk is recognised in proﬁt for the period. Capital management The capital management policy of the Company is consistent with that of the Group set out in note 6.7. Borrowing costs All borrowing costs are recognised in the Company’s proﬁt and loss account on an accruals basis, except for interest costs that are directly attributable to the construction of buildings and other qualifying assets which are capitalised and included within the initial cost of the asset. Capitalisation commences when both expenditure on the asset and borrowing costs are being incurred, and necessary activities to prepare the asset for use are in progress. In the case of new stores, this is generally once planning permission has been obtained. Capitalisation ceases when the asset is ready for use. Interest is capitalised at the effective rate incurred on borrowings before taxation of 5% (2014: 5%). Pension costs A deﬁned contribution scheme is a pension scheme under which the Company pays ﬁxed contributions into a separate entity and provides no guarantee as to the quantum of retirement beneﬁts that those contributions will ultimately purchase. A deﬁned beneﬁt scheme is one that is not a deﬁned contribution scheme. Pension scheme assets are valued at market rates. Pension scheme obligations are an estimate of the amount required to pay the beneﬁts that employees have earned in exchange for current and past service, assessed and discounted to present value using the assumptions shown in note 11.10). The net pension liability or asset recognised in the Company’s balance sheet is the net of the schemes’ assets and obligations, which are calculated separately for each scheme. The operating and ﬁnancing costs of the schemes are recognised separately in the proﬁt and loss account in the period in which they arise. Death-in-service costs are recognised on a straight-line basis over their vesting period. Actuarial gains and losses are recognised immediately in the STRGL. A liability or asset is recognised in the balance sheet in respect of the Company’s net obligations to the schemes and is stated net of deferred tax. Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange at the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currency are retranslated at the rates of exchange at the balance sheet date. Gains and losses arising on retranslation are included in the proﬁt and loss account for the period. 116 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Wm Morrison Supermarkets PLC – Company accounting policies continued 52 weeks ended 1 February 2015 11 Company ﬁnancial statements continued 11.1 Accounting policies continued Provisions Provisions are created where the Company has a present obligation as a result of a past event, where it is probable that it will result in an outﬂow of economic beneﬁts to settle the obligation, and where it can be reliably measured. For petrol ﬁlling station decommissioning costs this is when the ﬁlling station is ﬁrst constructed and for dilapidations on leased buildings, when the lease is entered into. Provisions for onerous leases are recognised when the Company believes that the unavoidable costs of meeting the lease obligations exceed the economic beneﬁts expected to be received under the lease. The amounts provided are based on the Company’s best estimate of the least net cost of exit. Where material, these estimated outﬂows are discounted to net present value using a pre- tax rate that reﬂects current market assumptions. The unwinding of this discount is recognised as a ﬁnancing cost in the proﬁt and loss account. Leases Leases in which substantially all the risks and rewards of ownership are retained by the lessor are classiﬁed as operating leases; all other leases are classiﬁed as ﬁnance leases. Lessor accounting – operating leases Assets acquired and held for use under operating leases are recorded as ﬁxed assets and are depreciated on a straight-line basis to their estimated residual values over their estimated useful lives. Operating lease income is recognised on a straight-line basis to the date of the next rent review. Sale and leaseback The accounting treatment of the sale and leaseback depends upon the substance of the transaction (by applying the lease classiﬁcation principles described above). For sale and operating leasebacks, the assets are sold at fair value, and accordingly the proﬁt or loss from the sale is recognised immediately in the proﬁt and loss account. A number of new property operating leases have been entered into in the year ended 1 February 2015 (see property commitments note 6.8). When forming the conclusion of operating lease classiﬁcation, consideration was given to the key lease classiﬁcation indicators of SSAP 21. The leases are typically for a 25 year period. The Directors have reviewed the remaining useful lives for these particular properties and concluded they are signiﬁcantly longer than the period of the lease. As disclosed on page 88 a review of the useful economic lives of each of the property, plant and equipment categories has been performed in the year with no changes made. Other key indicators considered in reaching an operating lease classiﬁcation were the present value of the minimum lease payments and the ownership clauses in the contracts upon expiry of the lease. Lessee accounting – operating leases Rental payments are taken to the proﬁt and loss account on a straight-line basis over the life of the lease. Lessee accounting – ﬁnance leases The lower of the fair value and the present value, calculated using the interest rate implicit in the lease, of the future minimum lease payments is included within property, plant and equipment and ﬁnancial liabilities as an obligation to pay future rentals. Depreciation is provided at the same rates as for owned assets, or over the lease period, if shorter. Rental payments are apportioned between the ﬁnance charge and the outstanding obligation so as to produce a constant rate of ﬁnance charge on the remaining balance. Deferred and current taxation Current tax payable is based on the taxable proﬁt for the period using tax rates in effect during the period. Taxable proﬁt differs from the proﬁt as reported in the proﬁt and loss account as it is adjusted both for items that will never be taxable or deductible and timing differences. Deferred tax is provided in full on timing differences which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at average rates expected to apply when they crystallise, based on tax rates enacted or substantively enacted at the balance sheet date. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in different periods from those in which they are included in the ﬁnancial statements. A net deferred tax asset is recognised only when it is recoverable on the basis that it is more likely than not that there will be suitable taxable proﬁts against which to recover carried forward tax losses and from which the future reversal of underlying timing differences can be deducted. Deferred tax assets and liabilities are not discounted. Stock Stock represents goods for resale and is measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale. Cost is calculated on a weighted average basis and comprises purchase price, import duties and other non-recoverable taxes, reduced by commercial income and a provision for estimated losses relating to shrinkage. Losses relating to shrinkage in stores are based on historical losses veriﬁed by physical stock counts conducted by an independent third party. Provision is made for obsolete and slow moving items. Share−based payments The Company issues equity-settled share-based payments to certain employees in exchange for services rendered by them. The fair value of the share-based award is calculated at the date of grant and is expensed on a straight-line basis over the vesting period with a corresponding increase in equity. This is based on the Company’s estimate of share options that will eventually vest. This takes into account movement of non-market conditions, being service conditions and ﬁnancial performance, if relevant. Fair value is measured by use of a binomial stochastic option pricing model. The expected life used in the model has been adjusted, based on management’s best estimate, for effects of non-transferability, exercise restrictions and behavioural considerations. The cost of the share-based award relating to each subsidiary is calculated, based on an appropriate apportionment, and recharged through intercompany. Financial contracts Where the Company enters into ﬁnancial contracts to guarantee the indebtedness of other companies within its Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. Share capital Ordinary shares are classiﬁed as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where the Company has purchased its own equity share capital, the consideration paid, including directly attributable incremental costs, is deducted from retained earnings until the shares are cancelled. On cancellation, the nominal value of the shares is deducted from share capital and the amount is transferred to the capital redemption reserve. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 117 Notes to the Company ﬁnancial statements 52 weeks ended 1 February 2015 11 Company ﬁnancial statements continued 11.1 Accounting policies continued Exemptions The Company has taken advantage of the exemption from the disclosure requirements of FRS 29 ‘Financial instruments: disclosures’. The cash ﬂows of the Company and ﬁnancial instruments disclosures are included in the consolidated ﬁnancial statements. The Company is exempt under the terms of FRS 8 ‘Related parties’ from disclosing related party transactions with wholly owned entities that are part of the Wm Morrison Supermarkets PLC Group. The Company has taken advantage of the exemption available under section 408 of the Companies Act 2006 and not presented a proﬁt and loss account for the Company. 11.2 Proﬁt and loss account The proﬁt after tax for the Company for the 52 week period ended 1 February 2015 was £1,055m (52 weeks ended 2 February 2014: £1,023m). The Company’s auditor, PricewaterhouseCoopers LLP (2014: KPMG Audit Plc), charged £0.4m (2014: £0.4m) for audit services in the year, £nil (2014: £0.1m) for services related to taxation and £0.3m (2014: £0.1m) for other services. 11.3 Intangible and tangible assets 11.3.1 Intangible assets Cost At 3 February 2014 Additions at cost At 1 February 2015 Accumulated depreciation and impairment At 3 February 2014 Charged in the period At 1 February 2015 Net book value At 1 February 2015 At 2 February 2014 Intangible assets primarily consist of purchased technology required to operate an online grocery business. Acquired intangibles £m 30 − 30 − 4 4 26 30 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 118 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Company ﬁnancial statements continued 52 weeks ended 1 February 2015 11 Company ﬁnancial statements continued 11.3 Intangible and tangible assets continued 11.3.2 Tangible assets Cost At 3 February 2014 Additions Interest capitalised Reclassiﬁcations Transfers Disposals At 1 February 2015 Accumulated depreciation and impairment At 3 February 2014 Charged in the period Reclassiﬁcations Transfers Impairment Disposals At 1 February 2015 Net book value At 1 February 2015 At 2 February 2014 Land and buildings Freehold £m 3,436 25 − (484) 28 (402) 2,603 855 109 (175) 2 186 (93) 884 1,719 2,581 Leasehold £m Plant, equipment, ﬁxtures & vehicles £m Software development costs £m 624 173 − − − (75) 722 251 13 − − 168 (13) 419 303 373 1,722 185 9 (168) − (68) 1,680 1,135 113 (2) − 127 (62) 1,311 369 587 − − − 652 − − 652 − − 177 − − − 177 475 − Total £m 5,782 383 9 − 28 (545) 5,657 2,241 235 − 2 481 (168) 2,791 2,866 3,541 In previous years software development costs have been held within other categories of property, plant and equipment. In order to provide greater understanding of the depreciation charge, these have been reclassiﬁed and presented separately above. Included in the note above is an amount of £907m (2014: £955m) relating to non-depreciable land and £163m (2014: £222m) of assets under construction. The cost of assets held under ﬁnance leases at 1 February 2015 is £336m (2014: £285m), with related accumulated depreciation of £101m (2014: £75m). The cost of property assets held as lessor included above is £57m at 1 February 2015 (2014: £144m) and accumulated depreciation of £46m (2014: £42m). The cost of ﬁnancing asset developments prior to them being ready for use has been included in the cost of the project. The cumulative amount of interest capitalised in the total cost above amounts to £128m (2014: £119m). Interest is capitalised at the effective interest rate of 5% (2014: 5%) incurred on borrowings. Included in the charge for the period is an impairment charge of £481m. The events and circumstances resulting in this loss are explained in note 1.4 and the key assumptions used in the calculation of recoverable amount are discussed in note 3.3. 11.4 Derivative ﬁnancial assets Current assets Forward foreign currency contracts 2015 £m 6 6 2014 £m 1 1 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 119 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 11 Company ﬁnancial statements continued 11.5 Investments Cost At 3 February 2014 Disposals At 1 February 2015 Provision for impairment At 3 February 2014 Disposals At 1 February 2015 Net book value At 1 February 2015 and 2 February 2014 Investment in equity instruments £m Investment in subsidiary undertakings £m 31 – 31 – – – 3,510 (70) 3,440 71 (70) 1 Total £m 3,541 (70) 3,471 71 (70) 1 31 3,439 3,470 On 11 July 2014, the Company disposed of Kiddicare.com Limited to Endless LLP. A list of the Company’s principal subsidiaries is shown in note 4.2. The Directors believe that the carrying value of remaining investments is supported by their underlying net assets. 11.6 Debtors – amounts falling due within one year Trade debtors Amounts owed by Group undertakings Other debtors Prepayments 2015 £m 118 1,950 6 216 2,290 2014 £m 167 2,258 14 385 2,824 Prepayments includes £180m (2014: £330m) relating to amounts falling due after more than one year. Amounts owed by Group undertakings are unsecured, interest free, and repayable on demand. 11.7 Creditors – amounts falling due within one year Trade creditors Amounts owed to Group undertakings Other taxation and social security Other creditors Bank overdraft Term loan Foreign currency swaps Energy price contracts Accruals and deferred income Amounts owed to Group undertakings are unsecured, interest free and repayable on demand. 2015 £m 1,379 113 73 89 24 − 6 12 315 2,011 2014 £m 1,247 2,087 63 73 155 400 4 6 256 4,291 120 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Company ﬁnancial statements continued 52 weeks ended 1 February 2015 11 Company ﬁnancial statements continued 11.8 Creditors – amounts falling due after more than one year Revolving credit facility $250m US private placement loan notes (USPP) 4.4% November 2026 £400m sterling bonds 4.625% December 2023 £400m sterling bonds 3.50% July 2026 €700m euro bond 2.25% June 2020 £300m sterling bonds 4.75% July 2029 Amounts owed to Group undertakings Cross-currency swaps and interest rate swaps Energy price contracts 2015 £m 314 164 397 421 518 291 191 45 5 2,346 2014 £m 572 149 397 389 569 – 208 34 2 2,320 Borrowings are denominated in sterling, US dollars and euros, and bear ﬁxed interest rates, with the exception of the revolving credit facility which bears ﬂoating interest rates. All borrowings are unsecured. In July 2014, the Company issued a £300m sterling bond at a ﬁxed interest rate of 4.75% expiring in July 2029. This is part of the Company’s £3bn Euro Medium Term Note programme. In September 2014 the Company entered into a new ﬁve year syndicated committed revolving credit facility of £1.35bn, replacing the £1.2bn facility that was due to mature in March 2016. The revolving credit facility incurs commitment fees at market rates and drawdowns bear interest at a spread above LIBOR. In the event of default of covenants on the bank facility, the principal amounts and any interest accrued are repayable on demand. Finance leases Net obligations under ﬁnance leases of £191m (2014: £139m) are payable in two to ﬁve years, and are included in amounts owed to Group undertakings in the table above. 11.9 Provisions for liabilities At 3 February 2014 Charge/(credit) recognised in proﬁt and loss Credit recognised directly in the STRGL (Utilised)/released during the period Unwinding of discount At 1 February 2015 Onerous lease provision £m Other property provisions £m Deferred taxation £m 88 117 − (3) 3 205 10 – − − 1 11 87 (22) (2) − − 63 Total £m 185 95 (2) (3) 4 279 Further details of the property provisions are provided in note 5.5. The potential deferred taxation on timing differences, calculated at 20% (2014: 20%), is set out below and has been provided for in full. Excess of capital allowances over depreciation Provisions and short term timing differences Provision at the period end excluding deferred tax on pension asset Deferred tax liability on pension asset (note 11.10.3) Provision at the period end including deferred tax on pension asset 2015 £m 100 (37) 63 3 66 2014 £m 114 (27) 87 3 90 The deferred tax liability of £3m (2014: £3m) relating to the pension asset has been deducted in arriving at the net pension asset on the balance sheet. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 121 11 Company ﬁnancial statements continued 11.10 Pensions 11.10.1 CARE scheme The Company operates a deﬁned beneﬁt pension scheme (‘CARE’) and a cash balance scheme. The CARE scheme is called the Wm Morrison 1967 Pension Scheme and provides beneﬁts deﬁned on retirement based on age at date of retirement, years of service and a formula using either the employee’s compensation package or career average revalued earnings (CARE). The Retirement saver plan (‘RSP’) is a cash balance scheme, which provides a lump sum beneﬁt based upon a deﬁned proportion of an employee’s annual earnings, which is revalued each year in line with inﬂation. The latest full actuarial valuations have been carried out as at 5 April 2013 for the CARE Scheme and the RSP. The results of these valuations have been used and updated for FRS 17 ‘Retirement beneﬁts’ purposes for the period to 1 February 2015 by a qualiﬁed independent actuary. The Group has previously entered into a pension funding partnership structure under which it has contributed interests in a Scottish Limited Partnership (SLP) valued at £90m (as at 31 January 2013) to the Group’s two CARE Schemes, of which £30m (as at 31 January 2013) related to the Morrison CARE Scheme. The CARE Schemes’ interests in the SLP reduce the respective deﬁcits on a funding basis and an accounting basis because the investments held by the CARE Schemes qualify as assets for FRS 17 purposes. As partners in the SLP, the CARE Schemes are entitled to receive a share of the proﬁts of the SLP twice a year for 20 years. The SLP made a cash contribution of £6.6m (£2.2m during the year ending 1 February 2015) and will make annual contributions of £6.6m (£2.2m in respect of the Morrison CARE Scheme) for a further 18 years. 11.10.2 Assumptions The major assumptions used in this valuation to determine the present value of the scheme’s deﬁned beneﬁt obligation are shown below. Financial Rate of increase in salaries Rate of increase in pensions in payment and deferred pensions Discount rate applied to scheme liabilities Inﬂation assumption (RPI/CPI) 2015 CARE 2015 RSP 2014 CARE 2014 RSP 3.10% 2.30% 2.10% to 3.10% 1.80% to 2.30% 3.10% 3.10%/2.30% 3.10% 3.10%/2.30% 3.50% 2.30% to 3.50% 4.50% 3.50%/2.70% 2.70% 2.10% to 2.50% 4.40% 3.50%/2.70% Longevity The average life expectancy in years of a member who reaches normal retirement age of 65 and is currently aged 45 is as follows: Male Female 2015 CARE 24.2 25.8 2015 RSP n/a n/a The average life expectancy in years of a member retiring at the age of 65 at balance sheet date is as follows: Male Female 2015 CARE 22.0 23.4 2015 RSP n/a n/a 2014 CARE 24.7 25.6 2014 CARE 22.3 23.2 2014 RSP n/a n/a 2014 RSP n/a n/a Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with published statistics. The longevity assumption considers how long a member will live when they reach the age of retirement. Amongst the UK population there is a continuing trend for a generation to live longer than the preceding generation, and this has been reﬂected in the longevity assumption. This means that a 45 year-old today is assumed to live on average longer than a 65 year-old today. The projection used as at 1 February 2015 is the CMI 2012 projection table and incorporates a long term rate of improvement in longevity of 1.5% pa. This compares to a projection of 80%/60% (males/females) of the ‘long cohort’ projection as at 2 February 2014. In calculating the present value of the liabilities an appropriate mortality table that reﬂects the longevity assumption is used. The current mortality table used is 110% S1PFA/110% S1PFA-Heavy YOB (2014: S1PMA/S1PFA-Heavy YOB). S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 122 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Company ﬁnancial statements continued 52 weeks ended 1 February 2015 11 Company ﬁnancial statements continued 11.10 Pensions continued The major assumptions used to determine the expected future return on the scheme’s assets, were as follows: Long term rate of return on: Equities Bonds Gilts Liability driven investments Scottish Limited Partnership Cash 2014 CARE 7.40% 4.50% 3.40% 3.40% 4.65% 1.10% 2014 RSP 7.40% n/a n/a n/a n/a n/a The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. Due to changes in UK accounting standards which apply to the Company from 1 February 2015 the expected return on scheme assets assumptions is no longer required. 11.10.3 Valuations The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject to signiﬁcant change before they are realised, and the present value of the scheme’s liabilities which are derived from cash ﬂow projections over long periods and are inherently uncertain, were as follows: Equities Bonds Gilts Liability driven investments Scottish Limited Partnership Cash Total market value of assets Present value of scheme liabilities Net pension asset Related deferred tax liability Net pension asset after deferred tax The movement in the fair value of the scheme’s assets over the period was as follows: Fair value of scheme assets at start of period Expected return on scheme assets Actuarial gain Employer contributions Employee contributions Beneﬁts paid Recognition of RSP scheme assets at end of period Fair value of scheme assets at end of period 2015 CARE £m 364 288 − 421 32 1 1,106 (1,095) 11 (2) 9 2015 CARE £m 817 44 239 21 1 (16) − 1,106 2015 RSP £m 87 − − − − − 87 (83) 4 (1) 3 2015 RSP £m 39 4 7 39 2 (4) − 87 2014 CARE £m 339 228 2 218 29 1 817 (805) 12 (3) 9 2014 CARE £m 745 41 19 18 5 (11) − 817 2014 RSP £m 39 − − − − − 39 (37) 2 – 2 2014 RSP £m − − − − − − 39 39 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 123 11 Company ﬁnancial statements continued 11.10 Pensions continued The movement in the present value of the deﬁned beneﬁt obligation during the period was as follows: Deﬁned beneﬁt obligation at the beginning of the period Current service cost Employee contributions Other ﬁnance income Actuarial loss Beneﬁts paid Recognition of RSP scheme assets at end of period Deﬁned beneﬁt obligation at the end of the period 2015 CARE £m (805) (24) (1) (36) (245) 16 − (1,095) 2015 RSP £m (37) (37) (2) (2) (9) 4 − (83) 11.10.4 Sensitivities Listed below is the impact on the liabilities of changing key assumptions whilst holding other assumptions constant: Discount factor Longevity +/− 0.1% +/− 1 year 2015 CARE £m −/+28 +/− 44 11.10.5 Proﬁt and loss account impact The following amounts have been charged in arriving at operating proﬁt in respect of pension costs: Current service cost 2015 CARE £m (24) 2015 RSP £m −/+2 n/a 2015 RSP £m (37) The amounts for current service cost and pensions credit have been charged in the following proﬁt and loss account lines: Cost of sales Administrative expenses The following amounts have been included in other ﬁnance income: Expected return on pension scheme assets Interest on pension scheme liabilities 2015 CARE £m (19) (5) (24) 2015 CARE £m 44 (36) 8 2015 RSP £m (30) (7) (37) 2015 RSP £m 4 (2) 2 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2014 RSP £m − − − − − − (37) (37) 2014 RSP £m − n/a 2014 RSP £m − 2014 RSP £m − − − 2014 RSP £m − − − 2014 CARE £m (717) (16) (5) (35) (43) 11 − (805) 2014 CARE £m −/+ 20 +/− 25 2014 CARE £m (16) 2014 CARE £m (13) (3) (16) 2014 CARE £m 41 (35) 6 124 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Company ﬁnancial statements continued 52 weeks ended 1 February 2015 11 Company ﬁnancial statements continued 11.10 Pensions continued 11.10.6 Amounts recognised in the statement of total recognised gains and losses The amounts included in the Statement of total recognised gains and losses (STRGL) were: Actual return less expected return on scheme assets Experience gains and losses arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Recognition of the RSP in the balance sheet at the end of the period Actuarial loss recognised in the STRGL Cumulative gross actuarial movement recognised in the STRGL Taxation on cumulative actuarial movement recognised in the STRGL Cumulative net actuarial movement recognised in the STRGL The actual return on scheme assets can therefore be summarised as follows: Expected return on scheme assets Actuarial movement recognised in the STRGL reﬂecting the difference between expected and actual return on assets Actual return on scheme assets 2015 CARE £m 239 − (245) − (6) 2015 CARE £m (152) − (152) 2015 CARE £m 44 239 283 2015 RSP £m 7 7 (16) − (2) 2015 RSP £m 2 − 2 2015 RSP £m 4 7 11 2014 CARE £m 19 (7) (36) − (24) 2014 CARE £m (190) 38 (152) 2014 CARE £m 41 19 60 2014 RSP £m − − − 2 2 2014 RSP £m 2 – 2 2014 RSP £m n/a n/a n/a The expected return on scheme assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on ﬁxed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity and property investments reﬂect long term real rates of return experienced in the respective markets. 11.10.7 History of experience gains and losses Difference between the expected and actual return on scheme assets: Amount Percentage of scheme assets Experience gains and losses arising on scheme liabilities: Amount Percentage of present value of scheme liabilities Effects of changes in the demographic and ﬁnancial assumptions underlying the present value of the scheme liabilities: Amount Percentage of present value of scheme liabilities Total amount recognised in statement of total recognised gains and losses: Amount Percentage of present value of scheme liabilities Total value of scheme assets Present value of deﬁned beneﬁt obligation Net pension asset 2015 £m 2014 £m 2013 £m 2012 £m 2011 £m 246 20.6% 7 0.6% (261) (22.2)% (8) (0.68)% 1,193 (1,178) 15 19 2.3% (7) (0.9)% (36) (4.4)% (24) (3.0)% 817 (805) 12 37 5.0% – – (39) (5.4)% (2) (0.3)% 745 (717) 28 36 5.6% 1 0.3% (58) (9.1)% (21) (3.3)% 638 (638) – 13 2.4% (52) (9.7)% 20 3.7% (19) (3.5)% 553 (537) 16 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 125 11 Company ﬁnancial statements continued 11.11 Reconciliation of movements in equity shareholders’ funds Proﬁt for the ﬁnancial period Cash ﬂow hedging movement Actuarial losses on pension schemes Tax relating to pension schemes and cash ﬂow hedging Purchase of trust shares Shares purchased for cancellation Share options exercised net of treasury shares purchased Share-based payments (note 11.14) Dividends (note 1.8) Net increase in equity shareholders’ funds Opening equity shareholders’ funds Closing equity shareholders’ funds 11.12 Share capital Authorised 4,000 million ordinary shares of 10p each (2014: 4,000 million) Issued and fully paid 2,335 million ordinary shares of 10p each (2014: 2,335 million) Ordinary shares At start of period Shares cancelled Share options exercised At end of period 11.13 Reserves S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2014 £m 1,023 – (24) (2) – (53) 28 6 (283) 695 3,092 3,787 2014 £m 400 234 2014 £m 235 (2) 1 234 2015 £m 1,055 (9) (8) 2 (8) − − 11 (308) 735 3,787 4,522 2015 £m 400 234 2015 £m 234 − − 234 At start of period Proﬁt for the period Cash ﬂow hedging movement Actuarial losses on pension schemes Tax relating to pension schemes and cash ﬂow hedging Purchase of trust shares Share-based payments Dividends At end of period Share premium account £m Capital redemption reserve £m Merger reserve £m Hedging reserve £m Proﬁt and loss account £m 127 − − − − − − − 127 39 − − − − − − − 39 2,578 − − − − − − − 2,578 (15) − (9) − 2 − − − (22) 824 1,055 − (8) − (8) 11 (308) 1,566 126 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Financial statements Notes to the Company ﬁnancial statements continued 52 weeks ended 1 February 2015 11 Company ﬁnancial statements continued 11.13 Reserves continued Capital redemption reserve The capital redemption reserve at the start of the period related to 389,631,561 of the Company’s own shares which it purchased on the open market for cancellation between 31 March 2008 and 8 March 2013 at a total cost of £1,081m. Merger reserve The merger reserve represents the reserve arising on the acquisition in 2004 of Safeway Limited. In the opinion of the Directors, this reserve is not distributable and accordingly it will be carried forward as a capital reserve. Hedging reserve This represents the gains and losses arising on derivatives used for cash ﬂow hedging. 11.14 Share−based payments The disclosure requirements for FRS 20 ‘Share-based payment’ are identical to that of IFRS 2 ‘Share-based payment’. The charge for the year relating to the Company net of tax was £11m (2014: £6m). Full IFRS 2 disclosures are provided in section 9. 11.15 Capital commitments Contracts placed for future capital expenditure not provided in the ﬁnancial statements (property, plant and equipment and intangible assets) 2015 £m 144 2014 £m 129 11.16 Operating lease commitments Annual commitments under non-cancellable operating leases: Expiring within one year Expiring within two to ﬁve years inclusive Expiring over ﬁve years 11.17 Contingent liabilities 2015 2014 Land and buildings £m Plant, equipment, ﬁxtures and vehicles £m Land and buildings £m Plant, equipment, ﬁxtures and vehicles £m − 2 63 65 2 13 − 15 1 2 37 40 1 11 – 12 The Company has given an unlimited guarantee in respect of the overdraft of all the subsidiary undertakings within the Group’s banking offset agreement. The overdraft position at 1 February 2015 was £178m (2014: £21m). The Company has also provided a guarantee in respect of sterling bonds amounting to £440m at fair value (2014: £605m) in respect of a subsidiary undertaking. Where the Company enters into ﬁnancial contracts to guarantee the indebtedness of other companies within its Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. 11.18 Related party transactions The Company has taken the exemption available in FRS 8 ‘Related parties’ from disclosing related party transactions with wholly owned entities that are part of the Wm Morrison Supermarkets PLC Group. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 127 Five year summary 52 weeks ended 1 February 2015 Consolidated statement of comprehensive income Turnover Cost of sales Gross proﬁt Other operating income Proﬁt/loss arising on disposal and exit of properties and sale of businesses Administrative expenses Operating (loss)/proﬁt Finance costs Finance income Share of proﬁt of joint venture (net of tax) (Loss)/proﬁt before taxation Analysed as: Underlying proﬁt before tax Impairment and onerous lease provisions Proﬁt/loss on disposal and exit of properties Proﬁt arising on disposal of Kiddicare.com Limited Net pension interest income/(cost) Taxation (Loss)/proﬁt for the period attributable to the owners of the Company Earnings per share (pence) – basic – diluted – underlying basic (2014 restated) Dividend per ordinary share (pence) 2015 £m 16,816 (16,055) 761 78 135 (1,670) (696) (105) 7 2 (792) 345 (1,273) 131 4 1 (792) 31 (761) (32.63) (32.63) 10.93 13.65 2014 £m 17,680 (16,606) 1,074 81 9 (1,259) (95) (87) 5 1 (176) 719 (903) 9 – (1) (176) (62) (238) (10.23) (10.23) 23.08 13.00 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2013 £m 18,116 (16,910) 1,206 80 2012 £m 17,663 (16,446) 1,217 86 2011 £m 16,479 (15,331) 1,148 80 (1) (336) 949 (75) 5 – 879 880 – (1) – – 879 (232) 647 26.65 26.57 27.26 11.80 (1) (329) 973 (47) 21 – 947 948 – (1) – – 947 (257) 690 26.68 26.03 25.55 10.70 (1) (323) 904 (43) 13 – 874 875 – (1) – – 874 (242) 632 23.93 23.43 23.03 9.60 128 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Investor information Five year summary continued 52 weeks ended 1 February 2015 Consolidated balance sheet Assets Goodwill and intangible assets Property, plant and equipment Investment property Net pension asset Investment in joint venture Investments Other ﬁnancial assets Non-current assets Current assets Non-current assets classiﬁed as held-for-sale Liabilities Current liabilities Other ﬁnancial liabilities Deferred tax liabilities Net pension liabilities Provisions Non-current liabilities Net assets Shareholders’ equity Called-up share capital Share premium Capital redemption reserve Merger reserve Retained earnings and hedging reserves Total equity attributable to the owners of the Company 2015 £m 520 7,252 68 4 68 31 − 7,943 1,144 84 (2,273) (2,558) (415) (43) (288) (3,304) 3,594 234 127 39 2,578 616 3,594 2014 £m 458 8,625 119 – 66 31 – 9,299 1,430 – (2,873) (2,516) (430) (11) (207) (3,164) 4,692 234 127 39 2,578 1,714 4,692 2013 £m 2012 £m 2011 £m 415 8,616 123 – – 31 – 9,185 1,342 – (2,334) (2,396) (471) (20) (76) (2,963) 5,230 235 107 37 2,578 2,273 5,230 303 7,943 259 – – 31 1 8,537 1,322 – (2,303) (1,600) (464) (11) (84) (2,159) 5,397 253 107 19 2,578 2,440 5,397 184 7,557 229 38 – – 3 8,011 1,138 – (2,086) (1,052) (499) – (92) (1,643) 5,420 266 107 6 2,578 2,463 5,420 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 129 Supplementary information 52 weeks ended 1 February 2015 (Decrease)/increase on previous year % Turnover Operating (loss)/proﬁt (Loss)/proﬁt before taxation (Loss)/proﬁt after taxation Underlying proﬁt before taxation Diluted earnings per share Dividend per ordinary share % of turnover Operating proﬁt (Loss)/proﬁt before taxation (Loss)/proﬁt after taxation Retail portfolio Size 000s square feet (net sales area) 0–5 5–15 15–25 25–40 40+ Total number of stores Petrol ﬁlling stations Total sales area (000s square feet) Total sales area excluding convenience (000s square feet) Average store size (000s square feet)2 Average sales area (000s square feet)1 Total supermarket takings ex petrol (gross) £m2 Average takings per square feet per week (£)2 Average takings per store per week ex petrol (£000)2 Average number of customers per store per week2 Average take per customer (£)2 Employees Full time Part time Total Full time equivalent (average) Average per FTE employee: Turnover (£000s) Operating proﬁt (£) Employee costs (£) 1 Includes sales area of divested stores. 2 Excludes convenience. 3 Before non-recurring exceptional costs. S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2015 % 2014 % 2013 % 2012 % 2011 % (4.89) (44.60) 349.35 219.38 (52.02) (218.96) 5.00 (2.41) (14.86)3 (120.02) (136.79) (12.87) (138.50) 10.17 2.63 (4.71) (4.52) 4.573 (1.00) (1.35) 153 75 126 260 53 667 334 14,723 14,332 27.9 14,442 14,033 19.11 518 22,034 23.83 48,519 71,259 119,778 85,545 197 5,167 23,029 102 76 123 252 52 605 328 14,233 13,976 27.8 13,640 14,593 20.58 558 22,874 24.41 52,315 75,088 127,403 90,264 196 8,9523 21,847 2.56 (2.47) (7.18) (6.23) (3.64) 1.92 10.28 5.24 4.85 3.57 12 64 135 239 48 498 312 13,421 13,383 26.9 13,396 14,875 21.62 591 23,905 24.73 56,177 72,528 128,705 91,760 197 10,342 21,327 7.18 7.63 8.35 9.18 7.56 11.10 11.46 5.51 5.36 3.91 3 65 135 228 44 475 300 12,904 12,894 27.4 12,456 14,585 22.52 618 25,083 24.62 57,169 74,038 131,207 94,114 188 10,339 19,530 6.94 10.78 1.86 5.69 13.30 4.74 17.07 5.49 5.30 3.84 – 45 137 213 44 439 296 12,261 12,261 27.9 11,959 13,916 22.38 624 25,583 24.40 58,287 73,787 132,074 95,181 173 9,498 19,311 The impact of week 53 in the period ended 3 February 2013 was to increase turnover by £328m and increase proﬁt before taxation by £11m. 130 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Investor information Investor relations and ﬁnancial calendar Financial calendar 2015/16 Annual General Meeting Financial events and dividends Quarterly management statement Final dividend record date Annual General Meeting Final dividend payment date Half year end Interim results announcement Interim dividend record date Interim dividend payment date Quarterly management statement Financial year end Company Secretary Mark Amsden Registered office Wm Morrison Supermarkets PLC Hilmore House Gain Lane Bradford BD3 7DL Telephone: 0845 611 5000 www.morrisons.com Investor relations Telephone: 0845 611 5710 Email: accinvr@morrisonsplc.co.uk Corporate responsibility enquiries Telephone: 0845 611 5000 7 May 2015 8 May 2015 4 Jun 2015 10 Jun 2015 2 Aug 2015 10 Sep 2015 1 Oct 2015 5 Nov 2015 9 Nov 2015 31 Jan 2016 The AGM will be held on 4 June 2015 at Wm Morrison Supermarkets PLC Head Office, Gain Lane, Bradford BD3 7DL. A separate notice convening the meeting is sent to shareholders, which includes an explanation of the items of special business to be considered at the meeting. Dividend reinvestment plan The Company has a dividend reinvestment plan which allows shareholders to reinvest their cash dividends in the Company’s shares bought in the market through a speciﬁcally arranged share dealing service. Full details of the plan and its charges, together with mandate forms, are available from the Registrars. Morrisons website Shareholders are encouraged to visit our website, www.morrisons.com, to obtain information on Company history, stores and services, latest offers, press information and a local store ﬁnder. Share price information The investor information section of our website provides our current and historical share price data and other share price tools. Share price information can also be found in the ﬁnancial press and the Cityline service operated by the Financial Times. Telephone: 0906 843 3545. Online reports and accounts Our annual and interim Group ﬁnancial statements are available to download from the website along with Corporate responsibility reports and other ﬁnancial announcements. The 2014/15 Annual report is also available to view in HTML format at www.morrisons-corporate.com/ar2015 The information in the Annual report and ﬁnancial statements, Strategic report, and the Interim reports is exactly the same as in the printed version. Environmental matters Our environmental footprint is taken very seriously. In the production of the 2014/15 Annual report, we have contributed to the reduction in environmental damage in the following ways: a) Website Shareholders receive notiﬁcation of the availability of the results to view or download on the Group’s website, www.morrisons-corporate.com, unless they have elected to receive a printed version of the results. Shareholders are encouraged to view the report on the website which is exactly the same as the printed version, but using the internet has clear advantages such as lowering costs and reducing the environmental impact. b) Recycled paper This document has been printed on recycled paper that is manufactured in mills with ISO 14001 accreditation from 100% recycled ﬁbre. It is totally chlorine free and is an NAPM certiﬁed recycled product. Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 131 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Registrars and shareholding enquiries Independent auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Benson House 33 Wellington Street Leeds LS1 4JP Stockbrokers Jefferies Hoare Govett Vintners Place 68 Upper Thames Street London EC4V 33J Bank of America Merrill Lynch Merrill Lynch Financial Centre 2 King Edward Street London EC1A 1HQ Investment bankers NM Rothschild & Sons Limited 1 King William Street London EC4N 7AR Administrative enquiries about the holding of Morrisons shares, such as change of address, change of ownership, dividend payments and the dividend reinvestment plan should be directed to: Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Telephone: 0871 664 0300 Overseas: +44 208 639 3399 Calls cost 10p per minute plus network extras. www.capitaassetservices.com ssd.capita.co.uk Solicitors Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA Eversheds LLP Eversheds House 70 Great Bridgewater Street Manchester M1 JES Gordons LLP Riverside West Whitehall Road Leeds LS1 4AW Shareholder information The number of shareholders at 1 February 2015 was 47,955 (2014: 48,347) and the number of shares in issue was 2,335,084,014 (2014: 2,335,041,736). Analysis by shareholder Private shareholder Nominee companies Deceased accounts Limited companies Other institutions Bank and bank nominees Investment trusts Pension funds Family interests Insurance companies Analysis by shareholder 1–1,000 1,001–10,000 10,001–1,000,000 Over 1,000,000 Number of holders % holders Balances at 1 Feb 2015 41,653 5,630 323 163 70 58 20 16 21 1 86.86 11.74 0.67 0.34 0.15 0.12 0.04 0.03 0.04 0.002 106,203,913 2,026,936,970 571,238 3,197,812 8,870,692 62,380,049 111,453 94,899 126,714,348 2,640 Number of holders % holders Balances at 1 Feb 2015 25,673 19,763 2,331 188 53.54 41.21 4.86 0.39 11,136,901 59,071,735 187,776,430 2,077,098,948 % capital 4.55 86.80 0.02 0.14 0.38 2.67 0.005 0.004 5.43 0.0001 % capital 0.48 2.53 8.04 88.95 132 Wm Morrison Supermarkets PLC Annual report and financial statements 2014/15 Investor information Information at your ﬁngertips Customer Corporate Our website, www.morrisons.com, allows you to learn more about Morrisons and our offering. Our corporate website, www.morrisons-corporate.com, has the following sections. Offers • Latest promotions • Speciﬁc product offerings • Marketing • Sign up for our latest offers by email • Online service Market Street More about our unique in-store offering, along with video presentations of where our food comes from and how to buy, cook and present it. You can now ﬁnd nutrition information for Market Street on our website. Recipe and ranges Information about our food ranges, healthy eating and mouth-watering recipes along with ideas of what drink goes well with each recipe. Lifestyle View our current and archived monthly magazine and read our handy health information for the whole family. Let’s Grow Information about our Let’s Grow scheme, including how to register, facts, how it works and teaching resources. Work with Morrisons Career opportunities and information about working for Morrisons. For our dedicated recruitment website, go to www.morrisons.jobs/ Media centre Latest releases about the growing estate of Morrisons, along with promotions and product news. Corporate responsibility Here you can ﬁnd out about our corporate responsibility ethos, including how we take good care of our environment, society and how we go about business. www.morrisons.co.uk/cr Investors User−friendly Presentations, announcements and ﬁnancial reports can be quickly and easily downloaded or viewed on-screen as PDFs. You can easily navigate around the Annual report and ﬁnancial statements 2014/15 on-screen, viewing only the parts you want to, at www.morrisons-corporate.com/ar2015 Webcasts Webcasts of the Directors delivering the preliminary results for 2014/15 on 12 March 2015 are available. Shareholder information Other relevant shareholder information is available, for example share price history, dividends, ﬁnancial calendar and AGM minutes. Electronic communications Electronic communications (eComms) is the fastest and most environmentally friendly way to communicate with our shareholders. Instead of receiving paper copies of the annual and interim ﬁnancial results, notices of shareholder meetings and other shareholder documents, you will receive an email to let you know this information is available on our website. Visiting our website to obtain our results reduces our environmental impact by saving on paper and also reduces our print and distribution costs. Sign up to eComms on our website at www.morrisons-corporate.com and follow the investor eComms link. About Morrisons You will ﬁnd information about the Group, its operations, strategy and structure, and past ﬁnancial information. Designed & Produced by Printing by Radley Yeldar www.ry.com Photography by Richard Moran Pureprint Paper stock: This report is printed on Amadeus Offset uncoated, a 100% recycled paper. Amadeus Offset is manufactured to the certiﬁed environmental management system ISO 14001. Wm Morrison Supermarkets PLC Hilmore House, Gain Lane Bradford BD3 7DL Telephone: 0845 611 5000 Visit our website: www.morrisons.com

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