Fix, Rebuild
and Grow
Wm Morrison Supermarkets PLC
Annual Report and Financial Statements 2016/17
Overview
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Fix, Rebuild
and Grow
We have a plan to Fix, Rebuild and Grow
our business for all of our stakeholders.
We have six priorities which we will
deliver through our five ways of working
to fulfil our ambitions for our four sets
of stakeholders.
priorities
6
We have six priorities to guide us
and shape our ambition to Fix,
Rebuild and Grow Morrisons.
• To be more competitive
• To serve customers better
• Find local solutions
• Develop popular and useful
services
• To simplify and speed up the
organisation
• To make the core supermarkets
strong again
ways of
working
5
Our colleagues know our
customers better than anyone
and are listening hard. We
have five ways of working that
underpin our approach and
enable colleagues to make the
best decisions for customers
and each other.
• Customers first
• Teamwork
• Freedom in the framework
• Listening and responding
• Selling, controlling costs,
growing profits, removing
waste
sets of
ambitions
4
Creating value for all key
stakeholders in a fair,
responsible, capital light
and sustainable way.
Customers
Colleagues
Read more on
page 10
Read more on
page 12
Suppliers
Shareholders
Read more on
page 13
Read more on
page 14
Read more about our progress on page 6
Read more about our progress on page 12
Read more on pages 10 to 14
Throughout the Directors’ report and Strategic report:
(1) Unless otherwise stated, 2016/17 refers to the 52 week period ended 29 January 2017 and 2015/16 refers to the 52 week period ended 31 January 2016. 2016 and 2017 refer to calendar years.
(2) Underlying profit is defined as reported profit before impairment, provision for onerous contracts and other 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 investments, and the impact of pension volatility, at a normalised tax rate, as reconciled in note 1.4 of the
Group financial statements. Underlying operating profit is reported operating profit before impairment, provision for onerous contracts, profit/loss arising on disposal and exit of properties
and sale of businesses and investments, and other items that do not relate to the Group’s principal activities.
(3) Like-for-like (LFL) sales reflects the percentage change in year-on-year store sales (excluding VAT and fuel), stripping out the impact of new store openings and closures in the current or
previous financial year.
Improving the shopping trip
for customers
A turnaround led
by colleagues
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
The shopping trip is improving with more customers buying more
from Morrisons more often.
Like-for-like transactions up 4%
The turnaround is being led by our colleagues and our ambition
is for our motivated and highly valued team of colleagues to
increasingly share in the success of Morrisons.
Colleague bonus equivalent to around
9% of underlying profit
Read about our ambitions for our customers on page 10
Read about our colleague ambitions on page 12
Building long term relationships
with suppliers
Creating value
for shareholders
We are building long term partnerships with suppliers, growing and
serving customers better together.
We are creating value for shareholders and aim to demonstrate
sustained growth in total shareholder returns.
Like-for-like volumes up 2%
Total dividend 5.43p, up 8.6%
Underlying profit before tax £337m, up 11.6%
Read about our progress for our suppliers on page 13
Read about our progress for shareholders on page 14
Strategic report
Chairman’s statement
Chief Executive’s statement
Our six priorities
Our business model
Performance review
Chief Financial Officer’s review
Risk
Corporate responsibility
Governance
Corporate governance report
Directors’ remuneration report
Directors’ report
Financial statements
Investor information
2
4
6
8
10
14
17
20
23
33
47
Independent auditors’ report
Consolidated statement of
comprehensive income
Consolidated balance sheet
Consolidated cash flow statement
Consolidated statement of changes in equity
General information
Notes to the Group financial statements
Company balance sheet
Company statement of changes in equity
Company accounting policies
Notes to the Company financial statements
Related undertakings
50
59
60
61
62
63
65
102
103
104
107
117
Five year summary
Supplementary information
Glossary
Investor relations and financial calendar
Information at your fingertips
Online annual report
Read how we are creating value for all
our stakeholders:
www.morrisons-corporate.com/
annual-report-2017
119
121
122
123
125
1
Strategic report
Chairman’s statement
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Building a business for
all our stakeholders
Our mission is a modest one, but we can
contribute widely to society
I am writing this statement with the business in
good heart after a year of profit and dividend
growth, further debt reduction, and five
quarters of positive like-for-like sales.
Uncertain times are ahead. Although the
UK consumer remains resilient so far, the
consequences of Brexit and significant currency
movements are not yet clear. Morrisons has
planned and prepared for Brexit but, in truth,
no one knows exactly what is to come.
By listening hard to customers – something
David Potts and his team do from shop floor
to Board room – Morrisons will not allow
itself to become victims of that uncertainty.
The Board and the senior team will work
tirelessly whatever the trading conditions to
build a successful business for the millions of
customers that shop with us every week.
So, we face the uncertainties with a positive
mind-set, and there will be no excuses from us.
Take scale as an example. Morrisons is often
accused of being structurally disadvantaged
and unable to compete with bigger rivals.
That is nonsense. Morrisons has always been
relatively small, but for decades competed
brilliantly and drove terrific returns for
shareholders. Scale rarely defines retail
winners and losers.
Most often it is outstanding execution that
results in a great shopping trip. Customers have
a vast choice of retailers and it is they who
decide the winners and losers, quite literally,
by ‘voting with their feet’.
Food retail is an ordinary business, touching
most consumers’ lives almost every day. It is
fiercely competitive. To execute ‘the ordinary’
consistently well is far from easy and relies on
outstanding leadership.
It is no coincidence that Morrisons much
improved performance coincides with the
appointment of David and his new senior
team. Morrisons skilled food makers and
shopkeepers are loyal, passionate and
dedicated, and virtually all are unchanged since
David started. Whilst all have contributed to
the improved performance, it is the leadership
that has changed.
This is pertinent to the discussions and AGM
resolutions relating to our proposals for the
next three year Executive remuneration
policy. In construct it is similar to our existing
policy that expires this year, however we have
tweaked the performance measures to reflect
the challenges ahead enabling the Executive
team to earn up to the maximum bonus
potential if outstanding long term performance
is delivered.
Our mission is a modest one – to provide our
customers with good quality food, great service
and prices – but our contribution to society
can be very wide. We strive to be a place where
our colleagues can get on – a meritocracy
where good, hard-working people can succeed
whatever their background, and everyone
shares in success. That is exactly what happened
to David and many of the senior team at
Morrisons who have worked their way up from
the shop floor.
We provide training and apprenticeships for
thousands of food makers and shopkeepers.
We pay the best we can, well above the
National Living Wage, and offer bonuses
to colleagues in all our stores, factories and
depots. Over a thousand colleagues participate
in our Long Term Incentive Plan, including all our
store managers.
Andrew Higginson
Chairman
We strive to be a place
where our colleagues
can get on
Dividend
5.43p
in line with policy
2
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
With over 110,000 colleagues and over 11 million
customers per week, Morrisons sits at the
heart of, and must reflect, the society we serve
in Britain. With plenty of choice available to
them, our customers are our toughest and
best regulator. It is right and proper that our
business is scrutinised, and that our customers
can see that we behave well. Be it in our
values, our actions, the impact we have on
the environment, our suppliers, or in the quality
and safety of the food we sell. We take all
our responsibilities seriously, knowing that if
we fall short, our customers may choose to
shop elsewhere.
With all these demands on the business, we
must also remember that our reason to exist
is to make a return for our shareholders.
As we build a sustainable recovery, we intend
to also build a track record of returns for our
shareholders. 2016/17 was the first for our new
dividend policy. That policy is for the dividend
to be covered around two times by underlying
earnings per share, and I am pleased that we
recently announced a 2016/17 dividend of 5.43p
per share (up 8.6% on last year).
As cash flow improves, our balance sheet is
getting stronger and we are on track for our
target of net debt to fall to less than £1bn by
the end of 2017/18.
We continue to prioritise balance sheet
strength over efficiency. As we keep improving
profitability and further de-leverage the
business, we will continue to be guided by
our capital allocation framework.
Governance highlights
Board composition and membership
• The Board comprises five independent
Non-Executive Directors and two
Executive Directors.
• All Directors stand for re-election annually
at the AGM.
• Rooney Anand is the Board’s Senior
Independent Director and
a Non-Executive.
• The Board is satisfied that Belinda Richards has
recent and relevant experience appropriate to
her position as Audit Committee Chair.
• There is clear division of responsibilities
between the roles of Chairman and the
Chief Executive.
Board effectiveness
• The Directors have all attended an acceptable
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
• The Audit Committee is satisfied that the
Group’s statutory auditor PwC, who were
appointed in 2014/15, are performing effectively.
• The Board has a policy on the engagement
of the external auditor to supply non-
audit services.
Sir Ken Morrison CBE
Everyone at Morrisons was very sad to hear
recently of the passing of Life President, and
former Chairman, Sir Ken Morrison CBE.
Sir Ken was an inspirational retailer and the
driving force behind Morrisons for more than
half a century, transforming the company from
a small family business into one of the UK’s
top 100 companies. He developed the culture,
values and clear direction for the business
which remain the bedrock of the firm today.
His legacy includes many enduring innovations,
such as Market Street and Morrisons’ unique
vertical integration model.
Sir Ken will be greatly missed by many
thousands of his current and former colleagues.
On a personal level, Ken was an enormous help
to me as we made some significant changes to
set the business on a new course; his knowledge
of retail and his strategic insights remained as
relevant and intuitive as they were when he first
built the business.
To honour his memory in the most appropriate
way we can, we will strive to develop the
company that he built and loved.
Accountability
• The Board is satisfied with the effectiveness of
internal control and that risk is being managed
effectively across the Group.
• Consideration has been given to financial
reporting matters with sufficient challenge
provided to management relating to
judgemental areas.
• The Group’s internal audit function perform
periodic reviews of the key areas of the
business, including the recognition of
commercial income.
Andrew Higginson
Chairman
See Corporate governance report on pages 23 to 32
3
Strategic report
Chief Executive’s
statement
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Becoming more popular
and connecting with
customers
We are listening to customers and they are powering
the plan to Fix, Rebuild and Grow Morrisons
David Potts
Chief Executive
During the year,
we improved the
offer, became more
competitive and served
customers better
2016/17 was Morrisons first full year of Fix.
The first year that the new senior team
and our hardworking food maker and
shopkeeper colleagues have been able,
together, to set about the task of delivering
a sustainable turnaround.
That turnaround is being powered by listening
hard to customers and responding quickly.
Customers continue to provide us with the
insight we need to make improvements to the
shopping trip. During the year, we improved
the offer, became more competitive and
served customers better, thereby becoming
more popular and re-connecting more with
our core customers.
Customers tell us that the Morrisons offer is
good quality and great value, and during the
past year we did much more to improve this
further. One highlight was our new premium
own label ‘Best’ range. We launched nearly
500 products in the autumn and a further
100 especially for Christmas shoppers.
Customer feedback on the quality and
breadth of ‘Best’ range has been excellent,
and we see further significant potential for
more ‘Best’ products.
We improved the offer in other areas such as
Food to Go, Free From, Nutmeg clothing, meal
solutions and craft beer. Our improvements are
starting to be recognised and rewarded, and
we were delighted to win a series of prestigious
awards during the year. We won Meat and Fish
Retailer of the Year, In-store Bakery Retailer
Key Measures
Morrisons brand warmth*
of the Year, National Café Chain of the Year,
Cheddar Cheese Retailer of the Year, and
International Wine Challenge Supermarket
of the Year for the second year running.
We continue to become more competitive for
customers. There were several waves of ‘Price
Crunch’ during the year, with low prices held
as long as possible for customers. ‘Morrisons
Makes It’ is a fresh range made by our specialist
food makers in our stores and in Manufacturing,
combining our unique craft skills with great
value. Through these, and other ways of
simplifying our offer, we are developing a more
competitive Morrisons price list that provides
great value for customers.
Customer satisfaction continues to improve.
During the year, we introduced a new ordering
system into all stores, which is improving
on-shelf availability for customers. Other ways
of serving customers better included the
introduction of more self-service belted
checkouts, and further forecourt convenience
trials which utilise our strengths as a wholesaler
while making the Morrisons brand accessible for
more customers. Supplying to Amazon has also
started well.
The response from our customers has been
very encouraging. On a like-for-like basis, we
served 4.0% more transactions during the year,
and 4.6% more during the fourth quarter which
includes Christmas and new year. Like-for-like
sales were up 1.7%, and were positive in every
quarter. With deflation throughout the year,
sales volumes were up. This means more
customers are buying more at Morrisons.
Our plan is for this to continue, with Morrisons
becoming a broader, stronger business. We have
many opportunities to invest in growth, and cut
waste and costs.
5
1
6
* Source: YouGov, 12 week moving average w/e 04/12/16
1
r
v
p
o
A
N
5
1
v
o
N
6
1
y
a
M
6
1
g
u
A
5
1
c
e
D
6
1
n
a
J
6
1
n
u
t
c
O
t
c
O
r
a
M
p
e
S
b
e
F
6
1
6
1
6
1
6
1
6
1
6
1
u
J
J
l
4
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Key Measures
2016/17 quarterly Group
LFL sales
2016/17 LFL quarterly
number of transactions
Q1
3.1%
Q2
4.3%
Q4*
1.6%
Definition
LFL number of transactions, year-on-year change.
Excludes online.
Q4
4.6%
Q3
4.1%
*2015/16
As Andrew noted and Trevor details later, cash
flow and working capital continue to improve,
we are making good progress on reducing debt,
and our balance sheet is strong. This provides
the platform for delivering growth and for
progressing Morrisons from Fix to Rebuild
and Grow.
Although 2016/17 was a good year, it was
just the start of the Morrisons turnaround.
We have lots more to do and our colleagues
have lots more ideas. As I set out in my Chief
Executive’s statement last year, this turnaround
will be colleague-led, and so it is proving.
Our performance so far is entirely due to the
continuing hard work, passion and dedication of
the Morrisons team of skilled food makers and
shopkeepers, and I would like to thank every
colleague for their invaluable contribution.
David Potts
Chief Executive
Q4*
0.1%
Q1
0.7%
Q2
2.0%
Q3
1.6%
Q4
2.5%
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.
*2015/16
We are confident we can lay the foundations
to move to the Rebuild and Grow phases
of this turnaround. We have made a good
start, achieving the first £18m of the £50m to
£100m incremental profit opportunity that we
identified across four areas – wholesale, online,
popular and useful services, and reducing
interest. We are following the customer and
investing in changes in their behaviour, to grow
profitability in a capital light way. As well as
our partnership with Amazon, we are working
on various new capital light projects such as
Morrisons Daily convenience stores on Rontec
forecourts and the revival of the Safeway brand
for wholesale customers. We also announced
a partnership with Timpson and a new plan for
Morrisons.com to grow profitably across Britain
with Ocado, as well as various initiatives to
reduce our gross debt and interest charge.
Our growth will be assisted by recycling
extensive future cost savings back into the
customer offer. We have exceeded our original
target of £1bn of savings over three years,
but there is more to come. The new ordering
system is a good example of us saving money
while becoming better shopkeepers. It is
simpler and saves time for colleagues, and
is reducing stock levels. In addition, we have
identified further productivity opportunities
in areas such as in-store administration,
distribution between Manufacturing and Retail,
and procurement.
Listening to our customers...
...and responding
We significantly expanded our
Free From range.
Listening to our colleagues...
...and responding
‘Morrisons Makes It’ products showcase
the best of our colleagues’ food
maker skills.
5
Strategic report
Our six priorities
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
The progress we’ve made
on our six priorities
We’ve made good progress but we have more to do
as we continue to turnaround the business
1
2
To be more
competitive
Customers want great value,
good quality fresh food
To serve
customers
better
Customer service makes
Morrisons different
3
Find local
solutions
Each supermarket is unique
to its local community
We are listening and responding
• Regular waves of ‘Price Crunch’, driving down prices
on thousands of everyday items. Keeping those
prices as low as possible for as long as possible
• A Morrisons price list, with the right prices for the
items our customers want to buy
We are listening and responding
• Queue lengths are shorter and we are opening
more tills for customers
We are listening and responding
• Locally sourced products in local stores, such as
strawberries, apples, kale, sprouts and poinsettia
• Our new ordering system is improving availability,
saving colleagues time and reducing stock levels
• Local events and communication
• Regional initiatives such as Hogmanay, Yorkshire
• Serving more customers, with LFL transactions
Day and Scottish favourites
• ‘Morrisons Makes It’ is a range of fresh items made
up 4.0% last year
• Customers are noticing the improvements and
responding, with customer satisfaction scores
up again this year
• The Fresh Look programme helps tailor the
look and feel of stores to the local community.
Listening groups at each store drive all aspects
of the improvement
by our specialist food makers, combining our
unique craft skills with great value
• A focus on Fresh, Market Street and sharing our
expertise with customers
• Improving the quality of Morrisons own brand,
• Specialist buyers for regions such as Scotland,
• Partnering with suppliers to buy and sell for less,
and saving our customers every penny we can
for everyday, important seasons and events, and
special gatherings for family and friends
• Ranges such as ‘Best,’ Nutmeg, Free From and
Food to Go. We are selling more things people
want to buy
• Broadening Morrisons and making the brand more
accessible by following the customer into online,
digital, convenience and new services
Wales and London
• Our data can target individual customers to better
personalise our offer
• Tailored plans to compete against new
competitor stores
• Installing Wi-Fi in all stores
Supermarkets LFL volumes*
Q1
0.1%
Q2
(0.6%)
Q3
(1.4%)
Q4
2.4%
Q1
2.2%
Q2
2.3%
Q3
1.7%
Q4
1.9%
2015/16
2016/17
*Supermarket LFL sales minus inflation/deflation
6
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
4
5
6
Develop popular
and useful
services
Another reason to visit
Morrisons
To simplify and
speed up the
organisation
Speed and teamwork makes
us responsive for customers
To make core
supermarkets
strong again
Investing in the core
We are listening and responding
• Always competitive on fuel, with busy forecourts
and extended opening hours
• Welcoming and hospitable cafés in 401 stores, with
over 130 modernised last year. Improved menus,
shorter queues and friendly service
• ‘Morrisons Daily’ convenience trials
• Partnerships such as ‘Timpson at Morrisons’ bringing
new in-store services to our customers
• Developing opportunities for complementary retail
and service initiatives in our car parks
• Popular pick-up services such as Amazon, Doddle
and InPost now available in hundreds of stores
• In-store pharmacies provide an important service
for customers
We are listening and responding
• A leaner, diverse team with many new internal and
external senior colleagues working together well
with our skilled food makers and shopkeepers
We are listening and responding
• Fresh Look programme is improving up to 100 stores
a year. Some components, such as Food to Go and
Nutmeg, are being rolled out across all stores
• Building stronger, lasting, mutually beneficial
• Investing in fresh food and Market Street to
relationships with our suppliers. Working together
to buy and sell simply
improve range, quality, colleague knowledge and
services such as tastings and customer advice
• Continuing to eliminate wasted effort and cost,
making the business more efficient and responsive
to customers. Over £1bn saved over the three-year
programme, with further opportunity including
automated ordering, distribution and in-store
administration
• Further initiatives in areas such as digital
communication, improved management information
and a culture of continuous improvement
• Technology investment has helped to automate
processes and speed up and simplify the business
• More training, talent programmes, succession
planning and rewards for colleagues to bring
our best people through
• Developing leaner processes in-store
• Aligning in-store bonuses with Mystery Shopper
and customer service scores
• Improving use of loyalty card and digital data to
inform the business of how to identify emerging
trends and better serve customers
• Creating value for all our different stakeholders –
customers, colleagues, suppliers and shareholders
Petrol filling stations
334
Cafés
401
Pharmacies
118
7
Strategic report
Our business model
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Food makers and
shopkeepers
We have been listening to what our customers want
from Morrisons... good quality fresh food, great value
for money, great and consistent customer service and
where possible authentically British
Resources
Customers
11 million customer transactions
every week
Colleagues
Over 110,000 colleagues and a high
quality management team
Sites
491 conveniently located
supermarkets
17 manufacturing sites
8 distribution centres
Brand
A well known brand which is
becoming more popular and
accessible to more customers
Financial strength
Strong balance sheet and cash
flow with largely freehold estate
and low debt is a firm foundation
for the business
Our business:
Food maker
Distributor
We have food makers in our 491 stores
and our 17 manufacturing sites
• We make fresh food visibly and daily
on Market Street for our customers
• We also make fresh food in our
manufacturing sites across the UK
• Over half of the fresh food we sell,
we make ourselves
• We work with suppliers to effectively
source the products we don’t make
ourselves
We have a national distribution network
that moves the food we make and buy
• Our stores are serviced by seven regional
and one national distribution centres
• This gives us the opportunity to support
our growth through other channels
• We are working on ways to further
improve the efficiency of our network –
particularly ‘hand offs’ between
manufacturing, distribution and retail
How we are different
Our food making skills are a recognisable point of
difference providing products that are unique to us
Controlling the whole supply chain means
we know where our food comes from and
can provide our customers with what they
want, when they want it
Delivered through our six priorities
1
To be more
competitive
2 To serve customers
better
3 Find local
solutions
Five ways of working underpin what we do
1 Customers first
2 Teamwork
3 Freedom in the
framework
4
Listening and
responding
5
Selling, controlling costs, growing
profits, removing waste
8
4 Develop popular
and useful services
5 To simplify and
speed up the
organisation
6 To make the core
supermarkets
strong again
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
How we are different
Retailer
We sell what we make and buy in-store
and online
• Listening informs improvements we make
• A competitive Morrisons price list, providing
good quality fresh food at the right price
• Shopkeepers caring deeply about service
• Our More Card helps us to understand
and serve our customers better
• Over 50% of the UK population has
access to our online offer
• Customers know what is new and
different at Morrisons
Wholesaler
We are a wholesaler, providing our products
to retail partners and third parties
• We can leverage the strength of our brand
and manufacturing capability to deliver
quality products
• We aim to make our brand more
accessible and increase volume through
our existing assets
Understanding our customers powers
the decisions we make. Customers trust
our brand and see us as competitive and
locally relevant
Through stores, manufacturing, online and
our wholesale partners, we can leverage
our brand to achieve meaningful and
sustainable growth without the need
for significant investment
Delivered through our six priorities
1
To be more
competitive
2 To serve customers
better
3 Find local
solutions
4 Develop popular
and useful services
5 To simplify and
speed up the
organisation
See Our six priorities on page 6
6 To make the core
supermarkets
strong again
Five ways of working underpin what we do
1 Customers first
2 Teamwork
3 Freedom in the
framework
4
Listening and
responding
5
Selling, controlling costs, growing
profits, removing waste
Outcomes for our
stakeholders
1 Customers
• More customers, buying more
from us, more often
• Customers can get what they
want when they want it
• Transactions up 4%
Read more on page 10
2 Colleagues
• Engaged and motivated colleagues
• Colleagues sharing in the success
of the business
• Colleague bonus scheme which
equates to around 9% of UPBT
Read more on page 12
3
Suppliers
• Establishing lasting relationships
• Working together with simplified
terms
• Volume growth
Read more on page 13
4
Shareholders
• A strong balance sheet
• A cash generative business with
reducing debt
• Sales, profit and dividend up
Read more on page 14
Environmental
and social value
• Making a positive contribution
to society
• Reducing food waste
• Taking care of the environment
Read our Corporate responsibility
section on page 20
9
Strategic report
Performance review
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Our customers
What customers tell us is at the heart of the decisions
we make to improve their shopping trip
HIGHLIGHTS
Number of customer transactions
each week
over 11m
Average number of customers
per month who participated
in listening sessions
over 30,000
Key Measures
Satisfied with time taken to queue?*
*Source: Morrisons is Listening survey
10
Listening to customers
With over 11 million customer transactions
every week, listening hard and responding
quickly is crucial as we continue to turnaround
the business. We have established a number
of ways for the whole Morrisons team to
get closer to customers and improve the
shopping trip.
On average we connect with over 30,000
customers every month through our online
panel of customers and regular in-store
listening sessions. They have told us about
changes to their shopping behaviour including
shopping more frequently and looking for new
products such as Free From, vegetarian and low
sugar products.
We are continuing to increase the breadth and
depth of our customer listening. This allows us
to get first hand feedback from customers on
their shopping journey.
The Morrisons ‘MyView’ customer panel is
an important way of getting closer to our
customers. ‘MyView’ allows customers to
contribute regularly to online discussions and
surveys, giving us immediate feedback on which
we can act quickly. The panel, for example, has
helped us to improve our cafés where customer
feedback directly led to a new café menu with
an expanded vegetarian range and more meals
with fewer than 600 calories.
Our social media channels give us access
to direct feedback from customers as do
customer emails and calls through to our
Contact Centre. In this way, thousands of
customer comments can be used to improve
our products and our service.
At Morrisons we recognise that our customers
are all different. We have identified five family
segments and understood what is important to
each of them regarding their shopping. To help
us understand the needs of each of the family
types, we have begun a six month programme
where we are in regular contact with a number
of Morrisons families. We talk to them regularly
both online and through social media to
understand how they feel about Morrisons,
and what we can do to improve their shopping
experience with us. This is an important way of
staying in regular touch with the different types
of people who shop with us, and adapting our
business to suit their needs.
We will listen even harder to our customers
throughout 2017, as we still have more to do.
Serving customers better
Service and expertise are key parts of our
ambition for customers. More customers tell us
they are either satisfied or highly satisfied with
their store experience and say we have started
to improve on a number of the measures that
are important to them.
At Morrisons we are food makers and
shopkeepers offering good quality food at
great value. Our customers tell us that they
rate us highly in terms of quality fresh food
and recognise our food making credentials
through our skilled and specialist colleagues
and our service counters. They also associate
us with British products, working closely with
farmers and making more of our own food
than other retailers.
Customers tell us that our in-store food
makers on Market Street are a unique point
of difference. Having our experts on hand
to help and advise is part of the Morrisons
experience. During the year, we made changes
in some stores, by opening up Market Street
departments such as butchery to make the
fresh food we produce in-store each day more
visible to customers.
Throughout the year, we showcased a number
of ‘Morrisons Makes It’ products – unique
products made by our specialist food makers,
each at great value for money. We continue
to invest in price through our ‘Price Crunch’
programme becoming more competitive for
customers, and developing the Morrisons price
list for customers.
We committed to improving the customer
experience at the checkout, particularly the
length of time our customers take to queue.
We have made good progress, and customers
tell us that this has made a big difference
to their shopping trip. Significantly more
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
customers are now highly satisfied with the
time taken to queue than they were in 2015.
Customers also tell us that our colleagues
are friendly and we have made good progress
improving the availability of products on
our shelves.
More Card
The More Card programme is now well
established and growing in popularity.
The number of customers actively using a
More Card continues to grow, meaning more
customers are regularly collecting More Card
points which can be converted into savings on
their shopping. The More Card programme is
one of the ways the business is able to listen,
helping us to serve customers better and be
more competitive by providing a range of
benefits and personalised rewards.
Since November 2015, customers have been
able to earn More Card points every time
they shop with us. Customers can earn
More Card points in-store and online, when
they buy fuel on our forecourts and when
they eat in our cafés.
We continue to find ways to enhance
the customer benefits of the More Card
programme. We recently introduced
Baby & More – a new way for parents (and
parents-to-be) to enjoy offers and earn
additional More Card points on the baby-
related products they buy. In addition,
customers can now save for Christmas
using their More Card with our Christmas
Savers programme.
The market
The UK food retail market remained highly
competitive throughout the year. We do not
expect that to change during 2017/18. We will
learn from the constantly evolving market
and our competitors, and believe that intense
competition can again bring out the best
in Morrisons.
The longer term impact of Brexit is still
unknown. Specifically for food shoppers, if
sterling stays at its currently low level we would
Listening to our customers...
...and responding
Our More Card allows customers to collect
points every time they shop with us.
These points can be converted into savings
on their shopping trip.
expect pressure to build on imported food
input prices.
As a British manufacturer and retailer sourcing
home grown product wherever possible, and as
British farming’s biggest single direct customer,
we feel well-placed to mitigate some of those
pressures. We are determined to work with
growers, farmers, manufacturers and other
suppliers to do the best we possibly can for
our customers. Morrisons is a value brand and
our customers respond well to us working
hard to deliver the best possible quality at
the lowest price.
We do not operate in a vacuum and market
forces are very important. For example, the
current oil price rise has been putting pressure
on prices at the pump, making household food
budgets tighter for our customers. We are also
mindful of other market and economic factors
such as rising property, employment, energy
and distribution costs.
While recognising the volatility of the various
market forces, we plan for them and can work
with them. Our turnaround is about investing
in opportunities and good execution, and is
more in our control than it is dependent on the
market. If we continue to serve our customers
better, we expect to continue to recover
Morrisons whatever the prevailing food retail
market conditions.
In addition, as we broaden Morrisons and make
the brand more accessible, our addressable
market also broadens too.
It is clear that customer shopping habits are
evolving, with customers choosing to shop
more frequently and through more channels,
with online and convenience increasingly
important markets.
We are following the customer into online,
convenience and areas of wholesale supply.
However, the supermarket channel still
represents the majority of the UK grocery
market. It is forecast that this will continue to
be the case for many years. Therefore, making
our core supermarkets strong again is a key
priority for our turnaround.
We also have exciting opportunities to provide
our customers with more popular and useful
services when they visit our stores. So, our
market is widening into other areas outside
of, but complementary with, food retail.
11
Strategic report
Performance review
continued
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Our colleagues
Listening to colleagues is informing our plan
HIGHLIGHTS
People progressing from the
shop floor to more senior
positions in 2016/17
920
Number of store managers
who participated in
‘My Job’ training
491
Listening to our colleagues...
...and responding
Our annual ‘Mastercraft’ competition
has been extended to Manufacturing
colleagues and more categories.
Our five ways of working
Our five ways of working, introduced
across the business during 2016, provide the
framework of how we operate as a business
and colleagues are reviewed against them
as part of their annual performance review.
The five ways of working are:
• Customers first
• Teamwork
• Freedom in the framework
• Listening and responding
• Selling, controlling costs, growing profits,
removing waste
12
Our colleagues have a say in what matters
The opportunity to develop and grow
Listening is fundamental to shaping our
colleague-led turnaround plan. Our ‘Your
Say’ survey was completed in March 2016
by two-thirds of colleagues and included over
69,000 free text comments, every one of
which was read.
Our measure of overall colleague engagement
was over 75% in 2016 and included
improvement in all business areas. Each area
of the business saw an improvement in key
questions such as ‘I receive a fair day’s pay for
the work I do’ and ‘I am proud to work here’,
reflecting our significant payroll investment,
especially the increase to £8.20 per hour for
all our store colleagues.
We introduced ‘Your Say’ forums in July 2016
across all stores and sites for colleagues at all
levels. These are colleague driven groups that
are empowered to listen hard and respond
quickly to make Morrisons a better place to
work and shop. Any suggestion which cannot
be acted upon locally is sent centrally for
review and response.
Highly valued and treated with respect
It is critical that colleagues feel valued and
that they share in the success of the business.
The business wide colleague bonus scheme
was changed for 2016/17 with each store or
site rewarded for performance against service
measures which they can influence directly.
In its first year, the new measures resulted
in a payout equivalent to around 9% of the
underlying profit before tax. During the year,
we launched a new uniform for store colleagues
which is better suited to each role. In addition,
we now provide a free laundry service for
colleague uniforms in all our fresh food areas.
Having listened to our colleagues we have
developed a new recognition programme which
has been introduced across all business areas
during 2016. The new ‘Thank You’ programme
gives our managers the tools and freedom to
be able to recognise their colleagues in a way
which is personal to them.
During the year, we have focused on developing
our colleagues to achieve our priorities and to
support our turnaround.
This year we designed our ‘My Job’ and ‘Our
five ways of working’ programmes which have
been delivered to all of our store managers
and Buying teams. These colleagues spent time
understanding their roles and developing both
their technical and leadership skills. In 2017, we
intend to extend the programme to all our
store management teams and to Manufacturing,
Logistics and People teams.
To support our food makers and shopkeepers
we trained over 6,000 colleagues on Fruit & Veg
during 2016 and trained 2,500 new Retail team
managers on the technical skills for their role.
Our apprentice and graduate programmes
remain popular, with around 200 colleagues
starting their career on one of our schemes
in areas including craft skills, engineering and
finance. Accelerated learning programmes in
Manufacturing and Logistics have continued
to provide a way to fast track colleagues to
gain new skills at pace, and progress to the
next stage in their career plans.
We made a commitment to all colleagues
across the business that they will have a career
conversation every year. This has supported
us in managing our talent and succession plans
more effectively, leading to successfully placing
individuals into key roles across the business.
We held our sixth annual ‘Mastercraft’
competition in November. ‘Mastercraft’ is our
in-house competition celebrating the talent
of our very best food makers and shopkeepers
that we have in our business.
The title of ‘Mastercraft Champion 2016’ was
contested by 46 finalists (including for the
first time colleagues from our Manufacturing
business) across Butchery, Fish, Deli, Bakery,
Cake Shop, Wine, Fruit & Veg and Flowershop.
The day was a huge success and highlights what
makes Morrisons unique, our food making and
shopkeeping skills, through our talented in-store
and site colleagues.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Our suppliers
Working closely with our supply chain to improve
the shopping trip for customers
HIGHLIGHTS
Percentage of Morrisons branded beef,
lamb, pork, chicken, milk and eggs
sourced in the UK
100%
Suppliers taking part in our
listening survey
over 500
Listening to our suppliers...
...and responding
In October 2015, we launched ‘Milk For
Farmers’. We have since expanded the
range to 15 product lines.
Our turnaround is powered by listening and
that will define how and what we improve.
We work closely with our suppliers to build
strong, mutually beneficial relationships and
to ensure the best results for our customers.
Strong supplier relationships
Our ambition is always to have lasting,
mutually beneficial arrangements with our
suppliers, responsible and fair trading terms
and practices in line with the Groceries Supply
Code of Practice (GSCOP). We work closely
with our suppliers to encourage and promote
responsible practices throughout the supply
chain, helping to ensure sustainable supply
for future generations.
During the year, we worked on improving the
way we buy our products – to buy and sell
simply. This included simplifying our supplier
arrangements to facilitate relationships built
on trust and teamwork, allowing us to speed
up, be more competitive and ultimately serve
customers better.
Our ways of working with our suppliers
centre around building a culture of putting
customers first, mutual respect and listening.
We have been listening hard to our suppliers
as we continue to turnaround the business.
During 2016, we conducted an independent
supplier listening survey in which over 500
suppliers participated. This survey, which will
be repeated regularly, builds on our day-to-day
interactions with suppliers and allows us
to understand views across many different
categories. We understand that how we
need to work with our suppliers will differ
by category and according to size of supplier.
This survey allows us to gain a significant
level of insight into how we can work more
effectively with all our different suppliers.
Our supply chain
Our vertically integrated business model
means we control more of our supply chain
and have closer relationships with farmers
and growers. We have greater control over
supply chain visibility, quantity and quality,
which reduces risk as we know where our food
comes from. These relationships allow us to
better understand our supply chain and work
together to ensure the highest quality and
ethical standards.
We take pride in our British heritage and buy
British wherever possible. 100% of our Morrisons
branded beef, lamb, pork, chicken, milk and
eggs are sourced in the UK. Buying British
reduces food miles, adds to the national
economy, strengthens agricultural industries
and supports rural communities.
In October 2015, we launched our ‘For Farmers’
range, giving customers the choice to buy a
brand of products where a clear element of the
proceeds goes back to farmers. During the year,
we have increased the range to 15 product lines,
covering milk, cream, cheese, butter and bacon.
Customers value this choice and these options
have proved popular, with strong sales across
the range. For example, over 58 million litres of
‘Milk for Farmers’ has been sold in our stores.
The range has generated over £5m of additional
income for farmers, since it was launched.
Read what we’ve been doing in our Corporate
responsibility section on page 20.
Modern Slavery statement
Morrisons is subject to the provisions
of the Modern Slavery Act 2015 and the
Group will publish its first statement this
year in line with the required timescales.
A copy of the statement will be available
on www.morrisons-corporate.com and
submitted to the Business and Human
Rights Resource Centre’s (BHRRC) Central
Registry for Modern Slavery Statements.
13
Strategic report
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Chief Financial Officer’s
review
Our shareholders
Capital discipline and generation of significant levels
of sustainable free cash
Introduction
2016/17 was a year of good progress towards
our aim of becoming a broader, stronger
business. We continued to listen hard to
what our customers and colleagues told us.
Responding quickly and delivering on our
six priorities meant a better shopping trip
for customers, which enabled us to deliver
improved like‑for‑like sales, positive volumes
and higher profits.
Capital discipline and a focus on cash and
returns remains at the heart of what we do, and
we are pleased with the progress we have made
this year but we remain in the Fix phase of our
recovery and have much more to do.
The balance sheet with high freehold
ownership, well funded pension schemes and
falling debt are sources of financial strength and
create a strong foundation for all elements of
our strategy. Three years ago we announced
a £1bn cost saving programme. We have
delivered savings of over £390m in the year,
taking the total over the three years to over
£1bn. We are making good progress against our
target of £50m to £100m of incremental profit
from becoming a broader, stronger business.
We exceeded our £2bn three‑year free cash
flow target six months early and have continued
to reduce net debt, ending the year at £1.2bn,
less than half of the level of three years ago.
During the next year we aim to grow the
business by connecting more with our core
customers and improving the supermarkets,
whilst tightly controlling costs. Growth will
continue to be capital light, disciplined and
sustainable. Our focus on cash improvement
programmes will continue next year.
Key Measures
Group LFL sales performance
2012/13
(2.1%)
2013/14
(2.8%)
2014/15
(5.9%)
2015/16
(2.0%)
2016/17
1.7%
Definition
See page 5 for definition.
Net debt (£m)
2013/14
2,817
2014/15
2,340
2015/16
1,746
2016/17
1,194
Definition
A metric that shows the Group indebtedness.
Net debt is cash and cash equivalents, non‑current
financial assets and current financial assets, less
borrowings, current financial liabilities and
non‑current financial liabilities.
Summary income statement
Turnover
Operating profit
Net finance costs
Share of profit of joint
ventures
Profit before tax
Underlying profit
before tax
One‑off restructuring costs
Underlying profit before
restructuring costs and tax
Underlying earnings
per share
2016/17
£m
16,317
468
(145)
2015/16
£m
16,122
314
(99)
2
325
337
–
337
2
217
242
60
302
10.86p
7.77p
Trevor Strain
Chief Financial Officer
The balance sheet is
a strong foundation
for all elements of
our strategy
HIGHLIGHTS
Net debt*
£1.2bn
£1.6bn lower than its peak in 2013/14
Free cash flow*
£2.3bn
Delivered over three years
*See the Glossary on page 122 for definition
14
Turnover
Underlying profit
Total turnover during the period was £16.3bn,
up 1.2% year‑on‑year. Store and online turnover
of £12.7bn, excluding fuel, was down by
0.5%. This comprised LFL up 1.7% (including
a contribution of 0.9% from online) and a
negative 2.2% contribution from net new
space due to the impact of the closure of
underperforming stores.
Sales improved through the year, and we
were pleased that quarter four was our fifth
consecutive period of positive LFL sales growth
and the seventh consecutive period of positive
LFL volume growth.
Deflation eased through the year but we
continued to invest in being more competitive
and driving volume growth through the
core business. Customers responded to the
improvements we made to the shopping trip
and transactions were up 4.0% for the year.
Fuel sales increased by 7.3% to £3.4bn.
The impact of weaker sterling and increasing
oil prices in the second half meant prices rose
year‑on‑year, but we continued to remain very
competitive and both fuel sales and volumes
were, once again, strong.
Operating profit
Operating profit
Underlying adjustments:
– Impairment and
provision for
onerous contracts
– Profit/loss on disposal
and exit of properties
and sale of businesses
and investments
– Pension scheme set‑up
costs
– Other exceptional costs
Underlying
operating profit
2016/17
£m
468
2015/16
£m
314
(6)
87
(32)
(97)
–
2
35
–
432
339
Operating profit was £468m (2015/16: £314m).
Since the impairments made in 2014 and 2015,
individual store performance has varied and as
a result we have booked a write back of £6m
made up of freehold stores impaired written
back (£191m), freehold stores impaired (£147m)
and charges on onerous contracts (£38m).
In addition, in line with our plan to optimise
assets, we generated profit on disposal of £32m,
including £13m relating to the completion of the
disposal of our investment in Fresh Direct Inc.
Before these items, underlying operating profit
was £432m (2015/16: £339m).
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
2016/17
£m
325
2015/16
£m
217
We exceeded our £2bn three year free
cash flow target six months early, and have
continued to reduce net debt ending the
year at £1.2bn, down £552m from last year.
Reported profit before tax
Underlying adjustments:
– Impairment and
provision for
onerous contracts
– Profit/loss on disposal
and exit of properties
and sale of businesses
and investments
– Costs associated with the
repayment of borrowings
– Pension scheme set‑up
costs
– Net pension interest
income
– Other exceptional costs
Underlying profit
before tax
Underlying profit margin
(6)
87
(32)
(97)
56
–
(8)
2
–
35
–
–
337
2.1%
242
1.5%
Reported profit before tax was £325m
(2015/16: £217m), and underlying profit
before tax, which excludes exceptionals,
was £337m (2015/16: £242m). Basic earnings
per share increased to 13.11p (2015/16: 9.51p).
Underlying basic earnings per share increased to
10.86p (2015/16: 7.77p), reflecting the increase in
underlying profit before tax.
Debt, cash flow and working capital
Summary cash flow
Cash generated from
operations before onerous
capital payments
Onerous capital payments
Cash generated
from operations
Proceeds from sale of
property, plant and
equipment and sale of
businesses and investments
Capital expenditure
Dividends paid
Dividends received
Purchase of shares
in subsidiary
Purchase of own shares
Tax and interest
Costs incurred on
repayment of borrowings
Other non‑cash
movements
Movement in net debt
Opening net debt
Closing net debt
2016/17
£m
2015/16
£m
1,207
(94)
1,055
(29)
1,113
1,026
123
(419)
(118)
8
–
(5)
(129)
(42)
320
(365)
(260)
8
(3)
(13)
(136)
–
21
552
(1,746)
(1,194)
17
594
(2,340)
(1,746)
Cash capex was £419m. Cash outflow on
onerous commitments which were previously
provided was £94m.
Operating working capital inflow was £360m,
taking the total delivered over three years to
£914m. A focus on cash is firmly embedded in the
business, and we made further progress against
our cash improvement programmes. The key
driver of the inflow in the year was improving
the commercial dynamics in our fuel business.
Interest
Net finance costs were £145m, up from £99m
last year due to one‑off costs of £56m relating
to our commitment to reduce debt. During the
last year, we have redeemed $250m US Private
Placement loan notes (USPP), and completed
tender offers of £360m across three sterling
bonds and one euro bond. We also repaid a
£200m bond facility which reached maturity.
We chose not to renew a £150m credit facility
that expired. Underlying net finance costs were
£97m (2015/16: £99m). Liquidity remains very
strong and our £1.35bn revolving credit facility
has been undrawn since October 2015.
Tax
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 the needs of all of our
stakeholders are considered.
The Group is committed to paying all of
its taxes in full and on time. We are a major
contributor across a wide range of UK taxes.
In 2016/17, Morrisons made net payments of
£1,056m to the UK Government of which
£545m was borne by Morrisons and the
remaining £511m was collected on behalf
of our colleagues, customers and suppliers.
UK corporation tax payments made during
the year were £31m compared to the current
tax charge of £57m in the income statement.
The difference is because the Group was not
required to make any payments relating to
the 2015/16 tax charge, which would normally
fall due for payment during 2016/17, during the
year because it was paid in full in the prior year.
The payments made during 2016/17 represent
instalment payments against the 2016/17
tax charge.
The remaining balance of the 2016/17 tax charge
is due for payment next year. The Group
expects tax payments made in future years to
be broadly equal to the current tax charge for
that year.
15
Strategic report
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Chief Financial Officer’s
review continued
Summary balance sheet
Space
Financial strategy
At 31
January
2016
New
stores Extensions
Store
closures
At 29
January
2017
498
1
–
(8)
491
Capital allocation framework
1 Investing in maintaining the estate and
reducing cost
2 Maintaining debt ratios to support
investment grade rating
14,142
40
43
(131) 14,094
3 Investing for profitable growth
Total
number
of stores
Total area
in square
feet (000)
Number
of petrol
filling
stations
336
–
–
(2)
334
Return on Capital Employed (ROCE)
ROCE at 6.9% remains a key measure. We are
focused on improving returns through the work
we are doing on the operational performance
drivers, specifically volume and costs. We are
also optimising existing assets and will continue
to deal with underperforming assets.
Key Measures
Return on Capital Employed (ROCE)
2012/13
9.8%
2013/14
8.2%
2014/15
5.6%
2015/16
5.3%
2016/17
6.9%
Definition
ROCE is a relative profit measure showing the return
generated from investments in assets. For a more detailed
definition, see the Glossary on page 122.
Key balance sheet metrics
Interest cover
Net debt/EBITDA
Gearing
ROCE
2016/17
2015/16
4.6 times
1.4
30%
6.9%
4.1 times
2.2
46%
5.3%
4 Paying dividends in line with stated policy
5 Returning surplus capital to shareholders
Our capital allocation framework is set out
above and is unchanged. Our first priority
is to invest in our stores and infrastructure,
and to reduce costs. Second, 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 in line with our
stated policy and then any surplus capital will
be returned to shareholders.
Shareholder returns
To reflect the Board’s commitment to the
capital allocation framework described above,
whilst providing the necessary financial
resources to invest in delivering the turnaround,
we set guidance that total annual dividends
should be sustainable and covered around two
times by underlying earnings. In line with this
guidance, the final dividend will be 3.85p per
share, bringing the total for the year to 5.43p.
Profits are up, debt is down and we generated
positive cash, before disposals and after
dividend. There is a significant amount of self‑
help and we are confident in the opportunity
to deliver £50m to £100m incremental profit
from making Morrisons a broader, stronger
business. The balance sheet is strong,
and getting stronger, and with continued
improvement in the customer shopping trip
we aim to deliver improving returns and value
to shareholders.
Trevor Strain
Chief Financial Officer
2016/17
£m
2015/16
£m
7,761
(2,009)
(767)
272
(1,194)
4,063
7,775
(1,710)
(749)
186
(1,746)
3,756
Fixed assets and
investments
Working capital
Provisions and tax
Net pension asset
Net debt
Net assets
Pensions
The assumptions relating to the pension
schemes remain prudent. The net surplus on
the balance sheet is £272m, an increase of £86m
since last year. In the period, with the Trustees,
we completed the triennial funding valuation
which shows a funding surplus in each of the
three schemes.
Key Measures
Capital expenditure (£m)
2012/13
1,016
2013/14
1,086
2014/15
520
2015/16
365
2016/17
419
Definition
Measured as additions to property, plant and equipment,
investment properties, intangible assets held‑for‑sale and
investments as per the cash flow statement.
Capital expenditure
Capital expenditure increased to £419m, from
£365m in 2015/16. This was lower than the
planned c.£450m, as some projects moved into
2017/18. We expect this timing difference, in
addition to last years’ underspend, to reverse
in 2017/18.
A large part of our expenditure was spent
on refreshing our stores. We completed 100
Fresh Look refits during the year and expect
to complete the whole of the estate in the
coming years.
16
Risk
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
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 risk management process
r
o
Risk management approach
The achievement of our six priorities depends
on our ability to make sound, risk-informed
decisions. Managing risk and uncertainty is an
integral part of doing business. We manage
increasing uncertainty as we respond to rapid
changes in our industry and the wider political-
economic climate by maintaining a business-
wide understanding of our key risks and how
to manage them. This assists in delivering our
promises to customers and shareholders.
Our risk management framework has been
built to identify, evaluate, mitigate and monitor
those risks which threaten the achievement of
our six priorities. The framework incorporates
both a top-down approach to identify the
Group’s principal risks and a bottom-up
approach to identify operational risks.
At the core of the risk management process are
the risk registers for each function. These detail
the key operating risks and are used to assess
the gross level of risk (likelihood and impact),
mitigating controls, the resultant net level of risk
and risk mitigation plans with dates and target
level of risk. The risk registers are owned and
managed by operational management, with
the head of each function certifying annually
that these have been reviewed and action plans
are in place where required. The risk registers
are formally reviewed by a sub group of the
Executive Committee.
A Group risk register is reviewed and updated
at least twice annually by the Executive
Committee. It details the Group’s principal
risks, owners, the level of risk and mitigating
actions. The Executive Committee’s assessment
of these risks takes into account the operating
risks, strategic risks, external factors and any
emerging risks. The principal risks are monitored
every month by the Executive Committee using
key risk indicator reporting, supplemented by
more detailed reviews as appropriate.
The Risk and Internal Audit function facilitates
the preparation of both functional and Group
risk registers. It supports the Audit Committee
in reviewing the effectiveness of our risk
management and internal control systems.
The risk management process
The risk management framework
Identif y
Eval
u
a
t
e
t
i
n
o
M
Mitigate
Top
down
Board of Directors
Maintains sound risk management and control systems,
assesses principal risks and sets risk appetite
Audit Committee
Sets risk management framework, assesses effectiveness
of risk and control systems and maintains oversight of
risk monitoring
Executive Committee
Assesses principal and operational risks and undertakes
regular monitoring of risk
Risk and Internal Audit
Coordinates risk management activity through review
of risk registers, agreement of risk mitigation plans and
preparation of risk reporting
Bottom
up
Operational Management
Reviews operational risks, operates controls and
implements risk mitigation plans
Where potential weaknesses are identified,
our Risk and Internal Audit teams work with
the business to agree robust actions to
mitigate these.
The Audit Committee supports the Board
in establishing a robust risk management
framework by approving the risk management
process and reviewing the Group’s principal risks
and key risk indicator reporting.
Read more on risk governance in the Audit
Committee report on page 28.
Key areas of focus
Key activities in 2016/17 included the review and
update of the key controls framework ensuring
that key controls are identified and assessed as
part of the review of risk registers. The Group’s
risk appetite framework has also been developed.
The focus in 2017/18 will be establishing the
rotational monitoring of key controls and aligning
reporting and ways of working to risk appetite.
Principal risks
The Directors have carried out a robust
assessment of the principal risks facing the
Group, including those that would threaten its
business model, future performance, solvency
or liquidity.
These risks are further detailed on the
following page.
This assessment of principal risks has resulted
in some changes from those risks disclosed last
year. Specifically, a ‘regulation’ risk has been
added which includes Groceries Supply Code
of Practice (GSCOP) and other key areas of
compliance. The ‘supplier relationships’ risk has
been removed as the key elements are now
covered in other risk areas.
The impact of the UK’s exit from the EU
has been considered and, whilst not seen
as a separate risk, it has been reflected in
some of the other risk areas. There are some
uncertainties, particularly in relation to the
impact of imported food prices and potential
changes to access to EU labour; however, there
has been no material change at this stage to the
Group’s residual risk profile.
Certain risks are inherent in the business and are
fundamental to the achievement of all of our
key priorities. Other risks could directly impact
the achievement of certain key priorities.
Viability statement
For more information, see page 30
17
Strategic report
Risk continued
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Principal risks
The principal risks have been identified following
a robust assessment by the Directors
Key changes in the year include the introduction of a ‘regulation’ risk and the consideration of the impact that an exit from the EU would have on the
business. The risks, which are shown in no particular order, are disclosed along with their alignment to the six priorities and the movement in residual
risk during the year. Residual risk is stated after considering the actions taken by management in response to new and emerging issues impacting the
identified risks.
RISK TYPE
DESCRIPTION
MITIGATION
There is a risk that a major incident,
such as a natural disaster or strike
action, could cause significant
disruption to business operations.
The Group’s response must be
appropriate to minimise disruption
and reputational damage.
The Grocery sector continues to have
high levels of competitive activity,
particularly in relation to price and
enhancement of service. The impact of
the EU referendum on exchange rates
has affected some commodity prices
and we need to remain competitively
priced through these fluctuations.
If we do not engage with our suppliers
and effectively manage our trade
plan to remain competitive, there
is a risk that we will not achieve our
financial targets.
There is a risk that we don’t meet the
needs of our customers in respect
of price, range, quality and service.
We need to be responsive to changes
in customer confidence and trends
resulting from changes to the economy
and the UK’s exit from the EU. If we
don’t provide the shopping trip that
customers want, we could lose sales
and market share.
• We have recovery plans in place covering our stores, depots, sites and offices;
• These plans include, where appropriate, secondary locations which would be used
as backup in case of an incident;
• A Crisis Management Group is in place to oversee these plans and to manage and
respond to any major incidents; and
• We conduct supplier risk assessments and have contingency plans in place, where
possible, to manage the risk of loss of supply.
• We review and actively manage our key price-points, sales proposition, and
promotional and marketing campaigns such as ‘Morrisons Makes It’ which
emphasises our point of difference;
• We work closely with our suppliers to build joint business plans, ensuring a
competitive customer offer and a resilient supply base;
• We continually review our range and quality and respond to customer feedback;
for example, ‘The Best’ premium own brand range was launched during 2016;
• Competitor pricing positions and market trends are reviewed on a weekly basis; and
• Our strong balance sheet and proven ability to generate cash will allow us to further
invest in our proposition.
• One of our six priorities is ‘to serve customers better’ and we have a range of
activities to support that (see page 6);
• A large-scale programme of customer listening groups is in place to gain a deep
understanding of what our customers want and, where we can improve, these have
informed key activities such as our store ‘Fresh Look’ programme;
• We closely monitor research on customer perceptions and respond quickly where
possible with support from a senior level. For example with a steering group to
address any particular risks arising from the UK’s exit from the EU; and
• We have worked with wholesale partners to make Morrisons products accessible to
more customers and continue with plans to further expand the geography covered
by our Online offering.
A security breach leading to loss
of customer, colleague or Group
confidential data is a key aspect of this
principal risk. A major data security
breach could lead to significant
reputational damage and fines.
The risk environment is challenging, with
increased levels of cybercrime and the
forthcoming General Data Protection
Regulation (GDPR).
• The Group has an Information Management Security Group which has the
responsibility for overseeing data management practices, policies, awareness
and training;
• Information security policies and procedures are in place, including encryption,
network security, systems access and data protection;
• This is supported by ongoing monitoring, reporting and rectification of
vulnerabilities; and
• The Group is taking steps to ensure compliance with the GDPR which applies
from May 2018.
Business
interruption
#
Competitiveness
1
Customer
1
2
3
4
6
Data
#
18
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
RISK TYPE
DESCRIPTION
MITIGATION
Financial
and treasury
#
The main areas of this principal risk are the
availability of funding and management
of cash flow to meet business needs,
fluctuations in commodity prices and
foreign exchange rate movements.
• The Group’s Treasury function is responsible for the forward planning and
management of funding, interest rate, foreign currency exchange rate and
certain commodity price risks (see note 7). They report to the Treasury
Committee and operate within clear policies and procedures which are
approved by the Board;
• There are governance processes in place to control purchases in foreign
currency and management of commodity prices; and
• For livestock and produce, we track prices and forecasts and enter into long
term contracts where appropriate to ensure stability of price and supply.
• Strict standards and monitoring processes are in place to manage food safety
and product integrity throughout the Group and our supply chain;
• Regular assessments of our suppliers and own manufacturing facilities are
undertaken by a dedicated team to ensure adherence to standards;
• Our vertical integration model gives us control over the integrity of a significant
proportion of our fresh food;
• Management regularly monitors food safety and product integrity performance
and compliance as well as conducting horizon scanning to anticipate emerging
issues; and
• The process is supported by external accreditation and internal
training programmes.
• We have clear policies and procedures detailing the controls required to manage
health and safety risks across the business;
• An ongoing training programme is in place for front-line operators
and management;
• A programme of health and safety audits is in place across our stores, depots,
sites and offices with resources dedicated to manage this risk effectively; and
• Management regularly monitors health and safety performance and compliance.
• We have competitive employment policies, remuneration and
benefits packages;
• A Group-wide reward framework is in place and roles are evaluated against
an external framework, driving stronger consistency of rewards;
• Our training and development programmes are designed to give colleagues
the skills they need to do their job and support their career aspirations;
• Line managers conduct regular talent reviews and processes are in place
to identify and actively manage talent (see more in our Colleagues section
on page 12);
• Colleague engagement surveys, listening sessions and networking forums are
used to understand and respond to our colleagues; and
• A senior level steering group is in place to monitor and take action on any
particular people risks relating to the UK’s exit from the EU.
Food safety
and product
integrity
#
There is a risk that the products we sell
are unsafe or not of the integrity that
our customers expect. It is of utmost
importance to us and to the confidence
that customers have in our business that
we meet the required standards. If we
do not do this it could impact business
reputation and financial performance.
Health
and safety
#
The main aspect of this principal risk is of
injury or harm to customers or colleagues.
Failure to prevent incidents could impact
business reputation and customer
confidence and lead to financial penalties.
Our colleagues are key to the achievement
of our plan, particularly as we make
changes to the business. There is a
risk that if we fail to attract, retain or
motivate talented colleagues, we will not
provide the quality of service that our
customers expect.
Business change and the challenging
trading environment may impact on
colleagues leading to an increase in this
risk. There is uncertainty on potential
changes to employment regulations
when the UK leaves the EU and this could
result in a retention and recruitment risk,
particularly at some manufacturing sites.
People
#
Regulation
#
The Group operates in an environment
governed by strict regulations including
GSCOP, competition, employment, health
and safety, and regulations over the Group’s
products. There is uncertainty on any
potential changes to regulations relating to
the UK’s exit from the EU. In all cases, the
Board takes its responsibilities very seriously
and recognises that breach of regulation can
lead to reputational damage and financial
penalties to the Group.
• We have a GSCOP compliance framework in place including training for relevant
colleagues and processes to monitor compliance;
• We have a senior level working group in place to review and improve GSCOP
compliance activity;
• We have a channel for suppliers to provide feedback and a Code
Compliance Officer;
• We have a senior level steering group in place to monitor and take action on any
potential regulatory change resulting from the UK’s exit from the EU; and
• We have training, policies and legal guidance in place to support compliance
with Competition Law and other regulations.
Key
Increase in residual risk
No change
Decrease in residual risk
New risk in the current year
Link to six priorities
1
2
3
4
To be more competitive
To serve customers better
Find local solutions
Develop popular and useful services
5
6
#
To simplify and speed up the organisation
To make the core supermarkets strong again
Underpins all six priorities
19
Strategic report
Corporate
responsibility
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Focusing on the issues
that matter to our
stakeholders
Responsible retailing
What’s next?
Our corporate responsibility programme
ensures we operate in a way that is right
for our customers, colleagues, suppliers
and shareholders whilst making a positive
contribution to society and taking good
care of the environment.
This section covers corporate responsibility
highlights during our 2016/17 financial year
as well as future plans for our strategy.
It is just a snapshot. Further information
on how we operate as a responsible
retailer can be found on our website at
www.morrisons-corporate.com/cr.
We have been listening to our stakeholders
to help review and redevelop the programme
to ensure it remains relevant to our business.
This year’s Corporate Responsibility Report
will set out our new strategy for 2017/18
and beyond detailing key priority issues
for the business alongside our streamlined
commitments and KPIs.
UN Sustainable Development Goals
We aim to be good corporate citizens and
support global initiatives. As such, we are
looking at the UN Sustainable Development
Goals and how we can align our strategy to
them in a meaningful way.
Our Corporate Responsibility Report 2016/17 will
be available for you to download later in the year.
Please visit www.morrisons-corporate.com/cr
Help British suppliers to be competitive, profitable and sustainable
What we will do next
What we’re doing
Why it matters?
British farming is essential to our business
as it keeps supply chains short and efficient.
It’s important that we support suppliers to
create profitable, affordable, high quality
products for our customers.
100%
British own brand
fresh meat sold in
our stores
£5.1m
extra income
generated for
farmers through
‘For Farmers’ range
• We will establish British Beef Shorthorn as the breed for our
‘Best’ range.
• We will build a pig production programme for greater eating
quality and affordability.
• We will develop more integrated dairy beef supply chains
through alliances with our milk processors and their farmers.
• We will support local suppliers through ‘The Nation’s Local
Foodmakers’ programme.
Ensure the highest standards of food safety and integrity
Why it matters?
What we’re doing
What we will do next
It is a priority that our products and services
meet all food safety and legal standards.
This significantly reduces risk and meets
customer expectation for quality and value.
7%
below the
FSA target for
campylobacter
levels
Focus on antibiotics
use within farming
• We will establish the monitoring and continuous improvement
of antibiotic use in chicken, eggs and pork production.
• We will continue to meet Food Standards Agency (FSA) targets
on campylobacter levels.
• We will ensure the most suitable methods are used for
microbiology testing.
Ensure fair working conditions for our suppliers
Why it matters?
What we’re doing
We take responsibility for ensuring that
workers are treated well and paid fairly
throughout our supply chain. Doing so
secures the best suppliers, improves product
integrity and reduces our risk.
1,000
ethical trade audits
undertaken in 2016
500
key supplier
colleagues attended
modern slavery
awareness training
What we will do next
• We will ensure visibility of valid ethical audits of high and
medium risk tier one suppliers.
• We will publish our modern slavery and human trafficking
statement by the end of June 2017.
20
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Making a positive difference in the communities we serve
Why it matters?
What we’re doing
What we will do next
Our stores play an active and positive role
in their local community. Doing so helps us
to support causes close to the hearts of our
colleagues and customers.
£7.5m
donated by
the Morrisons
Foundation to
local charities
£2.6m
raised for
charity partner
Sue Ryder (£7.2m
since Feb 2014)
• We will work with our new charity partner, CLIC Sargent,
over the next three years to raise funds to help stop cancer
impacting young lives.
• We will continue to make a positive difference in the communities
close to our stores by donating over £5m in grant awards.
• We will continue to support high profile partnerships in our stores
such as the Poppy Appeal and Children in Need.
Making it easier for customers to live healthier lives
Why it matters?
What we’re doing
What we will do next
As a food retailer, we must provide healthier
choices to our customers. Doing so reflects
social need, can help to increase sales and
greater enhance our brand perception.
88
tonnes of sugar
removed from
own brand
breakfast cereals
New healthier
eating brand ‘Eat
Smart’ launched
• We will reduce sugar as an ingredient in key categories which
contribute to children’s sugar intake.
• We will implement a nutrition and wellness strategy.
• We will continue to roll out Eat Smart endorsed products.
Source responsibly
Why it matters?
Increasing global demand and pressure for
key commodities can lead to ill managed
supply chains, erosion of land, illegal logging
and the destruction of natural habitats
and ecosystems. We must ensure that
our supply chains remain sustainable and
that we conserve the natural capital we’re
dependent on.
Reduce food waste
Why it matters?
We must drive smarter supply chains by
reducing avoidable food waste. Doing so can
reduce environmental risk, create innovation
and drive efficiencies.
What we’re doing
What we will do next
Continued work
with Responsible
Fishing Scheme
RSPO
certified palm
oil in own
brand products
• We will continue to work on seafood sourcing improvement
projects to ensure fresh fish is responsibly sourced.
• We will ensure all timber and timber derived products are third
party certified sustainable or from 100% recycled material.
• We will continue to monitor supplier compliance to source
Roundtable on Sustainable Palm Oil (RSPO) certified palm oil
and derivatives in own brand products.
What we’re doing
What we will do next
Over
2m
unsold food
products from
stores donated
to local community
groups
25,000
tonnes of
Wonky Veg sold
during 2016
• We will continue to increase the amount of surplus food we
redistribute from our operations to ensure that good food is
never wasted.
• We will work with Waste and Resources Action Programme
(WRAP) to look at food waste hotspots within our operations.
• We will further support the ‘Love Food Hate Waste’ initiative,
to help our customers reduce food waste in their home.
Look after our colleagues
Why it matters?
The success of Morrisons is dependent on
recruiting, developing and retaining the right
people. Supported and engaged colleagues
enable us to deliver great customer service
and meet our six priorities.
What we’re doing
What we will do next
‘Your Say’
forums launched
For more
information
please go to Our
colleagues section
on page 12
• We will ensure our colleagues have the right tools to do their
job through ‘My Job’ training. We will progress the best talent
within our business and support diversity.
• We will continue to run ‘Your Say’ forums and improve overall
engagement scores.
Continued on the next page
21
Strategic report
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Corporate
responsibility continued
Reduce general operational waste and carbon emissions
Why it matters?
What we’re doing
It’s important that we minimise environmental
risks to our business, protect natural capital and
create efficiencies throughout our operation.
26.9%
reduction in operational
carbon emissions
(2005 baseline)
2025
Courtauld commitment
signatories
Group GHG emissions for year ending 31 December
2004/05
Baseline
year
2015/16
Prior
year
2016/17
Current
year
Change vs
baseline
99,641
144,497
41,656
153,473
112,555
35,764
165,486
119,257
33,298
66.1%
(17.5%)
(20.1%)
504,431
239,222
235,934
(53.2%)
780,585
671,562
588,969
(24.5%)
1,680
36,730
–
1,609,221
49.0
1,100
20,876
9,894
1,244,445
30.2
983
16,657
15,101
1,175,685
27.8
(41.5%)
(54.6%)
–
(26.9%)
(43.3%)
The 2013 Environmental Reporting Guidelines
state that the baseline year should be
recalculated if there have been structural
changes that would significantly impact on the
organisation’s baseline year figures. For this year,
we have revised our historical emissions figures
to take account of the sale of a number of sites
and revisions to carbon conversion factors.
The Group Carbon Footprint 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:
Emission source
Combustion of fuel and operation of facilities
Natural gas
Haulage
Business miles
Fugitive emissions
Refrigerant
Energy purchased for own use
Electricity
Other
Staff travel
Waste
Online deliveries
Total
Intensity ratio: kg CO2e per ft² GIA
Reducing emissions
Methodology
The information above is taken from our
Group Carbon Footprint, prepared internally in
partnership with Jacobs who also independently
verify the Group Carbon Footprint. We have
reported for the calendar year 1 January to
31 December for all years in order to remain
consistent with our historical footprint reports.
We have used the UK Government’s
Environmental Reporting Guidelines (June
2013) to prepare these numbers, and the latest
emissions factors from the UK Government
GHG Conversion Factors for Company
Reporting (2016).
22
What we will do next
• We will help to deliver progress against our
commitment to WRAP’s Courtauld 2025
agreement, which is a collaborative action to
cut the resource needed to provide our food
and drink by one-fifth over ten years.
• We will continue to make progress against our
30% absolute reduction in operational carbon
emissions by 2020.
• We will ensure Carbon Trust re-certification,
which we have achieved since 2008. The Carbon
Trust Standard recognises organisations that
take a best practice approach to measuring and
managing their environmental impacts.
Subsidiaries and joint ventures
• Wm Morrison (HK) Ltd – Hong Kong office
that deals with energy locally.
• Wm Morrison Bananas Ltd – leases a site
which is operated by a third party.
Sites
• A number of distribution sites are operated
by third parties who are responsible for
the energy and carbon, including sites at
Dordon and Birstall, and sites operated by
Clipper Logistics PLC and Bunzl Cleaning &
Hygiene Supplies.
Omissions
• Fuel oil – only four sites have fuel oil, which
is estimated to account for less than 0.1%
of the total footprint.
Approval of the Strategic report
Pages 2 to 22 of the Annual Report form the Strategic
report. The Strategic report was approved by the Board
on 8 March 2017 and signed on its behalf by:
Jonathan Burke
Company Secretary
8 March 2017
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Corporate governance
report
Chairman’s governance
statement
I am pleased to introduce on behalf of the Board,
Morrisons Corporate governance report for the
financial year 2016/17
Andrew Higginson
Chairman
In a business as fast
paced as Morrisons, good
corporate governance
becomes all the more
important
Corporate governance statement
The Board considers that its corporate
governance policies and procedures are
appropriate and that the Group has applied the
principles and complied with the provisions of the
2014 UK Corporate Governance Code (the ‘Code’)
throughout the financial year 2016/17 and to the
date of this Annual Report. The one exception
to this is in relation to the external assessment of
Board effectiveness which will be discussed later
in this report.
The Code is available on the Financial Reporting
Council’s website (www.frc.org.uk).
Compliance statement
The Board’s Corporate governance compliance
statement sets out how the Group complies with
each of the provisions of the Code. It is available
in the investor relations section of the Group’s
website, www.morrisons-corporate.com.
This year was another very competitive
time in the UK grocery market, but a year
in which Morrisons made good progress in
its turnaround. This is perhaps best reflected
in improving like-for-like sales.
The Board has been very active in supporting
management in this journey and overseeing the
operational improvement as we provide a better
shopping experience for customers. The Board
has also devoted time to further developing the
Group’s long term strategy in such a competitive
environment, from overseeing the balance sheet
strategy, to reviewing risks and risk appetite,
from improving capability in both people and
systems, and to ensuring that the Group fulfils
its role as a good corporate citizen.
The Board has also spent time with the new
Executive Committee and the restructured
Leadership team, to help and pass on their
experience. Given that several of the Board
members took up their positions shortly before
the start of the year, there has also been an
ongoing familiarisation programme to enable
Directors to fully understand the diversity of
the business and its component parts.
We were sorry to lose the service of Irwin Lee
as a Non-Executive Director during the year.
Irwin decided to return to his native Philippines
and go back into a full time executive role.
We are grateful for his contribution to
the Group.
Board composition and effectiveness
I am delighted to see the Board and
management team working well together to
guide the Group through this turnaround. I am
satisfied that the Board is independent and
contains an appropriate mixture of skills and
experience. The experience the Board members
bring from other companies and industries
is being proven to be invaluable in guiding
Morrisons on the long and important journey
we must make. I also consider that each of
the Non-Executive Directors has committed
and is able to commit an appropriate amount
of time in fulfilling effectively their role and
responsibilities on the Board.
As the majority of the Board were appointed
during the last financial year, we took the
decision to delay the external review of Board
effectiveness by one year as noted later in
this report. This year we undertook an internal
evaluation of the effectiveness of the Board
and its Committees. The results are summarised
on page 27. The evaluation did not highlight
any particular areas of concern, although
Board members provided helpful and insightful
suggestions which will be considered.
Diversity
As I stated last year, the turnaround of Morrisons
will be customer and colleague led. As such, we
recognise the importance of diversity across
our colleague base, and the Board itself. This has
been key this year, as we have restructured much
of the leadership of the business. The Board
continues to meet our policy to maintain
female representation at not less than 20% with
an aspiration to increase this to at least 30%.
At the end of the financial year, 29% of total
Board composition was female, and at no point
during the year was there less than 25% female
representation on the Board. The diversity of
our Retail team continues to be an area of focus.
The proportion of female store managers has
increased from 7% to 10% this year whilst the
proportion of female regional managers has
increased to 30% from 9% last year. We have also
actively increased the gender diversity of the
Leadership team which is now 18% female.
Progress on the diversity agenda is measured
through regular functional talent reviews.
These reviews consider the ethnicity, gender,
age and length of service of all colleagues.
Retail, particularly grocery retail, is a very fast
paced industry. It is particularly important
that we have good corporate governance and
continually review and challenge ourselves to
do better. We will continue to listen hard to our
stakeholders and respond quickly where we can
as we continue the journey to Fix the business.
Andrew Higginson
Chairman
23
Governance
Board of Directors
Always
listening...
Trevor Strain
Chief Financial
Officer
Rooney Anand
Senior Independent
Non-Executive
Director
Appointment
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 Group’s productivity programmes.
Trevor joined the Board as Chief Financial
Officer on 10 April 2013.
Experience
Prior to joining Morrisons, Trevor worked
for Tesco PLC 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.
Appointment
Rooney joined the Board as a
Non-Executive Director and Senior
Independent Director on 1 January 2016.
Experience
Rooney is a highly experienced retail and
fast moving consumer goods (FMCG)
executive. Following a career with United
Biscuits and then Sara Lee, he joined
Greene King PLC in 2001 as Managing
Director of its brewery company. He was
appointed CEO in 2005. Rooney is credited
with changing Greene King from a regional
brewery and pub business, to a brand-led
pub, restaurant and hotel operator. In 2015,
he completed Greene King’s £770m
takeover of the Spirit Pub Group, which
made Greene King the largest managed
pub group in the UK.
Committee membership
N R C
Jonathan Burke
Company
Secretary
Paula Vennells
Non-Executive
Director
Appointment
Jonathan was appointed as the Group’s
Company Secretary on 15 February
2017, replacing Mark Amsden.
Experience
As a qualified accountant and
Company Secretary, Jonathan has
worked at Morrisons for the last
25 years holding various finance,
compliance and project roles. He also
held the role of Company Secretary
between 2001 and 2009.
Appointment
Paula joined the Board as a Non-Executive
Director on 1 January 2016.
Experience
Paula is currently Chief Executive of the
Post Office, a role she has held since April
2012. Paula joined the Post Office in 2007.
Previously she was Group Commercial
Director of Whitbread PLC having started
her career with Unilever and L’Oréal.
Paula has held directorships in sales and
marketing with a number of major retailers
including Dixons Stores Group and Argos.
She is Non-Executive Chair of First Rate
Exchange Services Limited.
Committee membership
N R
C A
24
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Andrew Higginson
Chairman
David Potts
Chief Executive
Appointment
Andrew joined the Group as Deputy
Chairman and Chairman Elect in October
2014 and became Chairman at the end
of January 2015.
Experience
Andrew is currently the Chairman of
N Brown Group PLC and a Non-Executive
Director of Woolworths Holdings Limited
(South Africa). Andrew was previously the
Chairman of Poundland Group PLC, Senior
Independent Director of BSkyB PLC and
a Non-Executive Director of the Rugby
Football Union and McCurrach UK Limited.
Andrew was an Executive Director at
Tesco PLC for 15 years.
Committee membership
N R
C
Appointment
David joined the Group as Chief Executive
on 16 March 2015.
Experience
David is a vastly experienced retailer who
joined Tesco PLC at the age of 16 and
worked there for 39 years. He rose to
become CEO of its Ireland business, its
UK retail stores business and then CEO
of Tesco Asia. David was also on the Tesco
PLC Board from 1998 until he left in 2011.
Prior to his appointment as CEO of
Morrisons, David held several advisory
positions with a number of private equity
and consultancy firms and developed his
own retail concept to sell general
merchandise. He also worked on two
extensive retail projects in the UK.
Committee membership
C
Belinda Richards
Non-Executive
Director
Neil Davidson
Non-Executive
Director
Appointment
Belinda joined the Board as a Non-
Executive Director on 1 September 2015.
She became Chair of the Audit Committee
on 1 January 2016.
Experience
Belinda had a career in professional services
for over 25 years, where she operated as a
senior adviser in corporate finance and
strategy. She was a corporate finance
partner at Deloitte and Global Head of
Merger and Separation Advisory Services
until 2010. Belinda is currently the Senior
Independent Director of Grainger PLC,
where she also chairs the Remuneration
Committee, a Non-Executive Director
of Aviva UK Life & Pensions and a
Non-Executive Director of the Monks
Investment Trust PLC. Belinda serves on
the Advisory Group of Audit Committee
Chairmen at the Financial Reporting
Council and is a member of the Governing
Council of the Centre for the Study of
Financial Innovation, a not for profit think
tank focused on research in Financial
Services.
Committee membership
N R
C A
Appointment
Neil joined the Board as a Non-Executive
Director on 1 October 2015. He became
Chair of the Corporate Compliance
and Responsibility Committee on
1 January 2016.
Experience
Neil has had an extensive career in
manufacturing, starting with Northern
Foods PLC where he rose to become
Managing Director of its milk division.
He subsequently became CEO of Express
Dairies PLC and then Arla PLC. He has
also been a Non-Executive Director of
Persimmon PLC and Northern Recruitment
Group PLC and the Chair of Leicestershire
County Cricket Club. He is currently the
Chairman of Produce Investments PLC.
Committee membership
N R
C A
Committee key
N Nomination Committee
R Remuneration Committee
C
Corporate Compliance and
Responsibility Committee
A Audit Committee
Committee Chairman
Executive Committee
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
David Potts
Chief Executive
Trevor Strain
Chief Financial Officer
See Directors on
page 24
See Directors
on page 24
Darren Blackhurst
Group Commercial
Director
Andy Atkinson
Group Marketing and
Customer Director
The Executive
Committee is
driving a culture
of listening within
the business to
all of our key
stakeholders
The Executive Committee
regularly joins customers on
‘accompanied shopping trips’
to get direct feedback on
shopping experiences.
At the AGM the Board
and Executive Committee
invite shareholders to ask
any questions they may
wish to raise.
The ‘Your Say’ forums are
a way for the Executive
Committee to listen to
feedback and suggestions
from colleagues to improve
Morrisons for our colleagues
and customers.
Clare Grainger
Group People
Director
Appointment
Darren joined Morrisons in June 2015
as Group Commercial Director.
Experience
Darren started his career at Tesco in 1988,
holding a number of buying positions in
fresh food and grocery. In 1994, he was
seconded to Tesco’s French business
Catteau before holding a number of
category director positions. Darren became
Commercial Director for Tesco Lotus
Thailand in 2002. He joined Asda in 2006 as
Executive Trading Director for Food and in
2008 was appointed Chief Merchandising
Officer. In 2011, he joined Matalan as Chief
Executive before moving to B&Q as
Commercial Director in 2014.
Committee membership
C
Gary Mills
Group Retail
Director
Appointment
Andy joined Morrisons in 2011 and
was appointed as Group Marketing and
Customer Director in January 2016
having held the interim position for
over five months.
Experience
Andy previously held a number of senior
Commercial and Trading roles within the
organisation. Prior to joining Morrisons,
Andy held a variety of senior commercial
roles within Boots, progressing to
Commercial Director. Andy started at
Coca-Cola expanding his career with roles
at Walt Disney and then L’Oréal.
Appointment
Clare joined Morrisons in February 2009
and was appointed Group People Director
on 1 September 2015.
Experience
Clare started her career at Asda and held
a number of roles both within Head Office
and the Retail division. She progressed
through a variety of senior human resources
(HR) roles including Head of HR at HBOS/
Lloyds Banking Group, where she led
a number of programmes to drive
differentiation in both sales and services.
She joined Morrisons in 2009 holding a
number of HR director roles. Most recently,
Clare was also Interim Group Retail Director.
Appointment
Gary joined Morrisons in August 2015
as Group Retail Director.
Experience
Gary has more than 30 years’ retail
experience, with Stewarts Supermarkets
in Northern Ireland and then with Tesco
PLC where he held a variety of senior
positions including Retail Director for
Convenience and Retail Director for the
North and Northern Ireland. Gary’s
experience covers all areas of retail and
all formats, including supermarkets and
convenience stores.
25
Governance
Corporate governance
report continued
Leadership
Structure of the Board and its Committees
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Chairman
Key objective: Governance of the Board
PLC Board
Key objectives: Overall conduct of the business and strategy setting
Executive
Committee
Audit
Committee
Corporate
Compliance and
Responsibility
Committee
Remuneration
Committee
Nomination
Committee
Key objectives
Key objectives
Key objectives
Key objectives
Key objectives
Implementation of strategy and
actions in respect of financial
planning and performance;
day-to-day management
of operations.
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.
Development and
implementation of the
Group’s policies on corporate
compliance and corporate
responsibility. Reviewing and
ensuring compliance with
those policies and ethical and
governance standards. Ensuring
the Group fulfils its role as a
good corporate citizen.
Development and
implementation of the Group’s
remuneration framework
and policies for Directors
and colleagues including
all incentives, bonuses and
pensions.
Advice to the Board on Board
and senior management
appointments and succession
planning; monitoring of the
composition of the Board and
its Committees.
PLC Board
Members1,2
Andrew Higginson, David Potts, Trevor Strain, Rooney Anand, Neil Davidson, Belinda Richards,
Paula Vennells
Key objective
• Overall conduct of the business and strategy setting.
Responsibilities
• Development and approval of the strategy and key policies of the Group;
• Monitoring of progress towards achieving all Board and Group objectives;
• Management of culture and values;
• Monitoring of financial performance, critical operational issues and risks by reviewing 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
• Approval of membership of the Board on recommendation of the Nomination Committee.
1 All Non-Executive Directors are independent.
2 Irwin Lee stepped down from the Board on 31 August 2016.
Throughout the year, the majority of the Board consisted of independent Non-Executive Directors.
Board responsibilities
The formal schedule of matters reserved for
the Board remains unaltered from 2015/16
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 by the
Board during the year and is also set out in the
Corporate governance compliance statement.
Board Committees
The decisions delegated by the Board to
its Committees and the activities of those
Committees during the financial year 2016/17
are described within each Committee’s
report below.
During the year, the Group considered
the changes recommended by the 2016
UK Corporate Governance Code (the
‘Code’) and implemented those changes,
as appropriate, throughout the Group.
The Corporate governance compliance
statement contains the terms of reference
of the Committees and these have been
updated during the year to take into account
changes in the Code.
26
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Senior Independent Director
Effectiveness
Rooney Anand was appointed as the Senior
Independent Director on 1 January 2016 when
he joined the Board. Rooney has extensive
knowledge of the retail and fast moving
consumer goods industries.
The Senior Independent Director provides
shareholders with an alternative contact to
the Chairman, the CEO and the CFO. The Senior
Independent Director also carried out the
Chairman’s performance review.
Board activities in 2016/17
The Board’s focus in this financial year was:
• setting the strategy;
• review of results and forecasts and approval
of regulatory announcements;
• review of the annual business plan and
monthly updates from the Executive
Committee regarding its delivery;
• the conduct of the business in accordance
with its values;
• review of the performance of the CEO;
• approval of the 2017/18 budget and
commercial plans, including productivity
savings required to invest in the core offer;
• approving the plan for the Group’s balance
sheet and capital structure strategy;
• approving the Group’s continued operations
and growth opportunities in online, wholesale
and manufacturing; and
• review of the governance structure and
activities of the subcommittees of the Board.
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 24.
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,
including 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 without
management present.
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 in
2013/14. As the majority of the Board members
were appointed shortly before the start of
the financial year 2016/17, it was decided that
the Group would conduct an internal Board
effectiveness review this year and conduct an
external review in the early part of 2017/18.
It was felt that the Group and the Board would
receive more value from an external review
once members of the Board had had sufficient
time to settle into role. An internal review led
by the Chairman and the Company Secretary
took place in 2016/17.
The evaluation comprised the Company
Secretary conducting an interview with each
member of the Board individually 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;
• efficiency of time;
• Board and senior management succession;
• the mix of skills and experience on the Board;
• the amount of time devoted to Board and
Committee matters;
• training and awareness; and
• overall Director performance.
Responses were collated by the Company
Secretary and discussed with the Chairman
and the Board.
The review concluded that the Board operates
well and cohesively and that the Chairman
fostered an atmosphere of open discussion
which encouraged full participation.
The improvements that the Group had made
to Board organisation and agendas in the
previous year were thought to work well.
Papers were well written and received in a
timely fashion.
The Board engaged on appropriate topics for
discussion with the right balance of information
provided. The move to fewer Board meetings
but with Board members travelling to the
meeting the night before, allowed longer, more
intensive Board sessions and the chance to
engage more informally with each other, and
with the Executive Committee.
Attendance at meetings
Board
Nomination
Remuneration
Andrew Higginson
David Potts
Trevor Strain
Rooney Anand1
Neil Davidson
Belinda Richards
Paula Vennells2
Irwin Lee3
1 Rooney Anand was unable to attend one meeting due to a pre-existing commitment which was known to the Group at the time of his appointment.
2 Paula Vennells was unable to attend one meeting due to a pre-existing commitment which was known to the Group at the time of her appointment.
3 Irwin Lee stepped down from the Board on 31 August 2016.
8/8
8/8
8/8
7/8
8/8
8/8
8/8
5/5
3/3
–
–
2/3
3/3
3/3
3/3
1/1
6/6
–
–
5/6
6/6
6/6
5/6
4/4
Audit
–
–
–
–
7/7
7/7
6/7
5/5
CCR
4/4
4/4
–
4/4
4/4
4/4
3/4
2/2
27
Governance
Corporate governance
report continued
Members felt this had been useful in getting to
know each other and the senior members of
the business, leading to better understanding.
Board members made helpful and insightful
suggestions for improvement, particularly on
areas of the business they would like more
discussion on. These suggestions will be
implemented in 2017/18 as part of the Group’s
ongoing effort to constantly improve its
corporate governance.
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 Chief Executive, who in turn is responsible
for monitoring the performance of the CFO.
During the year, the Group also reviewed and
considered its relationship with its principal
advisers, and concluded these were effective.
Membership
The Nomination Committee considers
that the Board and Executive Committee
contain the skills and experience necessary
in light of the Group’s current activities and
strategic direction.
Re-election of Directors
All the current Directors submit themselves
for re-election at the AGM to be held on
15 June 2017. After reviewing the outcome of
performance evaluations, the Board confirms
that the contributions made by the Directors
offering themselves for re-election at the AGM
in June 2017 continue to be effective and that
the Board supports their re-election.
Directors’ interests
The interests of the Executive and
Non-Executive Directors of the Group, and
their immediate families, in the shares of the
Group, along with share options, are contained
in the Directors’ remuneration report set out
on pages 33 to 46. At no time during the year
did any of the Directors have a material interest
in any significant contract with the Group or
any of its subsidiaries.
28
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Executive Committee
Audit Committee report
Members1
David Potts, Trevor Strain, Andy Atkinson, Darren
Blackhurst, Clare Grainger, Gary Mills
Members1
Belinda Richards (Chair), Neil Davidson,
Paula Vennells
Key objectives
Implementation of strategy and actions in
respect of financial planning and performance;
day-to-day management of operations.
Responsibilities
• Development and implementation of strategy.
• Oversight of:
– financial performance, reporting and control;
– risk management;
– operational improvement programmes; and
– control and supervision of all Group
operational activities.
• Making recommendations to the Board
in respect of:
– budgets and long term plans;
– dividend levels; and
– ad-hoc events.
Key objectives
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;
• Succession planning for senior management.
• whether the Annual Report is fair, balanced
1 Mark Amsden stepped down from the Committee on
15 February 2017.
Executive Committee activities in 2016/17
The Executive Committee’s focus in this
financial year was:
• driving trading performance and reviewing
financial performance;
• reducing the cost base of the organisation;
• implementing the Group’s six priorities;
• overseeing the Group’s compliance with its
obligations under the Groceries Supply Code
of Practice (GSCOP);
• overseeing the Group’s commitment
to corporate social responsibility in
particular in minimising food waste, in
supporting the Group’s charity partner
Sue Ryder and in supporting the charitable
Morrisons Foundation;
• overseeing the Group’s continued
development of its wholesale, online and
manufacturing operations;
• approval of capital budgets;
• determining the draft budget and long
term plan;
• periodic review of performance against
strategic objectives;
• determination of principal risks for the Group;
• approval of the projects with Ocado, Amazon,
Doddle, Timpson, Palmer & Harvey and Rontec;
• review of changes to speed up and simplify
the business;
• implementation of a new sales-based ordering
system; and
• agreeing improvements to the Group’s
IT infrastructure.
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, approval of their fees; and
monitoring of the Group’s policy on non-
audit services.
1 Irwin Lee stepped down from the Committee on
31 August 2016.
Audit Committee Chair
The Board is satisfied that Belinda Richards
has recent and relevant financial experience
appropriate to her position as Chair of the
Audit Committee. Belinda is considered to have
sufficient financial experience, having been
a corporate finance partner at Deloitte for
over ten years. Additionally, she serves on the
Advisory Group of Audit Committee Chairmen
at the Financial Reporting Council.
Audit Committee activities in 2016/17
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 Risk and Internal
Audit and discussed key risks (described
in more detail on pages 17 to 19);
• reviewed key policies including those
governing tax, treasury, expenses and
corporate hospitality;
• reviewed the recognition of commercial
income and the controls in place over
compliance with GSCOP;
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
• understood the Governance Code and
reporting requirements; and
store cash flows, which remains consistent
with the prior year.
• reviewed the Viability statement.
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;
• 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 49 of this Annual Report.
Financial reporting matters
The Audit Committee has considered whether
suitable accounting policies have been applied
and has reviewed key accounting judgements
and estimates made by management during
the year. The key judgements and financial
reporting matters considered by the
Committee are outlined in this section.
Impairment of property, plant and
equipment, intangible assets and onerous
property contracts
Impairment and onerous property contracts
continue to be a focus area for the Committee.
The Group’s policy to assess impairment
on an annual basis, or where changes in
circumstances indicate impairment (or
impairment reversal), is disclosed in note 3.1 of
the financial statements. The impairment review
is comprehensive, covering non-financial assets,
principally the Group’s property portfolio,
IT assets and goodwill.
The Group’s trading performance and evidence
of the market value for properties and sites are
considered by the Group as part of the annual
impairment review. Management estimates the
recoverable amount of assets to determine
the extent of any impairment charge or
whether a reversal of a previous impairment
charge is applicable. This assessment resulted
in a reversal of previous impairment on certain
cash generating units and an impairment charge
being recognised on others, as disclosed in note
3.3 of the financial statements.
The Committee reviewed the Group’s
assessment of recoverable value and reassessed
the key assumptions and judgements made
in the light of current market conditions and
trading performance. The Committee also
considered how management had assessed
the potential impact of the uncertain
economic conditions and the impact of an
exit from the EU in the impairment review.
The Committee has reviewed management’s
key assumptions including the market valuation
of the store portfolio. It has also understood
the methodology and approach to forecast
In addition, property contracts where
the expected future cash flows are less
than the future contract commitments,
an onerous contract provision should be
recognised. The Committee reviewed the key
judgements and understood the reasons for
year-on-year movements.
The Committee reviewed the sensitivity of key
assumptions along with their impact on the
impairment and onerous contract provisions
and is satisfied the assumptions applied by
management are appropriate.
Commercial income
Commercial income is a deduction from
the cost of purchase, and it is recognised in
accordance with signed supplier agreements,
with most income subject to little or no
subjectivity or judgement.
The Group’s definition of commercial
income is disclosed in note 1.1 of the financial
statements and is consistent with the definition
in the prior year.
Commercial income continues to be an area
of focus for the Committee. During the year,
the Committee has considered the policies
applied with regard to commercial income,
the key judgements, the level of income
recognised and the financial statement
disclosure. The Committee has been updated
on the Group’s initiative to simplify trading
arrangements and understood the impact this
has had on commercial income during the year.
In considering the appropriateness of
commercial income recognised in the year
and the financial position at the year end,
the Committee has reviewed reports from
management and Internal Audit outlining
the accounting judgements and the control
environment. The Committee understood the
key judgements in this area and considers them
to be appropriate.
The Group continues to seek to provide
transparency of disclosure surrounding
commercial income. The Committee also
reviewed the key messages from the FRC lab
case study highlighting the good practice in
the Group’s approach to commercial income
disclosure. The Committee remains supportive
of the level of disclosure made in this area.
Stock
Stock is a material balance in the Group’s
financial statements, with stock held across
a large number of locations. Stock count
procedures have remained consistent with
the prior year.
Judgement is required in determining provisions
for shrinkage and valuation and the Committee
reviews these judgements as part of the annual
accounting policy review.
The Committee has reviewed the level of stock
provision and key assumptions underpinning
the provisions and considers these to
be appropriate.
Pensions
The Group operates a number of defined
benefit pension schemes. Accounting for
defined benefit pension schemes requires
the application of a number of assumptions
which have an impact on the valuation
of the schemes’ assets and liabilities.
The IAS 19 valuations are performed by
an independent actuary.
The Committee has reviewed the
assumptions used in the schemes’
valuations. The Committee has considered
the appropriateness and sensitivity of the
assumptions used by the independent actuaries
in the valuation. The Committee has concluded
that the assumptions are appropriate.
The Committee reviewed the legal advice
the Group has obtained with regard to the
recognition of a pension surplus for the
Group’s defined benefit pension schemes
and considered the treatment appropriate.
The Committee reviewed management’s
assessment of the accounting treatment
resulting from the set-up of the new defined
contribution scheme and agreed with
Management’s treatment.
The Committee also instigated an update at the
Board regarding the outcomes of the triennial
valuation as part of understanding the Group’s
pension position.
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 Executive
Committee for all functions twice 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.
The Group’s principal risks are set out on
pages 17 to 19.
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;
29
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Governance
Corporate governance
report continued
• reviews financial whistle-blowing reports
Viability statement
from colleagues;
• reviews the external auditor’s management
letter 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.
These systems and processes have been in place
throughout the period and up to the date of
approval of this Annual Report.
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 Committee regularly reviews the Group’s
process for risk management and internal
control and annually conducts a formal review
of these processes. No significant failings or
weaknesses of internal control were identified
during these reviews. Limited weaknesses
and areas where controls could be further
automated were identified. Clear action plans
are in place to address these weaknesses and
are captured as part of functional risk registers
with defined management responsibility.
The Committee understands the importance
of a robust risk management process and
control environment and looks to progressively
strengthen it over time.
30
The Group’s business model and strategy,
as outlined on pages 8 and 9, are central to an
understanding of its future viability. The Group
continues to progress against the current
turnaround strategy, focusing on strengthening
the core supermarkets and delivering capital
light growth whilst maintaining discipline and
control in relation to costs and upholding a
strong balance sheet.
The Directors have assessed the viability of the
Group over a three year period to January 2020.
The Group’s business model is not dependent
on any particular contract or resource with
fixed end dates; the period was selected
because the Group’s forecasts associated with
the detailed strategic and financial plans are
prepared over this period and were considered
to be the most robust and appropriate means
to support its Viability statement.
The Board assesses the Group’s prospects
primarily through the strategic planning process.
The latest strategic planning update with
the Board was held in November 2016 with
involvement of all relevant functions across
the business.
As part of the strategic planning process,
the Directors make a number of assumptions
about business performance and the ability of
the Group to raise debt financing. The Group
carefully plans and reviews the maturity profile
of debt facilities to avoid coterminous maturity
dates, and liquidity forecasting gives visibility of
headroom under committed facilities over the
period of the financial plans.
Key metrics in the plan, such as cash flow,
interest cover, liquidity and the ability to raise
debt financing, were subject to sensitivity
testing by flexing a number of the main financial
assumptions in order to assess the impact of
principal risks in severe but plausible scenarios.
All principal risks were considered as part of the
testing but particular focus was given to:
• business interruption;
• competitiveness;
• customer;
• data; and
• financial and treasury.
Scenarios tested included measuring the impact
of a downturn in sales, an increase in costs, or
a business interruption event. Furthermore,
reverse stress testing was performed to
understand the level of performance decline
that the Group could withstand.
Based on this assessment, and taking into
account the Group’s current position, the
Directors have a reasonable expectation that
the Group will be able to continue in operation
and meet its liabilities as they fall due over the
three year period of their assessment.
Effectiveness and independence of the
external auditor
The Committee considered the effectiveness
of PricewaterhouseCoopers LLP (PwC)
as auditor during the year. In making this
assessment the Committee considered the
output of an effectiveness survey completed
by the Directors and management, the
information presented by the auditors,
management responses to the auditor’s
findings, including any adjustments, and the
level of non-audit fees.
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:
• 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 2016/17.
The policy on the engagement of the external
auditor to supply non-audit services is set out
in the investor relations section of the Group’s
website (see www.morrisons-corporate.com).
PwC has continued to provide certain non-
audit services throughout the year. In the year
the non-audit services work provided by PwC
was in line with the policy and the ratio of audit
to non-audit services was within the 1:0.7 limit
set in the policy.
The Committee is satisfied 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 include separate teams for
audit versus non-audit work.
External audit tender
As noted in last year’s Annual Report, the Board
appointed PwC as external auditor in June 2014.
The Group confirms that it has complied with
the provisions of the Competition and Markets
Authority’s Order in respect of The Statutory
Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive
Tender Processes and Audit Committee
Responsibilities) Order 2014 – statement
of compliance.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
attracting candidates with a wide range of
backgrounds and experience, 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.
Particular focus continued throughout the year
on increasing female representation in the Retail
team. Six of the 20 most senior retail field team
are now female, up from two just over a year
ago, an increase from 9% to 30%. An additional
ten female store managers were appointed
during the year, meaning that 10% of our store
managers are now female.
Progress on the diversity agenda is measured
through regular functional talent reviews.
These reviews consider the ethnicity, gender,
age and length of service of all colleagues
at Morrisons.
At the end of the 2016/17 financial year the
Board included two women members, 29% 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 Committee’s
regular review of the Board’s composition
and skills.
Stability and diversity
Following the decision for the UK to leave the
EU, the Committee and Board have worked
hard to reassure, engage and support our
colleagues from the EU. The Committee and
Board are confident that our multi-cultural sites
and stores will offer all our colleagues the same
commitments of respect, opportunity, training
and fair pay. The Group has improved our ways
of working to make our business accessible
for our EU colleagues through better English
language training, translation support, simplified
processes and more opportunities to progress.
Other areas of focus
The Committee also spent time reviewing
succession planning for both the Board and
Executive Committee as well as of the talent
pool for levels below Executive Committee.
Corporate Compliance and Responsibility
(CCR) Committee
Nomination Committee report
Members1
Neil Davidson (Chair), Andrew Higginson, David
Potts, Rooney Anand, Belinda Richards, Paula
Vennells, Darren Blackhurst, Andrew Clappen2
Key objectives
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:
• GSCOP;
• food safety and food integrity;
• health and safety;
• gender pay gap;
• cyber security;
• ethical trading;
• modern slavery;
• environmental and competition compliance;
• data protection;
• governance and reputation; and
• the Morrisons Foundation.
Generally ensuring that the Group is acting
as a good corporate citizen.
1 Irwin Lee stepped down from the Committee on 31 August
2016. Mark Amsden stepped down from the Committee on
15 February 2017.
2 Andrew Clappen is the Group Corporate Services Director.
Andrew joined Morrisons in 2012 and is responsible for the
Corporate Affairs and Policy, CSR & Ethical Trading, Agriculture
and Technical Services (Food and General Merchandise
Technology, Safety, Quality, Compliance and Health & Safety)
of the Group. Prior to Morrisons, Andrew was the Senior Vice
President responsible for Food Safety, Quality Assurance &
Regulatory Affairs at Loblaw Companies Ltd in Canada.
CCR Committee’s activities in 2016/17
Members1
Andrew Higginson (Chair), Rooney Anand, Neil
Davidson, Belinda Richards, Paula Vennells
Key objectives
Advice to the Board on Board and senior
management appointments and succession
planning; monitoring of the composition of the
Board and its Committees.
Responsibilities
• Evaluating the current and required mixture of
skills and experience on the Board;
• Sourcing and selecting candidates;
• General oversight of people and capability
within the business;
• Oversight and understanding of the Group’s
leadership and succession plans; and
• Oversight of the Group’s plans on diversity
and inclusion.
1 Irwin Lee stepped down from the Committee on
31 August 2016.
Nomination Committee’s activities in 2016/17
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.
The Committee’s focus in this financial year was
a review of:
Diversity
The Committee recognises the benefits of a
diverse colleague base across the Group and
is supportive of initiatives with the business
to improve diversity at all levels.
The Group wishes to increase female
representation in the Leadership team to
at least 30%. This target has not yet been
achieved. The Leadership team currently has
18% female representation and the Committee
recognises that more work is needed in
this area. Recruitment and promotion
policies have been reviewed with a view to
• GSCOP compliance including training and
results of internal reviews;
• 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;
• redistribution of food waste;
• food safety and improvements;
• food integrity and testing; and
• non-financial whistle-blowing reports.
Remuneration Committee report
The report from the Remuneration Committee
is contained in the Directors’ remuneration
report on pages 33 to 46.
Gender diversity
Board
Senior
management
Total
Female
representation
Female
representation %
Male
representation
Male
representation %
2
14
16
29%
18%
19%
5
65
70
71%
82%
81%
Total
7
79
86
31
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Matters dealt with elsewhere in the
Strategic report or Directors’ report
The way the Group generates value and the
Board’s strategy for delivering the Group’s
objectives are described in our business model
on pages 8 and 9, and in our six priorities
section on pages 6 and 7. The information
regarding the Takeover Directive disclosures are
on page 48. The consideration of going concern
is described on page 47.
Annual General Meeting (AGM)
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 2017 AGM of the Group is to
be sent to shareholders with an accompanying
letter from the Chair. The AGM will be held
at the Group’s headquarters at Gain Lane in
Bradford on 15 June 2017. 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 at 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.
Enquiries from suppliers on GSCOP related
matters are dealt with in accordance with the
regulations. Any matter not resolved directly
with a buyer is escalated to the relevant
Category Director and, if requested, to our
appointed CCO. During 2016/17 we successfully
worked with suppliers to resolve any GSCOP
complaints through the commercial escalation
process or with the intervention of our CCO.
Contact details and further information can be
found at www.morrisons.co.uk/gscop.
Relations with shareholders
The Board is committed to communicating
the 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 overseas
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 corporate 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.
Governance
Corporate governance
report continued
The Groceries Supply Code of Practice
(GSCOP)
GSCOP applies to designated grocery retailers
in the UK with an annual turnover in excess
of £1bn. This code of practice adds specific
regulations into the trading relationships
between the designated grocery retailers
and their suppliers.
We actively engage with the relevant regulatory
bodies, the Office of the Groceries Code
Adjudicator (GCA) and the Competition and
Markets Authority (CMA), to build best practice
in relation to the Code. We have regular
meetings with the GCA and provide updates
on our activity and details on specific areas
of interest for the Adjudicator.
In June 2016 the GCA published a case study
providing clarification on activity Morrisons had
undertaken in July 2015. The GCA determined
that Morrisons had breached paragraph 3 of
GSCOP, Variation of Supply Agreements by
indirectly requiring suppliers to pay lump sums
that were not provided for in the relevant
supply agreement. The GCA acknowledged that
we had responded immediately when alerted
to the issue, had conducted an extensive
internal investigation and no further action was
required to be taken.
In response to the GCA’s case study, and
supplier and buyer feedback, we enhanced
and extended our training programme for all
supplier-facing colleagues. This training covered
all colleagues in the Trading teams together with
bespoke training for colleagues in our Supply
Chain and Finance teams who work closely with
the Trading function. Over 1,000 colleagues
have been through the programme.
In addition, we strengthened our overarching
governance in this area with the establishment
of a governance group comprising of senior
leadership team members across the Trading,
Supply Chain, Finance, Legal and Compliance
functions. This group undertook a detailed
review of current activity and compliance
with the GCA’s sector-wide priority areas
and supplier relationship development.
Routine reports and updates are provided to
our Executive Committee and CCR Committee,
on activity and all relevant aspects of GSCOP
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 Code Compliance Officer
(CCO), and to the GCA and the CMA at the
financial year end.
32
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Directors’ remuneration
report
How our Directors
are rewarded
Annual statement by the Senior
Independent Director, on behalf
of the Remuneration Committee
Rooney Anand
Senior Independent Director
The first full year of
delivering a sustainable
turnaround, against
the backdrop of a very
competitive market
Dear Shareholder
On behalf of the Remuneration Committee
and the Board, I am pleased to present the
Directors’ remuneration report for the financial
year 2016/17.
Business context – performance for 2016/17
The Committee is pleased with the progress
made in the first full year of the Fix phase of the
turnaround. David and the team have been able
to improve the business faster than expected
by listening to customers and colleagues, and
responding to their feedback, to improve
the shopping experience. The business has
also continued its strong capital discipline,
continuing to improve free cash flow and
strengthen the balance sheet.
In a highly competitive market, like-for-like
(LFL) sales have grown and more customers
are choosing to shop with us. We have reduced
prices for customers without compromising
on quality, as shown by us winning a number
of prestigious awards, including Meat & Fish
Retailer of the Year and International Wine
Challenge Supermarket of the Year for the
second year running.
We have also started to realise the profit
opportunity from the business which will
power the Rebuild and Grow phases of the
turnaround – wholesale, online, popular and
useful services. We continue to explore capital
light growth opportunities.
Key financial highlights
• Underlying profit before tax (UPBT) for 2016/17
of £337m (an increase of 11.6% on 2015/16
before restructuring costs).
• LFL sales growth (excluding fuel) of 1.7%.
• Exceeded £2bn three-year free cash flow
target six months early and have continued
to reduce net debt.
New remuneration policy – summary
• No material change to the
remuneration policy
• Increase to shareholding requirement
• Change of level of normal LTIP grant
to reflect turnaround opportunity
In addition, we are pleased with the progress
we are making across the business for all
colleagues to share in the success of the
business going forward:
• In 2016/17, we paid the highest hourly rate for
store colleagues of the big four grocers.
• In 2016/17 we made a significant investment
in-store colleagues’ hourly pay and paid a
bonus to colleagues equivalent to around
9% of UPBT.
• Performance based Long Term Incentive Plans
(LTIPs) have been rolled out to store manager
level and above across the business.
The new remuneration policy presented
later in the report reflects feedback from
shareholders and the policy changes
aim to increasingly link Director and
shareholder experience.
Key Measures
Business performance
£302m
£337m
7.77p
10.86p
1.7%
UPBT
(before restructuring
costs in 2015/16)
2015/16
2016/17
Underlying
basic EPS
(2.0%)
LFL sales
33
Governance
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Directors’ remuneration
report continued
Incentive out-turns for 2016/17
Key actions during 2016/17
2017-2020 LTIP
Annual bonus
Shareholder engagement
The bonus for 2016/17 was based 50% on UPBT,
30% on a strategic scorecard of measures and
20% on personal objectives.
• UPBT of £337m resulted in 100% of this part
During the year, the Committee engaged
with our largest investors to obtain their views
on our current remuneration policy and the
proposed changes in the new policy.
of the bonus paying out.
Key feedback included:
• LFL sales growth of 1.7%, and relevant
cost/productivity savings of £269m were
achieved in 2016/17. Both elements of the
strategic scorecard measure achieved 100%
against their respective targets, resulting
in 100% achievement against the strategic
scorecard measure.
The result of the above measures combined
with achievement against personal objectives
resulted in bonus payouts of 100% of maximum
for both the CEO and CFO.
LTIP
The LTIP award granted in June 2014 and vesting
in June 2017 was based 50% on cumulative free
cash flow, 30% on underlying EPS and 20% on
total sales (excluding fuel and VAT) for 2016/17.
• Cumulative free cash flow of over £2bn over
the period resulted in 100% of this part of the
LTIP vesting.
• The underlying EPS growth and total sales
targets were not met and therefore none
of this part of the award will vest.
The LTIP will vest at 50% of the maximum.
• support for the principle of higher reward
for stretching targets;
• continued support for free cash flow
measure, but at lower weighting; and
• support for a long term incentive plan
that locked in the management team and
incentivised turning around the business and
delivering further growth.
We considered and incorporated the views of
our investors in the development of our new
policy as follows:
• stretching performance targets which reflect
the financial objectives of the business over
the next three to four years and reward
achievement of those objectives in a way that
is ‘self funding’;
• increasing the shareholding requirement
to drive alignment within the investor
experience; and
• continued focus on cash but at lower
weighting than previously.
New remuneration policy
We intend to present our new remuneration
policy for shareholder approval at the June
2017 AGM.
• No changes to policy on pay, annual bonus,
benefits or pensions.
• Individual LTIP awards rising to 300% (in
line with current policy), with associated
stretching targets.
• Increase in shareholding requirement
to 250% which represents a sector
leading requirement.
A detailed summary of the new remuneration
policy is set out on pages 37 to 40.
Implementation in 2017/18
• No change to policy on base pay, benefits,
pensions or annual bonus; and
• David Potts has again waived the pay rise
offered by the Committee.
The material change to the operation of the
policy is the LTIP award.
The plan has been designed with the following
two goals in mind:
Goal 1
Flexibility to motivate and reward achievement
of the business turnaround
Current LTIP
Performance targets driving market
typical levels of growth
New LTIP
Stretching performance targets driving
further growth
Increased normal grant levels and associated
stretching targets to drive performance
(self funding)
Goal 2
Greater alignment with investors
Current LTIP
Financial targets
Three year performance period
New LTIP
Increased shareholding requirement
Structure of the full Directors’
Remuneration Report
• At a glance – Overview of performance and
comparison of 2014 and 2017 policies.
• Remuneration policy – New remuneration
policy. Subject to binding shareholder vote
at the 2017 AGM in June.
• Annual report on remuneration –
Implementation of remuneration policy
during 2016/17 and proposed implementation
of the new policy in 2017/18. Subject to
shareholder vote at the 2017 AGM in June.
Rooney Anand
Senior Independent Director
The Group is required to prepare a Directors’
remuneration report for the 52 weeks ended 29 January
2017. 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.
34
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
At a glance – how we
have performed
Rewarding a year of strong financial performance and
achievement of our customer measures
Key business performance indicators
Measure 1
UPBT (before restructuring costs in 2015/16)
Underlying basic EPS
LFL sales (%)
Cumulative free cash flow (2014/15 onwards)
1 For definitions of these measures, see the Glossary on page 122.
Key shareholder performance indicators
Total shareholder return (TSR)
Value of a £100 holding
£
140
120
D Potts
100
Target
2016/17
£337m
10.86p
1.7%
£2,304m
2015/16
£302m
7.77p
(2.0%)
£1,639m
Actual
80
T Strain
Target
Actual
0%
Fixed pay
January 2016
Morrisons
FTSE 100
FTSE All Share Food & Drug Retailers
April 2016
July 2016
October 2016
January 2017
The graph above shows the Group’s total shareholder return (TSR) compared with the TSR of the FTSE 100 and FTSE All Share Food & Drug Retailers
indices over the 12 month period to 29 January 2017.
100%
80%
60%
40%
20%
Annual bonus (cash)
Annual bonus (shares)
LTIP
How we have been rewarded in 2016/17
Executive Directors (% of overall remuneration)
Total spend: Executive Directors vs Group (£m)
D Potts
Max1
Actual
T Strain
Max1
40%
40%
30%
30%
30%
30%
20%
16%
16%
48%
Actual
28%
22%
22%
28%
2016/17
Salaries
Bonus
LTIP
National Insurance
Benefits
Pension costs
Executive Directors
Total
1,631
54
19
118
19
78
6
1,925
£0m
£1m
£2m
£3m
£4m
£5m
£6m
Fixed pay
Annual bonus (cash)
Annual bonus (shares)
LTIP
% of overall remuneration
The above shows the proportion of the Executive Directors’
remuneration in 2017 that was at risk in the form of annual bonus and
LTIP arrangements, meaning 77% of their remuneration was linked to
the achievement of short and long term objectives.
The Group’s total spend on colleague reward is illustrated in the above
chart. This indicates that the spend on Executive Director pay is a small
proportion of the total investment in overall remuneration, and that our
colleagues are rewarded for their contribution to the Group’s success.
1 Reflects the maximum that the individual could earn under the current policy.
D Potts first LTIP award was 2015-2018, therefore he had no LTIP vesting in 2016/17.
35
Governance
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Directors’ remuneration
report continued
Changes to our Directors’
remuneration policy
We are evolving our policy to support our six priorities
Consideration of shareholder views and policy review process
Consideration of shareholder views
How we went about the policy review:
As well as normal ongoing dialogue with
shareholders, the Group has undertaken
a series of consultative meetings to shape
the development of the new policy, as
well as meeting with institutional investor
representative bodies. The design of the
LTIP was amended specifically in response
to shareholder feedback.
• Met with our major shareholders to
discuss views on remuneration in the
context of Morrisons
• Reviewed our current policy against our
strategic priorities and identified areas
of misalignment
• Developed alternative proposals for
consideration before identifying a
preferred approach
• Presented detailed proposals to our major
shareholders with further meetings to
discuss rationale
• Proposal further refined following
shareholder feedback
• Remuneration Committee approve changes
and present to shareholders for approval
Summary of policy changes
The principles underpinning our policy
1
Doing what is right for the
business for the long term
2
Ensuring lock-in of Directors as
we start to deliver Fix, Rebuild
and Grow
Summary of policy changes
3
Continuing to deliver sector
superior returns to shareholders
4
Providing clear alignment between
Directors and shareholders over
the policy period and beyond
5
Maintaining pay fairness in what
is a talent competitive industry
PAY ELEMENT POLICY GOALS
HOW POLICY IS EVOLVING TO FURTHER SUPPORT OUR STRATEGY1
Base salary
• Ability to recruit and retain our top talent
• Provide market competitive levels of fixed pay
Benefits
in a competitive industry
Fixed
• Provide for a sense of fairness amongst wider
colleagues
• Maintain policy of providing market competitive base pay, benefit and
retirement provisions
• Maintain limit on increases in base salary for Directors to those of the
wider workforce2
Pension
Annual
bonus
LTIP
Variable
• A focus on doing what is right for the business over the
• Maintain incentive focus on key business metrics of UPBT, LFL sales,
long term
free cash flow and EPS
• Clear alignment between Director and investor interests
• A strong and rigorous performance culture
• A remuneration package weighted towards
performance-related pay
• Transparency in targets set and performance
measurement
• Maintain current annual bonus framework to include a 50% deferral
into shares for three years3
• Increase in share ownership guidelines to 250% – a sector leading
requirement
• Provide opportunity for increased reward for achieving stretching
targets through increase in individual LTIP opportunity to 300%
from 240%3,4
1 Full policy is set out on pages 37 to 40. 2 Policy will permit increases of a higher amount in exceptional circumstances such as change in role or promotion.
3 The Committee have the discretion to adjust the clawback and malus periods as they deem appropriate. 4 Although outgoing policy already permits LTIP awards of this amount,
the intention is for normal award limits to be increased to 300% from 240% subject to achievement of ‘stretching’ targets.
The Committee is committed to ongoing
dialogue and consultation with shareholders
and their representative bodies.
alongside the principle of working with the
existing policy. The outcome of this review
resulted in two changes:
Policy change rationale
In reviewing our policy, we have reflected
the shareholder feedback from consultation,
Normal LTIP grant levels
The normal LTIP grant levels have been
increased in response to the feedback that
shareholders liked the principle of the potential
for higher reward, if linked to stretching targets.
Weightings of performance levels
Investors also told us they particularly liked our
focus on cash and wanted to see this retained
as a measure, albeit at lower weighting.
36
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Our new Directors’
remuneration policy
A remuneration policy that will drive long term
sustainable value creation for shareholders
As outlined on page 34, the Directors’
remuneration policy will be subject to a vote
at the 2017 AGM. If approved, the changes will
take effect following the AGM. The current
policy, as approved at the 2014 AGM, can be
found at www.morrisons-corporate.com.
In designing and setting the policy on Directors’
remuneration, the Committee has considered
the reward structure, market levels of pay and
general pay increases throughout the Group.
Pay and conditions in the wider Group
The new policy covers a period of turnaround
for the Group, and consequently we are seeking
to attract, motivate and retain the best talent
at all levels of the market. For store colleagues,
during 2016/17 we paid the highest hourly
rate of the big four grocers. We have also
introduced a performance-related colleague
bonus scheme which for 2016/17 performance
will pay out nearly double what the previous
‘profit share’ arrangement used to.
Although colleagues are not formally consulted
on Directors’ remuneration policy, colleagues
views on pay form part of our Engagement
Survey and colleague ‘Your Say’ forums.
The results of the survey are communicated to
the Board, and Executive Directors attend the
national ‘Your Say’ forum.
The only changes are to the LTIP (as outlined on
page 34). The policy is summarised below:
Remuneration policy table – new policy 2017
Executive Directors
ELEMENT AND HOW IT
SUPPORTS STRATEGY
OPERATION
OPPORTUNITY
PERFORMANCE
MEASURES
AND PERIOD
Not applicable.
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 Group provides a
market competitive benefits
package for Executive
Directors to support in the
ability to recruit and retain
the best talent.
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.
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 42.
Executive Directors are entitled to a car allowance (or other
car benefit), transport costs, private health provision, life
assurance and normal colleague discount entitlement.
Executive Directors are also entitled to participate in the all
colleague Share save schemes (and any other all colleague
share plan which the Group may operate) on the same
terms as all other UK-based colleagues. 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 Group 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.
37
Governance
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Directors’ remuneration
report continued
ELEMENT AND HOW IT
SUPPORTS STRATEGY
OPERATION
Pension benefits
The Group 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
colleagues are automatically enrolled into this
arrangement. A 10% cash salary supplement
in lieu of Group 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.
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.
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 (DSBP), 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.
OPPORTUNITY
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.
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.
LTIP
Awards under the
LTIP are designed to
incentivise and reward
achievement of the
Group’s long term
strategic objectives and
creation of sustainable
value for shareholders
through execution of
the strategy.
Awards are made annually subject to
performance measures set by the Committee,
which are aligned with business strategy and
the Group’s stated KPIs. The Committee has
the discretion to change the weightings of
measures, remove measures or introduce new
measures to support delivery of the Group’s
objectives and strategy.
The maximum annual
individual award level
under the plan is 300%
of salary.
The annual award level
for Executive Directors
is 300% of salary.
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.
38
PERFORMANCE
MEASURES AND PERIOD
Not applicable.
Annual bonus awards are subject to the following
performance measures:
• 50% is based on underlying profit before
tax performance;
• 30% is linked to achievement of a number of
strategic 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 may be changed
if the Committee decides this is appropriate to
support delivery of the Group’s strategy. 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. 10% of the maximum bonus potential).
Achievement of one of the strategic 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
forfeited if the individual leaves employment before
the vesting date. The Committee has discretion to
award ‘good leaver’ status.
LTIP awards are subject to the following
performance measures:
• 40% is based on cumulative free cash flow;
• 40% is based on total sales (excluding fuel and VAT);
and
• 20% is based on underlying EPS growth.
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.
For all awards, the Committee has the discretion
to adjust the vesting calculations as set out in
these notes.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to Policy table
Annual Bonus Plan and Deferred Share Plan
Annual Bonus Plan is measured over the
financial year. The current measures are
underlying profit before tax (50%), strategic
measures (30%) and personal performance
(20%). The weightings are reviewed each
year to ensure strategic alignment and the
Committee has the flexibility to adjust
weightings and measures to ensure alignment
to the strategy and our six priorities.
Weightings for each year are disclosed in
the statement of implementation.
Underlying profit before tax is a widely
accepted measure of Group and Director
performance. Directors are able to impact
it within the year, and it is directly aligned to
shareholder experience. The Committee has
the discretion to adjust for material exceptional
events or actions which were not contemplated
at the time of target setting, to ensure that
vesting is accurate and fair. As a point of
principle, the Committee has decided that the
threshold for profit targets will always be higher
than actual profit achieved in the previous
financial year.
Strategic scorecard measures are set annually
in line with the Group’s strategy and key
objectives for the financial year. The Committee
uses objective measures where possible (for
example, achievement of cost/productivity
savings) , and exercises its judgement to assess
the outcome of each element at the end of
the year.
Personal objectives for the CEO are set by
the Chairman, in line with objectives for the
next 12 months and the longer term Group
strategy. The CEO sets objectives for the other
Executive Director(s). The Committee assesses
performance against objectives and personal
bonus achievement at the end of each year.
Deferred share awards are not subject to any
further performance conditions.
LTIP
The Committee believes the mix of measures
and weightings are correct for the Group’s
current strategy and aims. The current
measures are:
• total sales (excluding VAT and fuel) (40%);
• free cash flow (40%); and
• underlying EPS growth (20%).
The Committee has the discretion to amend
the weightings, introduce new measures and
exclude measures in order to best align to long
term shareholder interests.
Targets are determined by the Committee
at the time of grant, and are based on the
internal financial plan, external expectations and
the need to ensure we incentivise long term
sustainable value creation for shareholders.
Total sales growth is the change in total sales
(excluding VAT and fuel).
Free cash flow is operating cash flow1
plus net proceeds from sale of properties
(excluding store sale and leasebacks) less
capital expenditure (excluding onerous
capital payments)
1 Operating cash flow is EBITDA plus movements in operating
working capital adjusted for non-cash charges as set out in
the notes to the financial statements.
Underlying EPS is based on underlying profit
before tax adjusted for a normalised tax charge.
The Committee uses a ROCE underpin to
ensure that ROCE exceeds weighted average
cost of capital for the performance period.
The calculation of ROCE is as described in
the Glossary on page 122.
The Committee has discretion to amend the
calculation for free cash flow in the interests
of fairness and accuracy. In this event, a full
disclosure will be given in the Directors’
remuneration report.
Remuneration for the wider Group
Everyone at store manager level and above
participates in the Annual Bonus Plan, with
the same measures and targets as the Executive
Directors. The same population participate in
the LTIP, again with the same measures and
targets. This alignment within the organisation
is an important part of ‘Teamwork’, one of our
five ways of working.
Approach to new hires
Prior to appointment, the Committee will
apply the following principles in agreeing
the remuneration of Executive Directors:
• The overall package will be sufficient
to attract and retain the best talent to
effectively deliver the Group’s strategy,
taking into account similar positions in the
market, experience of the candidate and
current remuneration.
• The Committee will look to align the base
salary, benefits, pension benefits, annual
bonus and LTIP, in line with the remuneration
Illustration of the application of the new remuneration policy
Executive Directors
£6m
£5m
£4m
£3m
£2m
£1m
£5.3m
48%
16%
16%
£2.6m
25%
16%
16%
£1.1m
£0.8m
100%
43%
20%
100%
£3.8m
48%
16%
16%
20%
£1.8m
25%
1 6%
1 6%
43%
D Potts
(minimum)
D Potts
(target)
D Potts
(maximum)
T Strain
(minimum)
T Strain
(target)
T Strain
(maximum)
Fixed pay
Annual bonus (cash)
Annual bonus (deferred)
LTIP
Notes
• Fixed pay includes base salary, benefits and pension benefits.
• The maximum bonus opportunity is 200% of base salary. Target bonus
opportunity is 50% of maximum opportunity. The cash element is
payable in 2018/19. The deferred element is deferred for three years
upon award – no further performance conditions are applied to
this element.
• Normal LTIP grant is 300% of base salary. Target is 25% of maximum.
39
Governance
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Directors’ remuneration
report continued
policy whilst taking into account the individual
circumstances (including compensation
for loss of remuneration from a previous
employer) of candidates and existing
Executive Directors.
• The maximum variable pay opportunity will
may be granted under the LTIP. This would be
separate to arrangements required to recruit
the preferred candidate.
12 months. On an exceptional basis, to complete
external recruitment, a longer initial period
reducing to 12 months might be used.
Directors’ service contracts, notice periods,
termination payments and change of control
be 500% of salary. Up to 200% may be earned
under the Annual Bonus Plan, and up to 300%
Our policy is for Executive Directors to have
rolling service contracts with a notice period of
Termination payments
At its discretion, the Group may pay in lieu
of notice. Payment in lieu of notice could
potentially include up to 12 months base
salary, benefits and pension, but is payable
in instalments and subject to mitigation.
The table below sets out the treatment of elements of remuneration that would normally apply for Executive Directors whose service with the
Group terminates:
CIRCUMSTANCES
OF TERMINATION
SALARY AND
CONTRACTUAL BENEFITS
ANNUAL BONUS PLAN
UNVESTED
DEFERRED SHARES
UNVESTED LTIP AWARDS
Resignation or
gross misconduct
Paid to date
of termination
No bonus paid for year
of termination
Award lapses when
employment ends
Award lapses when employment ends
Paid to date
of termination
Injury/ill health,
disability, death,
retirement (with
agreement of
the Group)
Negotiated
termination at
the discretion of
the Committee
Paid to date
of termination
Eligible to be considered for
a bonus, calculated on a time
pro-rata basis for service
in the relevant financial
year. Subject to meeting
performance targets
Deferred shares are retained
and will typically vest on
the normal three year
cycle. The Committee
has discretion to bring
forward vesting in
exceptional circumstances
Eligible to be considered for good leaver status,
which gives entitlement to retain the award
granted calculated on a time pro-rata basis.
Vesting of any pro-rata award is subject to
performance conditions. Malus provisions will
continue to apply to unvested awards
Eligible to be considered for
a bonus, calculated on a time
pro-rata basis for service
in the relevant financial
year. Subject to meeting
performance targets
Deferred shares are
retained and will typically
vest on the normal three
year cycle. The Committee
has discretion to bring
forward vesting in
exceptional circumstances
At the Committee’s discretion, may be eligible
to be considered for good leaver status, which
gives entitlement to retain the award granted
calculated on a time pro-rata basis. Vesting of
any pro-rata award is subject to performance
conditions. Malus provisions will continue to
apply to unvested awards
Under the Annual Bonus and LTIP scheme rules,
the Committee has discretion in relation to
termination of employment, including:
• whether a bonus payment is made;
• whether unvested deferred shares and LTIP
awards are retained or not;
• level of vesting; and
• timing of any payment arising from vesting.
In exercising discretion, the Committee
will take into account factors such as
personal performance and conduct, overall
Group performance and the specific
circumstances of the departure (including
but not limited to whether it is by mutual
agreement). The Committee may take into
account payments it considers reasonable
in consideration of potential legal claims,
including reasonable reimbursement of legal
fees. The Committee may also consider
providing support related to the ending of
employment, including outplacement support,
continuation of benefits for a limited period
or reimbursement of repatriation costs.
Change of control
In the event of a change of control, deferred
share awards vest immediately. Annual bonus
and LTIP awards vest to the extent that any
performance conditions have been met and,
unless the Committee decides otherwise, with
40
a pro-rata reduction to reflect the performance
period not yet completed.
Policy on remuneration for Non-Executive
Directors
Clawback and malus
As noted in the 2014/15 Directors’ remuneration
report, the Committee has incorporated
clawback into the Group’s incentive plans in
addition to the existing malus provisions in
the Group’s DSBP (Deferred Share Bonus Plan)
and LTIP.
Annual cash bonus and DSBP awards made
in respect of 2016/17 are therefore subject to
clawback and malus provisions. Clawback and
malus provisions apply to LTIP awards granted
from April 2015 onwards.
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). Awards may be clawed back in the
following circumstances:
• material misstatement of results;
• gross misconduct;
• reputational damage; and/or
• performance assessment error.
The Committee can adjust clawback and malus
periods as they deem appropriate.
Fees
Fees for the Non-Executive Directors (NEDs) are
determined by the Chairman and the Executive
Directors, and are reviewed from time-to-time
with regard to the necessary time commitment,
and the level of fees in comparable companies.
The Chairman’s fee is determined by the
Remuneration Committee and the Board,
and is reviewed on the same basis.
Fees for the NEDs are made up of a base
fee, plus additional fees for Committee
chairmanship, Committee membership and
for the appointed Senior Independent Director.
The Chairman receives a single fee only.
Current fee levels are disclosed on page 42.
There are no additional fees for other duties
to the Group.
Benefits and other items in the nature
of remuneration
The Chairman has use of a car and driver
and receives private health provision.
The Chairman and NEDs are entitled to normal
colleague discount. Neither the Chairman
nor any of the NEDs participate in any Group
incentive scheme.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Implementation of remuneration policy in 2017/18
Base salary
Annual base salaries for the Executive Directors
are set out below:
The performance measures and weightings for
the Executive Directors are as follows:
D Potts
T Strain
2017/18
£000
850
596
2016/17
£000
850
575
Underlying profit before tax
Strategic scorecard
Personal objectives
Weightings
(% of maximum bonus
opportunity)
50%
30%
20%
David Potts was appointed as CEO on 16 March
2015 on a base salary of £850,000. In 2016/17,
David waived the increase awarded by the
Committee. For 2017/18, the Committee offered
a rise equivalent to store colleagues, but David
again waived the increase awarded, and his
salary remains unchanged.
Trevor Strain was promoted to the role of
CFO in April 2013 on a base salary significantly
below market rate. In 2014/15 he assumed
responsibility for Property, Fuel, Online, Popular
and Useful Services, and Strategy. In 2015/16
he was given responsibility for the growing
wholesale business, including our partnership
with Amazon and our petrol forecourt
initiatives. He has also taken on responsibility
for the Legal and Company Secretary functions.
The Committee therefore felt it appropriate
to award a salary increase in line with store
colleagues, taking his salary to £596,000,
effective 1 February 2017.
The Committee took this decision in light of
the fact Trevor Strain was appointed on a salary
with the intention of stepping it up over time
as he developed in role. He has proved to be
pivotal in the performance and turnaround
of the business. Given his contribution, his
additional responsibilities and his marketability,
the Committee did consider whether a higher
increase would be appropriate; however, it
decided to keep in line with increases in the
wider business.
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.
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 the Directors’ remuneration
policy (policy set out on pages 37 to 40).
Underlying profit before tax targets are set
by reference to internal budgets.
Scorecard measures for 2017/18 will focus on
strategic objectives in the areas of like-for-like
sales (20%) and productivity/cost reduction (10%).
Personal objectives will be underpinned by
the Group’s strategic objectives.
Detail on the performance targets is regarded
by the Directors as commercially sensitive
at this time and cannot be disclosed here.
Subject to being considered no longer
commercially sensitive, targets will be
disclosed in a future remuneration report.
LTIP
The LTIP awards for David Potts and Trevor
Strain for 2017 will be 300% of salary. The reason
for awarding at the maximum of the range
is to align the Directors with the turnaround
opportunity. All leaders from store managers
and above were granted an exceptional
‘teamwork’ award (LTIP) in 2016, in recognition
of the size of the turnaround opportunity
and the work required. Only the Executive
Directors did not get a higher than usual grant.
Given that shareholders expressed support
for the principle of higher reward for value
creation, and the Chief Executive is already two
years in role, with a significant track record of
achievement, the Committee felt it appropriate
to align the incentives to stretch beyond the
financial plan.
The performance measures, weightings and
targets attached to LTIP awards due to be made
in April 2017 are as follows:
Weighting (% of
maximum award) Targets4
Measure
Sales1
40%
Free cash flow2 40%
Underlying
20%
EPS growth3
£400m to £750m
£600m to £800m
5% to 10%
per annum
1 The change in total sales (excluding VAT and fuel).
2 Operating cash flow plus net proceeds from sale of properties
(excluding store sale and leasebacks) less capital expenditure
(excluding onerous capital payments).
3 See the Glossary on page 122.
4 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 sales 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.
Chairman and Non-Executive Director fees
Base fees for Non-Executive Directors have not
been reviewed since 2008, and are therefore
being increased by 2% to £61,200. Fees for
subcommittee membership (last reviewed in
2013) have been increased to £7,000. The fees
for subcommittee chair roles are unchanged.
The fee for the Senior Independent Director
is also unchanged at £20,000. The base fee for
the Chairman is unchanged at £400,000.
41
Governance
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Directors’ remuneration
report continued
Annual report on remuneration
Audited information
Single total figure of remuneration
The table below sets out the single total figure of remuneration and breakdown for each Director for 2016/17 and the comparative figure for 2015/16.
Salary/fees
£000
Benefits1
£000
2016/17
Annual
bonus2
£000
LTIP3
£000
Pension
benefits4
£000
Total
£000
Salary/fees
£000
Benefits1
£000
2015/16
Annual
bonus2
£000
LTIP
£000
Pension
benefits4
£000
Total
£000
–
–
–
31
35
–
187
126
10
213
138
–
747
525
39
226
35
1
–
783
354
850
575
–
1,092
763
–
2,252
1,449
50
1,700
1,150
–
2,794
2,681
354
Executive Directors
D Potts5
T Strain
D Philips6
Non-Executive
Directors
401
A Higginson
–
R Anand 7
7
–
P Vennells7
5
–
I Lee8
32
–
N Davidson9
25
–
B Richards10
33
–
P Cox11
102
–
P Hughes11
84
–
R Gillingwater 12
26
–
J Waterous13
92
–
1 Taxable benefits for the Executive Directors include a car allowance (or other car benefit), transport costs and private health provision. The Chairman has use of a car and driver for Group business and
receives private health provision. All Directors receive the Group’s normal staff discount entitlement which is not taxable. The value of any new Sharesave awards granted in 2016/17 is also included in
this figure. The Group has been advised that for the Chairman, CEO and CFO, certain expenses in relation to travel should be treated as a taxable benefit. The table above includes these travel expenses
and the corresponding tax contributions.
400
92
76
54
92
92
–
–
–
–
400
7
5
32
25
33
102
84
26
92
415
92
76
54
92
92
–
–
–
–
15
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2 50% of the annual bonus is deferred in shares for a period of three years. There are no performance conditions attached to this deferred element.
3 Awards granted under the LTIP in June 2014 are scheduled to vest in June 2017. The performance conditions, relating to the 2014-2017 LTIP award, ended on 29 January 2017. The figures stated also include
the number of dividends accrued on the 2014-2017 LTIP award at the time of vesting.
4 D Potts received a salary supplement equal to 25% of base salary. T Strain received a salary supplement of 24% of base salary. None of the Executive Directors have a prospective entitlement to
a defined benefit pension by reason of qualifying services.
5 D Potts was appointed to the Board on 16 March 2015. The figures disclosed for 2015/16 are for the period following appointment to the Board.
6 D Philips stepped down from the Board on 16 February 2015. The figures disclosed for 2015/16 are for the period prior to him stepping down. Loss of office payments were disclosed in the 2015/16
remuneration report.
7 R Anand and P Vennells were appointed to the Board on 1 January 2016. The figures disclosed for 2015/16 are for the period following appointment to the Board.
8 I Lee was appointed to the Board on 1 September 2015. The figures disclosed for 2015/16 are for the period following appointment to the Board. I Lee retired from the Board on 31 August 2016.
9 N Davidson was appointed to the Board on 1 October 2015. The figure disclosed for 2015/16 is for the period following appointment to the Board.
10 B Richards was appointed to the Board on 1 September 2015. The figures disclosed for 2015/16 are for the period following appointment to the Board.
11 P Cox and P Hughes stepped down from the Board on 31 December 2015. The figures disclosed for 2015/16 are for the period prior to them stepping down.
12 R Gillingwater stepped down from the Board on 4 June 2015. The figure disclosed for 2015/16 is for the period prior to him stepping down.
13 J Waterous retired from the Board on 31 January 2016.
Annual bonus
The table below provides a summary of the performance achieved under the annual bonus for 2016/17:
Maximum bonus
opportunity
(% of salary)
200%
200%
Actual bonus
(% of salary)
200%
200%
Actual bonus
(£000)
1,700
1,150
Bonus deferred
into shares
(% of award)
50%
50%
Bonus paid
in 2017
(£000)
850
575
Director
D Potts
T Strain
42
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Group financial and strategic scorecard
Achieved as a % of maximum
Performance measure
Group financial
Weighting
(as a % of total annual
bonus opportunity)
Threshold
20% payout
Target
60% payout
Maximum
100% payout
Actual performance achieved
Actual achievement
Payout
(as a % of total annual
bonus opportunity)
Underlying profit before tax
50%
£302m
£316m
£330m
Strategic scorecard
20% payout
50% payout
100% payout
£170m
(2%)
£180m
(1%)
£190m
0%
£337m
£269m
+1.7%
50%
10%
20%
Cost reduction/productivity
10%
Like-for-like sales
Personal objectives
Personal measures
Director
D Potts
20%
20%
Weighting
(as a % of total annual
bonus opportunity)
20%
Objective
Deliver key actions against the
six priorities
Commentary
• Fresh Look store refurbishment programme met targets
• Improvements in store standards, product quality and
Develop capability
Strengthen GSCOP compliance,
processes and culture
Develop and start to implement
a strategy for growth post the
Rebuild phase of the turnaround
T Strain
20%
Build capacity in his functions
Cost reduction and Group
simplification programme
Develop and execute plans for
non-core/non-strategic assets
Deliver cash improvement
programmes and Group cash
flow targets
Lead the process to identify and
implement the actions required
to deliver our strategy
supply chain
• Launch of the ‘Best’ premium range
• Automated store ordering system delivered to every store
• Work led to increased like-for-like sales
• Executive Committee stabilised
• Senior leadership team enhanced
• 84 new store managers hired
• All store managers and regional managers attended five
day leadership development programme designed to
improve store standards, colleague engagement and
customer satisfaction
• Significant strengthening of internal GSCOP processes,
including governance and control framework, improving
the compliance culture and the way we treat suppliers
• Development of Popular and Useful Services
• Development of Wholesale business (including Amazon
partnership, petrol forecourts and re-launch of the
Safeway brand)
• Completed talent and succession review for function
• Hired new CIO
• Built talent pipeline by Teamwork moves across functions
• Group has exceeded cost/productivity savings target
• Disposal of investment in Fresh Direct Inc. at a profit
• Free cash flow targets exceeded
• Net debt reduced by £552m
• Leads Wholesale business, Online, and Popular and Useful
Services. Significant progress made across all including
Amazon partnership, petrol forecourts and re-launch of
the Safeway brand
Performance summary
As well as performance against individual objectives (which have been completed in full), the Committee considered the wider performance of the
Group. The Committee concluded that management were making substantial progress against the Fix phase of the turnaround, as well as laying the
foundations for Rebuild and Grow. The financial performance resulting from the contribution of the Executive Directors has exceeded maximum.
The Committee therefore decided to award them each the maximum 20%.
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. Deferred shares are normally forfeited if the individual leaves the Group before they vest.
43
Governance
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Directors’ remuneration
report continued
LTIP awards
Awards granted under the LTIP in June 2014 are scheduled to vest in June 2017. The performance period relating to these awards ended on 29 January
2017. Details of the performance conditions and the extent to which they have been satisfied are set out below:
Weighting
(25%)
Threshold performance required
(100%)
Maximum performance required
Actual outcome
Actual LTIP vesting
(% of maximum)
Performance condition1
Cumulative operating cash flow
from 2014/15 to 2016/17 inclusive
50%
Underlying basic EPS for 2016/17 30%
Total sales (excluding VAT and
20%
fuel) for 2016/17
LTIP vesting (% of maximum)
1 Vesting is on a straight-line basis between threshold and maximum.
Share awards granted in 2016/17
Achievement of
cumulative free cash
flow of £1bn over the
three year performance
period
17p
£14bn
Achievement of
cumulative free cash
flow of £2bn over the
three year performance
period
23p
£15bn
£2bn
10.86p
£12.9bn
50%
0%
0%
50%
The table below sets out the share awards made to the Executive Directors during 2016/17 under the Group’s LTIP:
Grant date
Award type
Basis on which
award made
Face value
of award (£000)1
Percentage of award
vesting at threshold
performance
Performance
period end date
Performance conditions
D Potts
T Strain
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.
Conditional award
Conditional award
3 February 2019
3 February 2019
240% of salary
240% of salary
6 April 2016
6 April 2016
See table below
See table below
2,040
1,380
25%
25%
The average share price used was £2.004 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 April 2016.
Measure1
Cumulative free cash flow
Underlying basic EPS
Total sales
(excluding fuel and VAT)
Period over which the
measure applies
Weighting
(% of maximum award)
Three year performance
period (2016/17 – 2018/19)
Three year performance
period (2016/17 – 2018/19)
Final year of the
performance period
(2018/19)
60%
20%
20%
1 For further detail on the definition of these measures, see page 39.
2 In line with the policy, the maximum target has been adjusted for the impact of closures of stores during the year.
Threshold (25%)
£620m
6% p.a.
£12.7bn2
Maximum (100%)
£1,340m
13% p.a.
£13.2bn2
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 minimum and maximum ‘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. For the avoidance
of doubt, the revenue targets in the table above exclude M Local convenience stores.
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
As disclosed in the 2014/15 Annual Report, Dalton Philips was granted good leavers status when he left the business in 2015. His 2014-2017 LTIP therefore
vests on a pro-rata basis, in line with the achievement of performance conditions, as outlined above, to the value of £353,558.
No other payments (including loss of office payments) have been made during 2016/17 to any individual who was previously a Director of the Group.
44
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Statement of Directors’ shareholding
The Group 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 deferred share bonus plan (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 Group 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.
David Potts has now met his shareholding requirement. Trevor Strain has not yet met the 200% shareholding guideline but is within the five year period
permitted to build up his shareholding.
Directors’ shareholdings – Executive Directors
Shareholding
requirement
(% salary)
Shareholding
as at
27 January 2017
(% salary)1,2
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
Executive Directors
D Potts
T Strain
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 £2.381 as at 27 January 2017 (the last trading day of the financial year ended 29 January 2017) has been used
1,002,881
97,794
2,311,329
1,904,691
270,306
385,670
200%
200%
265%
117%
7,411
7,682
3,591,927
2,395,837
(other than for shares purchased in the market which are valued at the acquisition price).
3 576,995 shares represent the LTIP award granted to T Strain in June 2014 which is due to vest in June 2017. 50% of the award is linked to cumulative free cash flow targets. 25% of this element vests for
achieving cumulative free cash flow of £1bn over the three year performance period and 100% vests for achieving £2bn over the three year performance period. 30% of the award is linked to underlying
earnings per share (EPS) targets. 25% of this element vests for achieving underlying EPS of 17p for the financial year 2016/17 and 100% vests for achieving underlying EPS of 23p for the financial year 2016/17.
20% of the award is linked to total sales (excluding VAT and fuel). 25% of this 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 and 100% vests for achieving total sales of £15bn for the financial year 2016/17. Vesting is on a straight-line basis between each of the points. 1,293,365 shares and 639,074 shares
represent LTIP awards granted to D Potts and T Strain respectively in April 2015 which are due to vest in April 2018. 60% of the award is linked to cumulative free cash flow targets. 25% of this element
vests performance period and 100% vests for achieving cumulative free cash flow of £1.6bn over the three year period. 20% of the award is linked to an underlying earnings per share (EPS) target.
25% of this element vests for achieving underlying EPS of 10p for the financial year 2017/18 and 100% vests for achieving underlying EPS of 15p for the financial year 2017/18. 20% of the award is linked
to total sales (excluding VAT and fuel). 25% of this element vests for achieving total sales of £12.7bn for the financial year 2017/18. 100% vests for achieving total sales of £13.2bn for the financial year
2017/18. Vesting is on a straight-line basis for the cumulative free cash flow and total sales (excluding VAT and fuel) measures. Intermediate vesting applies for the underlying earnings per share measure:
10p (25%), 12p (60%), 15p (100%), with straight-line vesting between each point. Performance targets for the 1,017,964 and 688,622 shares granted to D Potts and T Strain respectively represent LTIP awards
made in April 2016 which are due to vest in April 2019. Performance targets for these awards are disclosed in the section headed ‘Share awards granted in 2016/17’ on page 44.
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 29 January 2017
(or date of stepping down from the Board in the
case of I Lee) are set out in the table below.
A Higginson
R Anand
N Davidson
I Lee
B Richards
P Vennells
29 January 2017
Total (owned outright)
266,209
12,500
–
–
–
–
There have been no changes in the Directors’
interests since the year end.
Performance graph and table
Value of a £100 holding
£
250
200
150
100
50
2009
2010 2011 2012 2013 2014 2015
2016
2017
Morrisons
FTSE All Share Food & Drug Retailers
FTSE 100
The graph shows the Group’s total shareholder
return (TSR) compared with the TSR of the FTSE
100 and FTSE All Share Food and Drug Retailers
indices over the eight year period to 29 January
2017. These indices have been selected as being
appropriate in giving a broad equity view and
given that the Group is or has been constituent
of these indices over the period.
TSR is a measure of the returns that a company
has provided for its shareholders, reflecting
share price movements and assuming
reinvestment of dividends.
The table below sets out the total remuneration figure for the CEO over the same eight 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 remuneration
(£000)
Annual bonus payment
(% of maximum opportunity)
D Potts
D Philips
M Bolland
D Potts
D Philips
M Bolland
D Potts
D Philips
M Bolland
1 M Bolland was not treated as a good leaver and therefore did not receive a bonus in 2009/10.
2 Total remuneration includes value of unrestricted share award over 319,401 shares and restricted share award over 120,965 shares granted on recruitment.
3 D Potts was appointed on 16 March 2015 and D Philips stepped down from the Board on 16 February 2015.
–
3,3282
304
–
70%
–
–
–
–
–
2,502
–
–
90%
–
–
–
–
–
1,089
–
–
0%
–
–
0%
–
LTIP vesting level achieved
(% of maximum opportunity)
–
–
1,159
–
–
0%1
–
–
–
–
1,089
–
–
0%
–
–
0%
–
–
2,101
–
–
60%
–
–
0%
–
2015/163
2,252
50
–
73%
–
–
–
0%
–
2016/17
2,794
354
–
100%
–
–
–
50%
–
45
Governance
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Directors’ remuneration
report continued
Change in remuneration of CEO compared to Group employees
The table below sets out the change in total remuneration paid to the CEO from 2015/16 to 2016/17 and the average percentage change from 2015/16
to 2016/17 for employees of the Group as a whole.
D Potts
All Group employees1
1 Reflects the change in average pay for all Group employees employed in both the financial year 2015/16 and the financial year 2016/17.
2 Reflects the increase in the average bonus payout for eligible employees.
3 Change in taxable benefits for D Potts excludes relocation costs in 2015/16.
0%
5.4%
0%
0%
Salary and fees
Taxable benefits3
Annual bonus
55.7%
31%2
% increase in element between 2015/16 and 2016/17
Relative importance of spend on pay
The table below sets out the total spend on remuneration in the 2015/16 and 2016/17 financial years compared with distributions to shareholders.
Total spend on remuneration for all Group employees
Profit distributed by way of dividends
The Committee and its advisers
2016/17
£m
1,925
118
2015/16
£m
1,944
260
During the year, the following individuals were members of the Remuneration Committee:
Name of Director
I Lee (Chairman until departure)
R Anand
N Davidson
A Higginson
B Richards
P Vennells
Membership
From
2 Sep 2015
21 Jan 2016
3 Nov 2015
22 Jan 2015
2 Sep 2015
21 Jan 2016
Difference
£m
(19)
(142)
To
31 Aug 2016
To date
To date
To date
To date
To date
The CEO, the Group People 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.
Deloitte LLP (Deloitte) were appointed in July 2014 and served as independent advisers until August 2016. In August, Willis Towers Watson were
appointed by the Committee, following a competitive tender process, 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 2016/17 to Deloitte for material
advice and assistance in relation to remuneration matters were £86,000, on a time and expense basis. Total fees paid to Willis Towers Watson were
£92,427, also on a time and expense paid basis.
Statement of voting at 2014 AGM
As disclosed in previous Annual Reports, the table below shows the voting outcome at the June 2014 AGM for approval of the remuneration policy:
Remuneration policy
1,142,938,356
73.46
412,940,651
26.54
Votes for
For as a % of votes cast
Votes against Against as a % of votes cast
Abstentions
35,276,870
Total
1,591,155,877
Statement of voting at 2016 AGM
The table below shows the voting outcome at the June 2016 AGM for approval of the 2015/16 remuneration report:
Remuneration report
1,371,795,348
83.04
280,146,204
16.96
50,092,032
1,702,033,584
Votes for
For as a % of votes cast
Votes against Against as a % of votes cast
Abstentions
Total
Rooney Anand
Senior Independent Director
8 March 2017
46
Directors’ report
Statutory disclosures
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
The following disclosures have been included elsewhere within
the Annual Report and are incorporated into the Directors’ report
by reference.
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.
Disclosure
Financial instruments
Financial risk management
Future developments
Dividends
Greenhouse gas emissions
Corporate governance report
Directors of the Group
Employee involvement
Page
91 to 94
92
2 to 22
71
22
23 to 32
24 and 25
12
Disclosures required pursuant to Listing Rule 9.8.4R can be found on the
following pages:
Borrowing powers
The Articles of Association of the Group restrict the borrowings
of the Group 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 Group’s registrar,
Capita Registrars, or to the Group directly.
Disclosure
Interest capitalised
Long term incentive schemes
Waiver of Directors’ emoluments
Page
76 to 79
100
34
Directors’ and Officers’ liability insurance
The Group 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 Group also provides an indemnity
to the Non-Executive Directors for such liabilities and costs to the fullest
extent permitted by law.
Political donations
Substantial shareholdings
No political donations were made in the financial year, which is
Group policy.
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. 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.
Having assessed the principal risks as set out on pages 18 and 19 and the
other matters discussed in connection with the Viability statement on
page 30, the Directors considered it appropriate to adopt the going
concern basis of accounting in preparing the financial statements.
Forward-looking statements
The Strategic report and Directors’ report are prepared for the members
of the Group 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 Group has been notified by the following shareholders (excluding
Directors) that they have interests in 3% or more of the total voting
rights in the Group. The shares relate to the number informed by the
shareholders on the notification rather than the current share register:
Deutsche Bank AG
Amerprise Financial Inc
Schroders PLC
Silchester International
Investors LLP
BlackRock Inc
Brandes Investment
Partners, LP
Majedie Asset
Management Limited
First Eagle Investment
Management, LLC
Invesco Limited
Morgan Stanley
Zurich Financial Services
Eleanor Marie Kernighan
As at 29 January 2017
As at 8 March 2017
Number of
shares
198,270,279
177,970,287
155,916,196
% of share
Number of
capital
shares
8.49 186,566,882
177,970,287
7.62
155,916,196
6.68
% of share
capital
7.99
7.62
6.68
117,553,329
117,232,444
5.03
5.02
117,553,329
117,232,444
5.03
5.02
117,121,738
5.01
117,121,738
5.01
116,805,074
5.00
116,805,074
5.00
114,296,273
111,082,524
93,126,863
81,286,130
70,051,782
4.89
4.76
3.99
3.48
3.00
114,296,273
111,082,524
93,566,085
81,286,130
70,051,782
4.89
4.76
4.01
3.48
3.00
The percentage appearing above is the percentage that number
represents of the issued share capital of the Group as at 29 January 2017
and 8 March 2017 respectively.
47
Governance
Directors’ report
continued
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
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 Group
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 Group’s Articles of Association and the
relevant full provisions can be found in the Articles which are available
for inspection at the Group’s registered office.
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 Group is not
aware of any other restrictions on the transfer of shares in the Group
other than certain restrictions that may from time-to-time be imposed
by laws and regulations (for example, insider trading laws).
The Group is not aware of any agreements between shareholders that
may result in restrictions on the transfer of securities or voting rights.
Appointment and powers of Directors
Other disclosures
The Group is not party to any significant arrangements which take effect,
alter or terminate upon a change of control of the Group following a
takeover bid.
The Group does not have any employee share schemes where the shares
to which the scheme relates have rights with regard to the control of the
Group 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 Group 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 Executive Committee.
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
Jonathan Burke
Company Secretary
8 March 2017
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 Group in general meeting by special
resolution, the business of the Group shall be managed by the Directors,
who may exercise all powers of the Group which are not required to be
exercised by the Group in general meeting.
Articles of Association
The Group’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 Group, 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 Group held in June 2016, a special resolution was
passed to renew the authority given at the AGM held in June 2015 for the
purchase by the Group of up to 233,517,658 ordinary shares, representing
approximately 10% of the issued ordinary share capital at that time.
During the period, 381,043 (2016: 70,480) ordinary shares were issued to
employees exercising share options and 2,733,049 (2016: 3,118,702)
out of the Group’s trust shares.
Share capital and rights attaching to the Group’s shares
Under the Group’s Articles of Association, any share in the Group may
be issued with such rights or restrictions, whether in regard to dividend,
voting, return of capital or otherwise as the Group 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 Group, 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 Group 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 Group 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.
48
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Statement of Directors’ responsibilities in respect
of the Annual Report and Financial Statements
The Directors are responsible for preparing the Annual Report and the
Financial Statements in accordance with applicable law and regulation.
In the case of each Director in office at the date the Directors’ report
is approved:
Company law requires the Directors to prepare financial statements
for each financial 52 week period. Under that law the Directors have
prepared the Group financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union
and Group financial statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 101 Reduced Disclosure Framework, 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 the
profit or loss of the Group and Company for that period. In preparing
the financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• state whether applicable IFRSs as adopted by the European Union have
been followed for the Group financial statements and United Kingdom
Accounting Standards, comprising FRS 101, have been followed for the
Company financial statements, subject to any material departures
disclosed and explained in the financial statements;
• make judgements and accounting estimates that are reasonable and
prudent; and
• prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Group and Company will continue
in business.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Group and Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and Company and enable them to ensure
that the financial statements and the Directors’ remuneration report
comply with the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
The Directors are also responsible for safeguarding the assets of the
Group and Company 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 Group and Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and accounts, taken as a
whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group and Company’s position
and performance, business model and strategy.
Each of the Directors, whose names and functions are listed in the
Directors’ report confirm that, to the best of their knowledge:
• the Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the European Union, give a true
and fair view of the assets, liabilities, financial position and profit of the
Group; and
• the Annual Report includes a fair review of the development and
performance of the business and the position of the Group and
Company, together with a description of the principal risks and
uncertainties that it faces.
• so far as the Director is aware, there is no relevant audit information
of which the Group and Company’s auditors are unaware; and
• they have taken all the steps that they ought to have taken as a Director
in order to make themselves aware of any relevant audit information
and to establish that the Group and Company’s auditors are aware
of that information.
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 Group’s position and 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 Executive Committee 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 Group 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 Group and its subsidiaries included in
the consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face.
By order of the Board
Jonathan Burke
Company Secretary
8 March 2017
49
Financial statements
Independent auditors’
report
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Independent auditors’ report to the members of
Wm Morrison Supermarkets PLC
Report on the 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 29 January 2017 and of the Group’s profit and cash flows for the 52 week period (the
period) then ended;
• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the
European Union;
• the 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
The financial statements, included within the Annual Report and Financial Statements (the Annual Report), comprise:
• the consolidated balance sheet as at 29 January 2017;
• the Company balance sheet as at 29 January 2017;
• the consolidated statement of comprehensive income for the period then ended;
• the consolidated cash flow statement for the period then ended;
• the consolidated statement of changes in equity for the period then ended;
• the Company statement of changes in equity for the 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, 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 IFRSs as adopted by the European
Union, and applicable law. The financial reporting framework that has been applied in the preparation of the Company financial statements is United
Kingdom Accounting Standards, comprising FRS 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice), and
applicable law.
Our audit approach
Overview
Materiality
Audit scope
Areas of
focus
Materiality
• Overall Group materiality: £16.85m
which represents 5% of underlying
profit before tax.
Audit scope
• The Group engagement team conducted
all of our audit work in the UK other than
a PwC component audit team that
undertook a full scope audit of a UK
Manufacturing subsidiary.
Areas of focus
• Impairment of property.
• Onerous lease provisions and onerous
property contracts.
• Commercial income and
promotional funding.
• Impairment and capitalisation
of intangible assets.
• Stock valuation.
• Pension accounting.
50
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
The scope of our audit and our areas of focus
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”).
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked
at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and
considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls,
including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as
‘areas of focus’ in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the
financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list
of all risks identified by our audit.
Area of focus
Impairment of property
Refer to page 64 (critical accounting judgements and estimates) and note 3.3
(property, plant and equipment).
The Group has a large freehold store estate (£5,908m at 29 January 2017). Given the
challenging trading conditions in the UK grocery retail market in recent years and
the subsequent adverse impact on the market value of traditional supermarket
freehold stores, the possibility of impairment of these assets is an area of focus
for management, as is the possibility that previously charged impairments may
need reversing where store trading conditions have improved.
We focused on this area because of the judgemental factors involved in testing
for impairment and the significant carrying value of freehold property.
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.
Value in use
Value in use is based on discounted future cash flow forecasts, requiring
management to make judgements on certain key inputs including, for example,
discount rates and long term growth rates.
Fair value less costs of disposal
Fair value less costs of disposal is estimated by management based on their
knowledge of individual stores, 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 the Directors in this fair value
calculation relate to the estimated rental values and the yields of the stores.
Management has calculated that an impairment charge of £147m is required as
at 29 January 2017. A release of impairment charged in previous years of £191m
has also been calculated following an improvement in the performance of
certain stores.
How our audit addressed the area of focus
Value in use
We have obtained the Group’s approved budget (upon which forecasts
underlying the value in use calculations are based). Our audit procedures
included an assessment 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 the discount
rate of 9%, by reference to management’s forecasts, industry reports and
our valuation experts. We focused on these key assumptions because small
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.
Fair value less costs of disposal
Management has determined its own view of estimated rental values and yields
for each store used in their calculation of market values. Management derived
these assumptions having considered available information such as industry
data on market conditions, purchase offers recently received for properties and
information from an independent third party valuer. We evaluated management’s
supporting information, and assessed this using our own internal experts, with a
particular focus on the assumptions and methodology used, obtaining third party
evidence and market data to corroborate the assumptions.
We also evaluated the competency, qualifications, experience and objectivity of
management’s property valuation experts and noted no issues. We determined
that the valuations performed by management are reasonable.
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 by comparing the disclosures
against the requirements of IAS 36 ‘Impairment of assets’ and found them to
be consistent.
51
Financial statements
Independent auditors’
report continued
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Independent auditors’ report to the members of
Wm Morrison Supermarkets PLC continued
Area of focus
Onerous lease provisions and onerous property contracts
Refer to page 64 (critical accounting judgements and estimates) and note 5.5
(provisions).
Onerous lease provisions
Accounting standards require management to assess the Group’s leasehold
properties to identify where the expected future benefits from a property are
less than the future lease commitments which would indicate 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. We also note that management
judgement is required to assess the level of provision for lease guarantees in
respect of My Local stores previously disposed of.
Onerous property contracts
The Group has a number of sites that it is contractually committed to purchase
as well as other property related contracts. For example, where management
believes that no economic benefit would result from developing the store,
a provision is made. There are judgements involved in determining the expected
realisable value of these sites and therefore this has been an area of focus
during our audit.
How our audit addressed the area of focus
Onerous lease provisions
Having considered the possibility of impairment in the value of freehold
properties (see above), we also tested 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 onerous lease model, which includes all leased stores,
and tested the accuracy and completeness of key data by agreeing inputs such
as individual store cash flows. This helps provide an insight into store profitability.
We agreed lease expiry dates for a sample of stores to the original signed lease
agreements, noting no issues.
We obtained the Group’s approved budget (upon which forecasts are based) and
assessed the principles of the Group’s discounted cash flow model, noting no
exceptions. 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, analyst reports
and our own Real Estate experts, with no issues noted. The discount rate used is
consistent with the Group’s cost of debt and the requirements of IAS 37.
We obtained management’s calculation of the required provision for former
My Local leases which reverted back to the Group in a prior year. We assessed
the principles of the model and tested key inputs such as lease commitment
information and sub‑let assumptions, with no issues noted.
Onerous property contracts
In respect of onerous property contracts, we obtained original contracts and
management’s calculations and considered the accuracy of these provisions by
performing recalculations and testing key inputs such as estimates of contract exit
costs and contractual payments due. We considered the completeness of these
provisions by reviewing documentation in relation to these contracts. We found
no issues in this area.
Disclosures
We read the disclosures within the Annual Report in respect of onerous lease and
contract provisions, and, based on our work, determined that they are consistent
with accounting standards.
52
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Area of focus
Commercial income and promotional funding
Refer to note 1.1 (accounting policies), page 64 (critical accounting judgements and
estimates) and notes 1.6 (operating profit).
Commercial income
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 65. The total
income recognised in the income statement in a year is based on the expected
entitlement earned up to the balance sheet date under each supplier agreement.
It 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 category of commercial income
is considered below:
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 is based on specific agreements, and its recognition requires limited
judgement or estimation by management in determining the amount that the
Group is entitled to. Our focus was 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
The Group separately recognises promotional funding on promotions that are
partially funded by suppliers.
The majority of 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. There are also some elements of
promotional funding which include a manual element to the calculation and
invoicing. We focused on promotional funding 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. However, we note that the level
of judgement and subjectivity in the calculations is lower because of the level of
automation. Our focus was 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.
How our audit addressed the area of focus
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 tested a sample of commercial income and promotional funding to
supporting documentation including supplier agreements. We requested
confirmations directly from suppliers in respect of a sample of commercial
income and manual promotional funding across a large number of suppliers.
The confirmations received, and documentations reviewed, allowed us to evaluate
whether commercial income or promotional funding had been appropriately
recognised in the period. No exceptions arose from this work.
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 used a data
analytics approach to identify any unusual items in the commercial income and
promotional funding populations. Where unusual items were identified these
were agreed to supporting documentation without exception.
Balance sheet testing
We wrote to a sample of suppliers, and obtained independent evidence of the
value and timing of commercial income and promotional funding to evaluate
whether it had been recognised in the correct period. We also agreed a sample
of accrued income to evidence of post‑year end invoicing. 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.
We found no issues as a result of our audit procedures.
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). This testing was performed by assessing the ageing of
both outstanding commercial income and promotional funding debtors together
with understanding the details of any disputes, and obtaining explanations
from management to assess whether any provisions were appropriate.
We also considered management’s Key Performance Indicators in this analysis.
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 guidance on the reporting of
complex supplier arrangements issued by the Financial Reporting Council.
53
Financial statements
Independent auditors’
report continued
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Independent auditors’ report to the members of
Wm Morrison Supermarkets PLC continued
Area of focus
Impairment and capitalisation of intangible assets
Refer to page 64 (critical accounting judgements and estimates) and note 3.2
(goodwill and intangible assets).
The Group balance sheet includes capitalised intangible assets of £445m, of which
the majority relates to software development costs incurred in connection with
the Group’s technology improvement programme, details of which are shown on
page 76 of the Annual Report. The Group has developed a proportion of its own
software and systems that are used in the business.
We focused on this area because in light of the continued development of new
software and systems, judgement is required to assess whether the carrying value
of the existing capitalised software or systems is impaired.
In addition, some judgement is required with regards to the nature and extent of
costs capitalised in assessing whether the criteria, set out in accounting standards,
required for capitalisation of such costs have been met.
Stock valuation
Refer to note 1.1 (accounting policies), page 64 (critical accounting judgements and
estimates) and note 5.2 (stock).
The valuation of stock of £614m (2016: £616m) 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 based on an assessment of specific risks identified within
the stock balance. The most significant categories of risk include estimated losses
related to shrinkage and obsolescence, a deduction for unearned commercial
income (as the stock related to that commercial income and promotional
funding has yet to be sold) and other specific provisions based on identified risks.
When the stock is sold, the commercial income and/or promotional funding is
recognised in the income statement.
As stock is counted by the Group on a cyclical basis, rather than in full at the
period end date, the shrinkage provision at 29 January 2017 contains a degree
of estimation.
54
How our audit addressed the area of focus
We obtained management’s assessment 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 was no longer
in use or whether its life had been shortened by development activity. We found
no such items.
We re‑visited the expected costs budgeted by management within the cost
benefit analysis and compared them to actual outcomes in the current period and
we assessed the future expected benefits of the projects, with no issues identified
from our work.
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 met with
management responsible for particular costs to obtain an understanding of the
associated projects and 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, with no exceptions noted.
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. No exceptions were noted from this work.
We read the disclosures within the Annual Report in respect of intangible
assets, and, based on our work, determined that they are consistent with
accounting standards.
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 attended stock counts throughout the period at a sample of the Group’s
supermarkets, petrol forecourts, distribution centres and manufacturing locations.
In addition to performing sample test counts, we assessed the effectiveness of
the count controls in operation. 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 found no material variances or count
control deficiencies across these sites.
We tested management’s shrinkage assumptions determined by the count
procedures and the comparison of this to historical data. The historical data
included the results of the recent counts at each location, and our 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 management’s
view of the current stock profile and expected stock life. We considered this
provision by assessing the explanations provided by management on the current
profile and expected stock life noting no issues.
We tested the unearned commercial income deduction by verifying the inputs
of the calculation and methodology behind the provision with no issues noted.
We have assessed the other specific provisions with reference to the risks
identified by management and noted no issues.
Disclosures
We read the disclosures within the Annual Report in respect of inventory,
and, based on our work, determined that they are consistent with
accounting standards.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Area of focus
Pension accounting
Refer to note 1.1 (accounting policies), page 64 (critical accounting judgements and
estimates) and note 8 (pensions).
We have focused on the valuation of the Group’s defined benefit pension
schemes because of the level of judgement required in determining the year‑end
valuation. In addition, the size of the gross assets (£4,674m) and liabilities (£4,402m)
within the schemes are significant and material.
The Group also carries a provision for backdated pension contributions related
to the set‑up of a new defined contribution scheme which was formed in the year
ended 31 January 2016 and requires further judgement in determining the value
of the provision at 29 January 2017.
How our audit addressed the area of focus
We obtained the IAS 19 valuation reports produced by the Group’s actuaries.
We used our own actuarial experts to assess the judgemental assumptions used
within the reports to form the valuation of the pension schemes’ liabilities, such
as discount rate, inflation and mortality rates. We obtained the detailed reports
underlying the valuation of the schemes’ assets and agreed the valuations to
third party confirmations. We assessed the membership data used in valuing the
schemes’ liabilities and tested any significant changes since the last valuation.
We agreed a sample of contributions made by the Group to bank statements.
We have no exceptions to report as a result of this testing.
The net surplus position of the schemes at 29 January 2017 was £272m. We have
reviewed management’s assessment of the right to recognise the net surplus in
two of the three schemes under the requirements of IFRIC 14, including inspecting
updated legal advice, and are satisfied that it is appropriate to recognise the net
asset on the balance sheet. The third scheme (RSP) is recognised as a net liability
and therefore this aspect of IFRIC 14 is not applicable.
We obtained management’s latest assessment of the backdated pension
contribution provision at 29 January 2017, including evidence of discussions
with stakeholders in the period. We are satisfied that the value of the provision
is appropriate.
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, 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.
All work was conducted in the UK by the same Group audit team, other than Group reporting from a PwC component team from the UK firm auditing
the complete financial information of a UK Manufacturing subsidiary, Wm Produce Limited.
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 UK Manufacturing component audit team, including holding a detailed
planning meeting with them and attending the audit clearance meeting with management.
Taken together, the territories and functions where we performed our work accounted for 99% of Group revenues.
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 on the individual
financial statement line items and disclosures and in evaluating 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
How we determined it
Rationale for benchmark applied
£16.85m (2016: £12m).
5% of underlying profit before tax.
Consistent with last year, 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. Underlying profit is defined by
management as profit before impairment, onerous contracts and other 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 investments and IAS 19 pension interest, at a normalised tax rate, as reconciled in note 1.4 of the Group
financial statements.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £825,000 (2016: £600,000) as well
as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
55
Financial statements
Independent auditors’
report continued
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
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 47, in relation to going concern. We have nothing to report
having performed our review.
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the Directors’
statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing
material to add or to draw attention to.
As noted in the Directors’ statement, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial
statements. The going concern basis presumes that the Group and 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 and compliance with applicable requirements
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic report and the Directors’ report for the financial period for which the financial statements are prepared
is consistent with the financial statements; and
• the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.
In addition, in light of the knowledge and understanding of the Group, the Company and their environment obtained in the course of the audit,
we are required to report if we have identified any material misstatements in the Strategic report and the Directors’ report. We have nothing to report
in this respect.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Corporate governance statement set out on pages 29 and 30 with respect to internal control and risk management
systems and about share capital structures is consistent with the financial statements and has been prepared in accordance with applicable legal
requirements; and
• the information given in the Corporate governance statement set out on page 23 with respect to the Group’s Corporate Governance Code and
practices and about its administrative, management and supervisory bodies complies with rules 7.2.2, 7.2.3 and 7.2.7 of the Disclosure Guidance
and Transparency Rules sourcebook of the Financial Conduct Authority.
In addition, in light of the knowledge and understanding of the Group, the Company and their environment obtained in the course of the audit,
we are required to report if we have identified any material misstatements in the information referred to above in the Corporate governance
statement. We have nothing to report in this respect.
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
Company acquired in the course of performing our audit; or
– otherwise misleading.
• We have no exceptions
to report.
• the statement given by the Directors on page 49, in accordance with provision C.1.1 of the UK Corporate
• We have no exceptions
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
position and performance, business model and strategy is materially inconsistent with our knowledge
of the Group and Company acquired in the course of performing our audit.
to report.
• the section of the Annual Report on page 28, as required by provision C.3.8 of the Code, describing the work of the
• We have no exceptions
Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
to report.
56
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:
• the Directors’ confirmation on page 17 of the Annual Report, in accordance with provision C.2.1 of the Code, that
they have carried out a robust assessment of the principal risks facing the Group, including those that
would threaten its business model, future performance, solvency or liquidity.
• the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• the Directors’ explanation on page 30 of the Annual Report, in accordance with provision C.2.2 of the Code, as to
how they have assessed the prospects of the Group, over what period they have done so and why they consider
that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group
will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing material
to add or to draw
attention to.
We have nothing material
to add or to draw
attention to.
We have nothing material
to add or to draw
attention to.
Under the Listing Rules we are required to review the Directors’ statement that they have carried out a robust assessment of the principal risks
facing the Group and the Directors’ statement in relation to the longer‑term viability of the Group. Our review was substantially less in scope than an
audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in
alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the
course of performing our audit. We have nothing to report having performed our review.
Adequacy of accounting records and information and explanations received
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the Group, or returns adequate for our audit have not been received from branches not visited
by us; or
• the Group financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records
and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Directors’ remuneration report – Companies Act 2006 opinion
In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration specified by law are
not made. We have no exceptions to report arising from 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
Group. 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 ten further provisions of the 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 Directors’ responsibilities statement set out on page 49, 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 Group’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.
57
Financial statements
Independent auditors’
report continued
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Independent auditors’ report to the members of
Wm Morrison Supermarkets PLC continued
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 the 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. With respect to the Strategic report, Directors’ report and Corporate governance statement, we consider whether
those reports include the disclosures required by applicable legal requirements.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Leeds
8 March 2017
58
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Consolidated statement of comprehensive income
52 weeks ended 29 January 2017
Revenue
Cost of sales
Gross profit
Other operating income
Profit/loss on disposal and exit of properties and sale of businesses and investments
Administrative expenses
Operating profit
Finance costs
Underlying finance costs
Adjustments for:
Costs associated with the repayment of borrowings
Finance income
Share of profit of joint venture (net of tax)
Profit before taxation
Analysed as:
Underlying profit before tax
Adjustments for:
Impairment and provision for onerous contracts
Profit/loss on disposal and exit of properties
Profit arising on disposal of investment
Loss arising on disposal of business
Costs associated with the repayment of borrowings
Pension scheme set-up costs
Net pension income
Other exceptional costs
Taxation
Profit for the period attributable to the owners of the Company
Other comprehensive 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
Items reclassified from hedging reserve in relation to repayment of borrowings
Tax on items that may be reclassified subsequently to profit or loss
Exchange differences on translation of foreign operations
Other comprehensive income for the period, net of tax
Total comprehensive income for the period attributable to the owners of the Company
Earnings per share (pence)
– basic
– diluted
Note
1.2
1.4, 4.3, 4.5
1.6
6.2
6.2
1.4
6.2
4.2
1.4
1.4
1.4, 4.3
1.4, 4.5
1.4
1.4, 8.6
1.4, 8.2
1.4
2.2
8.2
2.3
1.4
2.3
1.5
1.5
2017
£m
16,317
(15,713)
604
76
32
(244)
468
(160)
(104)
(56)
15
2
325
337
6
19
13
–
(56)
–
8
(2)
325
(20)
305
86
(17)
69
30
6
1
(1)
36
105
410
13.11
12.95
2016
£m
16,122
(15,505)
617
72
97
(472)
314
(112)
(112)
–
13
2
217
242
(87)
131
–
(34)
–
(35)
–
–
217
5
222
236
(47)
189
16
–
(4)
1
13
202
424
9.51
9.47
59
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Consolidated balance sheet
29 January 2017
Assets
Non-current assets
Goodwill and intangible assets
Property, plant and equipment
Investment property
Pension asset
Investment in joint venture
Investments
Derivative financial assets
Current assets
Stock
Debtors
Derivative financial assets
Cash and cash equivalents
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
Pension liability
Deferred tax liabilities
Provisions
Net assets
Shareholders’ equity
Share capital
Share premium
Capital redemption reserve
Merger reserve
Retained earnings and other reserves
Total equity attributable to the owners of the Company
Note
2017
£m
2016
£m
3.2
3.3
3.5
8.2
4.2
4.3
7.3
5.2
5.3
7.3
6.4
3.4
5.4
6.3
7.3
6.3
7.3
8.2
2.3
5.5
6.5
6.5
6.6
6.6
6.6
445
7,227
33
293
56
–
16
8,070
614
214
22
326
1,176
–
1,176
(2,837)
–
(3)
(24)
(2,864)
(1,550)
(5)
(21)
(417)
(326)
(2,319)
4,063
234
128
39
2,578
1,084
4,063
483
7,161
37
186
63
31
30
7,991
616
192
12
496
1,316
–
1,316
(2,518)
(209)
(17)
(11)
(2,755)
(2,003)
(55)
–
(429)
(309)
(2,796)
3,756
234
127
39
2,578
778
3,756
The notes on pages 65 to 101 form part of these financial statements.
The financial statements on pages 59 to 101 were approved by the Board of Directors on 8 March 2017 and were signed on its behalf by:
Trevor Strain
Chief Financial Officer
60
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Consolidated cash flow statement
52 weeks ended 29 January 2017
Cash flows from operating activities
Cash generated from operations
Interest paid
Taxation paid
Net cash inflow from operating activities
Cash flows from investing activities
Interest received
Dividends received from joint venture
Proceeds from the sale of property, plant and equipment
Proceeds from the sale of businesses and investments
Purchase of property, plant and equipment, investment property and assets classified as held-for-sale
Purchase of intangible assets
Net cash outflow from investing activities
Cash flows from financing activities
Purchase of shares in subsidiary
Purchase of own shares for trust
Net repayment of revolving credit facility
Repayment of borrowings
Proceeds on settlement of derivative financial instruments
Costs incurred on repayment of borrowings
Dividends paid
Net cash outflow from financing activities
Net (decrease)/increase 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)/increase in cash and cash equivalents
Cash outflow from decrease in debt
Non-cash movements
Opening net debt
Closing net debt
Note
5.6
10.1
4.3, 4.5
4.4
6.5
1.8
6.4
Note
6.4
2017
£m
1,113
(100)
(35)
978
6
8
79
44
(374)
(45)
(282)
–
(5)
–
(729)
37
(42)
(118)
(857)
(161)
487
326
2017
£m
(161)
692
21
(1,746)
(1,194)
2016
£m
1,026
(99)
(41)
886
4
8
300
20
(266)
(99)
(33)
(3)
(13)
(320)
(10)
–
–
(260)
(606)
247
240
487
2016
£m
247
330
17
(2,340)
(1,746)
61
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Consolidated statement of changes in equity
52 weeks ended 29 January 2017
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
Current period
At 1 February 2016
Profit for the period
Other comprehensive income/(expense):
Cash flow hedging movement
Items reclassified from hedging reserve in relation to
repayment of borrowings
Exchange differences on translation
of foreign operations
Remeasurement of defined benefit
pension schemes
Tax in relation to components of other comprehensive
income
Total comprehensive income for the period
Purchase of trust shares
Proceeds and settlements of employee share award
Employee share option schemes:
Share-based payments
Dividends
Total transactions with owners
At 29 January 2017
1.4
8.2
2.3
6.5
6.5
1.7
1.8
234
–
127
–
39
–
2,578
–
–
–
–
–
–
–
–
–
–
–
–
234
–
–
–
–
–
–
–
1
–
–
1
128
–
–
–
–
–
–
–
–
–
–
–
39
–
–
–
–
–
–
–
–
–
–
–
2,578
(10)
–
30
6
–
–
(8)
28
–
–
–
–
–
18
788
305
3,756
305
–
–
(1)
86
(8)
382
(5)
(1)
30
6
(1)
86
(16)
410
(5)
–
20
(118)
(104)
1,066
20
(118)
(103)
4,063
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
Prior period
At 2 February 2015
Profit for the period
Other comprehensive income/(expense):
Cash flow hedging movement
Exchange differences on translation
of foreign operations
Remeasurement of defined benefit
pension schemes
Tax in relation to components of other comprehensive
income
Total comprehensive income for the period
Purchase of trust shares
Employee share option schemes:
Share-based payments
Dividends
Total transactions with owners
At 31 January 2016
8.2
2.3
6.5
1.7
1.8
234
–
127
–
–
–
–
–
–
–
–
–
–
234
–
–
–
–
–
–
–
–
–
127
39
–
–
–
–
–
–
–
–
–
–
39
2,578
–
–
–
–
–
–
–
–
–
–
2,578
(22)
–
16
–
–
(4)
12
–
–
–
–
(10)
638
222
–
1
236
(47)
412
(13)
11
(260)
(262)
788
3,594
222
16
1
236
(51)
424
(13)
11
(260)
(262)
3,756
62
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
There are a number of standards and interpretations issued by the IASB
that are effective for financial statements after this reporting period.
These are:
• IFRS 9 ‘Financial Instruments’ was published in July 2014 and will be
effective for the Group from the period beginning 5 February 2018.
The standard is applicable to financial assets and financial liabilities, and
covers the classification, measurement, impairment and de-recognition
of financial assets and financial liabilities together with a new hedge
accounting model. Work on the impact of the new recognition,
impairment and general hedge accounting requirements is in its early
stages and we are assessing whether any changes to the Group’s
systems and processes are required to aid the implementation of the
standard. It is not yet practicable to quantify the effect of IFRS 9 on
the Group;
• IFRS 15 ‘Revenue from Contracts with Customers’ will be effective for
the Group from the period beginning 5 February 2018, replacing IAS 18
‘Revenue’, IAS 11 ‘Construction contracts’ and related interpretations.
The standard establishes a principles-based approach for revenue
recognition and is based on the concept of recognising revenue when
a customer obtains control of a goods or service and has the ability
to direct the use and obtain the benefits from the goods or services.
It applies to all contracts with customers, except those in the scope
of other standards. It replaces the separate models for goods, services
and construction contracts under the current accounting standards.
Based on the Group’s preliminary assessment from work performed
to date, the Group believes that the adoption of IFRS 15 will not have
a material impact on the consolidated financial statements but work
is still ongoing to fully quantify its impact, with particular focus on
treatment of the Group’s customer loyalty arrangements; and
• IFRS 16 ‘Leases’ was published in January 2016 and will be effective for
the Group from the period beginning 4 February 2019, replacing IAS
17 ‘Leases’, subject to EU endorsement. The standard requires lessees
to recognise assets and liabilities for all leases unless the lease term
is 12 months or less or the underlying asset is of low value. IFRS 16
represents a significant change in the accounting and reporting of
leases and it will primarily change the balance sheet as well as impacting
the income statement and lessee reporting as disclosed in note 6.8.
Accounting requirements for lessors as disclosed in note 3.6 will be
substantially unchanged from IAS 17. The Group is in the process of
quantifying the impact of the new standard. The new standard is likely
to have an impact on the Group’s results and a material impact on
the balance sheet, as the majority of arrangements that are currently
accounted for as operating leases will come onto the Group’s balance
sheet. However, it is not yet practicable to fully quantify the effect of
IFRS 16 on these consolidated financial statements.
General information
Company information
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.
Basis of preparation
The financial statements have been prepared for the 52 weeks ended
29 January 2017 (2016: 52 weeks ended 31 January 2016) 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 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 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.
New IFRS and amendments to IAS and interpretations
There have been no significant changes to accounting under IFRS
which have affected the Group’s results. The Group has considered the
following amendments to published standards that are effective for the
first time for the 52 weeks ended 29 January 2017 and concluded that
they are either not relevant to the Group or they do not have a significant
impact on the Group’s financial statements. These amendments are:
• Amendments to IAS 1 ‘Presentation of Financial Statements’;
• Amendments to IFRS 11 ‘Joint arrangements’ on accounting for
acquisitions of interests in joint operations;
• Amendments to IAS 16 ‘Plant, property and equipment’ and
IAS 38 ‘Intangible assets’ on acceptable methods of depreciation
and amortisation;
• Amendments to IAS 27 ‘Consolidated and separate financial statements’
which allows entities to equity account for joint ventures and associates
in their separate financial statements; and
• Annual improvements 2012-2014.
63
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
General information continued
Basis of consolidation
Subsidiaries (including partnerships) are all entities over which the Group
has control. The Group controls an entity when it has power over that
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 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.
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:
• Impairment of property, plant and equipment and intangible assets
and onerous property commitments (note 1.4, 3.1, 3.2, 3.3, 5.5);
• Commercial income (note 1.1, 1.6, 5.2, 5.3, 5.4);
• IT and intangible assets (note 3.2);
• Stock (note 5.1, 5.2); and
• Pensions (note 8).
These are also described within the Corporate governance report on
page 29.
Alternative Performance Measures
The Directors measure the performance of the Group based on a range
of financial measures, including measures not recognised by EU-adopted
IFRS. These alternative performance measures may not be directly
comparable with other companies’ alternative performance measures
and the Directors do not intend these to be a substitute for, or superior
to, IFRS measures. For definitions of the alternative performance
measures used, see the Glossary on page 122.
64
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements
52 weeks ended 29 January 2017
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, ‘More’ points earned in-store and online, and the free element of multi-save transactions. Sale of fuel is recognised net of VAT and
‘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 sales includes income from concessions and commissions based on the terms of the contract, and 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.
‘More’ points
The fair value of ‘More’ points is determined to be the value to the customer of the points issued, adjusted for factors such as the expected
redemption rate. The Group continues to assess the appropriateness of the expected redemption rates against actual redemptions.
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 and when associated performance conditions are met.
The types of commercial income recognised by the Group, and the recognition policies are:
Type of commercial income
Marketing and
advertising funding
Description
Examples include income in respect
of in-store marketing and point of
sale, as well as funding for advertising.
Volume-based rebates Income earned by achieving volume
or spend targets set by the supplier for
specific products over specific periods.
Recognition
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 is netted against amounts owing to that supplier.
Any outstanding invoiced commercial income relating to these suppliers at the balance sheet date are included within trade payables. Any amounts
received in advance of income being recognised are included in accruals and deferred income.
• 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.
65
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
1 Performance in the period continued
1.1 Accounting policies continued
In order to provide users of the financial statements 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.
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 the 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
Sale of goods in stores and online
Fuel
Total store-based and online sales
Other sales
Total revenue
Like-for-like
sales
£m
12,727
3,351
16,078
–
16,078
Other
£m
20
–
20
219
239
2017
Total
£m
12,747
3,351
16,098
219
16,317
2016
Total
£m
12,811
3,124
15,935
187
16,122
1.3 Segmental reporting
The Group’s principal activity is that of retailing, derived 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 Executive Committee as this makes the key operating decisions of
the Group and 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 ‘Operating segments’ as well as its internal reporting framework, management and
operating structure. In particular, the Group considered its retail outlets, the fuel sale operation, the manufacturing entities and online 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. 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.
66
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
1 Performance in the period continued
1.4 Underlying profit
The definition of underlying profit is defined in the Glossary on page 122.
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 profit/loss to: (a) remove impairment,
provision for onerous contracts, or other 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 and investments; (c) remove the impact of pension volatility; and (d) apply a normalised tax
rate of 25% (2016: 25%).
Profit after tax
Add back: tax charge/(credit) for the period1
Profit before tax
Adjustments for:
Impairment and provision for onerous contracts1
Profit/loss arising on disposal and exit of properties1
Profit arising on disposal of investment (note 4.3)1
Loss arising on disposal of convenience business (note 4.5)1
Costs associated with the repayment of borrowings1
Pension scheme set-up costs (note 8.6)1
Net pension income (note 8.2)1
Other exceptional costs1
Underlying profit before tax
Normalised tax charge at 25% (2016: 25%)1, 2
Underlying profit after tax
Underlying earnings per share (pence)
– basic (note 1.5.2)
– diluted (note 1.5.2)
1 Adjustments marked1 decrease post-tax underlying earnings by £52m (2016: decrease of £41m), as shown in the reconciliation of earnings disclosed in note 1.5.2.
2 Normalised tax is defined in the Glossary, see page 122 for details.
2017
£m
305
20
325
(6)
(19)
(13)
–
56
–
(8)
2
337
(84)
253
10.86
10.73
2016
£m
222
(5)
217
87
(131)
–
34
–
35
–
–
242
(61)
181
7.77
7.73
Following the Group’s annual impairment and onerous contract review a net credit of £6m has been recognised, which is made up of £44m net
impairment reversal and £38m charge in relation to provision for onerous contracts.
The net impairment reversal of £44m (£191m impairment reversal offset by £147m impairment charge) reflects fluctuations in store level performance
(see note 3.3). This has been partially offset by a £38m additional charge relating to the Group’s provision for onerous contracts primarily relating to
onerous property contracts (see note 5.5). In the prior year the additional charge of £87m reflected changes in estimates related to provisions for stores
in the new space pipeline.
Costs associated with the early repayment of borrowing facilities and other refinancing activities total £56m. This includes £33m relating to financing
charges on redemption of financial instruments (primarily premiums), other fees incurred on the repayment of bonds and refinancing; write off of
facility fees; the payment of £17m relating to the early settlement of the US Private Placement loan notes (USPP); and £6m relating to losses which had
previously been recognised in reserves which have been reclassified to the income statement on termination of hedging arrangements.
Profits arising on disposal and exit of properties amounted to £19m (2016: £131m). A £13m profit has been recognised on the disposal of the Group’s
investment in Fresh Direct Inc (see note 4.3).
Other exceptional costs represent legal costs incurred in relation to cases which the Group pursued in respect of historic events. There are no
contingent liabilities associated with these cases.
The 2016 underlying profit before tax included £60m relating to one-off restructuring costs. When adjusted to exclude these items, underlying profit
before restructuring and tax for 2016 was £302m.
67
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
1 Performance in the period continued
1.4 Underlying profit continued
The adjustments above are classified within the Consolidated statement of comprehensive income on the following lines:
• impairment and provision for onerous contracts has been included within administrative expenses;
• profit/loss arising on disposal and exit of properties, profit arising on disposal of investments and loss arising on disposal of convenience business are
classified within profit/loss arising on disposal and exit of properties and sale of businesses and investments;
• pension scheme set-up costs and other exceptional costs are classified within administrative expenses;
• costs associated with the repayment of borrowings are classified within finance costs; and
• net pension income is included within finance income.
2016/17 Impairment and provision for onerous contracts
Impairment and provision for onerous contracts resulted in a net credit of £6m. This includes a net impairment release of £44m (£191m impairment
reversal offset by £147m impairment) and charge of £38m relating to provisions for onerous contracts (see notes 3.3 and 5.5).
2015/16 Impairment and provision for onerous contracts
Impairment and provision for onerous contracts in 2015/16 totalled £87m including £52m relating to onerous leases and £35m in relation to onerous
commitments for changes in estimates related to provisions for stores in the new space pipeline. No impairment was recognised during 2015/16.
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 excluding shares held in trust. 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 (2016: 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
Profit attributable to ordinary shareholders
Effect of dilutive instruments
Share options and LTIPs
Diluted EPS
Earnings
£m
Weighted average
number of shares
millions
305.0
–
305.0
2,327.1
27.9
2,355.0
2017
EPS
pence
13.11
(0.16)
12.95
Earnings
£m
Weighted average
number of shares
millions
221.8
–
221.8
2,332.5
9.0
2,341.5
2016
EPS
pence
9.51
(0.04)
9.47
68
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
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 is set out below:
Underlying EPS
Basic EPS
Profit attributable to ordinary shareholders
Adjustments to determine underlying profit
(note 1.4)
Effect of dilutive instruments
Share options and LTIPs
Diluted EPS
1.6 Operating profit
Earnings
£m
Weighted average
number of shares
millions
305.0
(52.2)
252.8
–
252.8
2,327.1
–
2,327.1
27.9
2,355.0
2017
EPS
pence
13.11
(2.25)
10.86
(0.13)
10.73
Earnings
£m
Weighted average
number of shares
millions
221.8
(40.6)
181.2
–
181.2
2,332.5
–
2,332.5
9.0
2,341.5
2016
EPS
pence
9.51
(1.74)
7.77
(0.04)
7.73
The following items have been included in arriving at operating profit:
Employee costs (note 1.7)
Depreciation and impairment:
– Property, plant and equipment (note 3.3)
– Investment property (note 3.5)
– Net impairment reversal (note 1.4 and 3.3)
Amortisation
– Intangible assets (note 3.2)
Operating lease rentals:
– Land and buildings
– Other
– Sublease receipts
Value of stock expensed
2017
£m
2016
£m
1,925
1,944
305
1
(44)
93
93
16
(6)
12,519
286
2
–
96
99
17
(6)
12,321
69
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
1 Performance in the period continued
1.6 Operating profit 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
£m
52
257
309
2017
% of VSE
0.4
2.1
2.5
Auditor remuneration
During the period PricewaterhouseCoopers LLP, 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
– other services
£m
260
143
403
2017
£m
0.5
0.2
0.2
0.9
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.
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
2017
£m
1,708
119
20
78
1,925
2016
% of VSE
2.1
1.1
3.2
2016
£m
0.4
0.2
0.4
1.0
2016
£m
1,728
116
11
89
1,944
70
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
1 Performance in the period continued
1.7 Employees and Directors continued
Average monthly number of people, including Directors
Stores
Manufacturing
Distribution
Centre
2017
No.
2016
No.
96,612
8,207
5,467
2,079
112,365
105,024
8,033
5,582
2,274
120,913
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 42). There are no Executive Directors (2016: 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 colleagues 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 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 29 January 2017 of 1.58p (2016: 1.50p)
Final dividend for the period ended 31 January 2016 of 3.50p (2016: 9.62p)
2017
£m
25
4
8
2
39
2017
£m
37
81
118
2016
£m
34
4
4
2
44
2016
£m
35
225
260
The Directors propose a final dividend in respect of the financial period ending 29 January 2017 of 3.85p per share which will absorb an estimated £90m
of shareholders’ funds. Subject to approval at the AGM, it will be paid on 29 June 2017 to shareholders who are on the register on 26 May 2017.
The dividends paid and proposed during the year are from cumulative realised distributable reserves of the Company.
71
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
2 Taxation
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’s approach to tax is to ensure compliance with the relevant laws of the territories in which the Group operates. The majority of the Group’s
stores and sales are in the UK so the majority of the Group’s taxes are paid in the UK.
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 operations in the Netherlands as part of its produce supply chain. Local corporation taxes of £1.3m were paid during
2017 (2016: £1.0m);
• Hong Kong: Offices in Hong Kong were established in 2011 and source many of the Group’s non-food products. Local corporation taxes of £0.3m were
paid during 2017 (2016: £0.3m); and
• Isle of Man, Jersey and Guernsey: The Group’s insurance company is based in the Isle of Man for regulatory reasons. Companies based in Jersey and
Guernsey hold UK property assets with a net book value of £38m as a result of historic acquisitions. All profits arising in these companies 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 the asset can be utilised. Deferred tax assets are reviewed at each reporting
date as judgement is required to estimate the probability of recovery. 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.
Uncertain tax positions
Uncertain tax positions are assessed with reference to Draft IFRIC Interpretation DI/2015/1 Uncertainty over Income Tax Treatments which provides
guidance on the determination of taxable profit and tax bases.
The Group uses in-house tax specialists, professional advisors and relevant previous experience to assess tax risks. The Group recognises a tax provision
when it is considered probable that there will be a future outflow of funds to a tax authority. Provisions are measured based on the single most likely
outcome for each item unless there is a range of possible outcomes for a particular item where a weighted average measurement is more appropriate.
Provisions are included in current liabilities.
72
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
2 Taxation continued
2.2 Taxation
2.2.1 Analysis of charge/(credit) 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 charge/(credit) for the period
2.2.2 Tax on items charged in other comprehensive income and equity
Remeasurements arising in the pension scheme
Cash flow hedges
Share-based payments
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)
2017
£m
57
2
(11)
48
(10)
3
(21)
(28)
20
2017
£m
17
8
(9)
16
16
2.2.3 Tax reconciliation
The reconciliation below shows how the tax charge of £20m (2016: tax credit of £5m) has arisen on profit before taxation of £325m (2016: £217m).
The tax for the period is lower (2016: lower) than the standard rate of corporation tax in the UK of 20% (2016: 20.2%). The differences are
explained below:
Profit before taxation
Profit before taxation at 20% (2016: 20.2%)
Effects of:
Recurring items:
Expenses not deductible for tax purposes
Disallowed depreciation on UK properties
Deferred tax on Safeway acquisition assets
Adjustments in respect of prior periods
Non-recurring items:
Profit on property transactions
Loss on disposal of business
Tax impact of impairment and related items
Effect of change in tax rate
Tax charge/(credit) for the period
2017
£m
325
65
1
20
(10)
(8)
(6)
–
(21)
(21)
20
2016
£m
35
5
(8)
32
15
(8)
(44)
(37)
(5)
2016
£m
47
4
–
51
51
2016
£m
217
44
–
24
(5)
(16)
(14)
6
–
(44)
(5)
73
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
2 Taxation continued
2.2 Taxation continued
2.2.3 Tax reconciliation continued
Factors affecting current and future tax charges
The effective tax rate for the year was 6.2% (2016: (2.3)%). The normalised tax rate for the year (excluding the impact of property transactions, business
disposals and tax rate changes) was 25% (2016: 25%).
The normalised tax rate was 5% above the UK statutory tax rate of 20%. The main factor increasing the normalised tax rate is disallowed depreciation
on UK properties which reflects the Group’s strategy to maintain a majority freehold estate.
Legislation to reduce the standard rate of corporation tax to 17% from 1 April 2020 was included in the Finance Bill 2016 and was enacted in the period.
Accordingly, deferred tax has been provided at 19%, 18% or 17% depending upon when the temporary difference is expected to reverse (2016: 20%, 19%
or 18%).
The reduction in tax rate at which deferred tax is provided has reduced the Group’s deferred tax liabilities by £21m, resulting in a credit of £21m being
recognised in the tax charge for the period.
There have been no indications of any further changes to the rate of corporation tax after 1 April 2020.
2.3 Deferred tax
Net deferred tax liability
2017
£m
417
2016
£m
429
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.
The movements in deferred tax liabilities during the period are shown below:
Current period
At 1 February 2016
(Credited)/charged to profit for the period
Charged/(credited) to other comprehensive income and equity
At 29 January 2017
Prior period
At 2 February 2015
(Credited)/charged to profit for the period
Charged to other comprehensive income and equity
At 31 January 2016
The analysis of net deferred tax liabilities are as follows:
Net deferred tax liabilities to be settled after more than 12 months
Net deferred tax (assets)/liabilities to be settled within 12 months
Property,
plant and
equipment
£m
Pensions
£m
Other
short term
temporary
differences
£m
392
(31)
–
361
428
(36)
–
392
33
(4)
17
46
(8)
(6)
47
33
4
7
(1)
10
(5)
5
4
4
2017
£m
420
(3)
417
Total
£m
429
(28)
16
417
415
(37)
51
429
2016
£m
427
2
429
74
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
3 Operating assets
3.1 Accounting policies
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.
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. Amortisation is charged in cost of sales.
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 or over the life of the licence if shorter. Amortisation is charged in cost of sales.
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.
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 of disposal 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.
75
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
3 Operating assets continued
3.1 Accounting policies continued
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 is excluded from underlying earnings.
3.2 Goodwill and intangible assets
Current period
Cost
At 1 February 2016
Additions
Fully written down assets
At 29 January 2017
Accumulated amortisation
At 1 February 2016
Charge for the period
Fully written down assets
At 29 January 2017
Net book amount at 29 January 2017
Goodwill
£m
Software
development costs
£m
Licences
£m
10
–
–
10
–
–
–
–
10
647
41
(41)
647
187
83
(41)
229
418
31
14
(14)
31
18
10
(14)
14
17
Total
£m
688
55
(55)
688
205
93
(55)
243
445
Included within software development costs are assets under construction of £3m (2016: £16m).
The Group has performed its annual assessment of its amortisation policies and asset lives and deemed them to be appropriate. No changes have
been made to asset lives during the year.
As in previous years, fully amortised assets are retained in the Group’s fixed asset register. In order to provide greater understanding of the Group’s
annual amortisation charge, assets which have become fully amortised in the year have been removed from both cost and accumulated amortisation.
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 pre-tax discount rate used is 9.0% (2016: 9.0%) and the growth rate applied to the period after five years is 2.0% (2016: 2.0%).
Software development costs
The cumulative interest capitalised included within software development costs is £41m (2016: £41m). The cost of internal labour capitalised is not
material for separate disclosure.
76
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Goodwill
£m
Software
development costs
£m
Licences
£m
10
–
–
–
–
10
–
–
–
–
–
10
633
58
4
(14)
(34)
647
138
87
(4)
(34)
187
460
33
7
–
(1)
(8)
31
18
9
(1)
(8)
18
13
Freehold
land
£m
Freehold
buildings
£m
Leasehold
land and
buildings
£m
Plant,
equipment,
fixtures & vehicles
£m
3,978
2
–
3
–
(35)
–
–
3,948
657
–
55
(92)
–
(19)
–
–
601
3,347
4
4,290
10
1
11
(4)
(30)
(9)
(18)
4,251
1,645
99
38
(53)
9
(26)
(4)
(18)
1,690
2,561
–
978
9
–
(14)
–
–
(24)
(5)
944
510
16
18
(39)
(9)
–
(22)
(5)
469
475
–
1,306
346
–
–
–
(4)
(76)
(163)
1,409
579
190
36
(7)
–
(4)
(66)
(163)
565
844
2
Total
£m
676
65
4
(15)
(42)
688
156
96
(5)
(42)
205
483
Total
£m
10,552
367
1
–
(4)
(69)
(109)
(186)
10,552
3,391
305
147
(191)
–
(49)
(92)
(186)
3,325
7,227
6
77
3 Operating assets continued
3.2 Goodwill and intangible assets continued
Prior period
Cost
At 2 February 2015
Additions
Interest capitalised
Disposals
Fully written down assets
At 31 January 2016
Accumulated amortisation and impairment
At 2 February 2015
Charge for the period
Disposals
Fully written down assets
At 31 January 2016
Net book amount at 31 January 2016
3.3 Property, plant and equipment
Current period
Cost
At 1 February 2016
Additions
Interest capitalised
Reclassifications
Transfers to investment properties
Transfers to assets held-for-sale
Disposals
Fully written down assets
At 29 January 2017
Accumulated depreciation and impairment
At 1 February 2016
Depreciation charge for the period
Impairment
Impairment reversal
Reclassifications
Transfers to assets held-for-sale
Disposals
Fully written down assets
At 29 January 2017
Net book amount at 29 January 2017
Assets under construction included above
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
3 Operating assets continued
3.3 Property, plant and equipment continued
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.
As in previous years, fully depreciated assets are retained in the Group’s fixed asset register. In order to provide greater understanding of the Group’s
annual depreciation charge, assets which have been fully depreciated in the year have been removed from both cost and accumulated depreciation.
Included within the table on page 77 are leasehold land and buildings held under finance lease with a cost of £294m (2016: £308m) and accumulated
depreciation of £80m (2016: £94m).
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 £198m (2016: £197m).
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% (2016: 9.0%). 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 specific local market conditions, in particular the continued low 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 a net impairment reversal of £44m during the year (2016: £nil)
(£191m impairment reversal offset by £147m impairment charge). This movement reflects fluctuations expected from store level trading performance
and local market conditions. At 29 January 2017, the key assumption to which the value in use calculation is most sensitive to is the discount rate.
Specific sensitivity analysis with regard to this assumption shows that an increase of 1% in the discount rate would result in an additional impairment
charge of £56m.
78
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
3 Operating assets continued
3.3 Property, plant and equipment continued
Prior period
Cost
At 2 February 2015
Additions
Reclassifications
Transfers from investment properties
Transfers to assets held-for-sale
Disposals
Fully written down assets
At 31 January 2016
Accumulated depreciation
At 2 February 2015
Charge for the period
Transfers from investment properties
Transfers to assets held-for-sale
Disposals
Fully written down assets
At 31 January 2016
Net book amount at 31 January 2016
Assets under construction included above
3.4 Assets classified as held-for-sale
At start of period
Additions
Transfers from property, plant and equipment at net book value
Transfers from investment property at net book value
Disposals
At end of period
Freehold
land
£m
Freehold
buildings
£m
Leasehold
land and
buildings
£m
Plant,
equipment,
fixtures & vehicles
£m
3,989
5
–
–
(3)
(13)
–
3,978
660
–
–
–
(3)
–
657
3,321
–
4,330
13
(8)
5
(5)
(44)
(1)
4,290
1,576
102
5
(4)
(33)
(1)
1,645
2,645
7
1,055
14
8
–
–
(91)
(8)
978
548
18
–
–
(48)
(8)
510
468
3
1,301
256
–
–
(3)
(90)
(158)
1,306
639
166
–
(3)
(65)
(158)
579
727
2
2017
£m
–
19
20
7
(46)
–
Assets transferred from property, plant and equipment had a cost of £69m (2016: £11m) and accumulated depreciation of £49m (2016: £7m). Assets
transferred from investment property had a cost of £10m (2016: £45m) and accumulated depreciation of £3m (2016: £15m).
Total
£m
10,675
288
–
5
(11)
(238)
(167)
10,552
3,423
286
5
(7)
(149)
(167)
3,391
7,161
12
2016
£m
84
–
4
30
(118)
–
79
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
3 Operating assets continued
3.5 Investment property
Cost
At start of period
Additions
Transfers from/(to) property, plant and equipment
Transfers to assets classified as 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 classified as held-for-sale
Disposals
At end of period
Net book amount at end of period
2017
£m
59
–
4
(10)
–
53
22
1
–
(3)
–
20
33
2016
£m
108
3
(5)
(45)
(2)
59
40
2
(5)
(15)
–
22
37
Included in other operating income is £7m (2016: £12m) of rental income generated from investment properties. At the end of the period the fair
value of investment properties, was £51m (2016: £68m). 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)
2017
£m
16
55
27
98
2017
£m
28
2016
£m
18
61
73
152
2016
£m
26
80
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
4 Interests in other entities
4.1 Accounting policies
Joint ventures
The Group applies IFRS 11 ‘Joint Arrangements’ 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. When the Group disposes of an
investment, the fair value of the consideration received less the carrying value of the investment at the date of disposal is recognised in profit or loss,
along with any amounts previously recognised in other comprehensive income in respect of the investment.
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 Joint ventures
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. 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 and determined that the Group continues to jointly control MHE JV Co.
MHE JV Co
Non-current assets
Current assets
Current liabilities
Net assets
Group’s share of net assets
Profit
Group’s share of profit
2017
£m
96
22
(6)
112
56
4
2
2016
£m
125
7
(7)
125
63
4
2
81
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
4 Interests in other entities continued
4.3 Investments
At start of period
Fair value adjustments
Disposals
At end of period
2017
£m
31
14
(45)
–
2016
£m
31
–
–
31
On 16 August 2016, the Group disposed of its 10% stake in Fresh Direct Inc, a US internet grocer for cash consideration of £45m, net of £1m of
transaction costs. In line with IAS 39 ‘Financial Instruments: Recognition and Measurement’, the asset was remeasured to fair value before the sale
completed, resulting in a £14m increase in the book value of the investment. On disposal the £14m revaluation gain was recognised in profit or loss
net of £1m of transaction costs. This profit is one-off in nature and therefore has been excluded from reported underlying earnings (see note 1.4).
Following the transaction the undrawn loan facility provided to Fresh Direct Inc ceased.
4.4 Business combinations
52 weeks ended 29 January 2017
In the 52 weeks ended 29 January 2017 there were no business combinations.
52 weeks ended 31 January 2016
On 7 December 2015, Wm Morrison Produce Limited exercised an option to acquire the remaining 49% of the issued share capital of Wm Morrison
Bananas Limited from Global Pacific Group, for a cash consideration of £3m. Due to the existence of the put and call option, the Group had previously
treated Wm Morrison Bananas Limited as a 100% subsidiary.
For part of the year the Group was part of a joint venture in respect of The Morrisons Farm at Dumfries House Limited (the Farm). The Group
terminated this agreement on 13 November 2015 when Wm Morrison Supermarkets PLC acquired the remaining 50% of the issued share capital
of the Farm. On 6 January 2016, the Farm was renamed Neerock Farming Limited. The Farm’s results are immaterial to the Group.
4.5 Disposals of businesses
52 weeks ended 29 January 2017
In the 52 weeks ended 29 January 2017 there were no disposals of businesses.
52 weeks ended 31 January 2016
On 26 October 2015, the Group disposed of its subsidiary Wm Morrison Convenience Stores Limited and associated assets to MLCG Limited for cash
consideration of £20m. This resulted in a loss on disposal of £34m. This loss was one-off in nature and was excluded from reported underlying earnings
in the 52 weeks ended 31 January 2016 (see note 1.4).
Following the sale, the Group continues to guarantee certain leases relating to its former convenience stores. At 31 January 2016, the Group made an
assessment of the likelihood and amount of future rental commitments should these leases revert, and recognised a liability on the balance sheet
reflecting the estimated cash outflow. In the event of lessee default the Group will look to minimise its liability by finding alternative occupiers as soon
as possible.
On 29 June 2016, MLCG Limited announced it was entering administration. The Group has subsequently reassessed the liability it recognised in the
52 weeks ended 31 January 2016 and considers this still to be appropriate.
82
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
5 Working capital and provisions
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 and
other onerous contracts are recognised when the Group believes that the unavoidable costs of meeting the obligations exceed the economic
benefits expected to be received under the contract. 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.
5.2 Stock
Finished goods
Unearned elements of commercial income are deducted from finished goods as the stock has not been sold.
2017
£m
614
2016
£m
616
83
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
5 Working capital and provisions continued
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
2017
£m
4
38
101
(6)
137
68
9
214
2017
£m
137
–
–
6
143
2016
£m
13
26
99
(6)
132
56
4
192
2016
£m
132
–
–
6
138
As at 29 January 2017 and 31 January 2016, 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 2017, £4m of the £4m commercial income trade debtor balance had been settled and £28m of the £38m 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
Included within accruals and deferred income is £3m (2016: £5m) in respect of deferred commercial income.
As of 5 March 2017, £25m of the £34m commercial income due above had been offset against payments made.
2017
£m
2,160
(34)
2,126
68
198
445
2,837
2016
£m
1,775
(85)
1,690
86
267
475
2,518
84
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
5 Working capital and provisions continued
5.5 Provisions
At 1 February 2016
Charged to profit for the period
Utilised/released during the period
Unwinding of discount
At 29 January 2017
Onerous leases and
onerous contracts
£m
289
38
(34)
13
306
Other property
provisions
£m
20
–
–
–
20
Total
£m
309
38
(34)
13
326
Part of the onerous leases relate to sublet and vacant properties, with commitments ranging from one to 56 years. The provision is revised regularly
in response to market conditions. During the year, £38m has been charged to onerous lease and onerous contracts provisions as detailed in note 1.4.
The utilisation of provisions relates to the ongoing utilisation of onerous contracts and the assignment of onerous leases.
Other property provisions include a petrol filling station decommissioning reserve for the cost of decommissioning petrol tanks, and provisions
for dilapidations on leased buildings, for the cost of restoring assets to their original condition.
5.6 Cash generated from operations
Profit for the period
Net finance costs
Taxation charge/(credit)
Share of profit of joint venture
Operating profit
Adjustments for:
Depreciation and amortisation
Impairment
Impairment reversal
Profit arising on disposal and exit of properties and sale of businesses and investments
Adjustment for non-cash element of pension charges
Share-based payments
Other non-cash charges
Decrease in stock1
(Increase)/decrease in debtors1
Increase in creditors1
Increase in provisions1
Cash generated from operations
2017
£m
305
145
20
(2)
468
399
147
(191)
(32)
7
20
2
2
(19)
306
4
1,113
2016
£m
222
99
(5)
(2)
314
384
–
–
(97)
11
11
1
40
30
313
19
1,026
Total working capital inflow (the sum of items marked1 in the table) is £293m in the year. This includes £38m as a result of the current year onerous
contract charge, net of £94m of onerous payments and other non-operating payments of £11m. When adjusted to exclude these items, the working
capital inflow is £360m.
85
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
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% (2016: 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. 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 78 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.
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).
86
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
6 Capital and borrowings continued
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
Underlying finance costs1
Costs associated with the repayment of borrowings (note 1.4)
Finance costs
Bank interest received
Amortisation of bonds
Other finance income
Underlying finance income1
Net pension income (note 1.4 and 8.2)
Finance income
Net finance cost
1 Underlying net finance costs marked 1 amount to £97m (2016: £99m).
6.3 Borrowings
The Group had the following current borrowings and other financial liabilities:
Current
Bank overdraft
£200m Sterling bonds 6.00% January 2017
The Group had the following non-current borrowings and other financial liabilities:
Non-current
£135m Sterling bonds 6.12% December 2018 (2016: £200m)
£365m Sterling bonds 4.625% December 2023 (2016: £400m)
£384m Sterling bonds 3.50% July 2026 (2016: £400m)
£300m Sterling bonds 4.75% July 2029 (2016: £300m)
US Private Placement loan notes (USPP) 4.4% November 2026 (2016: $250m)
€411m Euro bond 2.25% June 2020 (2016: €700m)
Total non-current bonds and loan notes
Revolving credit facility
2017
£m
(3)
(86)
1
(88)
(13)
(3)
(104)
(56)
(160)
6
1
–
7
8
15
(145)
2017
£m
–
–
–
2017
£m
136
363
411
292
–
348
1,550
–
1,550
2016
£m
(4)
(98)
4
(98)
(11)
(3)
(112)
–
(112)
5
1
7
13
–
13
(99)
2016
£m
9
200
209
2016
£m
202
398
416
291
174
527
2,008
(5)
2,003
The £200m 2017 Sterling bond was repaid in January 2017 on maturity. The movements on the nominal value of the other bonds and the US Private
Placement loan notes (USPP) are due to early repayment during the 52 weeks ended 29 January 2017.
87
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
6 Capital and borrowings continued
6.3 Borrowings continued
Borrowing facilities
Borrowings are denominated in sterling and euro, and bear fixed interest rates. All borrowings are unsecured.
In September 2016 the Group extended its syndicated committed revolving credit facility of £1.35bn by a further year, resetting its five year term and
resulting in a maturity date of September 2021. The revolving credit facility incurs commitment fees and drawdowns bear interest at floating interest
rates at a spread above LIBOR. There were no borrowings under the revolving credit facility at the balance sheet date. In the year, the Group did not
renew a further credit facility of £150m that was in place during 2016. Therefore the Group had £1.35bn of undrawn committed borrowing facilities
available (2016: £1.5bn).
In the event of default of covenants the principal amounts of borrowings and any interest accrued become repayable on demand.
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.
Less than one year
One to two years
Two to three years
Three to four years
Four to five years
More than five years
2017
£m
61
195
52
400
45
1,248
2016
£m
291
79
278
67
593
1,574
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 at 2016 was
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 equivalent maturity dates.
These compare to carrying values as follows:
Total bonds: non-current and current
Total loan notes: non-current
Amortised
cost
£m
1,550
–
1,550
2017
Fair
value
£m
1,676
–
1,676
Amortised
cost
£m
2,034
174
2,208
2016
Fair
value
£m
2,019
167
2,186
The fair value of other items within current and non-current borrowing equals their carrying amount, as the impact of discounting is not material.
88
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
6 Capital and borrowings continued
6.4 Analysis of net debt
Cash and cash equivalents per balance sheet
Bank overdrafts
Cash and cash equivalents per cash flow statement
Cross-currency contracts and interest rate swaps
Fuel and energy price contracts
Non-current financial assets
Foreign exchange forward contracts
Fuel and energy price contracts
Current financial assets
Foreign exchange forward contracts
Fuel and energy price contracts
Bonds
Current financial liabilities
Bonds
Private placement loan notes
Revolving credit facility
Cross-currency contracts and interest rate swaps
Fuel and energy price contracts
Non-current financial liabilities
Net debt
Note
6.3
7.3
7.3
7.3
7.3
6.3
6.3
6.3
6.3
7.3
7.3
2017
£m
326
–
326
6
10
16
11
11
22
(2)
(1)
–
(3)
(1,550)
–
–
–
(5)
(1,555)
(1,194)
2016
£m
496
(9)
487
30
–
30
12
–
12
–
(17)
(200)
(217)
(1,834)
(174)
5
(46)
(9)
(2,058)
(1,746)
Cash and cash equivalents include restricted balances of £9m (2016: £16m) which is held by Farock Insurance Company Limited, a subsidiary
of Wm Morrison Supermarkets PLC.
In March 2016, the IFRS Interpretations Committee issued an agenda decision regarding the treatment of offsetting and cash-pooling arrangements in
accordance with IAS 32 ‘Financial instruments: Presentation’. This provided additional guidance on when bank overdrafts in cash-pooling arrangements
would meet the requirements for offsetting in accordance with IAS 32. Following this additional guidance, the Group has reviewed its cash-pooling
arrangements and recognised £nil of cash-pooling facilities within bank overdrafts and short term borrowings in the current period that would
previously have been offset against cash and cash equivalent balances. Comparatives at 31 January 2016 have been restated by £8m. There is no impact
of this change in presentation on cash flows or net debt.
89
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
6 Capital and borrowings continued
6.5 Called-up share capital
At 1 February 2016
Share options exercised
At 29 January 2017
Number of
shares
millions
2,335.2
0.4
2,335.6
Share capital
£m
Share premium
£m
234
–
234
127
1
128
Total
£m
361
1
362
The total authorised number of ordinary shares is 4,000 million shares (2016: 4,000 million shares) with a par value of 10p per share (2016: 10p per
share). All issued shares are fully paid. The Group did not acquire any of its own shares for cancellation in the 52 weeks ended 29 January 2017 or
31 January 2016.
The holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at the meetings of the Company.
Trust shares
Included in retained earnings is a deduction of £14m (2016: £13m) in respect of own shares held at the balance sheet date. This represents the
cost of 8,458,487 (2016: 8,401,491) of the Group’s ordinary shares (nominal value of £0.8m (2016: £0.8m)). 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 29 January 2017 was £20m (2016: £15m). 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 2,790,045 (2016: 8,612,819) of its own shares to hold in trust for consideration of £5m (2016: £13m), and utilised
2,733,049 (2016: 3,118,702) trust shares to satisfy awards under the Group’s employee share plans.
Issue of new shares
The Group issued 381,043 (2016: 70,480) new shares to satisfy options exercised by employees during the period. Proceeds received on exercise of these
shares amounted to £0.6m (2016: £0.1m).
6.6 Reserves
Capital redemption reserve
Merger reserve
Hedging reserve
Retained earnings
Total
2017
£m
39
2,578
18
1,066
3,701
2016
£m
39
2,578
(10)
788
3,395
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 viability taking into consideration the risks that it faces whilst maintaining an
investment grade credit rating and having adequate liquidity headroom. The Group manages its capital structure by managing the balance of debt and
shares outstanding. It does this by seeking an effective balance between debt and equity. During the current financial year, net debt has reduced by
£552m, reflecting strong operating cash flow driven by working capital management and property and business disposals. Throughout the year, the
Group has comfortably complied with the gearing and fixed charge cover covenants attaching to its revolving credit facility.
90
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
6 Capital and borrowings continued
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:
2017
Vehicles, plant
and equipment
£m
14
34
–
48
Property
£m
121
466
1,851
2,438
2016
Vehicles, plant
and equipment
£m
15
25
–
40
Property
£m
119
451
1,854
2,424
At 1 February 2016
Net impact of disposal programme
New lease commitments
Other
At 29 January 2017
7 Financial risk and hedging
£m
119
(4)
4
2
121
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.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised or no longer qualifies for hedge accounting.
At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs at
which point the net cumulative gain or loss recognised in equity is transferred to profit or loss in the period.
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 or loss for the period as well as the gain or loss from changes in the fair value of the derivative.
91
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
7 Financial risk and hedging continued
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 is 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.
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.
At the reporting date, the sensitivity to a reasonable possible change (+/-10%) in the US dollar and euro exchange rates would equate to a £10m post-tax
profit or loss exposure in relation to the euro and £7m in relation to the US dollar, for the unhedged forecast foreign currency exposures over the
next 12 months. A weakening of the pound sterling by 10% against the euro and US dollar exchange rates would impact other comprehensive income
by £19m.
Liquidity risk
The Group policy is to maintain an appropriate maturity profile across its borrowings and a sufficient level of committed headroom to meet
obligations. The Group finances its operations using a diversified range of funding providers including banks and bondholders.
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 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 Treasury Policy.
The Treasury Committee compares the committed liquidity available to the Group against the forecast requirements including policy headroom.
This policy includes a planning assumption that supply chain finance facilities are not available.
Interest rate risk
The Group seeks 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, 100% (2016: 91%) 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.
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 £18m (2016: £8m).
92
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
7 Financial risk and hedging continued
7.3 Derivative financial assets and liabilities
Derivative financial assets
Current
Foreign exchange forward contracts
Fuel and energy price contracts
Non-current
Cross-currency contracts and interest rate swaps
Fuel and energy price contracts
2017
£m
11
11
22
6
10
16
2016
£m
12
–
12
30
–
30
All derivatives are categorised as level 2 instruments. Level 2 fair values for simple, over-the-counter derivatives are calculated by using benchmarked,
observable market interest rates to discount future cash flows.
Derivative financial liabilities
Current
Foreign exchange forward contracts
Fuel and energy price contracts
Non-current
Cross-currency contracts and interest rate swaps
Fuel and energy price contracts
2017
£m
2
1
3
–
5
5
2016
£m
–
17
17
46
9
55
The amounts disclosed in the table below are the contractual undiscounted derivative cash flows and therefore differ to those in the balance sheet.
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
– Inflow/(outflow)
2017
£m
< 1 year
£m
1-5 years
£m
< 1 year
£m
1-5 years
£m
(10)
8
–
–
(246)
251
8
(381)
376
–
–
–
–
7
(25)
20
(3)
7
(184)
194
(694)
613
(11)
28
–
–
(18)
(8)
2016
£m
5+ years
£m
(203)
223
(16)
39
–
–
–
93
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
7 Financial risk and hedging continued
7.4 Hedging activities
Cash flow hedges
At 29 January 2017 and 31 January 2016, the Group held cross-currency swaps designated as cash flow hedges. The notional principal amount of the
outstanding cross-currency swaps at 29 January 2017 was $nil (2016: $250m) and €413m (2016: €700m).
The fuel and energy price contracts and foreign currency derivatives shown in note 7.3 are designated as cash flow hedges.
Fair value hedges
The valuation of fixed-to-floating interest rate swaps designated in fair value hedges are £nil (2016: £21m). These financial instruments were terminated
during the period. Early termination costs have been included in costs associated with repayment of borrowings as an adjustment to underlying
earnings (see note 1.4).
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.
8.1.1 Defined benefit schemes
Pension scheme assets are valued at fair market value as required by IAS 19. 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.
Current service cost is treated as an operating cost in the Consolidated statement of comprehensive income and Consolidated cash flow statement
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 costs or income 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 of 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 note 8 are before any adjustments for deferred taxation.
8.2 Defined benefit schemes: Summary and description
The Group operates a number of 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 and/or career average revalued earnings (CARE) (the ‘CARE Schemes’). The CARE Schemes are not
open to new members and were closed to future accrual in July 2015. The RSP is a cash balance scheme, which provides a lump sum benefit based upon
a defined proportion of an employee’s annual earnings in each year, which is revalued each year in line with inflation subject to a cap.
The position of each scheme at 29 January 2017 is as follows:
2017
£m
293
(21)
272
2016
£m
178
8
186
CARE Schemes
RSP
Net pension asset
94
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
8 Pensions continued
8.2 Defined benefit schemes: summary and description continued
The disclosures below show the details of the schemes combined:
Balance sheet:
Fair value of scheme assets
Present value of obligations
Net pension asset/(liability)
Consolidated statement of comprehensive income
Current service cost – recognised in cost of sales
Current service cost – recognised in administrative expenses
Administrative costs paid by the Schemes – recognised in administrative expenses
Curtailment gain
Net interest on net pension asset – finance income
Total expense (credited)/charged to statement of comprehensive income
Statement of other comprehensive income:
Remeasurements in other comprehensive income (credit)/charge
2017
CARE
£m
4,455
(4,162)
293
2017
CARE
£m
–
–
3
(1)
(6)
(4)
(101)
2017
RSP
£m
219
(240)
(21)
2017
RSP
£m
42
29
1
–
(2)
70
15
2016
CARE
£m
3,812
(3,634)
178
2016
CARE
£m
21
3
3
(3)
–
24
(236)
2016
RSP
£m
138
(130)
8
2016
RSP
£m
42
20
1
–
–
63
–
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 interests of the scheme participants within the context of
administering the scheme in accordance with the purpose for which the trust was created, 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, while in the Safeway Scheme and the RSP this power is given to the Group, subject to regulatory override.
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 with different allocations amongst those categories,
according to the investment principles of that Scheme.
Currently, the investment strategy of the CARE Schemes is to maintain a balance of growth assets (equities and diversified growth funds), income assets
(comprising credit investments, corporate bonds and absolute return bonds) and protection assets (comprising an LDI portfolio), with a weighting
towards protection assets. 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)
Absolute return bonds (quoted)
Diversified growth funds (quoted)
Credit funds (unquoted)
Liability driven investments (unquoted)
Cash (quoted)
Total
2017
CARE
£m
770
382
382
489
417
1,998
17
4,455
2017
RSP
£m
107
–
–
50
–
61
1
219
2016
CARE
£m
681
833
–
734
271
1,286
7
3,812
2016
RSP
£m
98
–
–
–
–
34
6
138
95
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
8 Pensions continued
8.3 Scheme assets continued
Liability driven investments (LDI)
Part of the investment objective of the Schemes is to minimise fluctuations in the Schemes’ funding levels due to changes in the value of the
liabilities. This is primarily achieved through the use of ‘liability driven investments’ (LDI), whose main goal is to align movements in the value of assets
with movements in the Schemes’ liabilities arising from changes in market conditions. The Schemes have hedging that broadly covers interest rate
movements and inflation movements, as measured on the Trustees’ funding assumptions which use a discount rate derived from gilt yields.
LDI primarily involves the use of government fixed and inflation linked bonds (including re-purchase agreements). Derivatives such as interest rate
and inflation swaps are also used. There are no annuities or longevity swaps.
Diversified growth funds
The Schemes employ diversified growth funds in order to reduce their exposure to equity markets. These funds typically invest in a range of public
and private market assets, including equities, bonds, commodities, property and other assets.
Credit funds
The Schemes invest in credit funds in order to improve returns available from their bond assets. These funds typically lend directly to corporations
on a senior secured basis, rather than purchasing debt issued in the public markets.
Absolute return bonds
The Schemes employ absolute return bond managers to target a moderate investment return whilst aiming to preserve capital in most market
environments. These funds typically invest in a range of fixed income instruments and derivatives, across different countries and currencies, actively
managing their exposure according to their market views and opportunities available.
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
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
2017
CARE
£m
3,812
138
612
10
–
(114)
(3)
4,455
2017
RSP
£m
138
7
20
56
3
(4)
(1)
219
2016
CARE
£m
4,050
123
(299)
27
1
(87)
(3)
3,812
2016
RSP
£m
87
3
(5)
49
6
(1)
(1)
138
Scottish Limited Partnership
The Group has previously entered into a pension funding partnership structure. In January 2013, Wm Morrison Supermarkets PLC made a contribution
to the CARE Schemes of £90m. On the same day, the CARE Schemes invested £90m in the Wm Morrison Property Partnership (SLP) as a limited partner.
The SLP holds properties which have been leased back to the Group in return for rental income payments. The Group retains control over these
properties, including the flexibility to substitute alternative properties.
As partners in the SLP, the CARE Schemes are entitled to receive a fixed distribution of £6.6m p.a. from the profits of the SLP for 20 years from
2013, subject to certain conditions. The distributions shared with the Schemes are reflected in the Group financial statements as Employer pension
contributions.
In July 2015, the SLP was amended to enhance the security provided to the Schemes by including additional properties. The terms of these additional
properties are such that the CARE Schemes have no entitlement to receive a distribution.
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.
96
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
8 Pensions continued
8.4 Present value of obligations
The movement in the defined benefit obligation over the period was as follows:
Defined benefit obligation at start of period
Current service cost
Interest expense
Actuarial gain – demographic assumptions
Actuarial (loss)/gain – financial assumptions
Actuarial gain – experience
Curtailment gain
Employee contributions
Benefits paid
Defined benefit obligation at end of period
2017
CARE
£m
(3,634)
–
(132)
94
(852)
247
1
–
114
(4,162)
2017
RSP
£m
(130)
(71)
(5)
–
(40)
5
–
(3)
4
(240)
2016
CARE
£m
(4,093)
(24)
(123)
–
517
–
3
(1)
87
(3,634)
2016
RSP
£m
(83)
(62)
(3)
–
18
5
–
(6)
1
(130)
The durations of the defined benefit obligations at the end of the 2017 reporting period are: RSP 20 years; Morrison CARE 26 years; Safeway CARE 24
years. The weighted average duration of all three Schemes is 24 years.
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
2017
CARE
2.9%
3.5%
2017
CARE
22.3
23.8
24.5
26.2
2017
RSP
2.8%
3.5%
2017
RSP
n/a
n/a
n/a
n/a
2016
CARE
3.7%
3.2%
2016
CARE
22.6
24.1
24.9
26.5
2016
RSP
3.7%
3.2%
2016
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. Following analysis
completed as part of the 2016 actuarial valuations, the 2017 year-end mortality tables used have been updated to the S2PMA/S2PFA-Heavy tables
(males/females) based on year of birth with a scaling factor of 110%/100% applied to the mortality rates in the Morrison/Safeway Schemes respectively,
with CMI 2015 projections and a long term 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.)
2017
CARE
–
2.2%/3.3%
–
2017
RSP
2.4%
–
1.9%
–/2.4%
2.4%
2.4%/–
2.4%
2016
CARE
–
2.1%/3.2%
–
–/2.2%
2.2%
2016
RSP
2.2%
–
1.8%
2.2%/–
2.2%
97
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
8 Pensions continued
8.4 Present value of obligations continued
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% p.a.
+/– 0.1% p.a.
+/– one year
2017
CARE
£m
–/+105
+/–95
+180
2017
RSP
£m
–/+5
+/–3
–
2016
CARE
£m
–/+83
+/–76
+141
2016
RSP
£m
–/+3
+/–2
–
8.5 Funding
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 currently calculated in proportion to the
number of employees that are members of the RSP.
The latest full actuarial valuations were carried out as at 1 April 2016 for the Safeway Scheme and 5 April 2016 for the Morrison Scheme and the RSP.
The valuations indicated that, on the agreed funding basis, the Safeway, Morrison and RSP Schemes had surpluses of £100m, £1m and £10m respectively.
As a result of these funding positions there are currently no deficit contributions payable. As such there is no ‘minimum funding requirement’ in force.
The results of the 2016 actuarial valuations for the CARE Schemes have been used and updated for IAS 19 ‘Employee benefits’ purposes for the
period to 29 January 2017 by a qualified independent actuary. For the RSP an actuarial valuation for the purposes of IAS 19, based on member data
as at 31 December 2016, has been completed and updated to 29 January 2017 by a qualified 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.
At the year end, schemes in surplus have been disclosed within the assets on the balance sheet. The Group has taken legal advice with regard to the
recognition of a pension surplus and also recognition of a minimum funding requirement under IFRIC 14 ‘IAS 19 – The limit on a defined benefit asset,
minimum funding requirement and their interaction’. This advice concluded that recognition of a surplus is appropriate on the basis that the Group
has an unconditional right to a refund of a surplus. In respect of the RSP this is on the basis that paragraph 11(a) of IFRIC 14 applies enabling a refund of
surplus during the life of the RSP. In respect of the Morrison Scheme, this is on the basis that paragraph 11(b) or 11(c) of IFRIC 14 applies enabling a refund
of surplus assuming the gradual settlement of the scheme liabilities over time until all members have left the scheme or the full settlement of the
Scheme’s liabilities in a single event (i.e. as a scheme wind up). In respect of the Safeway Scheme, a refund is available on the basis that paragraph 11(b) of
IFRIC 14 applies. Amendments to the current version of IFRIC 14 are currently being considered. The legal advice received by the Group has considered
the proposed new wording to paragraph 12(A) of IFRIC 14 concerning whether other parties have a unilateral power to use a scheme’s surplus to settle
in full the scheme’s liabilities and has concluded that the above accounting treatment should not be affected by the current exposure draft of the
revised wording to IFRIC 14.
The current best estimate of Group contributions to be paid to the defined benefit schemes for the accounting period commencing 29 January 2017
is £79m (2016: £67m). This estimate includes amounts payable from the SLP and salary sacrificed contributions from employees.
8.6 Defined contribution scheme set-up costs
As previously announced the Group intends to open a new defined contribution pension scheme for colleagues during the accounting period
commencing 30 January 2017. This scheme will become the Auto Enrolment scheme and as such the Group will be liable for backdated contributions
for eligible colleagues to 1 October 2012. The estimated set up costs relating to backdated contributions of £35m were initially recognised in the
52 weeks to 31 January 2016. The accrual has been updated to 29 January 2017 to reflect a further year’s contribution for eligible colleagues and changes
to accounting assumptions.
98
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
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 the Black-Scholes 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 £20m (2016: £11m).
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 £350 each month for a fixed period of three years. Options are offered at a
discount 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:
Grant date
Share price at grant date
Fair value of options granted
Exercise price
Dividend yield
Annual risk free interest rate
Expected volatility1
1 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.
20 May 2014
£2.10
£11.6m
£1.64
6.21%
1.00%
18.3%
16 May 2016
£1.91
£5.1m
£1.70
2.62%
0.87%
26.8%
19 May 2015
£1.81
£4.8m
£1.64
5.15%
1.06%
22.7%
13 May 2013
£2.83
£8.1m
£2.25
4.17%
0.45%
16.8%
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 Black-Scholes 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
2017
Options
thousands
48,827
13,478
(381)
(15,159)
46,765
52
Weighted average
exercise price in
£ per share
1.85
1.64
1.66
1.93
1.72
2.36
Weighted average
exercise price in
£ per share
1.72
1.70
1.69
1.89
1.66
2.25
2017
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
Weighted average
share price at date
of exercise
£
2.14
Weighted average
option price at date
of exercise
£
1.69
Number of
shares
thousands
381
Weighted average
share price at date
of exercise
£
1.74
Weighted average
option price at date
of exercise
£
1.66
2017
£1.64 to £2.25
1.1 years
2016
Options
thousands
50,785
21,729
(70)
(23,617)
48,827
17
2016
Number of
shares
thousands
70
2016
£1.64 to £2.36
2.2 years
99
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Group financial statements continued
52 weeks ended 29 January 2017
9 Share-based payments continued
9.3 Long term incentive plans
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 with the exception of senior employees within the schemes granted this year.
LTIP grants issued between 2013 and 2016 had associated performance conditions for Executive Committee members, whilst other senior employees
eligible for LTIPs had to satisfy a service condition only. The LTIP schemes granted in April, May and October 2016 have service and performance
conditions for all employees. The performance conditions associated with all awards are measured through free cash flow, sales and earnings per share
performance.
Awards normally vest three years after the original grant date, provided the relevant service and performance criteria have been met.
The fair value of awards granted and the inputs used to determined it are as follows:
Grant date
Option fair value at grant date
Fair value of share awards
25 Oct
2016
£2.28
£9.2m
06 Apr
13 May
2016
2016
£2.00
£1.90
£1.9m £73.6m
23 Apr
01 Oct
2015
2015
£1.97
£1.74
£1.8m £5.3m
16 Oct
2014
£1.57
22 Apr
20 Jun
2014
2014
£2.02
£1.91
£0.9m £3.0m £16.7m
22 Apr
17 Oct
2013
2013
£2.80
£2.79
£1.5m £18.8m
Movement in outstanding share awards
Outstanding at start of period
Granted
Exercised
Forfeited
Outstanding at end of period
Exercisable at end of period
2017
Share awards
thousands
2016
Share awards
thousands
20,279
42,258
(2,459)
(13,596)
46,482
–
18,793
3,711
–
(2,225)
20,279
–
The weighted average remaining contractual life of the share awards is 1.96 years (2016: 1.1 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
10 July 2015
£1.72
–
£0.1m
There are 62,332 share awards outstanding at the end of the period (2016: 175,029). The movement during the period is entirely the result of options
vesting in the period. The weighted average remaining contractual life of the share awards is 1.09 years (2016: 0.8 years).
100
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
9 Share-based payments continued
9.5 Restricted share award
Movement in outstanding share awards
Outstanding at start of period
Exercised
Lapsed
Outstanding at end of period
2017
Share awards
thousands
2016
Share awards
thousands
1
–
(1)
–
2,340
(1,808)
(531)
1
9.6 Deferred share bonus plan
Certain members of senior management participate in the deferred share bonus plan under which 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
Lapsed
Outstanding at end of period
2016/17 scheme
£2.02
–
£nil
£2.0m
2015/16 scheme
£2.05
–
£nil
£1.1m
2017
Share awards
thousands
2016
Share awards
thousands
413
947
–
–
1,360
815
559
(432)
(529)
413
The weighted average remaining contractual life of the share awards is 1.8 years (2016: 1.9 years).
10 Other
10.1 Related party transactions
The Group’s related party transactions in the period include the remuneration of the senior managers (see note 1.7), and the Directors’ emoluments
and pension entitlements, share awards and share options in the audited section of the Directors’ remuneration report, which forms part of these
financial statements.
During the year, the Group received a dividend of £8m (2016: £8m) from MHE JVCo. The Group owns 50% of the equity of MHE JVCo (see note 4.2).
101
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Wm Morrison Supermarkets PLC – Company balance sheet
29 January 2017
Fixed assets
Intangible assets
Property, plant and equipment
Investment property
Investments
Investment in joint venture
Current assets
Stock
Debtors
Pension asset due after more than one year
Derivative financial assets due within one year
Derivative financial assets due after more than one year
Cash and cash equivalents
Creditors – amounts falling due within one year
Derivative financial liabilities due within one year
Net current assets
Total assets less current liabilities
Creditors – amounts falling due after more than one year
Derivative financial liabilities due after more than one year
Pension liabilities due after more than one year
Deferred tax liabilities
Provisions for liabilities
Net assets
Shareholders’ equity
Share capital
Share premium
Capital redemption reserve
Merger reserve
Retained earnings and other reserves1
Total shareholders’ funds
1 Included within Retained earnings and other reserves is profit after tax of £78m (52 weeks ended 31 January 2016: £91m).
Note
11.6
11.7
11.8
11.9
11.10
11.16
11.13
11.13
11.11
11.13
11.12
11.13
11.16
11.14
11.15
11.17
11.17
11.18
11.18
11.18
2017
£m
428
2,134
10
3,439
64
6,075
388
3,077
120
22
16
235
3,858
(3,501)
(3)
354
6,429
(1,593)
(5)
(21)
(130)
(271)
4,409
234
128
39
2,578
1,430
4,409
2016
£m
465
2,149
17
3,470
65
6,166
390
2,674
69
12
30
405
3,580
(2,943)
(17)
620
6,786
(1,974)
(55)
–
(132)
(254)
4,371
234
127
39
2,578
1,393
4,371
The accounting policies on pages 104 to 106 and the notes on pages 107 to 118 form part of these financial statements.
The financial statements on pages 102 to 118 were approved by the Board of Directors and authorised for issue on 8 March 2017. They were signed on its
behalf by:
Trevor Strain
Chief Financial Officer
102
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Wm Morrison Supermarkets PLC – Company statement
of changes in equity
52 weeks ended 29 January 2017
Current period
At 1 February 2016
Profit for the period
Other comprehensive income/(expense):
Cash flow hedging movement
Items reclassified from hedging reserve in
relation to repayment of borrowings
Remeasurement of defined benefit pension
schemes
Tax in relation to components of other
comprehensive income
Total comprehensive income for the period
Purchase of trust shares
Proceeds and settlements of employee share
awards
Employee share option schemes:
Share-based payments
Dividends
Total transactions with owners
At 29 January 2017
Prior period
At 2 February 2015
Profit for the period
Other comprehensive income/(expense):
Cash flow hedging movement
Remeasurement of defined benefit pension
schemes
Tax in relation to components of other
comprehensive income
Total comprehensive income for the period
Purchase of trust shares
Employee share option schemes:
Share-based payments
Dividends
Total transactions with owners
At 31 January 2016
Note
11.4
11.16
11.14
6.5
6.5
11.5
1.8
Note
11.4
11.16
11.14
6.5
11.5
1.8
Share
capital
£m
234
–
–
–
–
–
–
–
–
–
–
–
234
Share
capital
£m
234
–
–
–
–
–
–
–
–
–
234
Share
premium
£m
Capital
redemption
reserve
£m
127
–
–
–
–
–
–
–
1
–
–
1
128
39
–
–
–
–
–
–
–
–
–
–
–
39
Share
premium
£m
Capital
redemption
reserve
£m
127
–
–
–
–
–
–
–
–
–
127
39
–
–
–
–
–
–
–
–
–
39
Merger
reserve
£m
2,578
–
–
–
–
–
–
–
–
–
–
–
2,578
Merger
reserve
£m
2,578
–
–
–
–
–
–
–
–
–
2,578
The accounting policies on pages 104 to 106 and the notes on pages 107 to 118 form part of these financial statements.
Attributable to the owners of the Company
Hedging
reserve
£m
Retained
earnings
£m
Total
shareholders’
funds
£m
(10)
–
22
6
–
(7)
21
–
–
–
–
–
11
1,403
78
4,371
78
–
–
42
–
120
(5)
(1)
20
(118)
(104)
1,419
22
6
42
(7)
141
(5)
–
20
(118)
(103)
4,409
Attributable to the owners of the Company
Hedging
reserve
£m
Retained
earnings
£m
Total
shareholders’
funds
£m
(22)
–
16
–
(4)
12
–
–
–
–
(10)
1,519
91
4,475
91
–
69
(14)
146
(13)
11
(260)
(262)
1,403
16
69
(18)
158
(13)
11
(260)
(262)
4,371
103
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Wm Morrison Supermarkets PLC – Company accounting policies
52 weeks ended 29 January 2017
11 Company financial statements
11.1 General information
The principal activity of Wm Morrison Supermarkets PLC (‘the Company’) is the operation of retail supermarket stores under the Morrisons brand
and associated activities. The Company is incorporated and domiciled in the United Kingdom. The address of its registered office is Hilmore House,
Gain Lane, Bradford, BD3 7DL, United Kingdom.
11.2 Basis of preparation
The financial statements have been prepared for the 52 weeks ended 29 January 2017 (2016: 52 weeks ended 31 January 2016). These separate financial
statements of the Company have been prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (FRS 101) and
the Companies Act 2006 (‘the Act’). FRS 101 sets out a reduced disclosure framework for a ‘qualifying entity’ as defined in the standard which addresses
the financial reporting requirements and disclosure exemptions in the individual financial statements of qualifying entities that otherwise apply the
recognition, measurement and disclosure requirements of EU-adopted IFRS.
The Company is a qualifying entity for the purposes of FRS 101 as it is a member of a group which prepares publicly available consolidated financial
statements and it is included in the consolidation for that group.
The disclosure exemptions adopted by the Company in preparation of these financial statements in accordance with FRS 101 are as follows:
a) IFRS 2 ‘Share-based payment’ (paragraphs 45(b) and 46 to 52) – details of the number and weighted-average exercise prices of share options,
and how the fair value of goods or services received was determined;
b) IFRS 7 ‘Financial Instruments: Disclosures’;
c) IFRS 13 ‘Fair value measurement’ (paragraphs 91 to 99) – disclosure of valuation techniques and inputs used for fair value measurement of assets
and liabilities;
d) IAS 1 ‘Presentation of financial statements’ (paragraph 38) – comparative information requirements in respect of:
(i) paragraph 79(a)(iv) of IAS 1;
(ii) paragraph 73(e) of IAS 16 ‘Property, plant and equipment’;
(iii) paragraph 118(e) of IAS 38 ‘Intangible assets’ – reconciliations between the carrying amount at the beginning and end of the period; and
(iv) paragraph 76 and 79(d) of IAS 40 ‘Investment property’;
e) The following paragraphs of IAS 1 ‘Presentation of financial statements’:
(i) 10(d), (statement of cash flows);
(ii) 111 (cash flow statement information); and
(iii) 134-136 (capital management disclosures);
f) IAS 7 ‘Statement of cash flows’;
g) IAS 8 ‘Accounting policies, changes in accounting estimates and errors’ (paragraph 30 and 31) – requirement for the disclosure of information
when an entity has not applied a new IFRS that has been issued but is not yet effective;
h) The following requirements of IAS 24 ‘Related party disclosures’:
(i) paragraph 17 – key management compensation; and
(ii) the requirements to disclose related party transactions entered into with two or more wholly owned members of a group.
104
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
11 Company financial statements continued
11.2 Basis of preparation continued
In addition to the FRS 101 exemptions above, the Company has taken advantage of the exemption available under section 408 of the Act and not
presented a profit and loss account for the Company.
The financial statements have been prepared on a going concern basis under the historical cost convention except as disclosed in the Summary of
accounting policies in note 11.3. The Company’s accounting policies have, unless otherwise stated, been applied consistently to all periods presented
in these financial statements.
The preparation of financial statements in conformity with FRS 101 requires the use of certain critical accounting estimates. It also requires management
to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or
complexity, or areas where assumptions and estimates are significant to the financial statements are the same for the Company as they are for
the Group. For further details, see page 64 in the Group financial statements.
Accounting reference date
The accounting period of the Company ends on the Sunday falling between 29 January and 4 February each year.
11.3 Summary of accounting policies
The accounting policies listed below are the same for the Company as for the Group. As such, for further detail see the following notes:
a) Revenue recognition (1.1);
b) Cost of sales (1.1);
c) Promotional funding and commercial income (1.1);
d) Other operating income (1.1);
e) Taxation (2.1);
f) Intangible assets (3.1);
g) Property, plant and equipment (3.1);
h) Investment property (3.1);
i)
Impairment of non-financial assets (3.1);
j) Lessor accounting – operating leases (3.1);
k) Finance leases (3.1);
l) Stock (5.1);
m) Trade and other debtors (5.1);
n) Cash and cash equivalents (5.1);
o) Trade and other creditors (5.1);
p) Provisions (5.1);
q) Borrowings and borrowing costs (6.1);
r) Lessee accounting – operating leases (6.1);
s) Sale and leaseback (6.1);
t) Share capital (6.1);
u) Derivative financial instruments and hedge accounting (7.1);
v) Pensions (8.1); and
w) Share-based payments (9.1).
105
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Wm Morrison Supermarkets PLC – Company accounting policies
continued
52 weeks ended 29 January 2017
11 Company financial statements continued
11.3 Summary of accounting policies continued
The following accounting policies are those policies which are specific, and which deal with items considered material, in relation to the Company’s
financial statements.
Investments
Investments in subsidiary undertakings and joint ventures are stated at cost less provision for impairment.
All other equity instruments are held for long term investment and are measured at fair value, where the fair value can be measured reliably.
Gains or losses arising from changes in the fair value are presented in the profit and loss account within finance income or expenses in the period
they arise.
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.
Impairment losses or reversals of previous impairment losses are presented in the profit and loss account in the period they arise.
Contingent liabilities
Contingent liabilities are possible obligations whose existence will be confirmed only on the occurrence or non-occurrence of uncertain future events
outside the Company’s control, or present obligations that are not recognised because it is not probable that an outflow of economic benefits will be
required to settle the obligation or the amount cannot be measured reliably. The Company does not recognise contingent liabilities but does disclose
any such balances (see note 11.21). The disclosure includes an estimate of their potential financial effect and any uncertainties relating to the amount
or timing of any outflow, unless the possibility of settlement is remote.
Financial guarantees
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.
11.4 Operating profit
The employee benefit expense for the Company is £977m (2016: £1,047m). The average monthly number of people, including Directors, employed by
the Company is 55,556 (2016: 60,250).
The Company’s auditor, PricewaterhouseCoopers LLP charged £0.5m (2016: £0.4m) for audit services in the year, £nil (2016: £nil) for services related to
taxation and £0.2m (2016: £0.4m) for other services.
During the period the Company disposed of its 10% stake in Fresh Direct Inc. For further disclosure see notes 4.3 and 11.9.
11.5 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.
The fair value of share options is measured by use of the Black-Scholes 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 £20m (2016: £11m).
Further details of the Company’s share schemes are disclosed in note 9, including:
a) a description of the type of share-based payment arrangements that existed during the reporting period, including general terms and conditions,
maximum terms of options granted, and the method of entitlement;
b) weighted average share price information in respect of options exercised during the reporting period; and
c) the range of exercise prices and weighted average remaining contractual life of share options outstanding at the end of the reporting period.
106
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Company financial statements
52 weeks ended 29 January 2017
11 Company financial statements continued
11.6 Intangible assets
Cost
At 1 February 2016
Additions
Fully written down assets
At 29 January 2017
Accumulated amortisation and impairment
At 1 February 2016
Charged in the period
Fully written down assets
At 29 January 2017
Net book amount at 29 January 2017
Licences
£m
Software
development
costs
£m
30
13
(14)
29
19
8
(14)
13
16
635
41
(37)
639
181
83
(37)
227
412
Total
£m
665
54
(51)
668
200
91
(51)
240
428
The Company has performed its annual assessment of its amortisation 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 amortised assets have been retained in the Company’s fixed asset register. In order to provide greater understanding
of the Company’s annual amortisation charge, assets which have become fully amortised in the year have been removed from both cost and
accumulated amortisation.
Included within software development costs are assets under construction of £3m (2016: £16m).
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 £41m (2016: £41m). Interest is capitalised at the effective interest rate
of 5% (2016: 5%) incurred on borrowings.
107
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Company financial statements continued
52 weeks ended 29 January 2017
11 Company financial statements continued
11.7 Property, plant and equipment
Cost
At 1 February 2016
Additions
Disposals
Fully written down assets
At 29 January 2017
Accumulated depreciation and impairment
At 1 February 2016
Depreciation charged in the period
Impairment
Impairment reversal
Disposals
Fully written down assets
At 29 January 2017
Net book amount at 29 January 2017
Freehold
land
£m
Freehold
buildings
£m
Leasehold
land &
buildings
£m
Plant,
equipment,
fixtures & vehicles
£m
843
1
(5)
–
839
180
–
10
(16)
(2)
–
172
667
1,498
–
(19)
(11)
1,468
653
35
10
(10)
(7)
(11)
670
798
675
3
(31)
(7)
640
377
8
36
(25)
(28)
(7)
361
279
739
172
(39)
(70)
802
396
101
32
(8)
(39)
(70)
412
390
Total
£m
3,755
176
(94)
(88)
3,749
1,606
144
88
(59)
(76)
(88)
1,615
2,134
The Company 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 Company’s fixed asset register. In order to provide greater understanding
of the Company’s annual depreciation charge, assets which have become fully depreciated in the year have been removed from both cost and
accumulated depreciation.
Included in the note above is an amount of £839m (2016: £843m) relating to non-depreciable land and £2m (2016: £6m) of assets under construction.
The cost of assets held under finance leases at 29 January 2017 is £354m (2016: £353m), with related accumulated depreciation of £158m (2016: £143m).
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 £73m (2016: £73m). Interest is capitalised at the effective interest rate of 5% (2016: 5%) incurred
on borrowings.
The Company considers that each store is a separate cash generating unit (CGU) and therefore considers every store for an indication of impairment
annually. The Company 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. The methodology applied by the Company is the same methodology as applied by the Group, see note 3.3 for further details.
Having applied the methodology and assumptions, the Company has recognised a net impairment charge of £29m during the year (2016: £nil) (£88m
impairment charge offset by £59m impairment reversal). This movement reflects fluctuations expected from store level trading performance and local
market conditions.
108
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
11 Company financial statements continued
11.8 Investment property
Cost
At 1 February 2016
Disposals
At 29 January 2017
Accumulated depreciation and impairment
At 1 February 2016
Disposals
At 29 January 2017
Net book amount at 29 January 2017
Total
£m
30
(10)
20
13
(3)
10
10
Included in other operating income is £9m (2016: £8m) of rental income generated from investment properties. At the end of the period the fair
value of investment properties was £18m (2016: £39m). Investment properties are valued by independent surveyors on a vacant possession basis using
observable inputs (fair value hierarchy Level 2).
11.9 Investments
Cost
At 1 February 2016
Fair value adjustments
Disposals
At 29 January 2017
Provision for impairment
At 29 January 2017 and 31 January 2016
Net book amount at 29 January 2017
Net book amount at 31 January 2016
Investment
in equity
instruments
£m
Investment
in subsidiary
undertakings
£m
31
14
(45)
–
–
–
31
3,440
–
–
3,440
1
3,439
3,439
The disposal above relates to Fresh Direct Inc, for further details see note 4.3.
A list of all of the Company’s related undertakings is shown on pages 117 to 118. The Directors believe that the carrying value of investments is
supported by their underlying net assets.
11.10 Debtors – amounts falling due within one year
Trade debtors
Amounts owed by Group undertakings
Current tax asset
Prepayments and accrued income
2017
£m
119
2,640
82
236
3,077
Prepayments includes £165m (2016: £182m) relating to amounts falling due after more than one year. Amounts owed by Group undertakings are
unsecured and repayable on demand.
Total
£m
3,471
14
(45)
3,440
1
3,439
3,470
2016
£m
122
2,249
92
211
2,674
109
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Company financial statements continued
52 weeks ended 29 January 2017
11 Company financial statements continued
11.11 Creditors – amounts falling due within one year
Trade creditors
Amounts owed to Group undertakings
Other taxation and social security
Other creditors
Accruals and deferred income
Bank overdraft
2017
£m
1,991
992
56
79
383
–
3,501
2016
£m
1,609
740
124
89
377
4
2,943
Amounts owed to Group undertakings within one year are unsecured and repayable on demand.
In March 2016, the IFRS Interpretations Committee issued an agenda decision regarding the treatment of offsetting and cash-pooling arrangements in
accordance with IAS 32 ‘Financial instruments: Presentation’. This provided additional guidance on when bank overdrafts in cash-pooling arrangements
would meet the requirements for offsetting in accordance with IAS 32. Following this additional guidance, the Company has reviewed its cash-pooling
arrangements and recognised £nil of cash-pooling facilities within bank overdrafts and short term borrowings in the current period that would
previously have been offset against cash and cash equivalent balances. Comparatives at 31 January 2016 have been restated by £4m. There is no impact
of this change in presentation on cash flows or net debt.
11.12 Creditors – amounts falling due after more than one year
£365m Sterling bonds 4.625% December 2023 (2016: £400m)
£384m Sterling bonds 3.50% July 2026 (2016: £400m)
£300m Sterling bonds 4.75% July 2029 (2016: £300m)
US Private Placement loan notes 4.4% November 2026 (2016: $250m)
€411m Euro bond 2.25% June 2020 (2016: €700m)
Revolving credit facility
Amounts owed to Group undertakings
2017
£m
363
411
292
–
348
–
179
1,593
2016
£m
398
416
291
174
527
(5)
173
1,974
The movements on the nominal value of the bonds and the US Private Placement loan notes are due to early repayment made during the year.
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. 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.
Amounts owed to Group undertakings are unsecured and are non-interest-bearing.
Finance leases
Net obligations under finance leases of £179m (2016: £173m) are payable in two to five years, and are included in amounts owed to Group undertakings
in the table above.
110
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
11 Company financial statements continued
11.13 Derivative financial assets and liabilities
Assets due within one year
Foreign exchange forward contracts
Fuel and energy price contracts
Assets due after more than one year
Cross-currency contracts and interest rate swaps
Fuel and energy price contracts
Liabilities due within one year
Foreign exchange forward contracts
Fuel and energy price contracts
Liabilities due after more than one year
Cross-currency contracts and interest rate swaps
Fuel and energy price contracts
Further details of the derivative financial instruments are provided in note 7, including:
a) significant assumptions underlying the valuation;
b) fair value and the amounts recognised in profit and loss; and
c) significant assumptions underlying the valuation.
11.14 Deferred tax liabilities
Deferred tax liability
Deferred tax asset
Net deferred tax liability
2017
£m
2016
£m
11
11
22
6
10
16
2
1
3
–
5
5
2017
£m
148
(18)
130
12
–
12
30
–
30
–
17
17
46
9
55
2016
£m
149
(17)
132
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. The movements in deferred tax liabilities/(assets) during the period are shown below:
Current period
At 1 February 2016
(Credited)/charged to profit for the period
Charged/(credited) to other comprehensive income and equity
At 29 January 2017
Prior period
At 2 February 2015
Charged/(credited) to profit for the period
Charged to other comprehensive income and equity
At 31 January 2016
Property,
plant and
equipment
£m
Pensions
£m
Other
short term
temporary
differences
£m
137
(6)
–
131
136
1
–
137
12
(4)
9
17
3
(5)
14
12
(17)
1
(2)
(18)
(26)
5
4
(17)
Total
£m
132
(9)
7
130
113
1
18
132
111
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Company financial statements continued
52 weeks ended 29 January 2017
11 Company financial statements continued
11.15 Provision for liabilities
At 1 February 2016
Charge recognised in profit and loss
Utilised/released during the period
Unwinding of discount
At 29 January 2017
Further details of the provisions are provided in note 5.5.
Onerous leases and
onerous contracts
£m
247
36
(29)
10
264
Other property
provisions
£m
7
–
–
–
7
Total
£m
254
36
(29)
10
271
11.16 Pensions
11.16.1 Defined benefit schemes: summary and description
The Company operates two 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 Scheme provides pension benefits based on either
the employee’s compensation package or career average revalued earnings (CARE) (the ‘CARE Scheme’). The CARE Scheme is no longer open to new
members and was closed to future accrual in July 2015. 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 subject to a cap. For details on the scheme rules, funding
and the defined contribution scheme set-up costs see note 8.
The position of each scheme at the balance sheet date is as follows:
CARE Scheme
RSP
Net pension asset
Balance sheet:
Fair value of scheme assets
Present value of obligations
Net pension asset/(liability)
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 – finance income
Total expense charged to statement of comprehensive income
Statement of other comprehensive income:
Remeasurements in other comprehensive income (credit)/charge
2017
£m
120
(21)
99
2016
CARE
£m
1,047
(986)
61
2016
CARE
£m
12
–
2
(1)
–
13
(53)
2016
£m
61
8
69
2016
RSP
£m
138
(130)
8
2016
RSP
£m
42
20
1
–
–
63
(16)
2017
CARE
£m
1,222
(1,102)
120
2017
CARE
£m
–
–
2
–
(2)
–
(57)
2017
RSP
£m
219
(240)
(21)
2017
RSP
£m
42
29
1
–
(2)
70
15
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 interests of the Scheme participants within the context of
administering the Scheme in accordance with the purpose for which the trust was created, 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, while in the RSP this power is given to the Group, subject to regulatory override.
112
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
11 Company financial statements continued
11.16 Pensions continued
11.16.2 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 with different allocations amongst those categories,
according to the investment principles of that Scheme.
Currently, the investment strategy of the CARE Scheme is to maintain a balance of growth assets (equities and diversified growth funds), income assets
(comprising credit investments, corporate bonds and absolute return bonds) and protection assets (comprising an LDI portfolio), with a weighting
towards protection assets. There are no direct investments in the Group’s own shares or property occupied by any member of the Group.
Fair value of Scheme assets:
Equities (quoted)
Corporate bonds (quoted)
Absolute return bonds (quoted)
Diversified growth funds (quoted)
Credit funds (unquoted)
Liability driven investments (unquoted)
Scottish Limited Partnership (unquoted)
Cash (quoted)
Total
2017
CARE
£m
208
106
101
129
133
508
28
9
1,222
2017
RSP
£m
107
–
–
50
–
61
–
1
219
For definitions of the liability driven instruments, diversified growth funds, credit funds and absolute return bonds, see note 8.3.
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
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
Scottish Limited Partnership
2017
CARE
£m
1,047
38
171
2
–
(34)
(2)
1,222
2017
RSP
£m
138
7
20
56
3
(4)
(1)
219
2016
CARE
£m
182
225
–
195
72
342
29
2
1,047
2016
CARE
£m
1,106
34
(82)
12
–
(21)
(2)
1,047
2016
RSP
£m
98
–
–
–
–
34
–
6
138
2016
RSP
£m
87
3
(5)
49
6
(1)
(1)
138
The Company has previously entered into a pension funding partnership structure. In January 2013, the Company made a contribution to the CARE
Scheme of £30m. On the same day, the CARE Scheme invested £30m in the Wm Morrison Property Partnership (SLP) as a limited partner. The SLP
holds properties which have been leased back to the Company in return for rental income payments. The Group retains control over these properties,
including the flexibility to substitute alternative properties.
As a partner in the SLP, the CARE Scheme is entitled to receive a fixed distribution of £2.2m p.a. from the profits of the SLP for 20 years from 2013,
subject to certain conditions.
In July 2015, the SLP was amended to enhance the security provided to the Schemes by including additional properties. The terms of these additional
properties are such that the CARE Scheme has no entitlement to receive a distribution.
The CARE Scheme’s interests in the SLP increases the net pension asset on an IAS 19 accounting basis because the investments held by the CARE
Scheme qualify as an asset for Company IAS 19 purposes.
113
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Company financial statements continued
52 weeks ended 29 January 2017
11 Company financial statements continued
11.16 Pensions continued
11.16.3 Present value of obligations
The movement in the defined benefit obligation over the period was as follows:
Defined benefit obligation at start of period
Current service cost
Interest expense
Actuarial gain – demographic assumptions
Actuarial (loss)/gain – financial assumptions
Actuarial gain – experience
Curtailment gain
Employee contributions
Benefits paid
Defined benefit obligation at end of period
2017
CARE
£m
(986)
–
(36)
36
(232)
82
–
–
34
(1,102)
2017
RSP
£m
(130)
(71)
(5)
–
(40)
5
–
(3)
4
(240)
2016
CARE
£m
(1,095)
(12)
(34)
–
133
–
1
–
21
(986)
The durations of the defined benefit obligations at the end of the 2017 reporting period are: RSP 20 years; CARE 26 years. The weighted average
duration of the Schemes is 25 years.
11.16.4 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
2017
CARE
2.9%
3.5%
2017
CARE
21.7
23.2
23.9
25.6
2017
RSP
2.8%
3.5%
2017
RSP
n/a
n/a
n/a
n/a
2016
CARE
3.70%
3.20%
2016
CARE
22.0
23.5
24.3
25.9
2016
RSP
£m
(83)
(62)
(3)
–
18
5
–
(6)
1
(130)
2016
RSP
3.70%
3.20%
2016
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. Following analysis
completed as part of the 2016 actuarial valuation, the 2017 year-end mortality tables used have been updated to the S2PMA/S2PFA-Heavy tables
(males/females) based on year of birth with a scaling factor of 110% applied to the mortality rates in the CARE Scheme, with CMI 2015 projections
and a long term 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.)
2017
CARE
n/a
2.2%/3.3%
–
2017
RSP
2.4%
–
1.9%
–/2.4%
2.4%
2.4%/–
2.4%
2016
CARE
–
2.10%/
3.20%
–
–/
2.20%
2.20%
2016
RSP
2.20%
–
1.80%
2.20%/
–
2.20%
114
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
11 Company financial statements continued
11.16 Pensions continued
11.16.4 Significant actuarial assumptions continued
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% p.a.
+/-0.1% p.a.
+one year
2017
CARE
-/+30
+/-25
+50
2017
RSP
-/+5
+/-3
n/a
2016
CARE
-/+24
+/-21
+39
2016
RSP
-/+3
+/-2
–
11.16.5 Funding
The CARE Scheme is entirely funded by the Company. The Company along with other subsidiaries of the Group participate in the RSP. There is no
contractual agreement or stated policy for charging the net defined benefit cost between the Company and its subsidiaries. The contribution of each
participating subsidiary to the RSP is currently calculated in proportion to the number of employees that are members of the RSP.
The latest full actuarial valuations were carried out as at 5 April 2016 for the Morrison Scheme and the RSP. The valuations indicated that, on the agreed
funding basis, the Morrison and RSP Schemes had surpluses of £1m and £10m respectively. As a result of these funding positions there are currently no
deficit contributions payable. As such there is no ‘minimum funding requirement’ in force.
The results of the 2016 actuarial valuations for the CARE Scheme has been used and updated for IAS 19 ‘Employee benefits’ purposes for the period
to 29 January 2017 by a qualified independent actuary. For the RSP an actuarial valuation for the purposes of IAS 19, based on member data as at
31 December 2016, has been completed and updated to 29 January 2017 by a qualified independent actuary. The Schemes expose the Company to
inflation risk, interest rate risk and market investment risk. In addition, the CARE Scheme exposes the Company to longevity risk.
At the year end, schemes in surplus have been disclosed within the assets on the balance sheet. The Company has taken legal advice with regard to the
recognition of a pension surplus and also recognition of a minimum funding requirement under IFRIC 14 ‘IAS 19 – The limit on a defined benefit asset,
minimum funding requirement and their interaction’. This advice concluded that recognition of a surplus is appropriate on the basis that the Company
has an unconditional right to a refund of a surplus. In respect of the RSP this on the basis that paragraph 11(a) of IFRIC 14 applies enabling a refund of
surplus during the life of the RSP. In respect of the Morrison Scheme, this is on the basis that paragraph 11(b) or 11(c) of IFRIC 14 applies enabling a refund
of surplus assuming the gradual settlement of the scheme liabilities over time until all members have left the scheme or the full settlement of the
Scheme’s liabilities in a single event (i.e. as a scheme wind up).
Amendments to the current version of IFRIC 14 are currently being considered. The legal advice received by the Company has considered the proposed
new wording to paragraph 12(A) of IFRIC 14 concerning whether other parties have a unilateral power to use a scheme’s surplus to settle in full the
scheme’s liabilities and has concluded that the above accounting treatment should not be affected by the current exposure draft, including the
planned revised wording, to IFRIC 14.
The current best estimate of Company contributions to be paid to the defined benefit schemes for the accounting period commencing 29 January
2017 is £73m (2016: £59m). This estimate includes amounts payable from the SLP and salary sacrificed contributions from employees.
115
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Notes to the Company financial statements continued
52 weeks ended 29 January 2017
11 Company financial statements continued
11.17 Share capital and other reserves
Authorised
4,000 million ordinary shares of 10p each (2016: 4,000 million)
Issued and fully paid
2,336 million ordinary shares of 10p each (2016: 2,335 million)
For details of the share premium and shares issued in the period, see note 6.5.
11.18 Reserves
Capital redemption reserve
Merger reserve
Hedging reserve
Retained earnings
Total
2017
£m
400
234
2017
£m
39
2,578
11
1,419
4,047
2016
£m
400
234
2016
£m
39
2,578
(10)
1,403
4,010
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.
11.19 Capital commitments
Contracts placed for future capital expenditure not provided in the financial statements
(property, plant and equipment and intangible assets)
11.20 Operating lease commitments
Total outstanding commitments for future minimum lease payments under non-cancellable operating leases are:
Within one year
More than one year and less than five years
After five years
Land and
buildings
£m
79
308
1,263
1,650
2017
Plant, equipment,
fixtures and vehicles
£m
14
34
–
48
2017
£m
20
2016
£m
24
2016
Land and
buildings
£m
80
316
1,341
1,737
Plant, equipment,
fixtures and vehicles
£m
15
25
–
40
11.21 Contingent liabilities
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 29 January 2017 was £nil (2016: £4m). The Company has also provided a guarantee in respect of sterling bonds
amounting to £147m at fair value (2016: £426m) 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.
116
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Related undertakings
In accordance with section 409 of the Companies Act 2006, a full list of related undertakings including the country of incorporation, the principal
activity and the effective percentage of equity owned as at 29 January 2017 is disclosed below. The registered address of all undertakings is Hilmore
House, Gain Lane, Bradford, BD3 7DL unless otherwise stated.
Related undertakings of Wm Morrison Supermarkets PLC
Name
Bos Brothers Fruit and Vegetables B.V.1
De Mandeville Gate Management Limited
Erith Pier Company Limited
Farmers Boy Limited
Farock Insurance Company Limited2
Firsdell Ltd
G Park Management Company Limited3
Holsa Limited
I Morrisons.com Limited
International Seafoods Limited
Kiddicare Properties Limited
MHE JVCo Limited4
Morrisons Food Online Limited
Morrisons-online.com Limited
My Morrisons.com Limited
Neerock Farming Limited5
Neerock Limited
Optimisation Developments Limited
Optimisation Investments Limited
Rathbone Kear Limited
Safeway Limited
Wm Morrison GP 1 Limited
Wm Morrison GP 2 Limited
Wm Morrison GP 3 Limited
Wm Morrison (HK) Limited6
Wm Morrison LP 1 Limited
Wm Morrison LP 2 Limited
Wm Morrison LP 3 Limited
Wm Morrison Nominee 1 Limited
Wm Morrison Nominee 2 Limited
Wm Morrison Nominee 3 Limited
Wm Morrison Online Ltd
Wm Morrison Pension Trustee Limited
Wm Morrison Produce Limited
Wm Morrison Property Investments Limited7
Wm Morrison Supermarket Stores Ltd
Country of incorporation
Holland
United Kingdom
United Kingdom
United Kingdom
Isle of Man
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Hong Kong
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Principal activity
Acquirer of food products
Property maintenance
Property maintenance
Manufacturer and distributor of fresh food products
Insurance captive
Property investment
Property management
Dormant
Dormant
Preparation and supply of seafood
Lease company
Joint venture with Ocado
Dormant
Dormant
Dormant
Dormant
Fresh meat processor
Property development
Property investment
Manufacturer and distributor of morning goods and bread
Holding company
General partner in a partnership
General partner in a partnership
General partner in a partnership
Acquirer of non-food products
Limited partner in a partnership
Limited partner in a partnership
Limited partner in a partnership
Dormant
Dormant
Dormant
Dormant
Dormant
Produce packer and purchaser
General partner in a partnership
Dormant
Related undertakings of other Group companies
Name
Alliance Property Holdings Limited
Amos Hinton & Sons Ltd
Argyle Securities Limited7
Argyll Foods Limited
Argyll Stores (Holdings) Limited
Ascot Road Watford Limited
Cancede Limited
Country of incorporation
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
1 Registered address 3151 ZJ Hoek van Holland, the Netherlands, Amersgat 17.
2 Registered address 1st Floor, Rose House, 51-59 Circular Road, Douglas, Isle of Man, IM1 1AZ.
3 Registered address 100 Barbirolli Square, Manchester, M2 3AB.
4 Registered address Titan Court 3 Bishops Square, Hatfield Business Park, Hatfield,
Hertfordshire, AL10 9NE.
Principal activity
Dormant
Dormant
Dormant
Dormant
Dormant
Holding company
Property investment
5 Registered address Market Hill, Market Hill Road, Turriff, Aberdeenshire, Scotland, AB53 4PA.
6 Registered address 4304 China Resources Building, 26 Harbour Road, Wanchai, Hong Kong.
7 Registered address Capella Building (Tenth Floor), 60 York Street, Glasgow, G2 8JX.
117
Interest
100%
51%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Interest
100%
100%
100%
100%
100%
100%
100%
Financial statements
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Related undertakings continued
Related undertakings of other Group companies continued
Country of incorporation
Name
United Kingdom
Cordon Bleu Freezer Food Centres Limited
United Kingdom
Divertigo Limited
United Kingdom
English Real Estates Limited
United Kingdom
Evermere Limited
United Kingdom
Farmers Boy (Deeside) Limited
United Kingdom
Federated Properties Limited
United Kingdom
Flower World Limited
Freehold Investments Limited8
Jersey
J3 Property Limited7
United Kingdom
Lease Securities Limited8
Jersey
Maypole Limited9
Guernsey
United Kingdom
MDW (Eastbourne) Limited
United Kingdom
Monument Hill Properties Limited
United Kingdom
Newincco 1072 Limited
Oldwest Limited7
United Kingdom
United Kingdom
Presto Stores (LC) Limited
United Kingdom
Presto Stores Limited
United Kingdom
Rathbones Bakeries Limited
RP (No.37) Limited8
Jersey
United Kingdom
Safeway (Overseas) Limited
United Kingdom
Safeway Development Limited
United Kingdom
Safeway Food Stores Limited
United Kingdom
Safeway Pensions Trustees Company Limited
United Kingdom
Safeway Pension Trustees Limited
United Kingdom
Safeway Properties Limited
United Kingdom
Safeway QUEST Trustees Limited
Safeway Stores (Gibraltar) Pension Trustees Limited10
United Kingdom
United Kingdom
Safeway Stores (Ireland) Limited
United Kingdom
Safeway Stores Limited
United Kingdom
Safeway Trustee (FURB) Limited
United Kingdom
Simply Fresh Foods Holdings Limited
United Kingdom
Safeway Wholesale Limited
Stalwart Investments Limited8
Jersey
United Kingdom
Stores Group Limited
United Kingdom
The Home & Colonial Stores Limited
The Medical Hall Limited11
Gibraltar
United Kingdom
The Morrisons Foundation
United Kingdom
Tower Centre Hoddesdon Limited
United Kingdom
Trilogy (Leamington Spa) Limited
United Kingdom
Velligrist Limited
United Kingdom
Wm Morrison Bananas Limited
Wm Morrison Growers Limited12
United Kingdom
Wm Morrison Property Partnership LP7
United Kingdom
Wm Morrison Property Partnership 1 Limited Partnership
United Kingdom
Wm Morrison Property Partnership 2 Limited Partnership United Kingdom
Wm Morrison Property Partnership 3 Limited Partnership United Kingdom
Principal activity
Dormant
Dormant
Property holding company
Dormant
Dormant
Dormant
Dormant
Property investment
Dormant
Property management
Investment company
Dormant
Property development
Property development
Dormant
Dormant
Dormant
Dormant
Property investment
Grocery retailer
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Grocery retailer
Dormant
Dormant
Dormant
Property investment
Investment company
Dormant
Pharmaceutical licence holder (Gibraltar)
Charity
Property development
Property development
Dormant
Property investment
Acquirer of food products
Scottish Limited Property Partnership
Property partnership
Property partnership
Property partnership
7 Registered address Capella Building (Tenth Floor), 60 York Street, Glasgow, G2 8JX.
8 Registered address Lime Grove House, Green Street, St Helier, Jersey, JE1 2ST.
9 Registered address 1st & 2nd floors, Elizabeth House, Les Ruettes Brayes, St Peter Port,
10 Registered address Suites 41/42 Victoria House, 26 Main Street, Gibraltar.
11 Registered address 5 Secretary’s Lane, Gibraltar GX11 1AA.
12 Registered address Stubbings Farm, Otley, West Yorkshire, United Kingdom, LS21 1DN.
Guernsey, GY1 4LX.
118
Interest
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Five year summary
52 weeks ended 29 January 2017
Consolidated statement of comprehensive income
Turnover
Cost of sales
Gross profit
Other operating income
Profit/loss on disposal and exit of properties and sale of businesses
and investments
Administrative expenses
Operating profit/(loss)
Finance costs
Finance income
Share of profit of joint venture (net of tax)
Profit/(loss) before taxation
Analysed as:
Underlying profit before tax1
Impairment and provision for onerous contracts
Profit/loss on disposal and exit of properties
Profit arising on disposal of investment
Costs associated with the repayment of borrowings
Pension scheme set-up costs
(Loss)/profit arising on disposal of businesses
Net pension income
Other exceptional costs
Taxation
Profit/(loss) for the period attributable to the owners
of the Company
Earnings per share (pence)
– basic
– diluted
– underlying basic1
Dividend per ordinary share (pence)
1 2013 and 2014 underlying profit restated to include new business development costs.
2017
£m
16,317
(15,713)
604
76
32
(244)
468
(160)
15
2
325
337
6
19
13
(56)
–
–
8
(2)
325
(20)
305
13.11
12.95
10.86
5.43
2016
£m
16,122
(15,505)
617
72
97
(472)
314
(112)
13
2
217
242
(87)
131
–
–
(35)
(34)
–
–
217
5
222
9.51
9.47
7.77
5.00
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
2013
£m
18,116
(16,910)
1,206
80
(1)
(336)
949
(75)
5
–
879
880
–
(1)
–
–
–
–
–
–
879
(232)
647
26.65
26.57
26.75
11.80
119
Investor information
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Five year summary continued
52 weeks ended 29 January 2017
Consolidated balance sheet
Assets
Goodwill and intangible assets
Property, plant and equipment
Investment property
Pension asset
Investment in joint venture
Investments
Other financial assets
Non-current assets
Current assets
Assets classified as held-for-sale
Liabilities
Current liabilities
Other financial liabilities
Deferred tax liabilities
Pension liabilities
Provisions
Non-current liabilities
Net assets
Shareholders’ equity
Called-up share capital
Share premium
Capital redemption reserve
Merger reserve
Retained earnings and other reserves
Total equity attributable to the owners of the Company
2017
£m
445
7,227
33
293
56
–
16
8,070
1,176
–
(2,864)
(1,555)
(417)
(21)
(326)
(2,319)
(4,063)
234
128
39
2,578
1,084
4,063
2016
£m
483
7,161
37
186
63
31
30
7,991
1,316
–
(2,755)
(2,058)
(429)
–
(309)
(2,796)
3,756
234
127
39
2,578
778
3,756
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
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
120
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Supplementary information
52 weeks ended 29 January 2017
Increase/(decrease) on previous year %
Turnover
Underlying operating profit/(loss)
(Loss)/profit before taxation
(Loss)/profit after taxation
Underlying profit before taxation
Diluted earnings per share
Dividend per ordinary share
% of turnover
Underlying operating profit
Profit/(loss) before taxation
Profit/(loss) 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 sales area (000s square feet)1
Average store size (000s square feet)2
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)
Underlying operating profit (£)
Employee costs (£)
1 Includes sales area of divested stores.
2 Excludes convenience and online.
2017
%
1.21
27.43
49.77
37.39
39.26
36.74
8.60
2.65
1.99
1.87
4
54
118
259
56
491
334
14,094
14,094
14,313
28.7
13,591
18.40
531
23,532
22.62
42,054
70,311
112,365
77,300
211
5,589
24,900
2016
%
(4.13)
(23.30)
(127.40)
(129.17)
(29.86)
(129.17)
(18.32)
2.10
1.35
1.38
4
57
124
260
53
498
336
14,142
14,142
14,532
28.4
13,700
18.48
521
22,573
23.44
47,925
72,988
120,913
82,992
194
4,085
23,424
2015
%
2014
%
(4.89)
(44.60)
349.35
219.38
(52.02)
(218.96)
5.00
2.63
(4.71)
(4.52)
153
75
126
260
53
667
335
14,732
14,332
14,442
27.9
14,033
19.11
531
22,034
23.83
48,519
71,259
119,778
85,545
197
5,167
23,029
(2.41)
(14.86)
(120.02)
(136.79)
(18.67)
(138.50)
10.17
4.57
(1.00)
(1.35)
102
76
123
252
52
605
328
14,233
13,976
13,640
27.8
14,593
20.58
558
22,874
24.41
52,315
75,088
127,403
90,264
196
8,952
21,847
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.
2013
%
2.56
(2.47)
(7.18)
(6.23)
(5.45)
1.92
10.28
5.24
4.85
3.57
12
64
135
239
48
498
312
13,421
13,383
13,396
26.9
14,875
21.62
591
23,905
24.73
56,177
72,528
128,705
91,760
197
10,342
21,327
121
Investor information
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Glossary
Alternative Performance Measures
In response to the Guidelines on Alternative Performance Measures (APMs) issued by the European Securities and Markets Authority (ESMA), we have
provided additional information on the APMs used by the Group. The Directors use the APMs listed below as they are critical to understanding the
financial performance and financial health of the Group. As they are not defined by IFRS, they may not be directly comparable with other companies
who use similar measures.
APM
Like-for-like (LFL) sales
growth
Underlying profit
before tax (UPBT)
Underlying profit
before tax and
restructuring costs
Underlying profit
after tax
Underlying operating
profit
Definition
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.
Reported profit before tax including restructuring costs, but
excluding impairment and provisions for onerous contracts, profit/
loss on disposal and exit of properties and sale of businesses and
investments, the impact of pension volatility and other items that
do not relate to the Group’s principal activities on an ongoing basis.
UPBT excluding restructuring costs.
UPBT adjusted for a normalised tax charge.
Reported operating profit including restructuring costs, but
excluding impairment and provisions for onerous contracts, profit/
loss on disposal and exit of properties and sale of businesses and
investments and other items impacting operating profit that do not
relate to the Group’s principal activities on an ongoing basis.
Underlying net
finance costs
Underlying earnings
per share
Free cash flow
Reported net finance costs excluding net pension income and other
items impacting net finance costs that do not relate to the Group’s
principal activities on an ongoing basis.
Earnings per share based on underlying profit after tax rather than
reported profit after tax as described above.
Movement in net debt before payment of dividend.
Net debt
Working capital
movement
Operating working
capital movement
Return on capital
employed
Net debt is cash and cash equivalents, non-current financial assets
and current financial assets, less borrowings, current financial
liabilities and non-current financial liabilities.
Movement in stock, movement in debtors, movement in creditors
and movement in provisions.
Working capital movement adjusted for charges for onerous
contracts, onerous payments and other non-operating payments.
Return on capital employed is calculated as return divided by average
capital employed. Return is defined as underlying profit after tax
adjusted for underlying net finance costs and operating lease rentals
(on land and buildings). Capital employed is defined as average net
assets excluding net pension assets and liabilities, less average net
debt, plus the lease multiplier (14 times rent payable).
Normalised tax is the tax rate applied to the Group’s principal
activities on an ongoing basis. This is calculated by adjusting the
effective tax rate for the period to exclude the impact of profit/loss
relating to property disposals and sale of businesses and investments,
pension interest, impairment and provisions for onerous contracts,
and other items that do not relate to the Group’s principal activities
on an ongoing basis.
Normalised tax
122
Reconciliation for 2016/17 Group measures
Total turnover growth of 1.2% comprises LFL
sales of 1.7%, the impact of store openings and
closures of (2.2)% and fuel and other sales 1.7%.
A reconciliation of this measure is provided
in note 1.4 of the financial statements.
A reconciliation of this measure is provided
in note 1.4 of the financial statements.
UPBT of £337m less a normalised tax charge
of £84m (note 1.4 of the financial statements).
Reported operating profit (£468m) less
impairment and provisions for onerous
contracts (£6m), profit/loss on disposal and
exit of properties (£19m), profit on sale of
investments (£13m), plus other exceptional
costs (£2m).
A reconciliation of this measure is provided
in note 6.2 of the financial statements.
A reconciliation of this measure is included
in note 1.5 of the financial statements.
Movement in net debt (£552m) before
payment of dividend (£118m).
A reconciliation of this measure is provided
in note 6.4 of the financial statements.
A reconciliation of this measure is provided
in note 5.6 of the financial statements.
A reconciliation of this measure is provided
in note 5.6 of the financial statements.
ROCE (6.9%) equals return divided by average
capital employed:
Return (£443m)
Underlying profit after tax (£253m) adjusted
for underlying net finance costs (£97m)
and operating lease rentals (on land and
buildings) (£93m).
Average capital employed (£6,453m)
Average net assets excluding the net pension
asset (£3,681m), average net debt (£1,470m)
and the lease multiplier (£1,302m).
A reconciliation of the tax charge is found
in note 2.2.3 of the financial statements.
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Investor relations and financial calendar
4 May 2017
26 May 2017
15 Jun 2017
29 Jun 2017
30 Jul 2017
14 Sep 2017
29 Sep 2017
2 Nov 2017
6 Nov 2017
4 Feb 2018
Financial calendar 2017/18
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
Quarterly management
statement
Interim dividend payment date
Financial year end
Company Secretary
Jonathan Burke
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.
Annual General Meeting
The AGM will be held on 15 June 2017 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 2016/17 Annual Report is also
available to view in HTML format at
www.morrisons-corporate.com/
annual-report-2017
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 2016/17
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.
123
Investor information
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
Investor relations and financial calendar continued
Registrars and shareholding enquiries
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: +44 371 664 0300
Calls cost 12p per minute plus your phone
company’s access charge. If you are outside
the United Kingdom, please call +44 371 664
0300. Calls outside the United Kingdom will
be charged at the applicable international rate.
We are open between 9.00 am – 5.30 pm,
Monday to Friday excluding public holidays in
England and Wales.
Web: www.capitashareportal.com
Email: shareholder.services@capita.co.uk
Solicitors
Ashurst LLP
Broadwalk House
5 Appold Street
London EC2A 2HA
Eversheds Sutherland (international) LLP
1 Wood Street
London EC2V 7WS
DWF LLP
1 Scott Place
2 Hardman Street
Manchester M3 3AA
Allen & Overy LLP
One Bishops Square
London E1 6AD
Independent auditors
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Central Square
29 Wellington Street
Leeds LS1 4DL
Stockbrokers
Jefferies Hoare Govett
Vintners Place
68 Upper Thames Street
London EC4V 3BJ
Credit Suisse
One Cabot Square
London E14 4QJ
Shore Capital
Bond Street House
14 Clifford Street
London W1S 4JU
Investment bankers
NM Rothschild & Sons Limited
St Swithin’s Lane
London EC4N 8AL
Shareholder information
The number of shareholders at 29 January 2017 was 42,308 (2016: 45,571) and the number of shares in issue was 2,335,535,537 (2016: 2,335,154,494).
Number of holders
38,626
2,978
395
137
60
70
15
13
14
Number of holders
23,849
16,155
2,126
178
% holders
91.3
7.04
0.93
0.32
0.14
0.17
0.04
0.03
0.03
% holders
56.37
38.18
5.03
0.42
Balances at 29 Jan 17
90,330,970
2,082,108,865
739,409
2,416,457
4,435,761
90,927,663
74,540
77,334
64,424,538
Balances at 29 Jan 17
9,981,166
48,016,173
182,249,562
2,095,288,636
% capital
3.88
89.15
0.03
0.10
0.19
3.89
0.00
0.00
2.76
% capital
0.43
2.06
7.80
89.71
Analysis by shareholder
Private shareholder
Nominee companies
Deceased accounts
Limited companies
Other institutions
Bank and bank nominees
Investment trusts
Pension funds
Family interests
Analysis by shareholder
1–1,000
1,001–10,000
10,001–1,000,000
Over 1,000,000
124
Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2016/17
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.
Information at your fingertips
Customer
Corporate
Our website, www.morrisons.com, allows you
to shop online, search hundreds of inspirational
recipes for the food we make, move and
sell, and even find ideas for popular event-
themed activities.
Our corporate website,
www.morrisons-corporate.com, is a one-
stop portal that exists for the benefit of our
investors, the public and the media. This site has
the following sections:
Morrisons.com deliveries currently service 58%
of Great Britain; a postcode checker enables
you to see if you are eligible for our home
delivery service.
About Morrisons
You will find information about the Group,
its operations, strategy and structure, and past
financial information.
Jobs
Career opportunities and information
about working for Morrisons. For our
dedicated recruitment website, go to
www.morrisons.co.uk/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
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 2016/17 on-screen,
viewing only the parts you want to, at
www.morrisons-corporate.com/
annual-report-2017
Webcasts
Webcasts of the Directors delivering the
preliminary results for 2016/17 on 9 March 2017
are available.
At Morrisons.com you can:
• Buy over 19,000 Morrisons grocery products
• Benefit from competitive ‘one-off’
delivery charges
• Purchase a monthly, weekly or annual delivery
pass for flat-fee unlimited delivery
• Check out latest promotions and
seasonal events
• Review selected offline-only products
• Sign up for our latest offers by email
• Find recipes based on our ingredients and
inspired by our campaigns/events
• Learn about our produce and its journey from
‘field to fork’
• Read content on healthy eating, reducing food
waste and our support for various causes
You can also sign up to and manage your More
Card account on our website. In our dedicated
area, you can find out what our loyalty card
scheme has to offer, check your points balance
and make changes to preferences.
Not all products are available online. However,
the website is an excellent vehicle for finding
out more about things we offer.
You are also able to preview selected items
from ranges such as Nutmeg and Market Street,
and our new café offers, in-store services,
award wins, pharmacies, glass hire, flower shops
and new store openings online.
We also provide an online Store Finder where
you can find details of your nearest store,
opening times and services.
Designed & Produced by
Printing by
Radley Yeldar
ry.com
Photography by
Chris Leah Photography
Geoff Neal Group
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.
125
Wm Morrison Supermarkets PLC
Hilmore House, Gain Lane
Bradford BD3 7DL
Telephone: 0845 611 5000
Visit our website:
www.morrisons.com