AMENDMENT NO. 1 TO FORM 20-F

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F/A

 

(Mark One)

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12 (b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED JULY 25, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                      TO                     

 

Commission file number: 1-10083

 

COLES MYER LTD.

Australian Business Number 11 004 089 936

(Exact name of Registrant as specified in its charter)

 

VICTORIA, AUSTRALIA

(Jurisdiction of incorporation or organization)

 

800 TOORAK ROAD, TOORONGA, VICTORIA 3146 AUSTRALIA

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12 (b) of the Act.

 

Title of each class


 

Name of each exchange on which registered


Ordinary Shares

 

New York Stock Exchange*

American Depositary Shares**

 

New York Stock Exchange

 

* Not for trading but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

 

** Evidenced by American Depositary Receipts, each American Depositary Share representing eight Ordinary Shares.

 

Securities registered or to be registered pursuant to Section 12 (g) of the Act.

 

None

 

Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act.

 

None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report.

 

Fully Paid Ordinary Shares

   1,225,410,546

Partly Paid Ordinary Shares paid up to A$0.01 per share

   114,000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   x     No   ¨

 

Indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17   ¨    Item 18   x

 



 

EXPLANATORY NOTE

 

The Registrant hereby amends Item 18 of the Annual Report on Form 20-F for the above-noted fiscal year, which was filed with the Securities and Exchange Commission on December 27, 2004 (the “Form 20-F”). The sole amendment made to Item 18 relates to the wording of the Report of the Independent Registered Public Accounting Firm (the “auditors’ report”). The change to wording is required, as the original auditors’ report did not make reference to the standards of the Public Accounting Oversight Board (United States). No changes have been made to the Consolidated Financial Statements.

 

This Form 20-F/A consists of a cover page, this explanatory note, the signature page, Item 18, and the required certifications of the principal executive officer and principal financial officer.

 

Other than as set forth above, this Form 20-F/A does not, and does not purport to, amend, update or restate the information in any other Item of the Form 20-F or reflect any events that have occurred after the Form 20-F was filed.

 


 

Signatures

 

The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

 

       

COLES MYER LTD.

(Registrant)

         /s/ J.F. MACKENZIE

Date March 18, 2005

     

(Signature)

J.F. MacKenzie

CHIEF FINANCIAL OFFICER

 

96


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Coles Myer Ltd.

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of changes in shareholders’ equity present fairly, in all material respects, the financial position of Coles Myer Ltd. and its subsidiaries at July 25, 2004 and July 27, 2003, and the results of their operations and their cash flows for each of the three years in the period ended July 25, 2004, in conformity with accounting principles generally accepted in Australia. These financial statements are the responsibility of Coles Myer Ltd.’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

Note 1 (d) refers to a difference between these financial statements and those presented to shareholders in Australia, in relation to the CML Group’s treatment of goodwill arising on acquisition of companies and businesses until July 31, 1988, which treatment was not in conformity with Australian accounting standards. These financial statements have been adjusted to conform to Australian accounting standards.

 

Accounting principles generally accepted in Australia vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 31 to the consolidated financial statements.

 

/s/ PRICEWATERHOUSECOOPERS

 

PricewaterhouseCoopers

 

Melbourne, Australia

December 22, 2004

 

97


 

COLES MYER LTD.

CONSOLIDATED INCOME STATEMENTS

 

     Notes

  

2004

52 weeks

A$M


   

2003

52 weeks

A$M


   

2002

52 weeks

A$M


 

Sales

   3    32,266.8     27,016.6     25,688.7  

Cost of goods sold

        (24,059.5 )   (19,618.6 )   (19,419.9 )
         

 

 

Gross profit

        8,207.3     7,398.0     6,268.8  
         

 

 

Other revenue from operating activities

   3    27.1     17.7     650.6  

Cumulative effect of change in accounting policy for supplier promotional rebates

              (76.5 )      

Other revenue from non-operating activities

   3    309.2     275.3     286.3  

Proceeds from sale of property, plant and equipment, investments and businesses and controlled entities

   3    131.0     392.5     111.8  

Net book value of property, plant and equipment, investments and businesses and controlled entities disposed

        (146.5 )   (416.8 )   (123.9 )

Borrowing costs

   4    (71.1 )   (86.9 )   (102.9 )

Advertising expenses

        (431.7 )   (383.8 )   (323.0 )

Selling and occupancy expenses

        (5,801.7 )   (5,327.5 )   (5,159.2 )

Administrative expenses

        (1,357.4 )   (1,183.2 )   (1,126.3 )
         

 

 

Profit from ordinary activities before income tax

        866.2     608.8     482.2  

Income tax expense

   5    (258.1 )   (187.7 )   (137.2 )
         

 

 

Net profit

        608.1     421.1     345.0  
         

 

 

Net (decrease)/increase in asset revaluation reserve

        (8.2 )   83.5     (4.2 )

Net decrease in foreign currency translation reserve

        (30.4 )   (17.1 )   —    

Adjustment resulting from change in accounting policy for annual leave entitlements

              (6.6 )      
         

 

 

Total revenues, expenses and valuation adjustments attributable to members of Coles Myer Ltd recognized directly in equity

        (38.6 )   59.8     (4.2 )
         

 

 

Total changes in equity other than those resulting from transactions with owners as owners

        569.5     480.9     340.8  
         

 

 

Basic earnings per share (in A$)

        0.46     0.32     0.25  
         

 

 

Diluted earnings per share (in A$)

        0.47     0.33     0.27  
         

 

 

 

Notes on pages 106 to 168 form part of the financial statements.

 

98


 

COLES MYER LTD.

CONSOLIDATED BALANCE SHEETS

 

     Notes

   July 25,
2004
A$M


   July 27,
2003
A$M


ASSETS

              

Current assets:

              

Cash

        849.0    905.5

Receivables

   7    646.7    346.0

Inventories

        3,032.7    2,836.8

Other

   8    41.1    28.1
         
  
          4,569.5    4,116.4
         
  

Non-current assets:

              

Receivables

   9    50.4    121.5

Investments

   10    112.9    105.8

Property, plant and equipment, net

   11    3,395.7    3,340.6

Intangible assets, net

   12    590.5    516.8

Other

   13    332.7    251.7
         
  
          4,482.2    4,336.4
         
  

TOTAL ASSETS

        9,051.7    8,452.8
         
  

LIABILITIES AND SHAREHOLDERS’ EQUITY

              

Current liabilities:

              

Accounts payable

   14    2,815.7    2,476.3

Borrowings

   15    261.5    10.8

Tax liabilities

   16    161.6    13.6

Provisions

   17    563.3    540.8
         
  
          3,802.1    3,041.5
         
  

Non-current liabilities:

              

Long term debt

   18    713.4    1,143.3

Other

        48.3    49.3

Provisions

   19    390.3    419.5
         
  
          1,152.0    1,612.1
         
  

Shareholders’ equity:

              

Issued share capital

   20    2,306.7    2,210.3

Reserves

        430.2    468.8

Retained profits

        1,360.7    1,120.1
         
  
          4,097.6    3,799.2
         
  

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

        9,051.7    8,452.8
         
  

Commitments and contingent liabilities

   25          

 

Notes on pages 106 to 168 form part of the financial statements.

 

99


 

COLES MYER LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Notes

  

2004

52 weeks

A$M


   

2003

52 weeks

A$M


   

2002

52 weeks

A$M


 

Cash flows from operating activities

                       

Receipts from customers

        34,539.6     28,904.1     27,540.3  

Payments to suppliers and employees

        (32,905.0 )   (27,469.2 )   (26,259.9 )

Distributions received from associated entities

        7.0     6.2     5.6  

Interest received

        55.2     20.0     15.0  

Borrowing costs paid

        (70.0 )   (103.6 )   (105.9 )

Income tax paid

        (288.5 )   (179.1 )   (77.1 )
         

 

 

Net cash inflow from operating activities

   A    1,338.3     1,178.4     1,118.0  
         

 

 

Cash flows from investing activities

                       

Payments for property, plant and equipment

        (704.1 )   (625.2 )   (507.7 )

Cash paid for purchases of businesses and controlled entities

   B    (192.0 )   (241.7 )   (70.4 )

Cash paid for purchases of other investments

        (1.4 )            

Payment for purchase of associated entity

        (1.1 )   (1.4 )   (0.1 )

Proceeds on sale of property, plant and equipment

        80.3     37.1     31.1  

Proceeds on sale of Sydney Central Plaza

   B    9.9     372.8        

Proceeds on sale of businesses and controlled entities

   B    31.8           57.8  

Proceeds on sale of investments

              7.6     2.3  

Loans from other entities

        66.1     13.6     41.6  
         

 

 

Net cash outflow from investing activities

        (710.5 )   (437.2 )   (445.4 )
         

 

 

Cash flows from financing activities

                       

Proceeds from issue of shares

        37.1     —       —    

Proceeds from borrowings

        1,362.7     279.7     924.4  

Repayments of borrowings

        (1,772.6 )   (704.6 )   (1,022.4 )

Payments for shares bought back

                    (1.4 )

Dividends paid

        (307.8 )   (287.6 )   (285.3 )
         

 

 

Net cash outflow from financing activities

        (680.6 )   (712.5 )   (384.7 )
         

 

 

Net (decrease)/increase in cash held

        (52.8 )   28.7     287.9  

Cash at beginning of the year

        894.7     866.0     578.1  
         

 

 

Cash at end of the year

   C    841.9     894.7     866.0  
         

 

 

 

Notes on pages 106 to 168 form part of the financial statements.

 

100


COLES MYER LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    

2004

52 weeks

A$M


   

2003

52 weeks

A$M


   

2002

52 weeks

A$M


 

Notes

                  

A.     Reconciliation of net cash provided by operating activities to net profit is as follows:

                  

Net cash inflow from operating activities

   1,338.3     1,178.4     1,118.0  

Depreciation and amortization

   (536.7 )   (512.6 )   (493.4 )

Changes in assets and liabilities

                  

Increase in current receivables

   57.4     69.5     27.0  

Increase/(decrease) in inventories

   124.9     (24.0 )   (104.1 )

Increase/(decrease) in future income tax benefits

   80.8     (38.3 )   28.4  

Increase/(decrease) in other assets

   20.9     (29.6 )   17.9  

(Increase) in trade creditors

   (139.7 )   (105.1 )   (213.8 )

(Increase)/decrease in other liabilities

   (135.8 )   (55.0 )   90.4  

(Increase) in provision for income tax

   (148.0 )   (20.3 )   (28.1 )

(Increase) in provisions

   (53.6 )   (79.2 )   (44.9 )

(Decrease)/increase in deferred income tax

   66.7     74.4     (29.9 )

Net loss on sale of plant and equipment

   (45.0 )   (31.2 )   (27.0 )

Net profit/(loss) on sale of freehold properties

   7.8     1.4     15.0  

Net profit/(loss) on sale of businesses and controlled entities

   21.7     5.5     (0.1 )

Write-down of non-current assets to recoverable amounts

   (51.6 )   (12.8 )   (10.4 )
    

 

 

Net profit

   608.1     421.1     345.0  
    

 

 

 

B. Acquisitions/disposals

 

During 2004, the CML Group acquired from Shell multi-site franchisees the right to operate 585 fuel and convenience outlets and eight standalone convenience stores for $103.7 million (including transaction costs). In connection with this transaction, other assets and liabilities, including inventories, property, plant and equipment and employee related liabilities have been acquired for a further $79.5 million.

 

During 2004, the CML Group disposed of five Newmart stores and seven Sands and McDougall stores for $31.9 million.

 

On May 26, 2003, Liquorland (Australia) Pty Ltd., a wholly owned controlled entity of Coles Myer Ltd., acquired 100% of the issued share capital of Pallas Newco Pty. Ltd. and ALW Newco Pty. Ltd. (Theo’s NSW) for A$179.8 million plus associated inventory for A$37.4 million and freehold property for A$14.8 million. The consideration comprises cash, and the issue of 17,857,143 Coles Myer Ltd. ordinary shares. Coles Myer Ltd. has guaranteed a value of A$7.00 per share throughout a period of three years, commencing May 26, 2003, and will bear any share price risk during that period. Should any additional consideration become payable it will be brought to account as a component of goodwill arising on the acquisition under Australian GAAP. Under U.S. GAAP, any additional consideration will be recorded as a reduction to equity. Since May 26, 2003, the share price has remained above A$7.00 per share and payment of the additional consideration is not probable. At balance date F2003 the share price was A$7.34 and at balance date F2004 the share price was A$9.16. As the share price has traded above the guaranteed price of A$7.00, no liability has been recognized under Australian or U.S. GAAP.

 

On January 6, 2003, Officeworks Superstores Pty. Ltd., a wholly owned controlled entity of Coles Myer Ltd., acquired 100% of the issued share capital of Viking Direct Pty. Ltd. and Viking Office Products Pty. Ltd. for A$38.7 million plus associated inventory for A$11.1 million and freehold property for A$17.5 million.

 

101


COLES MYER LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

On March 10, 2003, the CML Group sold Sydney Central Plaza for A$372.8 million, net of transaction and sale related costs of A$17.2 million. During 2004, additional proceeds of A9.9 million were received.

 

During 2002 Coles Supermarkets (Australia) Pty. Ltd. and Bi-Lo Pty. Ltd., both wholly owned controlled entities of Coles Myer Ltd., acquired 35 ex-Franklins stores for A$59.3 million.

 

On May 27, 2002, Coles Myer Ltd. sold 100% of its investment in the issued capital of Amalgamated Food & Poultry Pty. Ltd. for A$65.0 million.

 

Details of the aggregate cash flows and consideration relating to the acquired businesses and controlled entities, which are accounted for as purchase business combinations, and the aggregate assets and liabilities of the entities at the date of acquisition were as follows:

 

     Acquisitions*

    Disposals

 
    

2004

52 weeks

A$M


   

2003

52 weeks

A$M


   

2002

52 weeks

A$M


   

2004

52 weeks

A$M


   

2003

52 weeks

A$M


   

2002

52 weeks

A$M


 

Cash consideration (paid)/received net of cash acquired/disposed

   (209.4 )   (362.6 )   (70.4 )   31.9     372.8     66.5  
    

 

 

 

 

 

Cash

   17.4     3.2           (0.1 )         (8.7 )

Receivables – current

         17.6                 (2.1 )   (1.9 )

Inventories

   73.9     51.8     12.9     (3.0 )         (4.1 )

Other assets – current

         2.4                 (1.2 )   (0.2 )

Property, plant and equipment

   15.0     45.8     25.4     (10.2 )   (363.0 )   (64.6 )

Deferred tax assets

         2.0     1.4                 (3.4 )

Intangible assets

   109.2     260.2     37.0     (9.3 )         (13.4 )

Other assets – non-current

                                 (0.3 )

Payables

         (19.1 )   (1.3 )         (1.0 )   18.9  

Provisions – current

   (6.1 )   (1.3 )   (4.5 )   0.4           6.2  

Interest bearing liabilities – non-current

               (0.5 )                  

Provisions – non-current

                                 1.1  
    

 

 

 

 

 

Net assets acquired/(disposed)

   209.4     362.6     70.4     (22.2 )   (367.3 )   (70.4 )
    

 

 

 

 

 

Reconciliation of cash flows:

                                    

Consideration

   (209.4 )   (362.6 )   (70.4 )   31.9     372.8     66.5  

Consideration satisfied by share issue

         117.7                          

Cash acquired/disposed

   17.4     3.2           (0.1 )         (8.7 )
    

 

 

 

 

 

Cash (Outflow)/Inflow

   (192.0 )   (241.7 )   (70.4 )   31.8     372.8     57.8  
    

 

 

 

 

 

 

* The purchase method of accounting is applied. Net assets are recorded at fair value.

 

102


COLES MYER LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

C. Reconciliation of cash

 

For the purposes of the Consolidated Statements of Cash Flows, cash includes cash on hand and at bank, net of bank overdrafts. Cash at the end of the year as shown in the Consolidated Statements of Cash Flows is reconciled to the relevant Consolidated Balance Sheet items as follows:

 

    

2004

52 weeks

A$M


   

2003

52 weeks

A$M


   

2002

52 weeks

A$M


Cash assets

   849.0     905.5     866.0

Bank overdrafts

   (7.1 )   (10.8 )    
    

 

 
     841.9     894.7     866.0
    

 

 

 

D. Non-cash financing and investing activities

 

Financing – CML issued ordinary shares under the Dividend Reinvestment Plan for A$59.3 million (2003 A$60.3 million, 2002 A$60.0 million).

 

Investments – During 2003 CML issued ordinary shares for A$117.7 million in connection with the purchase of Pallas Newco Pty. Ltd. and ALW Newco Pty. Ltd.

 

During 2002, the CML Group disposed of its investments in Power Investment Funding Pty. Ltd., Investment Funding Pty. Ltd., and Label Developments Pty. Ltd. for $NIL consideration. As a result, current receivables decreased A$115.3 million, current loans decreased A$115.3 million, non-current receivables decreased A$17.2 million, non-current loans decreased A$17.2 million and investments decreased $NIL on disposal.

 

E. Details of major financing facilities

 

Credit standby facilities: The CML Group has A$530.0 million (2003 A$580.0 million) of committed facilities of which A$530.0 million (2003 A$580.0 million) were undrawn at balance date. The facilities have maturity dates ranging between December 2004 and August 2009 (2003 maturity dates ranged between October 2003 and August 2008).

 

Commercial paper: The CML Group has commercial paper programs based in Australia and Europe. The programs are guaranteed by Coles Myer Ltd. and are supported by the credit standby facilities referred to above. At balance date no commercial paper was on issue (2003 $NIL).

 

Medium term notes: The CML Group has issued medium term notes under a debt issuance program and under medium term note programs in both Europe and Australia. It also operated a medium term note program in the United States on behalf of Coles Myer Finance (USA) Ltd. Medium term notes issued by Coles Myer Finance Ltd. and Coles Myer Finance (USA) Ltd. are unconditionally guaranteed by Coles Myer Ltd. At balance date, A$670.6 million (2003 A$1,052.4 million) equivalent of medium term notes were on issue.

 

Other loans: A$NIL (2003 A$7.5 million) equivalent of loans, denominated in Japanese yen, were outstanding at balance date with a maturity date of July 2004.

 

103


 

COLES MYER LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN

ISSUED SHARE CAPITAL

 

     Ordinary

     Fully Paid

    Partly Paid A$0.01

     millions

    A$M

    millions

   A$M

Balance, July 29, 2001

   1,176.6     1,293.1     0.2    —  

Conversion of partly paid to fully paid

   —       —       —      —  

Dividend reinvestment plan

   8.2     60.0           

Shares bought back on-market

   (0.2 )   (1.4 )         
    

 

 
  

Balance, July 28, 2002

   1,184.6     1,351.7     0.1    —  

Conversion of partly paid to fully paid

   —       —       —      —  

Dividend reinvestment plan

   10.0     60.3           

Issue for acquisition of Pallas Newco Pty. Ltd. and ALW Newco Pty. Ltd.

   17.8     117.7           
    

 

 
  

Balance, July 27, 2003

   1,212.4     1,529.7     0.1    —  

Conversion of partly paid to fully paid

   —       —       —      —  

Dividend reinvestment plan

   7.9     59.3           

Exercise of options

   5.1     37.1           
    

 

 
  

Balance, July 25, 2004

   1,225.4     1,626.1     0.1    —  
    

 

 
  
    

Preference (ReCAPS)

Fully Paid


          
     millions     A$M           

Balance, July 28, 2002

   7.0     680.6           
    

 

        

Balance, July 27, 2003

   7.0     680.6           
    

 

        

Balance, July 25, 2004

   7.0     680.6           
    

 

        

 

Notes on pages 106 to 168 form part of the financial statements.

 

104


 

COLES MYER LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN

RESERVES AND RETAINED PROFITS

 

     2004
52 weeks
A$M


    2003
52 weeks
A$M


    2002
52 weeks
A$M


 

Asset revaluation reserve*

                  

Balance at beginning

   485.9     402.4     406.6  

Fair value increment/(decrement) of freehold and investment properties

   (8.2 )   83.5     (4.2 )
    

 

 

     477.7     485.9     402.4  
    

 

 

*  The asset revaluation reserve includes the net increments and decrements arising from the revaluation of non-current assets in accordance with AASB 1041 “Revaluation of Non-current Assets”

     

Foreign currency translation reserve

                  

Balance at beginning

   (17.1 )   —       —    

Net exchange differences on translation of foreign controlled entity

   (30.4 )   (17.1 )   —    
    

 

 

     (47.5 )   (17.1 )   —    
    

 

 

*  As an outcome of restructuring the method of financing a self sustaining foreign operation, foreign currency translation losses relating to the CML Group’s net investment have been incurred, resulting in A$17.1 million being recorded in the year ended July 27, 2003 and A$30.4 million in the year ended July 25, 2004.

      

Retained profits

                  

Balance at beginning

   1,120.1     904.1     906.0  

Adjustment resulting from change in accounting policy for providing for dividends (Note 2)

         149.7        

Adjustment resulting from change in accounting policy for annual leave entitlements (Note 2)

         (6.6 )      

Net profit for the year

   608.1     421.1     345.0  

Cash dividends

   (367.5 )   (348.2 )   (346.9 )
    

 

 

     1,360.7     1,120.1     904.1  
    

 

 

Total reserves and retained profits

                  

Balance at beginning

   1,588.9     1,306.5     1,312.6  

Adjustment resulting from change in accounting policy for providing for dividends (Note 2)

         149.7        

Adjustment resulting from change in accounting policy for annual leave entitlements (Note 2)

         (6.6 )      

Net profit for the year

   608.1     421.1     345.0  

Cash dividends

   (367.5 )   (348.2 )   (346.9 )

Fair value (decrement)/increment of freehold and investment properties

   (8.2 )   83.5     (4.2 )

Net exchange differences on translation of foreign controlled entity

   (30.4 )   (17.1 )   —    
    

 

 

     1,790.9     1,588.9     1,306.5  
    

 

 

 

Notes on pages 106 to 168 form part of the financial statements.

 

105


 

COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

 

These financial statements are prepared specifically for the purposes of filing an Annual Report on Form 20-F with the United States Securities and Exchange Commission (the SEC), and differ from the Australian financial statements presented to shareholders in the respective years in their treatment of goodwill arising on acquisition of companies and businesses (Refer paragraph d).

 

The significant accounting policies adopted by Coles Myer Ltd. (the “Company”, “CML”) and its controlled entities (the “CML Group”) are detailed below. The financial statements are prepared in accordance with accounting principles generally accepted in Australia (“Australian GAAP”). Where these principles differ from those generally accepted in the United States (“U.S. GAAP”) reference is made by footnote. A reconciliation of the major differences between the accompanying financial statements and U.S. GAAP is included at Note 31.

 

  a Basis of preparation

 

The financial statements have been prepared as a general purpose financial report, which complies with Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Consensus Views and the Corporations Act 2001. The financial report is prepared in accordance with the historical cost convention, except for certain assets, which, as noted, are at valuation. The accounting policies adopted are consistent with those of the prior year. Comparative information has been restated where necessary, to present the information on a consistent basis with the current year disclosures.

 

  b Principles of consolidation

 

The consolidated financial statements have been prepared on an economic entity basis for the CML Group. The effects of all transactions within the CML Group have been eliminated in full. A list of controlled entities at year-end is contained in Note 33. Where control of an entity is obtained during the year, its results are included in the Consolidated Income Statements from the date on which control commences. Where control of an entity ceases during the financial year, its results are included for that part of the year where control existed.

 

  c Accounting for acquisitions

 

Acquired businesses are accounted for on the basis of the purchase method of accounting which consists of assigning fair values at date of acquisition to all the identifiable underlying assets acquired and to the liabilities assumed.

 

  d Goodwill

 

Goodwill on acquisitions since July 31, 1988 has been brought to account as an asset and amortized, using the straight line method, over the period in which the benefits are expected to arise, but not exceeding 20 years. The carrying value of goodwill is reviewed at each reporting period. For the purposes of U.S. GAAP, goodwill acquired is not amortized but must be tested for impairment at least annually, or when conditions warrant.

 

In the financial statements submitted to shareholders, directors caused goodwill on acquisitions to July 31, 1988 to be written off as an extraordinary item, this being contrary to the treatment required by the relevant Australian accounting standard. Directors were satisfied all relevant goodwill on acquisitions would generate benefits for the company for periods of at least twenty years, but preferred immediate write off to amortization over an arbitrarily chosen period of years. However, the SEC requires that financial statements filed with it comply in all material respects with accounting standards in each company’s country

 

106


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

of origin. Accordingly, in these financial statements prepared for purposes of filing with the SEC, goodwill on acquisitions to July 31, 1988 has been reinstated at cost and amortized, using the straight line method, against profit from operations over 20 years from date of acquisition, unless accelerated amortization is required due to a carrying value exceeding the recoverable amount. As a result, net profit reported in these financial statements has been decreased by A$8.4 million, (2003 A$8.4 million, 2002 A$8.8 million) with the aggregate adjustment arising from all prior years causing shareholders’ equity to increase by A$14.4 million (2003 A$22.8 million).

 

  e Equity accounting of associated companies

 

The principles of equity accounting have been applied to entities that are not controlled, but over which the CML Group has significant influence. Equity accounting disclosures are not provided as the investments are deemed to be immaterial.

 

  f Receivables

 

Trade and other debtors are recognized at nominal amounts as they are due for settlement no more than 30 days from the date of recognition. Provision for doubtful debts is made when collection of the full amount is no longer probable.

 

  g Inventories

 

At balance date all stock of finished goods on hand or in transit is valued at the lower of cost and net realizable value. Cost is determined using the weighted average cost method, after deducting any purchase settlement discount and including logistics expenses incurred in bringing the inventories to their present location and condition.

 

Volume related supplier rebates and supplier promotional rebates are recognized as a reduction in the cost of inventory and are recorded as a reduction of cost of sales when the inventory is sold. The only exception is in limited circumstances in relation to the reimbursement of direct advertising costs incurred on behalf of the supplier (Note 2). These reimbursements are recorded as other revenue from non-operating activities (Note 3).

 

  h Investments

 

The carrying amounts of all listed investments are stated at the lower of cost and recoverable amount. Dividends from all investments are brought to account when receivable.

 

  i Property, plant and equipment

 

  (i) Cost and valuation

 

Freehold land and buildings and investment properties are measured at their fair value. Valuations are made with sufficient regularity to ensure the carrying amount of property does not differ materially from its fair value at balance date. Under U.S. GAAP, a number of differences arise from revaluing property. Refer Note 31 for further explanation and a reconciliation to U.S. GAAP.

 

Annual internal assessments are made, supplemented by independent assessments at least every three years. Potential capital gains tax is not taken into account in determining revaluation amounts unless it is expected that a liability for such a tax will crystallize. Borrowing and other holding and development costs on property under development are capitalized until completion of the development.

 

Plant and equipment is measured at the lower of cost less accumulated depreciation, and recoverable amount.

 

107


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  (ii) Leasehold improvements

 

The cost of improvements to or on leasehold properties is amortized on a straight-line basis, over the unexpired period of the lease or the estimated useful life of the improvement, whichever is the shorter.

 

  (iii) Depreciation and amortization

 

Depreciation and amortization is provided on a straight-line basis on all property, plant and equipment, other than freehold land and investment properties, over their estimated useful lives. U.S. GAAP also requires investment properties to be depreciated. Refer Note 31 for a reconciliation to U.S. GAAP, where an additional expense has been recognized.

 

The depreciation rates used for each class of assets are as follows:

 

     2004

  2003

  2002

Buildings

   1.5%   1.5%   1.5%

Plant and equipment

   5% -33%   5% -33%   5% -33%

Computer software

   20%   33%   33%

 

All costs directly incurred in the purchase or development of major computer software, including subsequent upgrades and material enhancements, are capitalised. Costs incurred on computer software maintenance are expensed as incurred.

 

Effective July 28, 2003, the CML Group changed its accounting estimate with respect to the useful life of computer software. The previous estimate recognised that computer software had a useful life not exceeding three years.

 

The revised accounting estimate recognises that in all material respects, computer software has a useful life not exceeding five years. The impact of the change was an increase to profit before tax of A$12.0 million for the year ended July 25, 2004. The impact on Basic and Diluted earnings per share was A$0.01 per share for the year ended July 25, 2004.

 

  j Recoverable amount of non-current assets

 

The recoverable amount of a non-current asset is the net amount expected to be recovered through the cash inflows and outflows arising from its continued use and subsequent disposal. Where net cash inflows are derived from a group of assets working together, reasonable amount is determined on the basis of the relevant group of assets.

 

The carrying amounts of non-current assets valued on the cost basis are reviewed to determine whether they are in excess of their recoverable amount at balance date. If the carrying amount of a non-current asset exceeds its recoverable amount the asset is written down to its recoverable amount at balance date. The decrement in the carrying amount of assets valued on the cost basis is recognized as an expense in the Consolidated Income Statements in the reporting period in which the recoverable amount write-down occurs. In determining the recoverable amount, expected future cash flows have been discounted to their present value.

 

  k Identifiable intangible assets

 

  (i) Brand names

 

Brand names purchased by the CML Group are measured at fair value on acquisition and brought to account as non-current assets. Brand names held at July 25, 2004 have an indefinite life.

 

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COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  (ii) Licenses

 

Liquor and gaming licenses purchased by the CML Group are measured at fair value and brought to account as non-current assets on acquisition. Effective July 29, 2002, the CML Group changed its accounting estimate with respect to the useful life of liquor licenses. The previous estimate recognised that liquor licenses had a useful life not exceeding twenty years.

 

The revised accounting estimate recognises that liquor licenses have an indefinite life where they have unlimited legal lives and are unlikely to become commercially obsolete. Gaming licenses purchased during 2003 have an indefinite life. As a consequence, no amortization of licenses was charged for the year ended July 27, 2003.

 

Had a change in estimate of useful life not taken place, an amount of A$10.3 million relating to amortization expense would have been charged in the year to July 27, 2003.

 

  (iv) Co-branded operating rights

 

The CML Group holds the right to operate certain Shell fuel and convenience outlets around Australia. An exclusive supply agreement for fuel and lubricant products is in place, which allows for the sites to be branded both “Coles Express” and “Shell”. Co-branded operating rights are amortised over twenty years.

 

The carrying value of all intangibles is reviewed at each reporting date.

 

  l Accounts payable

 

These amounts represent liabilities for goods and services provided to the CML Group prior to balance date and which were unpaid. The amounts are unsecured and are usually paid between 7 and 60 days after recognition.

 

  m Income tax

 

Income tax is provided using the liability method of tax effect accounting. Income tax expense is calculated on profit from ordinary activities adjusted for permanent differences between taxable and accounting income. The tax effect of cumulative timing differences, which occur where items are included for income tax purposes in a period different from that in the financial statements, is shown in the provision for deferred income tax or future tax benefit, as applicable. The timing differences have been measured using the tax rates expected to apply when the differences reverse. The future income tax benefits arising from tax losses have been recognized only where the realization of such benefits in future years are considered virtually certain.

 

The CML Group implemented the tax consolidation legislation as of July 29, 2002. Refer Note 5 for further disclosure.

 

  n Foreign exchange

 

Foreign currency transactions are translated to Australian currency at the rates of exchange prevailing at the dates of the transactions. Amounts receivable and payable in foreign currencies at balance date are translated at the rates of exchange prevailing on that date. Resulting exchange differences are brought to account as exchange gains or losses in the Consolidated Income Statements in the financial year in which the exchange rates change.

 

With respect to specific commitments, hedging (as defined under Australian GAAP) is undertaken in order to avoid or minimise possible adverse financial effects of movements in exchange rates. Gains or costs arising upon entry into a hedging transaction intended to

 

109


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

hedge the purchase or sale of goods and services, together with subsequent exchange gains or losses resulting from those transactions, are deferred in the Consolidated Balance Sheets from the inception of the hedging transaction up to the date of the purchase or sale and included in the measurement of the purchase or sale. The net amounts receivable or payable under the hedging transaction are also recorded in the Consolidated Balance Sheets. Any gains or losses arising on the hedging transaction after the recognition of the hedged purchase or sale are included in the Consolidated Income Statements.

 

The assets and liabilities of foreign operations that are self-sustaining are translated at the rates of exchange prevailing at balance date. Equity items are translated at historical rates. The Consolidated Income Statements are translated at a weighted average rate for the year. Exchange differences arising on translation are taken directly to the foreign currency translation reserve.

 

The assets and liabilities of foreign operations that are integrated are translated using the temporal method. Monetary assets and liabilities are translated into Australian currency at rates of exchange current at balance date, while non-monetary items and revenue and expense items are translated at exchange rates current when the transactions occurred. Exchange differences arising on translation are brought to account in the Consolidated Income Statements.

 

  o Employee benefits

 

Liabilities for annual leave entitlements are accrued at nominal amounts on the basis of statutory and contractual requirements, including related on-costs. They are measured using rates expected to be paid when the obligations are settled, and are not discounted (Note 2). Under U.S. GAAP these liabilities are measured at their current rates. The effect of this difference is detailed in Note 31.

 

Liabilities for long service leave entitlements which are not expected to be paid or settled within twelve months are accrued at the present value of expected future payments to be made resulting from services provided by employees up to balance date. Consideration is given to future increases in wage and salary rates, experience of employee departures and periods of service. Expected future payments, including related on-costs, are discounted using the rates attaching to national government guaranteed securities with similar maturity terms. Contributions to superannuation funds are expensed as incurred (Note 23).

 

A liability for employee entitlements in the form of bonus plans is recognised when there is no realistic alternative but to settle the liability and at least one of the following conditions is met:

 

    there are formal terms in the plan for determining the amount of the entitlement;

 

    the amounts to be paid are determined before the time of completion of the financial report; or

 

    past practice gives clear evidence of the amount of the obligation.

 

Liabilities for bonus plans are expected to be settled within twelve months and are measured at the amounts expected to be paid when they are settled.

 

Equity-based compensation benefits are provided to employees via the Executive Share Option Plan (Note 24). No accounting entries are made until options over unissued shares are exercised at which time the amounts receivable from executives are recognized in the Consolidated Balance Sheets as share capital. Under U.S. GAAP the fair value of options granted are charged against profits over the expected term of the options. The effect of this difference is described in Note 31.

 

110


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  p Superannuation

 

The CML Group has a number of superannuation funds, which exist to provide benefits for employees and their dependants on retirement, disability or death. The most recent actuarial reports indicated that the financial position of the defined benefit funds is sufficient to meet projected commitments. The CML Group’s commitment in respect of accumulation type funds is limited to making the specified contributions. The CML Group’s contributions to the superannuation funds are expensed as incurred in these financial statements, which are prepared under Australian GAAP. The effect of the difference from U.S. GAAP is reflected in Note 31, and U.S. GAAP information in relation to the defined benefit funds (in accordance with FAS 87 and FAS 132) is detailed in Note 23.

 

  q Leases

 

The CML Group leases real estate, stores, office facilities and warehouses. The provisions of these leases are such that substantially all of the risks and benefits of ownership of the property are retained by the lessors, and accordingly, in the financial statements, they are classified as operating leases.

 

Payments made under operating leases are expensed on a straight-line basis over the term of the lease. Refer Note 25 for details of non-cancelable operating lease commitments.

 

  r Lease incentives

 

From January 30, 1995 lump sum payments received in relation to major lease contracts are deferred and amortized over the period of benefit. In the past such amounts were credited to the Consolidated Income Statements in the year in which they were receivable.

 

U.S. GAAP requires lease incentives for lease agreements entered into after December 31, 1988 to be recognized on a straight-line basis over the term of the new lease. The effect of this difference is detailed in Note 31.

 

  s Interest bearing liabilities

 

Borrowings are carried at their principal amounts. Interest is recognized as an expense as it accrues, except where it is included in the cost of qualifying assets. Qualifying assets are assets that necessarily take a substantial period of time to prepare for intended use. Long and medium term borrowing expenses are amortized over the lesser of five years or the term of the relevant borrowing.

 

  t Revenue

 

Revenue from sale of goods is recognized at the point of sale, includes concession sales and is after deducting returns, duties and taxes paid.

 

111


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  u Earnings per share

 

The CML Group has applied the revised AASB 1027 Earnings Per Share (issued June 2001) for the first time from July 30, 2001.

 

  (i) Basic earnings per share

 

Basic earnings per share is determined by dividing net profit less non-redeemable reset convertible preference shares (ReCAPS) dividends, by the weighted average number of ordinary shares outstanding during the financial year.

 

  (ii) Diluted earnings per share

 

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.

 

  v Derivatives

 

The CML Group is exposed to changes in interest rates and foreign exchange rates from its activities. These risks are hedged by the CML Group primarily through the use of derivatives, which mainly take the form of swaps, futures, forward contracts and options. Interest rate derivatives that are designated and are effective as hedges, are deferred and amortized over the remaining life of the hedged items. Cross currency swaps are revalued at spot rates at balance date and movements are recognized in the Consolidated Income Statements as gains and losses together with the foreign currency gains and losses on the underlying borrowings.

 

  w Goods and Services Tax (GST)

 

Revenues, expenses and assets are generally recognized net of the amount of GST. Where GST is incurred on purchases and is not recoverable from the Australian Taxation Office (ATO) it is included as part of the cost of acquisition of an asset or part of an item of expense. Cash flows are included in the statements of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to the ATO are classified as operating cash flows.

 

  x Segment reporting

 

Individual business segments have been identified on the basis of grouping individual products or services subject to similar risks and returns. The business segments reported are: Food, Liquor & Fuel, Kmart & Officeworks, Myer & Megamart, Target, Emerging Businesses and Property & Unallocated.

 

  y Rounding of amounts

 

Dollar amounts have been rounded to the nearest tenth of a million dollars. Where the amount is $50,000 or less, this is indicated by a dash (“-”). For the purpose of Notes 24 and 28 a dash indicates a nil balance.

 

  z Dividends

 

Provision is made for the amount of any dividend declared, determined or publicly recommended by the directors on or before the end of the financial year but not distributed at balance date (Note 2).

 

112


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  aa Onerous contracts

 

A provision for onerous contracts is recognised when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under that contract, and only after any impairment losses to assets dedicated to that contract have been recognised.

 

The provision recognized is based on the difference between the estimated cash flows to meet the unavoidable costs and the estimated cash flows to be received having regard to the risks of the activities relating to the contract. The net estimated cash flows are discounted to their present value.

 

Under U.S. GAAP this type of provision is not permitted. The effect of the difference from U.S. GAAP is reflected in Note 31.

 

  ab Workers’ compensation and self-insurance

 

The CML Group is self-insured for costs relating to workers’ compensation and general liability claims. Provisions are recognized based on claims reported, and an estimate of claims incurred but not yet reported. These provisions are determined on a discounted basis, utilizing an actuarially determined method which is based on various assumptions including but not limited to future inflation, investment return, average claim size and claim administration expenses.

 

  ac Advertising

 

Advertising costs are expensed as incurred.

 

  ad Stamp duty

 

Payments of stamp duty on leased property are deferred and amortised over the life of the lease.

 

  ae International Financial Reporting Standards (IFRS)

 

The Australian Accounting Standards Board (AASB) is adopting IFRS for application to reporting periods beginning on or after 1 January 2005. The AASB has issued Australian equivalents to IFRS. The adoption of Australian equivalents to IFRS will be first reflected in the CML Group’s financial statements for fiscal 2006, being the half-year ending 29 January 2006 and the year ending 30 July 2006.

 

The transitional rules for adoption of IFRS require the restatement of comparative financial statements using Australian equivalents of IFRS, except for AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139 “Financial Instruments: Recognition and Measurement”.

 

Most adjustments required on transition to IFRS will be made retrospectively against opening retained earnings as at 26 July 2004. An IFRS project team has been established to manage the transition to Australian equivalents of IFRS. The project team is chaired by the Chief Financial Officer and reports to the Audit/Governance Committee every six months.

 

Most of the Australian equivalents to IFRS have been evaluated and a number of key differences have been identified with Australian GAAP. The completion of this analysis is expected during fiscal 2005, enabling the implementation of required changes ahead of fiscal 2006 relative to Australian GAAP. No attempt has yet been made to examine how these changes might be reviewed under U.S. GAAP and no commentary is included in these accounts in this regard.

 

113


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following IFRS areas have been identified as significant for the CML Group relative to Australian GAAP:

 

(i) AASB 2 “Share-based Payment”

 

CML has established an Executive Share Option Plan, under which options are issued to employees. Under the current accounting policy an expense is not recognised for options issued (refer Note 1o).

 

On adoption of AASB 2, options issued to employees will be recognised as an expense over the relevant vesting periods. The expense will be determined with reference to the fair value of the options issued. The determination of fair value is prescribed by the new standard. An adjustment will be recorded against opening retained earnings at 26 July 2004 to reflect the fair value, so determined, of any options granted after 7 November 2002, but before 26 July 2004 that are not vested at 1 January 2005.

 

(ii) AASB 3 “Business Combinations”

 

Under the current accounting policy goodwill is amortised over the period in which the benefits are expected to arise (refer Note 1d).

 

Under AASB 3, goodwill is no longer amortised, but instead will be subject to impairment testing at each reporting date.

 

(iii) AASB 116 “Property, Plant and Equipment” and AASB 140 “Investment Property”

 

Under the current accounting policy freehold land and buildings and investment properties are measured at their fair value (refer Note 1i). Increments and decrements are offset, and the net movement in the valuation is recognised in the asset revaluation reserve.

 

Under AASB 140, where an insignificant portion of a property is held for the company’s own use it is classified as an investment property. Accordingly, it is unlikely that properties currently classified as investment properties will continue to meet the definition under IFRS. Properties that are not classified as investment properties under AASB 140 can be measured under either the revaluation model or the cost model prescribed by AASB 116.

 

Under the cost model the property is carried at its cost less accumulated depreciation and impairment losses. Under the revaluation model any gains arising from changes in fair value are recognised in the asset revaluation reserve. However, the gain shall be recognised in the net profit or loss to the extent that it reverses a revaluation decrement previously recognised in the net profit or loss. Losses are recognised in the net profit or loss except where the decrement reverses a previous revaluation increment in the reserve.

 

In addition, under IFRS increments and decrements within an asset class cannot be offset. Properties must be considered individually, which could result in greater volatility in the Statements of Financial Performance.

 

At this stage there has been no decision on which policy will be applied.

 

(iv) AASB 112 “Income Taxes”

 

Under the current accounting policy deferred tax balances are determined using the income statement method. Items are only tax-effected if they are included in the determination of pre-tax accounting profit or loss and/or taxable income or loss and current and deferred taxes cannot be recognised directly in equity.

 

114


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Under AASB 112, deferred tax balances are determined using the balance sheet method, which calculates temporary differences based on the carrying amounts of an entity’s assets and liabilities in the Statements of Financial Position and their associated tax bases. In addition, current and deferred taxes attributable to amounts recognised directly in equity are also recognised directly in equity.

 

It is expected that AASB 112 may require the CML Group to carry higher levels of deferred tax assets and liabilities. However, at this stage a significant transitional adjustment has not been identified.

 

(v) AASB 119 “Employee Benefits”

 

Under the current accounting policy an asset or liability is not recognised for the actuarially determined surplus or deficit of the defined benefit superannuation plan (refer Note 23).

 

Under AASB 119 net surpluses or deficits that arise within the defined benefit superannuation plan must be recognised as an asset or liability in the Statements of Financial Position. The annual movements in those surpluses or deficits must be recorded in the Statements of Financial Performance, which could result in greater volatility.

 

Upon adoption, an actuarial valuation of the defined benefit superannuation plan will be performed in accordance with AASB 119, and an adjustment will be recorded against opening retained earnings at 26 July 2004.

 

(vi) AASB 136 “Impairment of Assets”

 

Under the current accounting policy the recoverable amount of assets is determined by reference to cash flows generated by a group of assets.

 

Under AASB 136 recoverable amount is assessed for each “cash generating unit”, which is defined as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows of other assets.

 

At this stage the determination of the CML Group’s cash generating units has not been finalised.

 

(vii) AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139 “Financial Instruments: Recognition and Measurement”

 

CML has on issue 7,000,000 ReCAPS that are currently treated as equity (refer Note 20). Under AASB 132 the ReCAPS will be reclassified as debt, and dividends paid (refer Note 6) will be recorded as interest expense.

 

Under AASB 139 foreign exchange contracts held for hedging purposes will be recorded in the Statements of Financial Position at fair value. Changes in fair value will be recognised directly in equity where hedge effectiveness tests are met. Ineffectiveness outside the prescribed range precludes the use of hedge accounting, in which case the fair value changes are recognised in the Statements of Financial Performance.

 

AASB 132 and AASB 139 are not applicable until 1 August 2005. The impact on retained earnings at 1 August 2005 will depend on the value of foreign exchange contracts at that date.

 

The above should not be regarded as a complete list of changes in accounting policies that will result from the transition to Australian equivalents of IFRS. In addition, some decisions have not yet been made where choices of accounting policies are available. For these reasons it is not yet possible to quantify the impact of the transition to Australian equivalents to IFRS on the CML Group’s financial position and reported results.

 

115


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2. CHANGES IN ACCOUNTING POLICY

 

Changes in accounting policy for inventory costing

 

  (a) Supplier promotional rebates

 

Effective July 29, 2002, the CML Group has revised its policy of accounting for supplier promotional rebates such that accounting for all forms of rebates is reflective of guidance given by the Emerging Issues Task Force in the U.S. (EITF Issue No. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor”).

 

Under this guidance, virtually all forms of rebates (including some which under previous accounting guidance were able to be taken directly to income) are treated as a reduction in the cost of inventory, deferring the recognition of the income to as and when the inventory is sold. As a result, rebates previously recorded as other revenue from operating activities, have now been disclosed as a reduction in cost of goods sold. The only exception is in limited circumstances in relation to the reimbursement of direct advertising costs incurred on behalf of the supplier, which are recorded as other revenue from non-operating activities.

 

On initial adoption of the change at July 29, 2002, the CML Group inventory decreased by A$76.5 million (July 2001 A$76.7 million). If the accounting policy had always been applied, the impact of the change would have been an increase to profit before tax by A$0.2 million for the year ended July 28, 2002 and a decrease by A$2.8 million for the year ended July 27, 2003.

 

Under the Australian equivalents to IFRS which come into effect in the 2006 financial year, voluntary changes to accounting policies such as this would be made by an adjustment to retained earnings, rather than through the Consolidated Income Statements.

 

  (b) Indirect logistics expenses

 

Effective July 29, 2002, the CML Group made a modification to its policy of recognizing indirect costs of operating distribution centres as a component of the cost of inventory. Previously, these indirect costs were expensed as incurred. The modification was made to improve the relevance and reliability of the information presented in the financial report and to further comply with AASB 1019 “Inventories”. This treatment also complies with U.S. GAAP.

 

On initial adoption of the change at July 29, 2002, the CML Group’s inventory increased by A$4.5 million. For the year ended July 27, 2003, the change in accounting policy was an increase to the CML Group’s profit before tax of A$5.0 million. Had this policy been applied for the previous corresponding periods the effect would have been the same.

 

Change in accounting policy for providing for dividends

 

Effective July 29, 2002, the CML Group changed its accounting policy for providing for dividends to comply with AASB 1044 “Provisions, Contingent Liabilities and Contingent Assets” released in October 2001. This treatment of providing for dividends is consistent with U.S. GAAP. In previous years, in addition to providing for the amount of any dividends declared, determined or publicly recommended by the directors on or before the end of the financial year but not distributed at balance date, provision was made for dividends to be paid out of retained profits at the end of the financial year where the dividend was proposed, recommended or declared between the end of the financial year and the completion of the financial report.

 

An adjustment of A$149.7 million was made against retained profits at the beginning of the financial year to reverse the amount provided at July 28, 2002 for the accrued ReCAPS dividend and the proposed final ordinary dividend for that year that was recommended by the directors between the end of the financial year and the completion of the financial report. This reduced current liabilities - provisions and total liabilities for the year ended July 27, 2003 by A$149.7

 

116


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

million with corresponding increases in net assets, retained profits, total equity and the total dividends provided for or paid.

 

Change in accounting policy for annual leave entitlements

 

Effective July 29, 2002, the CML Group changed its accounting policy for providing for employee benefits to comply with the revised AASB 1028 “Employee Benefits” released in June 2001. In previous years, liabilities for wages and salaries and annual leave were measured at current remuneration rates. Under the revised accounting standard these benefits must be measured at their nominal amounts, using the rates expected to be paid when the obligations are settled, and are not discounted. Under U.S. GAAP these liabilities are measured at their current rates. The effect of this difference is detailed in Note 31.

 

An adjustment of A$6.6 million was made at the beginning of the financial year to reduce retained profits, A$9.4 million to increase employee provisions, and A$2.8 million to increase the future income tax benefit. If the accounting policy had always been applied, the impact of the change for the years ended July 28, 2002 and July 27, 2003 would have been immaterial.

 

3. REVENUE

 

    

2004

52 weeks

A$M


  

2003

52 weeks

A$M


   

2002

52 weeks

A$M


Revenue from operating activities

               

Sales

   32,266.8    27,016.6     25,688.7

Rebates and other allowances

   27.1    17.7     650.6

Cumulative effect of change in accounting policy for supplier promotional rebates

        (76.5 )    

Proceeds from disposal of

               

Property, plant and equipment

   89.2    19.7     38.8

Sydney Central Plaza

   9.9    372.8      

Businesses and controlled entities

   31.9          73.0
    
  

 
     131.0    392.5     111.8
    
  

 

Other revenue from non-operating activities

               

Interest income*

   57.6    23.7     27.4

Rental income

   25.9    30.8     37.8

Other income

   225.7    220.8     221.1
    
  

 
     309.2    275.3     286.3
    
  

 

Total revenue

   32,734.1    27,625.6     26,737.4
    
  

 

 

* Includes interest from the Coles Myer Employee Share Plan Trust of A$38.0 million (2003 A$3.7 million, 2002 A$12.4 million), comprising A$2.7 million received in the first half of the financial year, and A$35.3 million received in the second half of the financial year as a result of the restructuring of the Trust by its trustees.

 

117


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4. OPERATING PROFIT

 

     2004
52 weeks
A$M


    2003
52 weeks
A$M


    2002
52 weeks
A$M


 

Profit from ordinary activities before income tax expense includes the following net gains and expenses:

                  

Gains:

                  

Net gain/(loss) on sale of

                  

Freehold property

   7.8     1.4     15.0  

Plant and equipment

   (45.0 )   (31.2 )   (27.0 )

Sydney Central Plaza

   12.0     5.5        

Businesses and controlled entities

   9.7           (0.1 )
    

 

 

     (15.5 )   (24.3 )   (12.1 )
    

 

 

Expenses:

                  

Interest

   68.3     86.2     100.8  

Other costs of finance

   2.8     0.7     2.1  
    

 

 

Total borrowing costs

   71.1     86.9     102.9  
    

 

 

Depreciation

                  

Freehold buildings

   0.7     0.7     0.6  

Leasehold improvements

   52.1     49.4     45.4  

Plant and equipment

   438.1     418.2     408.9  
    

 

 

     490.9     468.3     454.9  
    

 

 

Amortization

                  

Liquor licenses

               10.3  

Co-branded operating rights

   3.5              

Goodwill

   19.2     16.2     15.7  

Computer software

   20.1     25.3     9.7  

Stamp duty

   3.0     2.8     2.8  
    

 

 

     45.8     44.3     38.5  
    

 

 

Provisions

                  

Employee entitlements

   246.2     254.3     240.2  

Workers’ compensation

   101.3     101.2     64.6  

Self-insured risks

   13.1     14.1     9.5  
    

 

 

     360.6     369.6     314.3  
    

 

 

Write-down of non-current assets to recoverable amounts

                  

Property, plant and equipment

   45.9     12.8     10.4  

Goodwill

   5.7              
    

 

 

     51.6     12.8     10.4  
    

 

 

Bad and doubtful debts

   4.7     3.8     9.6  
    

 

 

 

118


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5. INCOME TAX EXPENSE

 

     2004
52 weeks
A$M


    2003
52 weeks
A$M


    2002
52 weeks
A$M


 

The Australian statutory tax on profit is reconciled to the income tax expense as follows:

                  

Profit before income tax

   866.2     608.8     482.2  
    

 

 

Statutory rate of taxation

   30 %   30 %   30 %

Tax calculated at the statutory rate on profit before income tax (from)/to which is (deducted)/added the tax effect of:

   259.9     182.6     144.7  

Non-deductible depreciation and amortization

   6.4     2.5     5.4  

Realization of unrecognized timing differences

   (5.5 )   (5.5 )   (0.5 )

Investment property tax depreciation

         (2.1 )   (3.5 )

Lease termination payments

   4.3              

Under/(over) provision from prior year

   (6.6 )   2.0     10.4  

Non-allowable goodwill amortization and write off

   2.6     2.6     2.6  

Loss/(profit) on property sales not subject to tax

   (5.9 )   0.6     (3.8 )

Other items not subject to tax

   (2.7 )   (0.6 )   (7.3 )

Other non-deductible expenditure

   6.5     6.6     2.0  

Income losses recouped

               (11.8 )

Difference between accounting and tax profits from partnerships and trusts

   (0.9 )   (1.0 )   (1.0 )
    

 

 

Income tax expense

   258.1     187.7     137.2  
    

 

 

The components of income tax expense are:

                  

Income tax expense credited to current tax provision

   436.2     199.3     104.8  

The net tax effect of temporary differences:

                  

Fixed assets and software temporary differences

   (58.0 )   (26.7 )   (17.9 )

Co-branded operating rights

   28.1              

Employee entitlements

   (3.9 )   (12.7 )   (4.3 )

Prepayments

   (0.9 )   (0.4 )   (3.2 )

Provisions

   (35.2 )   (4.4 )   29.1  

Income received in advance

   0.9     (1.6 )   1.0  

Income received from partnerships

         (1.6 )   2.1  

Foreign exchange translation, hedge and

                  

other finance costs

   (13.6 )   33.0     (19.3 )

Inventory valuation

   (65.6 )   (24.4 )   14.8  

Other

   (29.9 )   27.2     30.1  
    

 

 

Income tax expense

   258.1     187.7     137.2  
    

 

 

 

119


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5. INCOME TAX EXPENSE (continued)

 

The significant temporary differences which give rise to deferred tax assets and liabilities are as follows:

 

     July 25, 2004

   July 27, 2003

 
     Deferred
income tax
liabilities
A$M


    Future
income tax
benefits
A$M


   Deferred
income tax
liabilities
A$M


   

Future

income tax
benefits
A$M


 

Fixed assets and software depreciation

   (32.8 )   6.0    (101.2 )   16.4  

Foreign exchange translation, hedge and other finance costs

   (4.9 )        (4.8 )   (13.7 )

Employee entitlements

         164.8          160.9  

Prepayments

   (15.9 )        (16.8 )      

Income received in advance

   (6.7 )        (5.8 )      

Inventory valuation

         67.5    1.9        

Provisions and accruals

   (20.0 )   50.7    (48.4 )   43.9  

Lease incentives

         13.7          14.4  

Co-branded operating rights

   (28.1 )                 

Differences between tax and accounting income of partnerships and trusts

              —          
    

 
  

 

     (108.4 )   302.7    (175.1 )   221.9  
    

 
  

 

Included in:

                       

Provisions (non-current)

   (108.4 )        (175.1 )      

Other assets (non-current)*

         302.7          221.9  
    

 
  

 

     (108.4 )   302.7    (175.1 )   221.9  
    

 
  

 

 

* Potential future income tax benefits of A$7.1 million (2003 $7.1 million, 2002 A$NIL) attributable to tax losses of A$23.8 million (2003 $23.8 million, 2002 A$NIL) have not been recognized as realization of the losses is not virtually certain under Australian GAAP. Under U.S. GAAP, these tax losses would not be recognized as realization of the losses is not probable. Future income tax benefits attributable to tax losses that were recognized in 2002 totaled A$12.4 million.

 

These financial statements have been prepared on the basis that the CML Group implemented the tax consolidation legislation as of July 29, 2002. The Commissioner of Taxation has been notified of this decision and a tax sharing and a fax funding agreement between members of the tax-consolidated group is in place. As a consequence of implementing the consolidation legislation, CML, as the head company in the tax-consolidated group, recognizes current and deferred tax amounts relating to transactions, events and balances in the tax consolidated group as if those transactions, events and balances were its own in addition to the current and deferred tax amounts arising in relation to its own transactions, events and balances. Amounts receivable or payable under an accounting tax sharing arrangement with the tax-consolidated subsidiaries are recognized separately as inter-company tax-related amounts receivable or payable. Expenses and revenues arising under the tax allocation arrangement are recognized as a component of income tax expense or revenue.

 

In the opinion of the directors, the tax sharing agreement is a verbal agreement under the tax consolidation legislation and limits the joint and several liability of the entities in the tax consolidation group.

 

The financial effect of the tax consolidation legislation has been recognized in these financial statements, with no material impact on the Consolidated Income Statements or balance sheets.

 

120


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     2004
52 weeks
A$M


   2003
52 weeks
A$M


   2002
52 weeks
A$M


 

6.      DIVIDENDS

                

Final ordinary dividend for the year ended July 27, 2003 of 12.5 cents (2002 12.0 cents) paid on November 10, 2003. The 2002 final dividend was recognized as a liability at July 28, 2002, but adjusted against retained profits at the beginning of the financial year as a result of the change in accounting policy for providing for dividends (Note 2).

   151.6    142.1    142.1  

Interim ordinary dividend for the year ended July 25, 2004 of 14.0 cents (2003 13.5 cents, 2002 13.5 cents) paid on May 10, 2004

   170.3    160.6    159.3  

Preference A$3.2589 (2003 $3.2589, 2002 $3.2589) paid on December 1, 2003

   22.8    22.8    22.8  

Less: provided at July 29, 2001*

             (7.6 )
    
  
  

     22.8    22.8    15.2  

Preference A$3.2589 (2003 $3.2411, 2002 $3.2411) paid May 31, 2004

   22.8    22.7    22.7  

Preference A$3.2589 payable December 2, 2002 pro rata to July 28, 2002*

             7.6  
    
  
  

Total ReCAPS dividends

   45.6    45.5    45.5  
    
  
  

     367.5    348.2    346.9  
    
  
  

*  In previous periods A$7.6 million was provided at balance date. As a result of the change in accounting policy this has been adjusted against retained profits (Note 2). Since year-end the Directors have recommended the payment of a dividend of A$3.2589 per share, fully franked at 30% tax rate.

      

Dividends not recognized at year end

                

In addition to the above dividends, since year end the Directors have recommended the payment of a final dividend of 15.0 cents per fully paid ordinary share, fully franked based on tax paid at 30%. Aggregate amount of the proposed dividend expected to be paid on November 8, 2004 out of retained profits at July 25, 2004, but not recognized as a liability at year end as a result of the change in accounting policy for providing for dividends (Note 2)

   206.6    151.6       

The franked portions of the final dividends recommended after July 25, 2004 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending July 31, 2005.

  

Dividend franking account

                

This amount represents the balance of the dividend franking account after allowing for current tax paid and provided for, dividend provisions (the 2002 financial year only), dividend payments and franking credits the CML Group is prevented from distributing (the 2002 financial year only), based on a tax rate of 30% (2002 30%).

   412.9    141.4    39.7  

 

During 2003, franking credits of A$118.2 million were transferred from wholly-owned entities to the parent entity at the time these entities entered the tax consolidated group.

 

121


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     July 25,
2004
A$M


    July 27,
2003
A$M


 

7.      RECEIVABLES (CURRENT)

            

Customer receivables

   390.9     309.6  

Allowance for doubtful accounts

   (9.5 )   (9.2 )
    

 

     381.4     300.4  
    

 

Other debtors

   32.3     46.6  

Allowance for doubtful accounts

   (1.4 )   (1.0 )
    

 

     30.9     45.6  
    

 

Short-term deposits

   234.4        
    

 

     646.7     346.0  
    

 

Short-term deposits are due for maturity within 4 months and pay interest at 5.90%

            

8.      OTHER ASSETS (CURRENT)

            

Prepayments

   41.1     28.1  
    

 

9.      RECEIVABLES (NON-CURRENT)

            

Loan to employee share plan – Note 24

   29.7     95.4  

Term deposits and advances

   18.1     23.7  

Loans to associated unit trust and partnership

   2.6     2.4  
    

 

     50.4     121.5  
    

 

 

122


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

    

July 25,
2004

A$M


  

July 27,
2003

A$M


10.    INVESTMENTS

         

Interests in bonds (market value 2004 A$9.1 million, 2003 A$7.7 million)*

   9.1    7.7

Unlisted securities, at cost**

   19.3    19.3
    
  
     28.4    27.0
    
  

Other:

         

Interest in shopping center unit trusts, At fair value ***

   82.5    76.8

Interest in partnerships

   2.0    2.0
    
  
     84.5    78.8
    
  
     112.9    105.8
    
  

 

* Bonds have maturity dates extending to May 2009

 

** The CML Group has a 2% interest in GlobalNetXchange Ltd. (GNX). GNX is an international retail alliance, which offers hosted software solutions for retail applications.

 

*** Fair value represents the estimated market selling price of the underlying property less any estimated selling costs. Capital gains tax has not been taken into account in determining the revalued amount.

 

Interest in associated trusts and partnerships:

 

     Investment

   Interest

    

July 25,

2004
A$M


   July 27,
2003
A$M


   July 25,
2004 %


   July 27,
2003 %


Unit trusts

                   

CMS General Trust (1)

                   

- Property ownership

   82.5    76.8    50    50
    
  
         
     82.5    76.8          
    
  
         

Partnership

                   

Fly Buys Partnership (2)

                   

- Loyalty program

   2.0    2.0    50    50
    
  
         
     2.0    2.0          
    
  
         

Proprietary company

                   

Quids Technology Pty. Ltd. (1)

                   

- Software development

   —      —      50    50
    
  
         
     —      —            
    
  
         

 

(1) Balance date is June 30

 

(2) Balance date is December 31

 

123


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

    

July 25,

2004

A$M


   

July 27,

2003

A$M


 

11.    PROPERTY, PLANT AND EQUIPMENT

            

Freehold properties

            

Land

            

At fair value

   213.7     202.1  
    

 

Total land

   213.7     202.1  
    

 

Buildings

            

At fair value

   35.9     45.5  

Accumulated depreciation

   (9.1 )   (1.8 )
    

 

     26.8     43.7  
    

 

Total buildings

   26.8     43.7  
    

 

Total freehold properties

   240.5     245.8  
    

 

Leasehold improvements

            

At cost

   705.3     674.5  

Accumulated amortization

   (333.5 )   (297.4 )
    

 

     371.8     377.1  
    

 

Investment properties

            

Investment freehold properties At fair value

   77.5     71.5  
    

 

Total investment freehold properties

   77.5     71.5  
    

 

Total properties

   689.8     694.4  
    

 

Plant and equipment

            

At cost

   5,667.7     5,659.1  

Accumulated depreciation

   (3,326.7 )   (3,241.2 )
    

 

     2,341.0     2,417.9  
    

 

Computer software

            

At cost

   160.2     152.5  

Accumulated depreciation

   (85.5 )   (64.5 )
    

 

     74.7     88.0  
    

 

Capital work in progress, at cost

   290.2     140.3  
    

 

Total property, plant and equipment

   3,395.7     3,340.6  
    

 

 

The basis of valuation of freehold and investment properties is fair value, being the amounts for which the assets could be exchanged between willing parties in an arm’s length transaction. The latest assessments of fair value as at July 25, 2004 are primarily based on independent assessments.

 

Freehold and investment properties are recorded at current estimated market valuations (assuming continuation of the properties’ existing or intended use), as permitted by Australian GAAP. The effect of this variation from U.S. GAAP is shown in Note 31.

 

124


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11. PROPERTY, PLANT AND EQUIPMENT (continued)

 

Reconciliations of the carrying amount of each class of property, plant and equipment are set out below:

 

CML Group 2004


   Freehold properties:

    Leasehold
improvements


    Investment
properties


    Plant and
equipment


   

Computer

software


   

Capital work

in progress


    Total

 
   Land

    Buildings

             

Carrying amount at the start of the year

   202.1     43.7     377.1     71.5     2,417.9     88.0     140.3     3,340.6  

Additions

   35.6     6.4     50.1     7.4     369.5     19.5     254.5     743.0  

Disposals

   (28.5 )   (12.1 )   (5.0 )   (21.9 )   (64.1 )   (0.9 )   (0.7 )   (133.2 )

Acquisitions of entities or operations

               0.1           14.8     0.1           15.0  

Fair value increments/ (decrements)

   4.4     (15.8 )         4.3     (5.7 )               (12.8 )

Write-down to recoverable amounts

               (1.2 )         (36.6 )   (8.0 )   (0.1 )   (45.9 )

Depreciation expense

         (0.7 )   (52.1 )         (438.1 )   (20.1 )         (511.0 )

Transfers (to)/from another class

   0.1     5.3     2.8     16.2     83.3     (3.9 )   (103.8 )      
    

 

 

 

 

 

 

 

Carrying amount at the end of the year

   213.7     26.8     371.8     77.5     2,341.0     74.7     290.2     3,395.7  
    

 

 

 

 

 

 

 

 

    

July 25,

2004

A$M


   

July 27,

2003

A$M


 

12.    INTANGIBLES

            

Goodwill, at cost

   468.8     470.0  

Accumulated amortization

   (332.3 )   (311.0 )
    

 

     136.5     159.0  
    

 

Licenses, at cost

   358.6     362.6  

Accumulated amortization

   (27.4 )   (27.4 )
    

 

     331.2     335.2  
    

 

Co-branded operating rights, at cost

   103.7        

Accumulated amortization

   (3.5 )      
    

 

     100.2        
    

 

Brand names, at cost

   22.6     22.6  
    

 

     590.5     516.8  
    

 

13.    OTHER ASSETS (NON-CURRENT)

            
              

Future income tax benefits

   302.7     221.9  

Other

   30.0     29.8  
    

 

     332.7     251.7  
    

 

 

125


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     July 25,
2004
A$M


   July 27,
2003
A$M


14.    ACCOUNTS PAYABLE

         

Trade creditors

   2,067.8    1,896.6

Accrued liabilities

   747.9    579.7
    
  
     2,815.7    2,476.3
    
  

15.    BORROWINGS (CURRENT)

         

Bank overdraft

   7.1    10.8

Other loans

   254.4    —  
    
  
     261.5    10.8
    
  

In 2002, other loans are predominantly due for repayment within 4 months of balance date with a weighted average interest rate of 6.38%. Refer Note 18 for details of the company’s negative pledge.

         

16.    TAX LIABILITIES (CURRENT)

         

Provision for income tax

   161.6    13.6
    
  

17.    PROVISIONS (CURRENT)

         

Provision for employee benefits

   477.1    465.0

Self-insured risks

   36.9    36.3

Workers’ compensation

   48.7    36.2

Provision for New Zealand onerous contracts

   0.6    3.3
    
  
     563.3    540.8
    
  

 

Movements in provisions

 

Movements in each class of provision during the financial year, other than employee entitlements, are set out below:

 

CML Group – 2004

A$ million


   Self-insured
risks


   

Workers’

compensation


    Onerous
contracts


    Total

 

Carrying amount at the start of the year

   36.3     36.2     3.3     75.8  

Provisions acquired

         5.6           5.6  

Additional provisions recognized

   13.1     101.3           114.4  

Payments/utilized

   (12.5 )   (47.0 )   (1.8 )   (61.3 )

Transfer between current & non-current

         (47.4 )   (0.9 )   (48.3 )
    

 

 

 

Carrying amount at the end of the year

   36.9     48.7     0.6     86.2  
    

 

 

 

 

126


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     July 25,
2004
A$M


   July 27,
2003
A$M


18.    LONG-TERM DEBT

         

6.1% - 7.1% bonds and notes issued under domestic and international facilities due 2003 – 2005

   330.0    600.0

0.3% - 6.5% unsecured international bonds and notes due 2002 – 2006

   320.6    452.4

5.7% unsecured international loans due in 2004

        7.5
    
  
     650.6    1,059.9

Net value of currency swaps supporting foreign currency facilities

   62.8    83.4
    
  
     713.4    1,143.3
    
  

 

At balance date, all foreign currency borrowings were fully hedged. The CML Group’s borrowing structure is flexible and consistent, based on the acceptance by financial institutions of the Standard Coles Myer Negative Pledge (the Negative Pledge), and acceptance by investors of complementary Trust Deeds for public issues of bond and notes.

 

The Negative Pledge is the basis of an unsecured borrowing structure, providing financial ratio restrictions of total liabilities to total tangible assets at 80%, and the ratio of total secured liabilities of creditors who are not a party to the Negative Pledge to total tangible assets at 40%. A controlled entity has pledged A$80.0 million of assets as security over obligations to a trade creditor. In addition, a pledge is given not to provide security over CML Group assets to parties to the Negative Pledge, without providing equivalent security to all parties to the Negative Pledge.

 

Liabilities covered by the above mature as follows:

 

2004/2005

        409.3

2005/2006

   292.7    430.5

2006/2007

   167.9    80.1

2007/2008

   50.0    90.0

2008/2009

   90.0    50.0

2009/2010

   50.0     
    
  
     650.6    1,059.9
    
  

 

Long-term foreign currency loans included above consist of:

 

United States dollars

   27.9    48.3

Japanese yen

     292.7       411.6
    
  
     320.6    459.9
    
  

 

Unused firmly committed long-term financing facilities of A$530.0 million (2003 A$580.0 million) were available at year-end. All borrowings are generally subject to, or consistent with, terms and conditions of the Standard Coles Myer Negative pledge.

 

To limit its exposure to movements in foreign exchange rates the CML Group has entered into agreements to exchange Australian dollars and foreign currencies, predominantly the exchange of Australian dollars for United States dollars. At year end the total face value of contracts entered into was A$633.8 million (2003 A$626.3 million). Of these, A$383.4 million (2003 A$543.3 million) related to the principal exchanges under currency swaps for terms of up to 5 years, and A$250.4 million (2003 A$83.0 million) related to foreign currency contracts for terms of up to 1 year.

 

127


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     July 25,
2004
A$M


   July 27,
2003
A$M


19.    PROVISIONS (NON-CURRENT)

         

Provision for employee benefits

   74.6    73.3

Provision for workers’ compensation

   201.3    150.9

Deferred income tax

   108.4    175.1

Provision for New Zealand onerous contracts

   6.0    20.2
    
  
     390.3    419.5
    
  

 

Movements in provisions

 

Movements in each class of provision during the financial year, other than employee entitlements and deferred income tax, are set out below:

 

CML Group – 2004

A$ million


   Workers’
compensation


   Onerous
contracts


    Total

 

Carrying amount at the start of the year

   150.9    20.2     171.1  

Provisions acquired

   3.0          3.0  

Provision no longer required due to re-measurement

        (15.4 )   (15.4 )

Foreign exchange differences

        0.3     0.3  

Transfer between current & non-current

   47.4    0.9     48.3  
    
  

 

Carrying amount at the end of the year

   201.3    6.0     207.3  
    
  

 

 

     July 25,
2004
A$M


   July 27,
2003
A$M


20.    SHARE CAPITAL

         

Issued and paid up

         

Ordinary fully paid – 1,225,410,546 shares (2003 1,212,423,917)

   1,626.1    1,529.7

Ordinary partly paid – 114,000 shares paid to A$0.01 (2003 124,000)

   —      —  

ReCAPS fully paid – 7,000,000 shares

   680.6    680.6
    
  
     2,306.7    2,210.3
    
  

 

Changes in issued share capital during the year were:

 

    the issue of 7,937,954 (2003 9,982,892) ordinary shares under the Dividend Reinvestment Plan for A$59.3 million (2003 A$60.3 million);

 

    the conversion of 10,000 (2003 4,000) partly paid ordinary shares to fully paid ordinary shares, for A$NIL million (2003 A$NIL million);

 

    the issue of 5,038,675(2003 NIL) ordinary shares for A$37.1 million (2003 A$NIL million) upon the exercise of options.

 

128


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

20. SHARE CAPITAL (Continued)

 

Ordinary Class Shares

 

Ordinary shares entitle the holder to participate in the dividends of the company and the proceeds on winding up of the company, subject to entitlements of the non-redeemable reset convertible preference shares. Fully paid ordinary class shares entitle the holder to one vote, except on a poll, where each share is entitled to one vote. Partly paid shares do not have any voting rights, until fully paid (except with respect to any proposal to vary the rights of these shareholders).

 

At July 25, 2004, there were 114,000 (2003 124,000) partly paid shares on issue, of which a further $1.99 per share is uncalled.

 

On July 19, 2001, the first 500 of each shareholder’s ordinary shares were redesignated on the Australian Stock Exchange as Discount Card shares. On April 12, 2002, the Discount Card shares reverted back to ordinary shares. During their separate listing, Discount Card shares remained ordinary shares and as such, ranked equally with non-Discount Card shares in every respect including voting and dividend rights.

 

Dividend Reinvestment Plan

 

The company has a dividend reinvestment plan under which holders of ordinary shares have previously been able to elect to have their dividend entitlements satisfied by the issue of new fully paid ordinary shares. The plan has been suspended. All future dividends will be paid in cash.

 

Share buy-back

 

At July 25, 2004, an on-market buy-back program remained in place, with 28.4 million (2003 28.4 million) shares remaining of the original approved limit of 30.0 million shares.

 

Non-redeemable reset convertible preference shares (ReCAPS)

 

On December 18, 2000, the company allotted 7,000,000 ReCAPS with an issue price of A$100 per share. Shareholders receive a preferential, non-cumulative dividend of at least 6.5% per annum, fixed until 2005. ReCAPS dividends will be paid in priority to any dividends declared on ordinary shares. ReCAPS shareholders are not entitled to vote at any general meetings, except in the following circumstances:

 

a) on a proposal:

 

i) to reduce the share capital of the company;

 

ii) that affects rights attached to the ReCAPS;

 

iii) to wind up the company;

 

iv) for the disposal of the whole of the property, business and undertaking of the company;

 

b) on a resolution to approve the terms of a buy-back agreement;

 

c) during a period in which a dividend or part of a dividend on the ReCAPS is in arrears;

 

d) during the winding up of the company.

 

In the event of the winding up of the company, ReCAPS will rank ahead of ordinary shares. On reset dates, the outstanding ReCAPS may be converted into ordinary shares at the option of the holders of the ReCAPS or CML. The rights of holders of ReCAPS were not affected by the redesignation of ordinary shares on July 19, 2001 and their subsequent reversion on April 12, 2002.

 

Under U.S. GAAP, ReCAPS have been reclassified from equity to debt. The impact of this is described in Note 31.

 

129


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     July 25,
2004


    July 27,
2003


 

21.    EARNINGS PER SHARE

            

Basic earnings per share (A$)

   0.46     0.32  

Diluted earnings per share (A$)

   0.47     0.33  

Weighted average number of shares (’000s) used as the denominator

            

Weighted average number of shares used as the denominator in calculating basic earnings per share

   1,216,260     1,192,073  

Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share

   1,304,470     1,294,840  

Reconciliation of earnings used in calculating earnings per share (A$’000)

            

Basic earnings per share

            

Net profit

   608,117     421,114  

Dividends on reset convertible preference shares

   (45,600 )   (45,500 )
    

 

Earnings used in calculating basic earnings per share

   562,517     375,614  
    

 

Diluted earnings per share

            

Net profit

   608,117     421,114  
    

 

Earnings used in calculating diluted earnings per share

   608,117     421,114  
    

 

    

July 25,

2004

A$000


   

July 27,

2003

A$000


 

22.    AUDITOR’S REMUNERATION

            

Amounts received or due and receivable by auditors for:

            

Audit

   4,302     3,956  
    

 

Other assurance services

            

Acquisitions/divestments

   118     718  

Sales certificates under leases

   293     213  

Advice on accounting standards

   385     697  

Related party transaction review

   30     80  

U.S. regulatory assistance

   394     630  

Assurance reviews

   118        

Other

   149     265  
    

 

     1,487     2,603  

Taxation advice

   199     219  
    

 

Total PricewaterhouseCoopers

   5,988     6,778  
    

 

PwC Consulting*

            

Support for Food & Liquor review

         400  

Other

         93  
          

Total PwC Consulting

         493  
    

 

     5,988     7,271  
    

 

 

* The acquisition of PwC Consulting by IBM was completed on October 1, 2002. From this date CML’s auditor PricewaterhouseCoopers and PwC Consulting were organizations independent of each other.

 

130


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

23. RETIREMENT BENEFITS

 

The CML Group sponsors several retirement plans covering a substantial proportion of permanent employees, including both defined benefit and defined contribution plans. The CML Group’s contribution to retirement plans for all company sponsored plans as recognized in these consolidated financial statements under Australian GAAP was A$63.9 million in 2004, A$61.2 million in 2003 and A$56.2 million in 2002.

 

Prior to March 12, 2003, the assets of both plans were held in the Coles Myer Superannuation Fund (CMSF). On March 12, 2003, the Company decided that retirement benefits would best be provided through a master trust agreement rather than a standalone fund. The Mercer Super Trust was selected and the members and assets were transferred to the Coles Myer Super Plan (CMSP), a sub plan of the Mercer Super Trust.

 

Prior to the transfer to the CMSP the accrued pension liability was calculated based on the status of the aggregated plans held in the CMSF. For the first time in 2004, the accrued pension liability has been calculated based on the status of the defined benefit portion of the CMSP only. There was no material adjustment required as a result of this change. Disclosures for 2002 and 2003 have been restated to ensure comparability with the 2004 disclosures.

 

The effect of the differences in accounting for retirement benefits under Australian GAAP and U.S. GAAP is reflected in Note 31.

 

Defined benefit plans

 

Defined benefit plans, covering the majority of salaried employees and a relatively small proportion of hourly paid permanent employees, provide lump sum benefits on retirement that are based on the employee’s compensation during defined periods within the three years before retirement, as well as lump sum death, disablement and resignation benefits. It is the CML Group’s policy to contribute to the plans at rates determined by the actuary as being necessary and sufficient to ensure the stability and financial soundness of each plan, subject to its rights to reduce, suspend or terminate contributions as specified in the relevant trust deeds. The assets of these plans are invested in government securities, equity shares, property and a variety of other securities as determined by professional investment managers appointed by the trustees.

 

Retirement benefit expense, actuarial assumptions, and the funded status of the defined benefit plans under Statement of Financial Accounting Standards No. 87 (SFAS 87) are as follows:

 

    

2004

52 weeks

A$M


   

2003

52 weeks

A$M


   

2002

52 weeks

A$M


 

Net periodic retirement benefit expense (Note a):

                  

Service cost

   19.4     23.0     24.8  

Interest cost on projected benefit obligation

   25.1     30.8     35.4  

Expected return on assets

   (28.8 )   (37.8 )   (45.7 )

Net amortization and deferral

         0.2     (1.8 )
    

 

 

     15.7     16.2     12.7  
    

 

 

Discount rate

   5.25 %   6.00 %   6.00 %

Rate of increase in compensation levels

   4.00 %   4.50 %   5.00 %

Expected long-term rate of return on assets

   6.50 %   7.00 %   8.00 %

 

131


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

23. RETIREMENT BENEFITS (continued)

 

    

July 25,

2004

A$M


   

July 27,

2003

A$M


 

Projected benefit obligation, beginning of year

   568.3     648.1  

Service cost

   19.4     23.0  

Interest cost

   25.1     30.8  

Contributions by plan participants

   9.3     21.6  

Actuarial (profits)/losses

   (53.2 )   (80.4 )

Benefits paid

   (70.9 )   (74.8 )
    

 

Projected benefit obligation, end of year

   498.0     568.3  
    

 

Funded status of plans:

            

Plan assets at fair value, beginning of year

   484.5     560.9  

Actual return on plan assets

   74.6     (36.7 )

Contributions (employer and employee)

   27.5     34.9  

Benefits and expenses paid

   (70.9 )   (74.8 )

Adjustment to assets at beginning of year

   (19.7 )   0.2  
    

 

Plan assets at fair value, end of year (Note b)

   496.0     484.5  

Projected benefit obligation

   (498.0 )   (568.3 )
    

 

Projected (shortfall)/benefit obligation less than plan assets

   (2.0 )   (83.8 )

Unrecognized prior service cost

            

Unrecognized net loss/(gain) from past experience different from that assumed (Note c)

   (65.5 )   2.1  
    

 

Accrued pension cost (Note d)

   (67.5 )   (81.7 )
    

 

 

Notes:

 

a As discussed above, the net periodic retirement benefit expense and accrued pension cost have not been recognized in these consolidated financial statements, which have been prepared under Australian GAAP and which record the expense for the year as the CML Group’s contributions payable to the plans. The amount of the contributions payable is determined by the terms of the respective trust deeds. The effect on the CML Group’s reported financial position and results of operations is reflected in Note 31.

 

b Plan assets include fully paid ordinary shares in the company of A$NIL million (2003 A$NIL).

 

c These are gains or losses in the plans that are deferred and recognized over future periods under U.S. GAAP. They represent the cumulative gain from changes in the value of either plan assets or the projected benefit obligation resulting from actual experience being different from that assumed when performing SFAS 87 calculations.

 

d Accrued pension cost has been recorded in other non-current liabilities for the purposes of the U.S. GAAP reconciliation – refer Note 31.

 

132


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

24. EMPLOYEE SHARE AND OPTION PLANS

 

CML has established a general employee share plan, the Coles Myer Employee Share Plan (the Plan), and the Coles Myer Employee Share Plan Trust (the Trust). The Trust acquired CML fully paid ordinary shares (shares) and then invited eligible employees to purchase them. At CML’s discretion employees who had worked continuously for the CML Group for 12 months full-time, 12 months part-time, or 24 months casually, were eligible to purchase shares on the following bases:

 

  Shares were purchased from the Trust at the average cost of the shares available for sale or such price as determined by the Trust

 

  Employees pay for the shares by applying dividends on the shares and making voluntary payments

 

  No interest is charged on the outstanding purchase price

 

  Employees who left the CML Group within three years of acquiring shares under the Plan forfeited their shareholding

 

  A maximum of 20 years is allowed for the purchase price to be paid in full.

 

The number of shares offered to each employee depended on the employee’s position and performance within the CML Group. At balance date, the following shares were on issue:

 

Issue date


   Type

  

Price

A$


   No. of shares
offered per
employee


   No. of employees

   Total shares on issue

            2004

   2003

   2004

   2003

6 May 1994

   G    4.93    200 to 2,500    16,321    17,920    10,086,800    11,138,550

15 June 1995

   P    4.78    50 to 2,000    1,463    1,642    305,150    336,000

12 January 1996

   P    4.54    50 to 2,500    1,656    1,839    355,420    395,630

14 August 1996

   P    4.61    100 to 1,100    818    905    296,215    330,785
                             
  
                              11,043,585    12,200,965
                             
  

 

G = General issue                    P = Performance issue

Price = Average cost (including stamp duty and brokerage) of the shares to the Trust.

 

CML has established an Executive Share Option Plan, under which options over unissued shares, and over issued shares held by the Trust, may be issued to executives at CML’s discretion. Options are issued for A$NIL consideration. Each option is over one share. Options have no voting rights until exercised. The holders of options are entitled to participate in bonus share issues. Where options are over issued shares held by the Trust, the Trust’s consent is required to make the necessary shares available.

 

During 2004 the trustees restructured the Trust. The trustees disposed of eleven million CML shares. At balance date the Trust held a residual balance of 1,765,071 (2003 13,200,321) shares. This residual balance is held in reserve for the exercise of certain options issued under the Coles Myer Executive Share Option Plan. The exercise of all other options will be satisfied by the issue of new shares by CML.

 

The Trust used the proceeds from the sale of the eleven million shares to repay part of the loan from CML that related to the sold shares and to pay accrued loan interest of A$35.3 million. At balance date a loan of A$29.7 million (2003 A$95.4 million) was receivable from the Trust (refer Note 9).

 

The market value of CML ordinary shares at balance date was $9.16.

 

133


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

24. EMPLOYEE SHARE AND OPTION PLANS (continued)

 

Details of options granted under the Coles Myer Executive Share Option Plan to 25 July 2004 are:

 

Date of
grant


  

Expiry
date


  

Exercise
price

A $


     Hurdle
conditions
(page 136)


    

No. of
options at

27 July 2003


     No. of
options
issued
during
period


     No. of
options
exercised
during
period


     No. of
options
lapsed
during
period


    

No. of
options at

25 July 2004


    

No. of vested
options at

25 July 2004


Jul 99

   Oct 05    4.50      1      66,000      —        22,000      —        44,000      44,000

Jul 99

   Oct 06    4.50      1      66,000      —        —        —        66,000      66,000

Jul 99

   Oct 07    4.50      1      85,000      —        —        —        85,000      85,000

Nov 99

   Nov 06    8.25      2      950,000      —        —        950,000      —        —  

May 00

   Oct 06    4.50      3      96,000      —        —        96,000      —        —  

May 00

   Oct 07    4.50      3      96,000      —        —        96,000      —        —  

May 00

   Oct 08    4.50      3      96,000      —        —        96,000      —        —  

Jun 00

   Jun 07    6.46      4      3,231,000      —        —        501,000      2,730,000      —  

Nov 00

   Jul 06    7.28      NIL      4,000,000      —        4,000,000      —        —        —  

Aug 01

   **    6.21      NIL      2,000,000      —        500,000      —        1,500,000      —  

Sep 01

   **    6.28      NIL      1,500,000      —        —        —        1,500,000      600,000

Sep 01

   Sep 07    6.33      5      2,500,000      —        —        —        2,500,000      1,000,000

Oct 01

   Apr 07    4.50      NIL      66,000      —        —        —        66,000      66,000

Oct 01

   Apr 08    4.50      NIL      66,000      —        —        —        66,000      66,000

Oct 01

   Apr 09    4.50      NIL      68,000      —        —        —        68,000      68,000

Mar 02

   Dec 06*    7.66      5      18,133,000      —        675,163      1,113,841      16,343,996      6,378,837

Jun 02

   Dec 06*    8.32      5      430,000      —        —        —        430,000      172,000

Jun 02

   Dec 06*    7.66      NIL      12,142,000      —        329,930      1,081,451      10,730,619      4,195,600

Jun 02

   Dec 07*    6.44      5      2,500,000      —        —        —        2,500,000      —  

Jul 02

   May 07*    8.26      5      400,000      —        —        —        400,000      —  

Jul 02

   May 07*    8.26      NIL      270,000      —        12,000      —        258,000      96,000

Dec 02

   Dec 07*    6.59      5      510,000      —        14,000      56,000      440,000      —  

Dec 02

   Dec 07*    5.88      5      1,720,000      —        —        —        1,720,000      —  

Dec 02

   Dec 07*    6.59      NIL      120,000      —        7,582      22,418      90,000      —  

Feb 03

   Dec 07*    6.59      5      690,000      —        —        220,000      470,000      —  

Feb 03

   Dec 07*    6.59      NIL      90,000      —        —        —        90,000      —  

May 03

   May 08*    6.42      5      1,290,000      —        —        —        1,290,000      —  

May 03

   May 08*    6.42      NIL      120,000      —        —        —        120,000      —  

Jun 03

   May 08*    6.42      5      720,000      —        —        —        720,000      —  

Jun 03

   May 08*    6.42      NIL      300,000      —        —        24,608      275,392      —  

Aug 03

   Nov 08*    7.28      5      —        2,500,000      —        —        2,500,000      —  

Aug 03

   Nov 08*    7.28      6      —        500,000      —        —        500,000      —  

Oct 03

   Nov 08*    7.26      5      —        1,583,000      —        100,000      1,483,000      —  

Oct 03

   Nov 08*    7.26      NIL      —        390,000      —        —        390,000      —  

Nov 03

   **    7.53      7      —        1,500,000      —        —        1,500,000      —  

Dec 03

   Nov 08*    7.12      5      —        430,000      —        —        430,000      —  

Jan 04

   Nov 08*    7.26      5      —        1,100,000      —        —        1,100,000      —  

Jan 04

   Nov 08*    7.26      NIL      —        420,000      —        —        420,000      —  

Apr 04

   May 09*    7.43      5      —        540,000      —        100,000      440,000      —  

Apr 04

   May 09*    7.43      NIL      —        120,000      —        —        120,000      —  

Jul 04

   May 09*    7.43      5      —        770,000      —        —        770,000      —  

Jul 04

   May 09*    7.43      NIL      —        180,000      —        —        180,000      —  

Jul 04

   Nov 09*    8.43      5      —        210,000      —        —        210,000      —  
                       
    
    
    
    
    

Total

                      54,321,000      10,243,000      5,560,675      4,457,318      54,546,007      12,837,437
                       
    
    
    
    
    

 

* See legend on page 135

 

** See legend on page 135

 

134


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

24. EMPLOYEE SHARE AND OPTION PLANS (continued)

 

At July 25, 2004, 4,500,000 options were outstanding that expired upon cessation of employment. Of the remaining options outstanding the weighted average remaining life was 2 years 11 months.

 

At July 27, 2003, there were 4,649,000 vested options. During 2003, 5,660,000 options were issued with exercise prices between A$5.88 and A$6.59 (weighted average A$6.30), 819,000 options were exercised with prices between A$NIL and A$6.21 (weighted average A$4.45), and 4,436,000 options lapsed with exercise prices between A$6.46 and A$8.26 (weighted average A$7.55).

 

Options exercised during the financial year and the number of shares provided to executives on the exercise of options:

 

Exercise date+


   Fair value
of shares
at
issue date+


  

2004

Number


  

2003

Number


September 2002

   $ 5.87         80,000

November 2002

   $ 6.25         80,000

January 2003

   $ 6.35         40,000

February 2003

   $ 5.68         23,000

June 2003

   $ 7.12         540,000

July 2003

   $ 7.10         56,000

September 2003

   $ 7.74    500,000     

October 2003

   $ 7.69    22,000     

December 2003

   $ 7.53    7,582     

March 2004

   $ 8.10    340,940     

April 2004

   $ 8.33    159,800     

May 2004

   $ 8.41    137,600     

June 2004

   $ 8.46    97,746     

July 2004

   $ 8.70    4,295,007     
           
  

Total

          5,560,675    819,000
           
  

 

Aggregate proceeds received by the Trust from employees on the exercise of options over issued shares was A$3,204,000 (2003 A$3,640,500), and the fair value of those shares at issue date was A$4,039,180 (2003 A$5,594,840).

 

Aggregate proceeds received by CML from employees on the exercise of options over unissued shares was A$37,060,328 (2003 A$NIL), and the fair value of those shares at issue date was A$43,485,748 (2003 A$NIL).

 

Legend:

 

* Expiry date is shown as the expected month only. The actual last exercise date is 60 days after the announcement of the results of the CML Group.

 

** Cessation of employment + 1 year.

 

+ Exercise dates are grouped by month, and the fair value of the shares at issue date is based on the weighted average of fair values on each issue date for that month.

 

135


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

24. EMPLOYEE SHARE AND OPTION PLANS (continued)

 

The performance hurdle conditions attaching to each tranche of options are as follows:

 

1 Net profit for the CML Group must exceed specified targets set for any one of the financial years ending July 2000, 2001 and 2002; or

 

Total shareholder return (TSR) over any one of the periods 16 October 1998 to 15 October 2000, 15 October 2001 or 15 October 2002 must equal or exceed the median return over the same period of a set list of top 100 industrial companies listed on the Australian Stock Exchange (ASX).

 

The profit hurdle was met for the financial year ended July 2000 and thus all options are exercisable.

 

2 TSR over any one of the periods 1 March 1999 to 28 February 2002, 28 February 2003, or 29 February 2004 must equal or exceed the median return over the same period of a set list of top 100 industrial companies listed on the ASX.

 

The hurdles were not met and the options lapsed during 2004.

 

3 Net profit for the CML Group must exceed specified targets set for any one of the financial years ending July 2001, 2002 and 2003; or

 

TSR over any one of the periods 16 October 1999 to 15 October 2001, 15 October 2002, or 15 October 2003 must equal or exceed the median return over the same period of a set list of top 100 industrial companies listed on the ASX.

 

The hurdles were not met and the options lapsed during 2004.

 

4 TSR over any one of the periods 1 March 2000 to 28 February 2003, 29 February 2004, or 28 February 2005 must equal or exceed the median return over the same period of a set list of top 100 industrial companies listed on the ASX.

 

5 TSR must equal or exceed the median return over the relevant period of a list of top 50 industrial companies; or earnings per share growth (EPSG) expressed as a compound annual growth rate must equal or exceed 12.5% over the relevant period.

 

6 TSR must equal or exceed the median return over the relevant period of a list of top 50 industrial companies; or EPSG expressed as a compound annual growth rate must equal or exceed 15% over the relevant period.

 

7 TSR must exceed the median return over the relevant period of a list of top 50 industrial companies; or EPSG expressed as a compound annual growth rate must equal or exceed 12.5% over the relevant period.

 

For hurdles 5, 6 and 7, the options will progressively vest according to the level of TSR or EPSG achieved each year. To the extent that TSR or EPSG is not achieved, the non-vested options will be carried forward to be retested in following years.

 

The directors have discretion to disregard any changes in net profit, TSR or EPSG due to an anomaly, distortion or other event which is not directly related to the financial performance of any company or entity or which would lead to an incorrect comparison.

 

136


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

25. COMMITMENTS AND CONTINGENT LIABILITIES

 

    

July 25,

2004

A$M


  

July 27,

2003

A$M


Capital commitments

         
Contracted capital expenditure commitments not provided for in these financial statements, which principally relate to building and fixture contracts for new stores and shopping centers are as follows:          

Not later than one year

   190.0    222.1

Later than one year but not later than five years

   3.4    12.3
    
  
     193.4    234.4
    
  

 

Lease commitments

 

The CML Group leases both property and equipment under operating leases. Future minimum lease obligations are detailed below.

 

    

July 25,

2004

A$M


  

July 27,

2003

A$M


Operating leases:

         

Due not later than one year

   939.1    846.9

Due later than one year and not later than five years

   3,422.4    3,108.9

Due later than five years

   5,023.7    4,633.6
    
  

Total future minimum lease obligations*

   9,385.2    8,589.4
    
  

 

* The CML Group subleases property and equipment to external parties. Future minimum lease obligations include any potential exposure arising from default by external parties.

 

     2004
52 weeks
A$M


   2003
52 weeks
A$M


   2002
52 weeks
A$M


Base rental incurred

   929.2    832.6    799.4
    
  
  

Percentage rental incurred

   88.7    86.3    86.1
    
  
  

Rental received

   25.9    30.8    37.8
    
  
  

 

The CML Group conducts the majority of its operations from leased premises. The leases are classified as operating leases. At the end of the initial term of most of the leases the Company can renew the arrangements for 5 to 10 year periods. The majority of lease payments for leased stores are based on a minimum rental plus a percentage of each store’s sales in excess of stipulated amounts. Management expects, that in the normal course of business, leases will be renewed or replaced by other leases.

 

137


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

25. COMMITMENTS AND CONTINGENT LIABILITIES (continued)

 

     July 25,
2004
A$M


   July 27,
2003
A$M


Contingent liabilities

         

Contingent liabilities at balance date, not otherwise provided for in these financial statements, are categorized as arising from:

         

Guarantees

         

Trading guarantees

   340.2    255.0
Coles Myer Ltd. has unconditionally guaranteed the obligations of Coles Myer Finance Ltd. and Coles Myer Finance (USA) Ltd., both of which are controlled entities.          
Coles Myer Ltd. has unconditionally guaranteed the debts of certain controlled entities under the terms of an Australian Securities and Investments Commission class order, thereby eliminating the need to prepare statutory financial statements for those entities.          
Other          

 

Coles Myer Ltd. has entered into risk sharing arrangements under which contingent payments may arise.

 

Coles Myer Ltd. has entered into an agreement with Coles Myer Employee Share Plan Trust to provide funds for the purchase of Coles Myer Ltd. shares, allot new shares in Coles Myer Ltd. and make contributions to ensure the solvency of the Trust. Refer Note 24.

 

Certain companies within the CML Group are party to various legal actions which have arisen in the normal course of business. It is the opinion of directors that any liabilities arising from such legal actions would not have a material adverse effect on the consolidated financial statements.

 

The Australian Competition and Consumer Commission has commenced proceedings against Liquorland Australia Pty. Ltd. alleging contraventions of the Trade Practices Act. Liquorland Australia Pty. Ltd. has denied liability and is defending the action. It is not possible to estimate the potential outcome of this claim at this time.

 

138


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

26. SEGMENT INFORMATION

 

Under Australian GAAP, the CML Group is considered to operate predominantly within the retailing industry and predominantly in Australia.

 

During 2004, the CML Group acquired the right to operate certain Shell fuel and convenience outlets. These businesses operated as Coles Express. The results of the Coles Express business are included in the Food, Liquor and Fuel segment.

 

During 2004, management reporting was restructured resulting in Liquorland Direct being reported in Food, Liquor and Fuel, having previously been reported in Emerging Businesses. The 2003 and 2002 comparatives have been amended accordingly.

 

Industry Segments

 

     2004
52 weeks
A$M


   2003
52 weeks
A$M


   2002
52 weeks
A$M


Revenue

              

Sales to external customers

              

Food, Liquor & Fuel

   21,146.3    16,557.6    15,908.8

Kmart and Officeworks

   4,679.9    4,368.6    3,903.6

Myer and Megamart

   3,322.4    3,239.9    3,243.2

Target

   2,851.8    2,646.9    2,422.4

Emerging businesses

   266.4    203.6    210.7
    
  
  
     32,266.8    27,016.6    25,688.7

Intersegment sales (eliminated on consolidation)

              

Food, Liquor & Fuel

             0.9

Kmart and Officeworks

   1.1    0.9    0.8

Myer and Megamart

              

Target

              

Emerging businesses

   24.2    31.5    25.0
    
  
  
     25.3    32.4    26.7

Total sales

              

Food, Liquor & Fuel

   21,146.3    16,557.6    15,909.7

Kmart and Officeworks

   4,681.0    4,369.5    3,904.4

Myer and Megamart

   3,322.4    3,239.9    3,243.2

Target

   2,851.8    2,646.9    2,422.4

Emerging businesses

   290.6    235.1    235.7
    
  
  
     32,292.1    27,049.0    25,715.4

Other revenue1

              

Food, Liquor & Fuel

   132.6    44.6    657.7

Kmart and Officeworks

   51.4    16.0    134.6

Myer and Megamart

   49.0    51.5    129.1

Target

   30.2    14.9    49.8

Emerging businesses

   7.6    10.0    23.3

Property and Unallocated

   138.9    448.3    26.8
    
  
  
     409.7    585.3    1,021.3

Total segment revenue2

              

Food, Liquor & Fuel

   21,278.9    16,602.2    16,567.4

Kmart and Officeworks

   4,732.4    4,385.5    4,039.0

Myer and Megamart

   3,371.4    3,291.4    3,372.3

Target

   2,882.0    2,661.8    2,472.2

Emerging businesses

   298.2    245.1    259.0

Property and Unallocated

   138.9    448.3    26.8
    
  
  
     32,701.8    27,634.3    26,736.7
    
  
  

 

139


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

26. SEGMENT INFORMATION (continued)

 

     2004
52 weeks
A$M


    2003
52 weeks
A$M


    2002
52 weeks
A$M


 

Segment result – management reporting3

                  

Food, Liquor & Fuel

   697.6     602.0     537.4  

Kmart and Officeworks

   135.6     103.6     62.4  

Myer and Megamart

   60.7     25.2     (21.6 )

Target

   150.9     92.0     51.7  

Emerging businesses

   (19.2 )   (9.7 )   (13.9 )

Property and Unallocated

   (81.2 )   (84.5 )   (57.5 )
    

 

 

Total Segment result – management reporting

   944.4     728.6     558.5  
    

 

 

Segment result – Australian GAAP3

                  

Food, Liquor & Fuel

   674.5     562.0     541.6  

Kmart and Officeworks

   151.0     103.8     62.4  

Myer and Megamart

   42.8     5.0     (26.5 )

Target

   149.7     89.9     51.7  

Emerging businesses

   (19.2 )   (9.7 )   (13.9 )

Property and Unallocated

   (119.1 )   (79.0 )   (57.6 )
    

 

 

Total Segment result – Australian GAAP

   879.7     672.0     557.7  

Net borrowing costs

   (13.5 )   (63.2 )   (75.5 )
    

 

 

Profit before tax

   866.2     608.8     482.2  

Income tax expense

   (258.1 )   (187.7 )   (137.2 )
    

 

 

Net profit

   608.1     421.1     345.0  
    

 

 


1 Reduction in other revenue is due to the accounting policy change for rebates - refer Note 2.

 

2 Total segment revenue excludes interest income and includes inter-segment sales.

 

3 Segment result is calculated as profit before interest and tax. Management reporting excludes goodwill amortization for acquisitions prior to July 1988, and is adjusted for other non-recurring items that management do not consider to be reflective of the underlying operations of the business.

 

140


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

26. SEGMENT INFORMATION (continued)

 

     2004
A$M


    2003
A$M


    2002
A$M


 

Segment assets

                  

Food, Liquor & Fuel

   3,980.9     3,551.2     3,216.1  

Kmart and Officeworks

   1,384.8     1,362.1     1,267.7  

Myer and Megamart

   1,000.3     1,036.2     1,087.1  

Target

   805.9     793.8     782.2  

Emerging businesses

   79.6     74.0     50.1  

Property and Unallocated

   1,497.5     1,413.6     1,652.4  
    

 

 

     8,749.0     8,230.9     8,055.6  

Tax assets

   302.7     221.9     265.0  
    

 

 

Total assets

   9,051.7     8,452.8     8,320.6  
    

 

 

Segment liabilities

                  

Food, Liquor & Fuel

   (1,789.7 )   (1,564.3 )   (1,506.7 )

Kmart and Officeworks

   (544.4 )   (520.3 )   (479.3 )

Myer and Megamart

   (390.9 )   (397.3 )   (337.8 )

Target

   (352.1 )   (340.5 )   (281.0 )

Emerging businesses

   (47.0 )   (46.6 )   (51.7 )

Property and Unallocated

   (1,560.0 )   (1,595.9 )   (2,075.8 )
    

 

 

     (4,684.1 )   (4,464.9 )   (4,732.3 )

Tax liabilities

   (270.0 )   (188.7 )   (249.5 )
    

 

 

Total liabilities

   (4,954.1 )   (4,653.6 )   (4,981.8 )
    

 

 

     2004
52 weeks
A$M


    2003
52 weeks
A$M


    2002
52 weeks
A$M


 

Acquisitions of property, plant and equipment, intangibles and other non-current segment assets

                  

Food, Liquor & Fuel

   513.3     627.3     402.0  

Kmart and Officeworks

   68.3     116.5     46.3  

Myer and Megamart

   67.4     53.4     42.8  

Target

   53.2     41.5     35.5  

Emerging businesses

   6.8     11.2     6.0  

Property and Unallocated

   164.3     142.4     84.5  
    

 

 

     873.3     992.3     617.1  
    

 

 

Depreciation and amortization expense

                  

Food, Liquor & Fuel

   290.2     260.6     251.1  

Kmart and Officeworks

   69.9     67.9     67.4  

Myer and Megamart

   69.1     73.1     73.1  

Target

   52.5     55.7     47.8  

Emerging businesses

   4.4     4.4     4.6  

Property and Unallocated

   50.6     50.9     49.4  
    

 

 

     536.7     512.6     493.4  
    

 

 

Other non-cash expenses

                  

Food, Liquor & Fuel

   25.7     59.0     15.4  

Kmart and Officeworks

   4.8     23.7     7.2  

Myer and Megamart

   3.3     21.6     (0.3 )

Target

   3.2     2.8     (4.2 )

Emerging businesses

   (1.0 )   (0.7 )   (5.3 )

Property and Unallocated

   73.0     70.8     45.0  
    

 

 

     109.0     177.2     57.8  
    

 

 

 

141


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

26. SEGMENT INFORMATION (continued)

 

Geographic regions

 

     2004
52 weeks
A$M


   2003
52 weeks
A$M


   2002
52 weeks
A$M


Sales to external customers

              

Australia

   32,113.4    26,869.0    25,565.3

New Zealand

   153.4    147.6    123.4
    
  
  
     32,266.8    27,016.6    25,688.7
    
  
  

Acquisition of non-current assets

              

Australia

   869.2    988.3    616.9

New Zealand

   2.4    0.3    0.1

Other *

   1.7    3.7    0.1
    
  
  
     873.3    992.3    617.1
    
  
  
     2004
A$M


   2003
A$M


   2002
A$M


Assets

              

Australia

   8,433.6    8,120.3    8,196.3

New Zealand

   293.3    91.3    82.8

Other *

   22.1    19.3    41.5
    
  
  
     8,749.0    8,230.9    8,320.6
    
  
  

 

* Other geographic regions consist of various legal entities principally in China.

 

Business segments

 

The CML Group operates predominantly in the retail industry and comprises the following main business segments:

 

Food, Liquor & Fuel

   Retail of grocery, liquor and fuel products.

Kmart & Officeworks

   Retail of apparel, general merchandise and stationery items.

Myer & Megamart

   Retail of apparel and general merchandise

Target

   Retail of apparel and general merchandise

Emerging Businesses

   E-commerce trading, predominantly the Coles Online and Harris Technology Businesses.

Property and Unallocated

   Management of the CML property portfolio and unallocated or corporate functions

 

Geographical segments

 

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets.

 

The CML Group’s business segments operate geographically as follows:

 

Australia

   The home country of the parent entity. The CML Group undertakes retail operations in all states and territories.

New Zealand

   The CML Group has Kmart retail operations, supplying basically the same ranges of goods as the corresponding businesses in Australia. These operations are predominantly based in the North Island.

Asia

   Non-trading branch offices located in China.

 

Intersegment transfers

 

Segment revenues, expenses and results include transfers between segments. Such transfers are principally priced on an arm’s length basis and are eliminated on consolidation.

 

The CML Group has certain investments in associates. Segments disclosures relating to these investments have not been included as they are not considered to be material.

 

142


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

27. RELATED PARTY INFORMATION

 

Directors and director-related entities

 

Disclosures relating to directors and specified executives are set out in Note 28.

 

Transactions with entities in the wholly owned group

 

CML is the ultimate chief entity in the CML Group.

 

CML advanced and repaid loans, received loans and provided accounting, taxation and administrative assistance to other entities in the CML Group during the current and previous financial years. These transactions were on normal commercial terms and conditions.

 

Dividends, interest and lease rental details are disclosed in Notes 3, 4 and 25. Details of ownership interests in controlled entities are disclosed in Note 33.

 

Transactions with other related parties

 

The aggregate amounts brought to account in respect of the following types of transactions and each class of related party involved were:

 

Lease rentals, net of recoverable expenses, paid to associated entities by the CML Group A$4,032,285 (2003 A$3,911,866) on normal commercial terms and conditions. Balance of amounts payable by the CML Group (current) at balance date A$NIL (2003 A$NIL).

 

Distributions received and receivable by the CML Group from associated entities A$7,445,915 (2003 A$6,427,609) in accordance with Trust Deed and Partnership Agreements.

 

The CML Group’s cost of participation with an associated entity in a customer loyalty program A$43,726,000 (2003 A$29,526,537) in accordance with a service agreement. Balance of amounts payable by the CML Group (current) at balance date A$10,488,000 (2003 A$7,845,878).

 

The sale of gift vouchers to an associated entity on normal commercial terms and conditions A$18,000,000 (2003 A$21,750,000). Balance of amounts receivable from an associated entity by the CML Group (current) at balance date A$NIL (2003 A$NIL).

 

Details of associated entities are disclosed in Note 10.

 

143


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

28. DIRECTOR AND EXECUTIVE DISCLOSURES

 

AASB 1046 “Director and Executive Disclosures by Disclosing Entities” has been applied for the first time in 2004. These disclosures are in more detail than previously required.

 

Directors

 

The following persons were directors of CML during the financial year:

 

Chairman – non-executive

 

Richard Allert

 

Executive director

 

John Fletcher

 

Non-executive directors

 

Patricia Akopiantz

Keith Barton

Richard Charlton (retired 26 November 2003)

William Gurry

Anthony Hodgson

Mark Leibler (retired 18 November 2004)

Sandra McPhee

Martyn Myer

Michael Wemms

 

Executives (other than executive director, John Fletcher) with the greatest authority for strategic direction and management.

 

The following persons were the executives with the greatest authority for the strategic direction and management of the CML Group (specified executives) during the financial year:

 

Steven Cain

   Group Managing Director, Food, Liquor and Fuel (appointed 11 August 2003)

Larry Davis

   Managing Director, Target

Tim Hammon

   Chief Officer, Corporate & Property Services

Fraser MacKenzie

   Chief Financial Officer

Dawn Robertson

   Managing Director, Myer

Hani Zayadi

   Managing Director, Kmart

 

Remuneration of directors and executives

 

Principles used to determine the nature and amount of remuneration

 

The remuneration of non-executive directors reflects the size and complexity of the CML Group as well as the additional compliance issues arising from its multiple stock exchange listings. Committee fees are included in non-executive remuneration.

 

Emoluments for the executive director and senior executives in the CML Group are designed to drive performance over both the short and long-term. The CML Group’s remuneration structure provides rewards for increasing shareholder value and the achievement of financial targets and business strategies.

 

Emoluments are structured to attract, retain and motivate high calibre directors and senior executives who are best able to enhance the CML Group performance. Remuneration packages for specified executives recruited from overseas are structured such that they are competitive with their home country.

 

144


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

28. DIRECTOR AND EXECUTIVE DISCLOSURES (Continued)

 

The senior executive remuneration structure has three components:

 

1. Fixed compensation

 

The annual review of senior executives’ remuneration packages takes account of market comparisons for similar sized roles in other major corporations, performance of the incumbent, the appropriate mix of skills and experience and the performance of individual business groups and of the total CML Group. Appropriate advice is obtained from external consultants as to market and economic conditions as well as current directions in senior executive remuneration in Australia and overseas.

 

2. Senior Executive Incentive Scheme

 

The Senior Executive Incentive Scheme is based directly on the successful achievement of individual business unit, business group and the CML Group performance targets over the financial year and is paid annually as cash. Performance targets include financial (eg. profitability and comparative store growth) and non-financial measures (eg. safety).

 

For Retail Support executives, their performance targets also include key strategic deliverables relating to their functional area of responsibility. Executives need to be employed with the CML Group at the completion of the financial year to which the incentive relates, to be eligible to receive any payment.

 

3. Executive Share Option Plan

 

CML’s Executive Share Option Plan is designed to reward senior executives for the creation of sustainable shareholder wealth over a 2-5 year period. The plan is currently based on market priced options, the exercise of which is linked to the achievement of performance hurdles. The performance hurdles are based on the achievement of relative total shareholder return in the top 50 industrials or minimum earnings per share growth expressed as a compound annual growth rate (refer Note 24).

 

Senior executive remuneration packages are based on established, long-standing work value assessments to provide a robust, systematic approach to determining remuneration packages, which are market competitive with similar sized roles in other major Australian corporations. Whole-of-job comparison is also undertaken to ensure packages are fair and reasonable as well as being financially responsible.

 

The nature and amount of each component of the emoluments are reviewed annually by the Board Nomination and Remuneration Committee in respect of both the performance of the CML Group and industry best practice. The Board Nomination and Remuneration Committee is responsible for reviewing and making recommendations to the Board in respect to the emoluments of non-executive directors, the managing director and chief executive officer and senior executives reporting to the managing director and chief executive officer.

 

Contracts for the managing director and chief executive officer, John Fletcher, and specified executives generally provide for 12 months notice by both the Company and the executive. Mr MacKenzie is employed on a contract which provides that if his employment is terminated prior to 30 April 2007 he will receive payment up to but not beyond that date. After 30 April 2007 Mr MacKenzie’s contractual notice period will be 12 months. Mr MacKenzie is required to provide the Company with 6 months notice. If the employment of Ms Robertson is terminated within three years of the date she commenced employment (May 2002), she will receive a payment of twelve months salary in addition to the twelve months notice period.

 

145


COLES MYER LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

28. DIRECTOR AND EXECUTIVE DISCLOSURES (Continued)

 

Details of remuneration

 

Details of the remuneration of each director of CML, including their personally-related entities, is set out in the following table.

 

     Primary

   Post Employment

     Salary &
Fees


   Bonus

  

Non-

monetary1


   Superannuation
Contribution


  

Retirement

Benefit2


   Cost to the
Company


Patricia Akopiantz

   116,450    —      —      9,956    102,771    229,177

Richard Allert

   313,325    —      —      27,675    239,078    580,078

Keith Barton

   130,894    —      —      11,256    —      142,150

Richard Charlton

   37,786    —      —      3,225    4,182    45,193

William Gurry

   108,325    —      —      9,225    52,310    169,860

John Fletcher3

   2,288,953    2,412,705    2,956    8,250    —      4,712,864

Anthony Hodgson

   151,536    —      —      13,114    —      164,650

Mark Leibler4

   116,450    —      —      —      19,590    136,040

Sandra McPhee

   130,894    —      —      11,256    —      142,150

Martyn Myer

   116,450    —      —      9,956    14,930    141,336

Michael Wemms

   138,348    —      —      11,927    —      150,275
    
  
  
  
  
  

Total

   3,649,411    2,412,705    2,956    115,840    432,861    6,613,773