british american tobacco p.l.c. annual report 2008 - Notes on the accounts: 3 of 31
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DIRECTORS' REPORT: BUSINESS REVIEW
DIRECTORS' REPORT: GOVERNANCE
FINANCIAL STATEMENTS AND OTHER INFORMATION
3 Profit from operations
(a) Employee benefit costs
| 2009 £m | 2008 £m | |
|---|---|---|
| Wages and salaries | 1,880 | 1,577 |
| Social security costs | 225 | 196 |
| Other pension and retirement benefit costs (note 12) | 137 | 71 |
| Share-based payments (note 27) | 75 | 63 |
| 2,317 | 1,907 |
(b) Depreciation and amortisation costs
| 2009 £m | 2008 £m | |
|---|---|---|
| Intangibles | ||
| – amortisation of trademarks (note 3(g)) | 58 | 24 |
| – amortisation of other intangibles | 67 | 56 |
| – impairment | 53 | |
| Property, plant and equipment | ||
| – depreciation | 379 | 345 |
| – impairment | 54 | 5 |
| 611 | 430 |
Impairment in respect of intangibles and property, plant and equipment arose in relation to the restructuring costs (see note 3(e)).
(c) Other operating income
This represents income arising from the Group’s activities which falls outside the definition of revenue and includes gains on the disposal of businesses and trademarks, property disposals, service fees and other shared costs charged to third parties, manufacturing fees and trademark income.
(d) Other operating expenses include:
| 2009 £m | 2008 £m | |
|---|---|---|
| Research and development expenses (excluding employee benefit costs and depreciation) | 51 | 50 |
| Exchange differences | 17 | (63) |
| Rent of plant and equipment (operating leases) | ||
| – minimum lease payments | 37 | 31 |
| – contingent rents | 2 | 1 |
| – sublease payments | 3 | |
| Rent of property (operating leases) | ||
| – minimum lease payments | 83 | 80 |
| – contingent rents | 1 | |
| – sublease payments | 3 | 4 |
| Fees payable for audit services pursuant to legislation: | ||
| – fees payable to PricewaterhouseCoopers LLP for Parent Company and Group audit | 1.7 | 1.6 |
| – fees payable to other PricewaterhouseCoopers firms and associates for local statutory and Group reporting audits | 8.6 | 8.5 |
| Audit fees payable to PricewaterhouseCoopers firms and associates | 10.3 | 10.1 |
| Audit fees payable to other firms | 0.5 | 0.6 |
| Total audit fees payable | 10.8 | 10.7 |
| Fees payable to PricewaterhouseCoopers firms and associates for other services: | ||
| – other services pursuant to statutory legislation | 0.2 | 0.7 |
| – tax advisory services | 4.3 | 3.5 |
| – tax compliance | 1.2 | 1.4 |
| – services relating to information technology | 1.2 | 0.8 |
| – other non-audit services | 0.9 | 0.6 |
| 7.8 | 7.0 |
The total fees payable to PricewaterhouseCoopers firms and associates included above are £18.1 million (2008: £17.1 million).
Total research and development costs including employee benefit costs and depreciation were £112.1 million (2008: £105.1 million).
(e) Restructuring and integration costs
Restructuring costs reflect the costs incurred as a result of initiatives to improve the effectiveness and the efficiency of the Group as a globally integrated enterprise. These initiatives include a review of the Group’s manufacturing operations, overheads and indirect costs, organisational structure and systems and software used. The costs of these initiatives together with the costs of integrating acquired businesses into existing operations, are included in profit from operations under the following headings:
| 2009 £m | 2008 £m | |
|---|---|---|
| Employee benefit costs | 143 | 92 |
| Depreciation and amortisation costs | 107 | 5 |
| Other operating expenses | 61 | 82 |
| Other operating income | (7) | (19) |
| 304 | 160 |
Restructuring and integration costs in 2009 principally relate to costs in respect of the planned closure of the Soeborg factory in Denmark, the planned downsizing of the manufacturing plant in Australia, the continued integration of ST and Tekel and the merger of Bentoel with existing Indonesian operations, as well as other restructuring initiatives directly related to improving the efficiency and effectiveness of the Group as a globally integrated enterprise. The costs for these other initiatives include redundancies, principally in respect of restructuring activities in the Group’s subsidiary in Canada, and impairment charges for certain software assets where the development of global software solutions has resulted in these assets having minimal or limited future economic benefits.
Restructuring costs in 2008 principally relate to costs in respect of the integration of ST and Tekel into existing operations, the reorganisation of the business in the Netherlands, as well as further costs in respect of restructurings announced in 2007 and earlier years.
Other operating income in 2009 includes a gain on disposal of a property related to restructuring announced in prior years and the release of deferred income from a disposal in 2007. In 2008, other operating income includes gains on property disposals and a gain on disposal of a non-core business in the Asia-Pacific region arising from the restructuring exercises.
(f) Canadian settlement
On 31 July 2008, the Group’s subsidiary in Canada (Imperial Tobacco Canada) announced that it had reached a resolution with the federal and provincial governments with regard to the investigation related to the export to the United States of Imperial Tobacco Canada tobacco products in the late 1980s and early 1990s. The subsidiary entered a plea of guilty to a regulatory violation of a single count of Section 240(i) (a) of the Excise Act and paid a fine of £102 million which was treated as an adjusting item and included in other operating expenses in profit from operations for the year ended 31 December 2008.
At the same time, Imperial Tobacco Canada also entered into a 15 year civil agreement with the federal and provincial governments. In order, amongst other things, to assist the governments in their future efforts against illicit trade, Imperial Tobacco Canada agreed to pay a percentage of annual net sales revenue each year for 15 years, up to a maximum of Can$350 million, which is expensed as it is incurred. These payments are not treated as adjusting items.
(g) Amortisation of trademarks
The acquisitions of Bentoel, Tekel and ST resulted in the capitalisation of trademarks which are amortised over their expected useful lives, which do not exceed 20 years. The amortisation charge of £58 million is included in depreciation and amortisation costs in the profit from operations for the year ended 31 December 2009 (2008: £24 million).
(h) Gains on disposal of businesses and trademarks
The acquisition of the cigarette and snus businesses of ST (as described in note 26(c)) was subject to regulatory approval which was received on the condition that the Group divest a small number of local trademarks, primarily in Norway. The disposal of the trademarks was dealt with in two packages, with the first package sold and completed in February 2009. In March 2009, contracts were exchanged in respect of the second package with completion in May 2009. The total proceeds from the two packages resulted in a gain of £2 million which is included in other operating income in profit from operations for the year ended 31 December 2009.
The gain on disposal of businesses and trademarks for the year ended 31 December 2008 was £141 million, of which £139 million arose on 2 July 2008 with the disposal of the Group’s 32.35 per cent holding in the non-cigarette and snus businesses of ST. The gain was included in other operating income in profit from operations for the year ended 31 December 2008.