2 Segmental analyses

Segmental analyses of revenue, profit, assets and liabilities for the year ended 31 December.

 a) Segment review

The segmental analysis of revenue is based on location of manufacture. Figures based on external sales by subsidiaries in each segment are as follows:

  b) Segment assets

  c) Segment liabilities

  d) Segment analysis of the Group's share of the revenue and post-tax results of associates and joint ventures

External revenue

Post-tax results

* Excluding restructuring costs, US Federal tobacco buy-out, brand impairments and exceptional tax credits and other impairments (note 5)

 Note 3 Profit from operations

  a) Employee benefit costs

  b) Depreciation and amortisation costs

Impairment and accelerated depreciation in respect of property, plant and equipment arose in relation to the restructuring costs (see note e below) and in respect of the impairment of a business (see note f below).

  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 disposals of subsidiaries, joint venture and brands, property disposals, service fees and other shared costs charged to third parties, manufacturing fees and trademark income.

  d) Other operating expenses include:

Fees for other services pursuant to statutory legislation payable to PricewaterhouseCoopers firms and associates include £6.1 million (2005: £5.3 million) for local statutory and Group reporting audits. In addition, the Group paid £0.6 million (2005: £0.5 million) in audit fees to other audit firms, which are excluded from the table above.

Total research and development costs including employee benefit costs and depreciation were £76 million (2005: £66 million).

 e) Restructuring costs

These were the costs incurred as a result of a review of the Group's manufacturing operations and organisational structure, including the initiative to reduce overheads and indirect costs, and are included in the profit from operations under the following headings:

The restructuring costs in 2006 principally relate to manufacturing rationalisation in the Netherlands, with further costs for the earlier restructurings in the UK and Ireland and in Canada. The initial recognition of these earlier restructurings comprised the main costs in 2005. Other operating income relates to gains on property disposals arising from the restructuring exercises.

 f) (Losses)/gains on disposal of a business, brands and joint venture

In April 2005, the Group sold its Benson & Hedges and Silk Cut trademarks in Malta and Cyprus to Gallaher Group plc (Gallaher), together with the Silk Cut trademark in Lithuania, resulting in a gain on disposal of £68 million included in other operating income in the profit from operations. The transactions were in accordance with contracts of 1993 and 1994 in which Gallaher agreed to acquire these trademarks in European Union states and the accession of Malta, Cyprus and Lithuania necessitated the sale.

As described in note 26, on 4 October 2005, the Group announced that it had agreed the sale of its 55% shareholding in BARH Ltd to Honda and the sale was completed on 20 December 2005. As a result of these transactions a gain of £5 million was included in other operating income in the profit from operations for 2005.

On 10 March 2006, the Group's Italian subsidiary signed an agreement to sell its cigar business, Toscano, to Maccaferri for euro 95 million. The sale was subject to regulatory and governmental approval and was completed on 19 July 2006. 

This resulted in the recognition of a loss of £19 million including an impairment charge of £15 million which is included in depreciation and amortisation costs in the profit from operations.

On 29 September 2006, the Group signed a trademark transfer agreement with Philip Morris International. Under this arrangement the Group agreed to sell its Muratti Ambassador brand in certain markets, as well as the L&M and Chesterfield trademarks in Hong Kong and Macao, while acquiring the Benson & Hedges trademark in certain African countries, which resulted in a net payment to the Group of US $115 million. The agreement was subject to regulatory approval which was received and the transactions completed on 29 November 2006, resulting in a gain of £ 60 million included in other operating income in the profit from operations.

  4 Net finance costs

Other interest payable includes interest on the bonds and notes detailed in note 21.

In December 2005, the International Accounting Standards Board issued an amendment to IAS21 on foreign exchange rates. The amendment to IAS21 allowed intercompany balances that form part of a reporting entity's net investment in a foreign operation to be denominated in a currency other than the functional currency of either the ultimate parent or the foreign operation itself. This means that certain exchange differences previously taken to the income statement are instead reflected directly in changes in total equity. However this amendment was only adopted by the EU in 2006. Therefore the previously published results for 2005 have been restated accordingly, which has resulted in an increase in net finance costs above of £4 million and a corresponding reduction in differences on exchange in equity movements (note 20).

The £40 million movement to a charge of £1 million for net fair value changes and exchange differences is principally due to :

1. £19 million of gains in 2005 which distort net finance costs as described in note 7; and
2. The impact of interest rate movements on the fair value of derivatives to be recognised in the accounts.

  5 Associates and joint ventures

The share of post-tax results of associates and joint ventures is after restructuring costs, the US Federal Tobacco buy-out, brand impairments, exceptional tax credits and other impairments.

In 2006, Reynolds American benefited from the favourable resolution of tax matters of which the Group's share was £17 million (2005: £31 million). Reynolds American also modified the previously anticipated level of support between certain brands and the projected net sales of certain brands, resulting in a brand impairment charge of which the Group's share amounted to £13 million (net of tax) (2005: £29 million).

In 2005, Reynolds American also incurred restructuring costs and a one-off charge related to the stabilisation inventory pool losses associated with the US tobacco quota buy-out programme. The Group's share (net of tax) of these amounted to £13 million and £12 million respectively.

In 2005, the contribution from ITC Limited in India included a benefit of £26 million (net of tax), principally related to the write back of provisions for taxes offset by the impairment of a non-current investment.