Marks and Spencer plc financial statements 2020, Lecture notes of Business

Download Marks and Spencer plc financial statements 2020 and more Lecture notes Business in PDF only on Docsity! Marks and Spencer plc financial statements 2020 REGISTERED NUMBER 00214436 Marks and Spencer plc STRATEGIC REPORT 1 Review of the business and future developments Marks and Spencer plc (the ‘Company’) is the main trading company of the Marks & Spencer group of companies. The Company and its subsidiaries (the ‘Group’) are one of the UK’s leading retailers of clothing, food and home products. The Group employs over 78,000 people and has around 1,519 stores including Simply Food franchised stores. The Group also trades in wholly-owned stores in the Republic of Ireland and the Czech Republic, through partly-owned stores in a number of European countries and India and in franchises within Asia, Europe and the Middle East. The results for the year reflect a year of substantial progress and change including outperformance in Food, some green shoots in Clothing in the second half and the transformative investment in Ocado by the Ultimate Parent Group, Marks and Spencer Group plc, with the Company preparing for the launch in September 2020. However, the Covid-19 crisis has galvanised our colleagues to secure the future of the business. Prior to the Covid-19 impact, both major businesses were making good progress in implementing the transformation programme with Food outperforming the market and despite teething issues in changes to men’s clothing ranges, kids, women’s, and lingerie starting to show sustained improved performance. In recent years, we have made a number of structural changes to the basic infrastructure of the business including closing 54 of our legacy shared stores, migrating off mainframe infrastructure to cloud-based systems and implementing new warehouse management systems. These changes have been instrumental in enabling the business to react effectively in the early weeks of the Covid-19 crisis. We set out the Food strategy 18 months ago, rebuilt the leadership team and started to reposition M&S Food to broaden its appeal and move to ‘trusted value’. The programme was picking up momentum before the crisis struck. The UK Clothing & Home business experienced a year of substantial reshaping, resulting in some encouraging performance indicators in the second half. However, revenue declined 8.3% overall, with like-for-like revenue down 6.2%, including an estimated 2.2% adverse impact from Covid-19 in March. Online revenue was level. First-half trading was affected by poor availability in Womenswear, and in the second half by teething issues with the move to a more contemporary style and fit in Menswear. However, towards the end of the year performance, prior to the effects of Covid-19, in Womenswear and Kidswear was encouraging, Menswear saw improving sales trends and Lingerie held its market leading share. The first phase of transforming the International business has been the move away from direct ownership to a franchise and joint venture model working with strong partners in high-potential territories. The focus now is on localising ranges and reducing prices, and will increasingly be on developing sales online globally. Operating profit before adjusting items declined 15.2% to £110.7m, largely as a result of trading conditions in March. The acquisition by the Ultimate Parent Group of 50% of Ocado Retail gives us access to the UK’s fastest growing food channel and is a strategic driver of growth for our Food business. The crisis has created a step change in demand for online grocery and we will commence supply to Ocado in September, making the M&S food range of over 6,000 products available online for the first time. The Covid-19 pandemic has been unprecedented in scale and pace of impact and has changed the way people around the world live their lives. In response to the pandemic, both the Group and the Company have had to respond, focusing the response to four central issues: Colleagues; Customers and Business Continuity; Supply & Demand; and Balance Sheet Resilience. A summary of this response is set out below: Colleagues: - 26 March 2020, decision approved to make use of the UK’s Coronavirus Job Retention Scheme, with 25,000 store colleagues placed on furlough on full pay, with colleagues continuing to work receiving a 15% uplift in pay; - 9 April 2020, c.1000 support centre staff placed on furlough on 90% of salary with those still working receiving an equity grant via the Company’s Restricted Share Plan equivalent to 5% of salary during the furlough period. Customers and Business Continuity: - Following announcement of UK lockdown measures and closure of non-essential retail, all Outlet stores closed from 24 March 2020, reopening on 15 June 2020; - Social distancing measures put in place across stores and distribution centres to protect customers and colleagues. Supply & Demand: - Clothing & Home worked closely with suppliers to mitigate the impacts of the virus on sourcing, with production of un-cut items halted on 24 March 2020. - Closure of Outlets and Clothing & Home sections of stores significantly impacted sales; - Unpredictable Food trading with initial lockdown trade being up on the prior year, with trade declining as lockdown continued; - Commitments to immediate payments for small food suppliers. Balance Sheet Resilience: - Successful negotiation to substantially relax or waive covenant conditions, until September 2021, attached to the revolving credit facility (RCF) to ensure access to the £1.1bn facility; - Successful application made to Bank of England’s Covid Corporate Financing Facility (CCFF). Full details of the response are set out on pages 50 to 53 of the Marks and Spencer Group plc Annual Report 2020. Marks and Spencer plc is incorporated in the United Kingdom and domiciled in England and Wales. The Company's registered office is Waterside House, 35 North Wharf Road, London W2 1NW. Marks and Spencer plc STRATEGIC REPORT 4 Key performance indicators Financial Group revenue Group profit before tax (PBT) & adjusting items £10.2bn -1.9% £399.9m -21.8% Group Revenue decreased by 1.9%, largely as a result of lower UK Clothing & Home sales. It is estimated that Covid-19 impacted Group revenue by £83.5m in March 2020 relative to forecast. Group profit before tax and adjusting items was £399.9m, down 21.8% on last year. The decline includes an estimated impact from Covid-19 of £51.9m in March. Strategic KPIs FOOD Like-for-like sales (see page 99 for definition) Value for money perception Like-for-like sales performance improved and strengthened through the year as we outperformed the market. The proportion of customers who rated us highly on value for money. We reduced the price of over 500 lines by 10% this year to ensure ‘trusted value’. 18/19 19/20 Availability Quality perception We continued our drive to improve availability and reduce waste through the Vangarde programme, designed to improve the running of our stores. The proportion of customers who rated us highly on quality. Our Food strategy of ‘protect the magic’ includes maintaining the quality our Food products are famous for. CLOTHING & HOME Like-for-like sales (see page 99 for definition) Value for money perception Like-for-like sales for 2019/20 were adversely impacted by availability in H1. However, before the impact of Covid-19, the eight weeks ended 22 February showed encouraging signs of improvement with life-for-like sales increasing 0.3%. The proportion of customers who rated us highly on value for money. We are accelerating our move towards trusted value for customers. -1.6% -6.2% Clothing & home space Style perception We continue to make good progress in reshaping our store estate for customers. The proportion of customers who rated us highly on style. We are reengineering our Clothing & Home business towards more contemporary fit and style as well as improvement to our core ranges. 63% (18/19: 59%) 93.3% +1.9% Level 86% (18/19: 85%) 18/19 19/20 67% (18/19: 65%) -6.2% -2.3% 63% (18/19: 58%) 18/19 10.7m sq ft 19/20 10.4m sq ft +1.9% -2.3% 18/19 £10.4m 19/20 £10.2m 18/19 £511.7m 19/20 £399.9m Marks and Spencer plc STRATEGIC REPORT 5 Key performance indicators (continued) STORES Footfall (average per week) Transactions (average per week) Net promoter score* -3.2% +4.4% 18.0m (18/19: 18.6m) 11.9m (18/19: 11.4m) 73 (18/19: 68) * Net promoter score (NPS) equals percentage of ‘promoters’ minus the percentage of ‘detractors’. M&S.COM Percentage of UK Clothing & Home sales online Traffic (visits per week) Net promoter score* +1.8% +8.0% 22.5% 9.5m 57 (18/19: 54) * Net promoter score (NPS) equals percentage of ‘promoters’ minus the percentage of ‘detractors’. INTERNATIONAL International websites Net promoter score* 44 (18/19: 39) 85 Our International business recorded a net promoter score for the first time in line with the wider business and will continue to measure future progress against this. * Net promoter score (NPS) equals percentage of ‘promoters’ minus the percentage of ‘detractors’. PEOPLE Engagement Colleague Net Promoter Score* 81% (18/19: 81%) 12 The proportion of our colleagues who feel proud to work at M&S and enjoy what they do. The first full quarter results of our new monthly digital colleague pulse, following the move away from an annual colleague survey to better track colleague sentiment throughout the year. We will continue to report against these revised measurements in future. * Net promoter score (NPS) equals percentage of ‘promoters’ minus the percentage of ‘detractors’. PLAN A Recyclable packaging M&S greenhouse gas emissions (CO2e) Volunteering hours +7% -6% -2% 77% 338,000 46,398 % M&S product packaging classified as easily recyclable in the UK. The gross carbon dioxide emissions from M&S operated stores, offices, warehouses and delivery fleets worldwide. Paid hours of volunteering provided by M&S colleagues. Marks and Spencer plc STRATEGIC REPORT 6 Financial review Full year financial summary 52 weeks ended 28 March 2020 £m 30 March 2019 Restated1 £m Change % Group revenue 10,181.9 10,377.3 (1.9) UK Food 6,028.2 5,903.4 2.1 UK Clothing & Home 3,209.1 3,499.8 (8.3) International 944.6 974.1 (3.0) Group operating profit before adjusting items 587.5 725.6 (19.0) UK Food 236.4 212.9 11.0 UK Clothing & Home 223.6 355.2 (37.0) International 110.7 130.5 (15.2) Other 16.8 27.0 (37.8) Interest on leases (133.4) (147.2) (9.4) Net financial interest (54.2) (66.7) (18.7) Profit before tax & adjusting items 399.9 511.7 (21.8) Adjusting items (339.7) (403.4) 15.8 Profit before tax 60.2 108.3 (44.4) 1. Prior year comparatives have been restated for the adoption of IFRS 16 ‘Leases’. Refer to note 28 of the financial statements for detailed restatement tables and associated commentary. UK FOOD UK Food revenue increased 2.1% and operating profit before adjusting items increased 11.0%, due to lower costs. We estimate a positive effect on March revenue of £17.7m and operating profit of £3.7m, largely related to Covid-19. Like-for-like revenue was up 1.9%. Performance was particularly strong in quarter four with growth of 3.7% in the two months to February before increased demand related to Covid-19 in March. As we executed our strategy to broaden appeal and make M&S more accessible to more customers by removing promotions and lowering prices, total full year volumes were up 3.3%. As expected, the contribution from new space was largely offset by full line store closures. % 2018/19 operating profit margin before adjusting items 3.6 Gross margin -0.5 Store staffing 0.3 Other store costs 0.3 Distribution and warehousing -0.2 Central costs 0.4 2019/20 operating profit margin before adjusting items 3.9 Gross margin decreased 50bps which was more than expected, as continued investment in price and inflationary headwinds were not fully offset by reduced promotions and the programme to lower costs. The reduction in gross margin was more than offset by operating costs, which reduced overall and as a percent of sales. Store staffing and other store costs were slightly down as efficiencies more than offset the pay review and cost inflation. Distribution costs increased largely due to cost inflation, impacting margin. The reduction in central costs was largely driven by lower depreciation, partly due to a system write off in the prior year. UK CLOTHING & HOME UK Clothing & Home revenue declined 8.3% and operating profit before adjusting items was down 37.0%. We estimate an adverse effect on March revenue of £78.1m and operating profit of £43.8m, largely related to Covid-19. Like-for-like revenue declined 6.2%, of which an estimated 2.2% related to the adverse movement in March, largely due to Covid-19. After a disappointing first half, revenue performance both in store and online began to improve in the second half, supported by better availability and growth in key categories in Womenswear and Kidswear. Menswear experienced some initial problems as the range moved towards a more contemporary style and fit. Marks and Spencer plc STRATEGIC REPORT 9 Financial review (continued) A number of charges have been recognised in the period relating to the implementation of previously announced strategic programmes including: - A charge of £29.3m (of which £11.6m represents the directly attributable incremental impairment due to Covid-19) in relation to store closures identified as part of transformation plans reflecting an updated view of latest store closure costs. Further material charges relating to the closure and re-configuration of the UK store estate are anticipated as the programme progresses. Following restatement for IFRS 16 and the updated view of store closure costs, future charges of up to c.£110m are estimated within the next two financial years. - A charge of £13.8m in relation to the redundancy costs associated with the review of the support centre organisational structure and an updated view of ongoing costs associated with centralising the Group’s London support centres. - A charge of £11.6m in relation to the transformation and simplification of supply chain and operations across Clothing & Home and Food. - A net charge of £10.2m as we continue to transition to a single tier Clothing & Home UK distribution network, including the cost of closure of two distribution centres. In February 2020 next steps were announced with a further two sites expected to close in the next two years, resulting in an expected additional charge of c.£13m. Store impairment and other property charges of £78.5m (including £24.2m representing the directly attributable incremental impairment due to Covid-19) were recognised. In response to the ongoing pressures impacting the retail industry, as well as reflecting the Group’s strategic focus towards growing online market share, the Group has revised future projections for UK stores (excluding those stores which have been captured as part of the UK store estate programme). Charges of £12.6m have been incurred relating to M&S Bank, primarily relating to the insurance mis-selling provision, as well as further charges recognised in relation to forward economic guidance provisions recognised as a result of Covid-19. The Group’s share of the total insurance mis-selling provisions of £327.6m exceeds the total offset against profit share of £242.7m to date. Further costs of c.£100m, predominantly relating to the estimated mis-selling liability are expected and will be deducted from the Group’s future profit share from M&S Bank. COVID-19 ADJUSTING ITEMS Following the declaration by the World Health Organisation of the Covid-19 global pandemic and the subsequent UK and International government restrictions, Clothing and Home has been unable to trade from full line stores, M&S outlet stores and a number of Food franchises have temporarily closed and trade in Food has had to continue with social distancing measures in place. As a result, charges of £212.8m have been recognised relating to the Covid-19 pandemic. The charges relate to stock provisioning, impairments or intangible assets, property plant and equipment and onerous contract provisions, cancellation charges and one-off costs. Should the estimated charges prove to be in excess of the amounts required, the release of any amounts previously provided would be treated as adjusting items. The impact that Covid-19 has had on underlying trading is not recognised within adjusting items. The charges relate to: - Stock provisioning: £157.0m. - Incremental impairments of intangibles and PP&E: £49.2m. - Onerous contract provisions, cancellations, one-off costs: £6.6m. Following a detailed assessment of all retail inventory, a charge of £157.0m has been recognised (C&H: £145.3m; Food £6.0m and International: £5.7m). The provision relates to items from previous seasons which are unlikely to be saleable when stores reopen; items in the summer sale that are likely to be cleared below cost and the cost associated with hibernating stock to Spring/Summer 2021. The provision in Food includes charges related to unsaleable seasonal goods as a result of the lockdown of activity in late March. As a direct result of the Covid-19 pandemic, following a reperformance of all impairment assessments using the cash flows in the Covid-19 scenario, incremental impairment charges have been recognised of £49.2m (Store impairment: £24.2m, per una: £13.4m and UK store estate programme: £11.6m). £6.6m of charges have been recognised relating to onerous contracts and other provisions, cancellation charges and impairment and write-off of intangible assets in the course of construction following project cancellations. TAXATION The effective tax rate on profit before tax and adjusting items was 20.9% (last year 20.5% (restated)). The effective tax rate is higher than the UK statutory rate due to the recapture of previous tax relief under the Marks and Spencer Scottish Limited Partnership (“SLP”) structure. The effective tax rate on statutory profit before tax was 60.0% (last year 39.0%) due to the impact of disallowable adjusting items. Marks and Spencer plc STRATEGIC REPORT 10 CAPITAL EXPENDITURE 52 weeks ended 28 March 2020 £m 30 March 2019 £m Change £m UK store remodelling 60.3 26.0 34.3 New UK stores 33.3 40.1 (6.8) International 12.3 11.0 1.3 Supply chain 39.2 48.7 (9.5) IT & M&S.com 84.5 88.2 (3.7) Property asset replacement 102.4 69.0 33.4 Capital expenditure before disposals 332.0 283.0 49.0 Proceeds from property disposals (2.7) (48.1) 45.4 Capital expenditure 329.3 234.9 94.4 Group capital expenditure before disposals increased £49.0m to £332.0m. UK store remodelling spend increased £34.3m largely reflecting the investment in five ‘test and learn’ trial stores. Spend on UK store space was down as 13 fewer owned Food stores opened compared with the prior year. Supply chain expenditure reflects investment in the expansion of the Bradford distribution centre. Spend has reduced due to the significant prior year investment in the Welham Green national distribution centre. IT and M&S.com spend decreased largely due to the completion of the technology transformation programme. Property asset replacement increased £33.4m due to the initiation of an asset replacement programme in stores. STATEMENT OF FINANCIAL POSITION Net assets were £5,699.5m at the year end, an increase of 13.0% on last year largely due to the increase in the net retirement benefit surplus. Marks and Spencer plc STRATEGIC REPORT 11 Financial review (continued) CASH FLOW & NET DEBT 52 weeks ended 28 March 2020 £m 30 March 2019 Restated £m Change £m Adjusted operating profit 587.5 725.6 (138.1) Depreciation and amortisation before adjusting items 632.5 702.6 (70.1) Cash lease payments (335.7) (312.7) (23.0) Working capital (48.5) 61.1 (109.6) Defined benefit scheme pension funding (37.9) (37.9) - Capex and disposals (325.9) (264.8) (61.1) Financial interest and taxation (171.1) (184.7) 13.6 Investment in joint ventures (2.5) (2.5) - Employee related share transactions 9.6 13.7 (4.1) Cash received on refinancing of derivatives 7.7 - 7.7 Adjusting items outflow (87.4) (120.2) 32.8 Free cash flow 228.3 580.2 (351.9) Dividends paid (193.8) (305.0) 111.2 Free cash flow after shareholder returns 34.5 275.2 (240.7) Decrease in lease obligations 201.4 170.1 31.3 New lease commitments (204.1) (150.4) (53.7) Opening net debt (1,526.9) (1,818.8) 291.9 Exchange and other non-cash movements 23.8 (3.0) 26.8 Closing net debt (1,471.3) (1,526.9) 55.6 The business generated free cash flow before shareholder returns of £228.3m, down on last year, driven by lower adjusted operating profit, lower depreciation, working capital increase and higher capital expenditure. The working capital outflow relative to last year was largely the result of the timing of payments and increased inventory. This follows a planned reduction in inventories in the prior year, and higher than normal year-end inventory levels as a result of additional Food to meet stockpiling demand and lower than expected Clothing & Home sales in March. Higher capital expenditure reflects the spend on ‘test and learn’ stores and the asset replacement programme in stores. Defined benefit scheme pension funding of £37.9m largely reflects the second limited partnership interest distribution to the pension scheme. Adjusting items in cash flow during the year were £87.4m. These included £22.7m in relation to the store closure programme, £20.9m for organisational change, £15.4m for operational transformation, £12.6m for M&S Bank, £4.3m for the technology transformation programme and £3.7m relating to distribution and warehousing. After the payment of the final dividend from 2018/19, the interim dividend for 2019/20 and the reduction in outstanding discounted lease commitments due to capital repayments, net debt was down £55.6m from the start of the financial year. PENSION At 28 March 2020, the IAS 19 net retirement benefit surplus was £1,902.6m (£914.3m at 30 March 2019). The increase in the surplus is mainly due to a significant increase in longer dated credit spreads driven by market changes linked to Covid-19 resulting in a reduction in scheme liabilities. Additionally, the return on scheme assets increased due to a fall in gilt yields. It is currently anticipated that the increase in surplus will give rise to an increased pension credit next year. In April 2019, the Scheme purchased additional pensioner buy-in policies with two insurers for approximately £1.4bn. Together with the two policies purchased in March 2018, the Scheme has now, in total, hedged its longevity exposure for around two thirds of the liabilities for pensions in payment. The buy-in policies cover specific pensioner liabilities and pass all risks to an insurer in exchange for a fixed premium payment, thus reducing the Company’s exposure to changes in longevity, interest rates, inflation and other factors. Marks and Spencer plc STRATEGIC REPORT 14 RISK DESCRIPTION & CONTEXT MITGATING ACTIVITIES ‘no deal’ departure and the consequential ability to implement the necessary measures on a timely basis. 5 FOOD ONLINE A failure to effectively execute the launch of M&S products for Ocado Retail would significantly impact the achievement of our strategy to take our food online in a profitable, scalable and sustainable way. The investment in Ocado Retail by the Ultimate Parent Group and the Company’s supply agreement with Ocado Retail is part of our strategy for improving our online reach and capability. To achieve this, we are committed to providing M&S product ranges and to have established new product development capabilities for Ocado Retail by the beginning of September 2020. Activities include: - Finalisation of all commercial agreements with suppliers. - Delivery of a range of M&S products to allow a seamless transition for Ocado customers on launch. - Establishing data and technology interfaces with Ocado Retail. - Developing operating procedures and ways of working between the two businesses. An inability to establish effective operating protocols in advance of the launch date, whether related to the impact of Covid-19 or other factors, could delay delivery of the expected benefits from the Ultimate Parent Group’s investment in Ocado Retail and the Company’s supply agreement with Ocado Retail. - M&S nominated directors are part of the Ocado Retail Board and participate in leadership forums. - The establishment and continued operation of a dedicated M&S programme team, supported by senior leadership, to oversee all aspects of project delivery including commercial agreements, product range, and establishment of ongoing operating processes. - Joint working group in place with Ocado Group Plc and Ocado Retail to establish the systems, processes and ways of working to coordinate sourcing, product development, product ranging, customer data and marketing. - Regular remote communication continues under lockdown with the Board, senior management and the delivery teams. 6 FOOD SAFETY & INTEGRITY Failure to prevent or effectively respond to a food safety incident, or to maintain the integrity of our products, could impact business performance, customer confidence and our brand. Food safety and integrity remain vital for our business. We need to manage the potential risks to customer health and consumer confidence that face all food retailers. This includes considering how external pressures on the food industry and wider economic and environmental changes could impact the availability and integrity of our food, the ability to operate all routine controls, our reputation and shareholder value. Many of these external pressures, including the impact of Covid-19, inflationary costs, labour quality and availability, increased regulatory scrutiny, animal disease, and the unknown impact of Brexit, are, to a large degree, outside our control but are nevertheless monitored. - Oversight from Customer and Brand Protection Committee. - Food Safety Policy and Standards are in place, with clear accountability set at all levels. - Defined Terms of Trade, manufacturing standards, specification for “from farm to fork” and standard operating procedures (stores, support centre and supply chain). - New food initiatives assessed for food safety risks. - Qualified and capable technical team, with continuing professional development programme. - Store, supplier and depot audit programmes, including unannounced visits and raw material testing, adapted to be managed remotely where site visits are not possible. - Introduction of modified processes, including enhanced monitoring of quality and customer complaints, to mitigate risk during the Covid-19 lockdown and ongoing assessment of the need for further change. - Quarterly review of our control framework. - Established processes for the development and legal sign-off for product packaging. - Documented and tested crisis management plan. - Membership of the Food Industry Intelligence Network at Board and Operating Committee level. - Periodic Internal Audit reviews to consider process design and operating effectiveness. Marks and Spencer plc STRATEGIC REPORT 15 RISK DESCRIPTION & CONTEXT MITGATING ACTIVITIES 7 CORPORATE COMPLIANCE & RESPONSIBILITY Failure to deliver against our legal, regulatory, social and environmental commitments would undermine our reputation as a responsible retailer, may result in legal exposure or regulatory sanctions, and could negatively impact our ability to operate and/or remain relevant to our customers. The increasingly broad and stringent legal and regulatory framework for retailers creates pressure on both business performance and market sentiment requiring continual improvements in how we operate as a business to maintain compliance. More recently, the requirements triggered by the Covid-19 outbreak, including in relation to safety and social distancing, have in a short time frame necessitated immediate changes to operating procedures in our distribution network, stores and support centres. In addition, the expectations of our customers and other stakeholders (including regulators) are increasingly demanding. The environmental impact of food, packaging and the sustainability of clothing are all increasingly relevant. Speed in responding to evolving expectations is vital to maintaining a positive business perception. Non-compliance may result in fines, criminal prosecution for M&S or colleagues, litigation, additional investment to rectify breaches, disruption or cessation of business activity, as well as have an impact on our reputation and financial results. - A Code of Conduct is in place and has recently been reviewed and updated. This is underpinned by policies and procedures, including human rights, modern slavery, global sourcing, data protection, anti- bribery and corruption, health & safety, food safety, national minimum wage, equal pay, cyber and data security. An annual self-assessment compliance process is also in place. - Immediate crisis response capability (via the Crisis Management team) when required on a reactive basis – more recently for Covid-19. - Mandatory induction briefings and annual training for relevant colleagues on key regulations. - Oversight from committees and steering groups such as for fire, health and safety or food safety. - In-house regulatory legal team, including specialist solicitors, which conducts ‘horizon scanning’ on new and emerging regulatory and legislative changes. - Dedicated non-legal regulatory issue leaders and advisers to drive compliance against key risk areas within the business. This includes, for example, GSCOP (Groceries Supply Code of Practice) compliance in Food or ethical sourcing in Clothing & Home. - Proactive engagement with regulators, legislators, trade bodies and policy makers. - Simplified Plan A operating model with a lean central team responsible for setting the framework and establishing sustainability priorities in each of our family of businesses. - Published, monitored and reported commitments in relation to environmental and social issues in line with regulatory requirements. - Established auditing and monitoring systems. - Customer contact centre insight and analysis of live social media issues. 8 BUSINESS CONTINUITY & RESILIENCE Failures or resilience issues at key business locations could result in major business interruption. In particular, a major incident at our Castle Donington e-commerce distribution centre may have a significant impact on our ability to fulfil online orders. More broadly, an inability to effectively respond to global events, such as pandemic of supply chain disruption, would significantly impact business performance. As our sole online Clothing & Home fulfilment centre, the effective operation of our Castle Donington depot is vital. A major incident leading to a sustained period offline would impact sales and potentially hinder the growth of M&S.com. In addition to Castle Donington, the loss of other locations such as the dedicated warehouses that store beers, wines & spirits or frozen goods in the UK or support facilities, such as for IT, could impact business operations. While the response to Covid-19 has highlighted positives in the business’s ability to continue operating in extreme circumstances, it has also underlined the risk associated - A dedicated Business Continuity team. - An established Group Crisis Management process – which was invoked and has operated throughout the Covid-19 outbreak. - Business continuity plans, incorporating remote working requirements, are in place for key activities across our operations, including offices, depots and IT sites. These were invoked and, where needed, refined during lockdown. - Group Incident Reporting & Management Procedures in place and used to escalate incidents on site. These also include critical third parties. - Store and sourcing office business continuity assessments and visits, where appropriate. - Insurance cover to mitigate the impact of remediation and business interruption. - Mechanisms to validate the existence of key supplier arrangements. Marks and Spencer plc STRATEGIC REPORT 16 RISK DESCRIPTION & CONTEXT MITGATING ACTIVITIES with our global supply chains. The reliance on China and the interdependency of sourcing locations, in addition to the concentration of supply from individual countries such as Bangladesh, highlight the potential impact of globally disruptive events. Beyond the supply chain, the implications on trading both in the UK and International are also a risk. - Ongoing contingency planning for Brexit. - Enhanced capabilities at Castle Donington to manage technology failure. - Engagement with external stakeholders including Retail Business Continuity Association and government-led initiatives. - Membership of the National Counter Terrorism Information exchange. 9 INFORMATION SECURITY Failure to adequately prevent or respond to a data breach or cyber-attack could adversely impact our reputation, result in significant fines, business disruption, loss of stakeholder confidence, and/or loss of information for our customers, employees or business. The increasing sophistication and frequency of cyber- attacks in the retail industry, coupled with the General Data Protection Regulation (GDPR), highlight the escalating information security risk facing all businesses. Our reliance on a number of third parties hosting critical services and holding M&S and customer data also means the information security risk profile is changeable. This risk also increases as we develop our digital capabilities. For example our dependency on the availability of, and access to, insightful data across our business and/or with the increasing shift online. In addition, the risk of data breach or misuse is impacted by Covid-19 as there is the potential for: - An increase in targeted phishing campaigns. - New risks linked to working from home and the usage of personal devices. - Increased reliance on third parties supporting critical support services. - Dedicated Information Security function, comprising a multi-disciplinary operating of information security specialists and support services and capabilities, with a 24/7 Security Operation Centre. - Continued focus on improving controls, policies and procedures in line with our environment and threat landscape, including heightened areas of risk due to Covid-19. - Maintained focus on scanning our threat environment. - Established third-party assurance programme. - Focused security assurance, overall operational rigor and security hygiene around significant change activities. - Network of Data Protection Compliance Managers in priority business areas to oversee and address compliance. - Mandatory information security and data protection training for colleagues, including responsibilities for the use of personal data. - Corporate Security team with a focus on improving the physical security environment. 10 TECHNOLOGY CAPABILITY A failure to improve our technology capabilities, reduce dependency on legacy systems and enhance digital capability could limit our ability to keep pace with customer expectations and competitors, enable business transformation and grow profitably. The digital world continues to evolve at an unrelenting pace, enabling competitive advantage, influencing consumer behaviours or expectations and increasing demands on IT infrastructure. As demonstrated during the Covid-19 lockdown, our business resilience is increasingly dependent on the reliability and effectiveness of our technology infrastructure and capability. We are clear on our aim to be Digital First and continue to plan and invest to support this objective. While a focus on improving the existing IT infrastructure has begun to deliver improvements in capability, flexibility and cost efficiency, further work is required to enable the business to move with pace to meet customer and colleague needs. We also need to continue to develop the skills and capabilities of our colleagues in order to drive beneficial and effective use of the technological changes that are made. - Delivery against our technology transformation programme continues and is underpinned with a defined technology operating model, project governance principles and agile methodology. - Cross-channel technology investment strategy in place and aligned to the family of businesses, reviewed quarterly to track benefits realisation of core projects. - Improvements to our IT infrastructure, increased bandwidth and deployment of a unified communication and collaboration tool, which underpinned the rapid move to remote working during the Covid-19 lockdown. - Continued investment in in-store technology and digital capabilities to enhance both customer and colleague experience. - Prioritisation of technology initiatives which is fully aligned with our operating and capital expenditure targets. - Continued collaboration with our principal technology services partner, TCS, and other strategic partnerships, such as Microsoft, to drive our Digital First ambition. Marks and Spencer plc STRATEGIC REPORT 19 RISK CATEGORY RISK DESCRIPTION RELEVANT PRINICPAL RISK Strategy realignment An inability to define and successfully implement a revised strategy to rapidly respond to a post Covid-19 world and the associated changes in customer behaviours and operational requirements would significantly undermine the transformational imperatives of the business. This would include, although not be limited to, the operation of our online Clothing & Home business, International operations, management of operating and capital expenditure and the portfolio of business transformation initiatives under way. Multiple risk implications Many of the principal risks prior to the pandemic remain the same in substance but have been amplified by the current events – for example, our ability to effectively respond to Brexit, the transformational improvements needed to the supply chain, maintaining controls over food safety, the potential risk of disruption to critical third-party relationships or readiness to execute the launch of M&S products with Ocado Retail. It is also important to note that, in many respects, the impact of Covid-19 has the characteristics of an emerging risk as well as changing the principal risk profile today, as future events, and their impact on our business and the global community we work within, cannot be determined with any certainty. We will therefore continue to monitor and respond to further changes as needed in the months ahead. As a consequence, the nature and magnitude of the ongoing events will continue to change the risk profile in currently unknown ways. Going concern In adopting the going concern basis for preparing the financial statements, the directors have considered the business activities and strategic report as set out on pages 1 – 11 as well as the Group’s principal risks and uncertainties as set out on pages 12 -19. In addition to this, the directors have reviewed the forecast results and the downside sensitivities set out in note 1. The directors have also considered the performance of the Group, subsequent to the period end, noting that actual performance is not adverse in relation to the forecast results. Based on this and the Group’s cash flow forecasts and projections, the Board is satisfied that the Group will be able to operate within the level of its facilities for the foreseeable future. For this reason the Group continues to adopt the going concern in preparing its financial statements. The Strategic Report was approved by the Board on 17 August 2020 and signed on its behalf by Nick Folland Director Marks and Spencer plc REPORT OF THE DIRECTORS 20 Profit and dividends The consolidated profit for the financial year, after taxation, amounts to £20.4m (last year: £66.1m). The directors have declared dividends as follows: 2020 £m 2019 £m Ordinary shares: Paid final dividend 4.1p (last year 6.8p) 116.8 193.8 Paid interim dividend 2.7p (last year 3.9p) 77.0 111.2 Total ordinary dividend 6.8p per share (last year 10.7p) 193.8 305.0 The directors have not proposed a final dividend for 2019/20. In order to provide for the uncertain outlook the Board of Directors do not, at this stage, anticipate paying a dividend for 2020/21. Share capital The Company’s issued ordinary share capital, as at 28 March 2020 comprised a single class of ordinary share. Details of the issued share capital can be found in note C18 to the financial statements. Significant agreements There are a number of agreements to which the Company is party that take effect, alter or terminate upon a change of control of the Company following a takeover bid. Details of the significant agreements of this kind are as follows: - The $300m US Notes issued by the Company to various institutions on 6 December 2007 under Section 144a of the US Securities Act contain an option such that, upon a change of control event, combined with a credit ratings downgrade to below sub-investment level, any holder of such a US Note may require the Company to prepay the principal amount of that US Note. - The amended and restated £1.1bn Credit Agreement dated 16 March 2016 (originally dated 29 September 2011) between the Company and various banks contains a provision such that, upon a change of control event, unless new terms are agreed within 60 days, the facility under this agreement will be cancelled with all outstanding amounts becoming immediately payable with interest. - The amended and restated Relationship Agreement dated 6 October 2014 (originally dated 9 November 2004 as amended on 1 March 2005), between HSBC and the Company and relating to M&S Bank, contains certain provisions which address a change of control of the Company. Upon a change of control, the existing rights and obligations of the parties in respect of M&S Bank continue and HSBC gains certain limited additional rights in respect of existing customers of the new controller of the Company. Where a third-party arrangement is in place for the supply of financial services products to existing customers of the new controller, the Company is required to procure the termination of such arrangement as soon as practicable (while not being required to do anything that would breach such a third-party arrangement). - Where a third-party arrangement is so terminated, or does not exist, HSBC has the exclusive right to negotiate proposed terms for the offer and sale, of financial services products to the existing customers of the new controller by HSBC on an exclusive basis. - Where the Company undertakes a re-branding exercise with the new controller following a change of control (which includes using any M&S brand in respect of the new controller’s business or vice versa), HSBC may, depending on the nature of the re-branding exercise, have the right (exercisable at HSBC’s election) to terminate the Relationship Agreement. The Company does not have agreements with any director or employee that would provide compensation for loss of office or employment resulting from a takeover except that provisions of the Company’s share schemes and plans may cause opt ions and awards granted to employees under such schemes and plans to vest on a takeover. Directors The directors who held office during the year and up to the date of signing the financial statements were as follows: Nick Folland Stephen Rowe Humphrey Singer (resigned on 31 December 2019) Eoin Tonge (appointed 26 June 2020) Marks and Spencer plc REPORT OF THE DIRECTORS 21 Directors’ indemnities The Company maintains directors’ and officers’ liability insurance which provides appropriate cover for legal action brought against its directors. The Company has also granted indemnities to each of its directors and the Company Secretary to the extent permitted by law. Qualifying third party indemnity provisions (as defined by Section 234 of the Companies Act 2006) were in force during the year ended 28 March 2020 and remain in force in relation to certain losses and liabilities which the directors (or Company Secretary) may incur to third parties in the course of acting as directors or Company Secretary or employees of the Company or of any associated company. Business relationships and colleague engagement The Company is the Ultimate Parent Group’s primary trading, contracting and employing entity, and therefore the Company’s business relationships with employees, suppliers, customers and partners, are those of the Ultimate Parent Group. The directors of the Company are also the Executive Directors and the Company Secretary of the Ultimate Parent Group. As a result of this and of the Ultimate Parent Group’s governance structure (which is outlined in the Corporate Governance Statement in the Report of the Directors on page 23), the directors of the Company have undertaken their directors duties in relation to employees and other stakeholders together with the Ultimate Parent Group Board, for both the overall Ultimate Parent Group and for the Company specifically. This included engaging with and having due regard for employee interests and to the need to foster business relationships with suppliers, customers and other stakeholders in decision making. This engagement, and examples of key decisions influenced by, and impacting, our colleagues, customers, suppliers and partners is summarised below: • Colleagues: Our colleagues are the heart and soul of the business and central to its success, so properly incorporating their views into the Ultimate Group Board’s decision-making (adopted by the directors of the Company) is essential to our transformation, of which culture change is a key plank. To achieve this, the role of our Business Involvement Group (BIG) network has been redeveloped with a more regular presence at the Ultimate Parent Group’s Board and Remuneration Committee meetings. Feedback, suggestions and concerns from colleagues across the business are also considered through channels such as our Monday trading calls, Talk Straight monthly colleague engagement and the Suggest to Steve initiative. The Ultimate Parent Group Board (and consequently the Board of the Company) receives regular updates on these topics. o Key Decisions: Colleagues told us that their role in delivering the transformation was often unclear, so we developed a set of clear, relatable behaviours, with supporting training to help them; Engaging with colleagues directly shaped the reset of the role of BIG and strengthened the colleague voice at M&S, with BIG attendance at three Ultimate Parent Group Board meetings and one Remuneration Committee meeting during the year. • Customers: Ensuring the customer is at the heart of every decision is crucial to the Ultimate Parent Group Board’s strategy (and consequently the strategy adopted by the directors of the Company). This year, we have focused on our customers by offering trusted value and a wider range in Food, moving to a first price, right price approach with improved availability in Clothing & Home, reshaping our store estate and improving our website to serve customers however they want to shop. We engage directly with customers through social media and have implemented a range of measures to protect their safety and promote social distancing to minimise the risk of Covid-19 spread. o Key Decisions: In Food, we improved our range and value proposition for customers through continued price investment in high-volume lines and improving our product innovation pipeline; In International, completion of the roll-out of market right pricing and launch of local flagship websites has improved our value and availability propositions internationally. • Suppliers: Our long-term supplier partnerships are an important part of being able to innovate and offer trusted value to customers. In 2019, we focused on improving our supply chain; an essential facet of our strategy and one that can only be driven forwards through continuing, close engagement with our suppliers. Looking ahead, the launch of products on the Ocado platform in September (which commences the Company’s relationship with Ocado Retail Limited), and our ambition to grow online to one third of sales presents significant, mutually beneficial volume growth opportunities that we will continue to work with our suppliers to achieve. o Key Decisions: Working with suppliers to implement logistical improvements, including more frequent, better planned deliveries and moving to a single-tier network; We continue to ensure that our global supply chain is robust, with viable business continuity plans in place, including no over-reliance on one supplier or geography. • Partners: Our digital, franchise and JV partners have been an important feature of Board discussions, particularly leveraging the expertise of our digital partners to make better use of technology in our transformation. Into 2020/21, we have worked in partnership with the UK government, banks and other food retailers to secure both the continuity of UK food supplies and the future liquidity of our business. o Key Decisions: Members of the International leadership team regularly meet with key international partners to discuss progress and any areas of concern; We worked closely with our key international partners and suppliers to agree appropriate supporting measures during times of significant economic difficulty, including the ongoing Covid-19 crisis. Marks and Spencer plc REPORT OF THE DIRECTORS 24 Marks and Spencer Group plc is the Company’s sole shareholder and ultimate parent company of the M&S Group. Consequently, the Board of Marks and Spencer Group plc (‘Ultimate Parent Group Board’) and its Committees have overarching decision making authority for the Ultimate Parent Group on a number of reserved matters. These include setting the Ultimate Parent Group’s strategy and values, reviewing and approving operating plans, and reviewing and approving the Ultimate Parent Group’s policies, processes and management structures, amongst others. Responsibility for actioning the Ultimate Parent Group Board’s decisions and strategic direction throughout the day-to-day management of the Ultimate Parent Group then rests with the Ultimate Parent Group Board’s executive directors and the senior leadership team, which during the year comprised the Operating Committee (now the Executive Committee) and the Business Boards for each of the family of businesses (Food, Clothing & Home, Retail & Property, International, and Bank & Services). Authority is delegated formally to these bodies via the Ultimate Parent Group’s Delegation of Authority document, and those with delegated authority provide the Ultimate Parent Group Board with regular updates confirming that appropriate controls are in place, are fit for purpose and are being adhered to. As the Company is the Ultimate Parent Group’s primary trading, contracting and employing entity, the directors of the Company ensure that they give due care and consideration to discharging their duties by adhering to the governance arrangements outlined above. The Board has adopted the Ultimate Parent Group’s internal governance arrangements and internal controls as set out above as its own, being used to delegate authority on the Company’s behalf. The directors have also recently instigated a practice of holding meetings immediately following those of the Ultimate Parent Group Board to review and consider all Ultimate Parent Group matters and decisions with respect to the specific interests of the Company and its stakeholders, which included having regard to the need to engage and consider the interests of employees, customers, suppliers and others in a business relationship with the Company. This regard is outlined in the ‘Business relationships and colleague engagement’ section on page 21. Further information about the Ultimate Parent Group’s corporate governance is provided in the Director’s Report set out on pages 44-97 of the Group’s Annual Report 2020, and in the Ultimate Parent Group’s Corporate Governance Statement 2020 on the M&S corporate website (marksandspencer.com/thecompany). In addition to these corporate governance arrangements, the Ultimate Parent Group has established internal control and risk management systems in relation to the process for preparing consolidated financial statements. The key features of these internal control and risk management systems are: - Management of the Ultimate Parent Group conduct periodic reviews of the Ultimate Parent Group's risks and mitigation. Each business unit is responsible for identifying, assessing and managing the risks in their respective areas on a half yearly basis. These are then collated to give a consolidated view of the business risk areas; - Management regularly monitors and considers developments in the accounting regulations and best practice in financial reporting, and, where appropriate, reflects developments in the consolidated financial statements. Appropriate briefings and/or training are provided to key finance personnel on relevant developments in accounting and financial reporting; - The Group's consolidation is subject to various levels of review by the Group finance function; and - The financial statements are subject to external audit. Disclosure of information to auditor Each of the persons who are directors at the time when this Directors’ Report is approved confirms that, so far as he/she is aware, there is no relevant audit information of which the Company’s auditor is unaware and that he/she has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to ensure that the Company’s auditor is aware of that information. Independent auditor A resolution to reappoint Deloitte LLP as auditor of the Company has been approved by the directors and shareholders at the time of signing these financial statements. The Directors’ Report was approved by a duly authorised committee of the Board of Directors on 17 August 2020 and signed on its behalf by NICK FOLLAND Director London, 17 August 2020 Marks and Spencer ple INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MARKS AND SPENCER PLC. Report on the audit of the financial statements 1. Opinion In our opinion: - the financial statements of Marks and Spencer plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 28 March 2020 and of the Group's profit for the 52 weeks then ended; - the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union and IFRSs as issued by the International Accounting Standards Board (‘IASB’); - the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and - the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements which comprise: * the Consolidated Income Statement; the Consolidated Statement of Comprehensive Income; the Consolidated and Parent Company Statement of Financial Position; the Consolidated and Parent Company Statements of Changes in Shareholders’ Equity; * the Consolidated and Parent Company Statement of Cash Flows; and * the related notes 1 to 29 and C1 to C25. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006 2. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council's (the ‘FRC’s’) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services provided to the Group and Parent Company for the period are disclosed in note 4 to the Group financial statements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion 3. Summary of our audit approach Key audit matters The key audit matters that we identified in the current period were: e disclosure of adjusting items; * accounting for the UK store rationalisation programme; « impairment of UK store assets; «impairment of per una goodwill and brand; 25 Marks and Spencer plc INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MARKS AND SPENCER PLC. © inventory provisions for UK Clothing & Home; * recognition of leases under IFRS 16 Leases; and © the going concern basis of accounting. Within this report, key audit matters are identified as follows: Newly identified @ Increased level of risk ©) _ Similar level of risk QY _ Decreased level of risk Materiality The materiality that we used for the Group financial statements was £18.0 million (2019: £20.0 million) which was determined on the basis of considering a number of different metrics used by investors and other readers of the financial statements. These included: * adjusted profit before tax; * earnings before interest, tax, depreciation and amortisation; and * revenue. Scoping We have performed a full-scope audit on the UK component of the business, representing 95% (2019: 99%) of the Group's revenue, 92% (2019: 95%) of adjusted profit before tax, 91% (2019: 92%) of profit before tax, 80% (2019: 80%) of total assets and 87% (2019: 99%) of total liabilities. We perform analytical review procedures on the residual balances. Significant changes in our approach We have changed the basis on which we have determined materiality in the current period to reflect the volatility in the results of the Group arising from the impact of Covid-19. For further details refer to section 6 of this report. In 2020, we have reduced the scope of procedures performed in relation to the India and Ireland components. Refer to section 7 for further details of our approach to scoping the audit. In the current period we have identified two new key audit matters related to: * the going concern basis of accounting; and * the impairment of per una goodwill and brand. We have also determined that the valuation of the UK defined benefit pension obligation is no longer a key audit matter in the current year. These changes and the reasons for identification of these areas as key audit matters are discussed further in section 5. 4, Conclusions relating to going concern We are required by ISAs (UK) to report in respect of the following matters where: We have nothing to report in respect of these matters. * the directors’ use of the going concern basis of accounting in preparation of the financial statements is not appropriate; or * the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group's or the Parent Company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. 26 Marks and Spencer plc INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MARKS AND SPENCER PLC. Key We are satisfied that the items included in adjusting items (including the directly attributable (gains)/expenses observations _resulting from the Covid-19 pandemic of £163.6 million) are in line with the Group's policy and that they are appropriately disclosed 5.2. Accounting for the UK store rationalisation programme ®™ Key audit matter description In February 2018 the Board approved a list of stores marked for closure as part of its UK store rationalisation programme. Including the impact of IFRS 16 Leases on the way rental payments and other property costs are accounted for the total charge recognised in connection with this closure programme in the previous two periods was £537.6 million. A further net charge of £29.3 million has been recognised in the current period as a result of: * management revisiting its assessment of stores approved for closure and the adequacy of estimates made in light of known developments in the exit strategy, including current trading performance, negotiations with landlords and changes in the retail property market, including as a result of Covid-19; * further accelerated depreciation of stores previously identified for closure as they approach their planned closure dates; and * accelerated depreciation and impairment of buildings and fixtures and fittings in respect of additional stores added to the programme. Further information is set out in notes 1 and 5 to the financial statements. Our key audit matter was focused on the specific assumptions applied in the discounted cash flow analysis prepared by management including the discount rate, expected sublet income, sublet lease incentives, void periods, freehold sales proceeds and store closure costs. We consider this to represent a key audit matter as a result of the level of judgement applied by management. There is an increased level of judgement in the current period as a result of the Covid-19 pandemic, which may impact the ability of the Group to negotiate closure or exit from certain stores in the forecast timeframes or on forecast terms. How the scope of our audit responded to the key audit matter In responding to the identified key audit matter we completed the following audit procedures: * obtained an understanding of key controls relating to the review and approval of the Group's UK store exit model; * performed enquiries of management and inspected the latest strategic plans, Board and relevant sub-committee minutes of meetings; * understood and challenged the basis of management's judgement where stores previously marked for closure are no longer expected to close and additional stores have been identified for closure; * with the involvement of our internal real estate specialists, we evaluated the appropriateness of management's judgements for a representative sample of properties and benchmarked these with reference to external data, particularly as a result of the market uncertainty caused by the Covid-19 pandemic; * assessed the mechanical accuracy of discounted cash flow models and other key provision calculations; * assessed the integrity of key inputs to the discounted cash flow models including lease data, agent valuations, surveyor plans and rental payments with reference to supporting evidence; * recalculated the closing provision for a representative sample of stores; * evaluated the accuracy and completeness of provisions recorded in light of the status of the Group's UK store rationalisation plan; and * assessed the completeness and accuracy of disclosures within the financial statements in accordance with IFRS. 29 Marks and Spencer plc INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MARKS AND SPENCER PLC. Key observations We are satisfied that the Group's estimate of the impairments and store exit charges and the associated disclosures are appropriate. 5.3. Impairment of UK store assets ®™ Key audit matter description As at 28 March 2020 the Group held £3,925.5 million (2019: £2,830.0 million) of UK store assets respect of stores not considered for closure within the UK store rationalisation programme. In accordance with IAS 36 Impairment of Assets, the Group has undertaken an annual assessment of indicators of impairment. An impairment charge of £69.3 million (2019: £103.0 million) has been recognised within adjusting items as set out in notes 5 and 14 to the financial statements. As described in note 14 to the financial statements, the Group has estimated the recoverable amount of store assets based on their value in use, derived from a discounted cash flow model prepared by management. The model relies on certain assumptions and estimates of future trading performance, incorporating committed strategic changes to the UK Clothing & Home and Food businesses and the performance of new stores operating within their shelter period (which takes in to account the time new stores take to establish themselves in the market), all of which involve a high degree of estimation uncertainty (as disclosed in note 1 and note 14). We believe the level of risk related to the impairment of UK store assets has increased, both due to the increased level of uncertainty in forecasting future cash flows as a result of the Covid-19 pandemic, and in light of current retail market conditions and the impact of wider economic uncertainty. The key assumptions applied by management in the impairment reviews performed are: * future revenue growth and changes in gross margin; « — long term growth rates; and * discount rates. The Group considers that each retail store constitutes its own cash generating unit (‘CGU’) and is assessed for impairment separately, with the exception of the outlet stores which are used to clear aged seasonal Clothing & Home inventory at a discount. The outlet stores are considered to be a single group of assets for the purpose of impairment testing. How the scope of our audit responded to the key audit matter In responding to the identified key audit matter we completed the following audit procedures: * — obtained an understanding of key controls relating to the impairment review process; * evaluated and challenged management's range of impairment indicators with due consideration paid to the profitability impact of committed strategic changes to the UK Clothing & Home and Food businesses and the performance of new stores; * assessed the mechanical accuracy of the impairment models and the methodology applied by management for consistency with the requirements of IAS 36; * assessed the appropriateness of forecast revenue and gross margin growth rates through comparison with external economic benchmarking data and with reference to historical forecasting accuracy, with a particular focus on the impact of Covid-19 on those forecasts; * assessed the appropriateness of the discount rates applied in conjunction with support from our internal valuations specialists and compared the rates applied with our internal benchmarking data; — evaluated the appropriateness and completeness of information included in the impairment model based on our cumulative knowledge of the business driven by our review of trading plans, strategic initiatives, minutes of property and investment committee meetings, and meetings with regional store managers and senior trading managers from key product categories, together with our wider retail industry knowledge; and assessed the completeness and accuracy of disclosures within the financial statements in accordance with IFRS. 30 Marks and Spencer plc INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MARKS AND SPENCER PLC. Key observations We are satisfied that the judgements applied, impairments recorded and disclosures within the financial statements are appropriate. 5.4. Impairment of per una goodwill and brand Key audit matter description As at 28 March 2020 the Group held £56.1 million (2019: £69.5 million) of goodwill associated with the per una brand. The Group is required to assess the goodwill and intangible assets annually for impairment in accordance with IAS 36. Following difficult trading conditions the per una brand was relaunched in October 2019. Trading conditions have been challenging throughout the period and deteriorated further around the period end as a result of the Covid-19 pandemic. The level of risk associated with per una has increased as a result of the inherent challenges in forecasting results due to Covid-19 as well as the pre-existing macro-economic uncertainty. These represent a key source of estimation uncertainty as disclosed in note 1, and management has provided sensitivities in note 13. The test for impairment of intangible assets compares the carrying value of related assets to the higher of their fair value or value-in-use (a ‘recoverable amount’) using an impairment model. Developing a recoverable amount requires significant management judgement; the key judgements applied by management in the development of its impairment model are: * the sales forecasts for the brand; longer term growth forecasts; and * the discount rate used As set out in note 13, the forecast shows a sales decrease of 46.4% in 2020/21 driven by the impact of Covid-19 before returning to the pre-Covid-19 budgeted level in 2021/22. Following the completion of the impairment review, management has recognised an impairment charge of £13.4 million in relation to the per una goodwill We consider this to represent a key audit matter reflecting the sensi amount calculation to changes in these key assumptions. ity of the recoverable Refer to note 13 of the financial statements. How the scope of our audit responded to the key audit matter In responding to the identified key audit matter we completed the following audit procedures: * — obtained an understanding of key controls relating to the review and approval of the impairment review; * tested the integrity of the model and cash flow forecasts and assessed that the methodology used is consistent with IAS 36; * assessed the appropriateness of forecast revenue and gross margin growth rates through comparison with external economic benchmarking data to determine if it provided corroborative or contradictory evidence in relation to management's assumptions, and with reference to historical forecasting accuracy, with a particular focus ‘on the impact of Covid-19 on those forecasts; * assessed the mechanical accuracy of the impairment models and the methodology applied by management for consistency with the requirements of IAS 36; * with the involvement of our internal valuation specialists, we assessed the discount rate assumptions; * evaluated other material assumptions applied to the cash flow forecasts with reference to the macro-economic and industry environment; and * assessed the completeness and accuracy of disclosures within the financial statements in accordance with IFRS. 31 Marks and Spencer plc INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MARKS AND SPENCER PLC. retailers, the impact on the Group's sales and the anticipated cost savings throughout the going concern period Taking into account the sensitivities, the Directors have concluded that the Group has sufficient resources available to meet its liabilities as they fall due and have concluded that there are no material uncertainties around the going concern assumptions. We have identified a key audit matter related to going concern as a result of the judgement required to conclude there is not a material uncertainty related to going concern. Further details of the Directors’ assessment, including the sensitivities applied, are included within the Strategic Report on page 19 and in note 1 to the financial statements. How the scope of our audit In responding to the identified key audit matter we completed the following audit procedures: responded to the key audit matter © obtained an understanding of key controls over management's going concern models, including the review of the inputs and assumptions used in those models; * — obtained management's board approved three year cash flow forecasts and covenant compliance forecasts, including the impact of Covid-19 and the reverse stress test; involved our internal specialists in our assessment of the appropriateness of forecast assumpti ions by: reading analyst reports, industry data and other external information and comparing these with management's estimates to determine if they provided corroborative or contradictory evidence in relation to management's assumptions; comparing forecast sales with recent historical financial information to consider accuracy of forecasting; enquiring of management regarding the mitigating actions to reduce costs and manage cash flows and challenging the quantum of those actions with reference to supporting evidence and assessing whether the mitigating actions were within the Group's control; testing the underlying data generated to prepare the forecast scenarios and determined whether there was adequate support for the assumptions underlying the forecast; reviewing correspondence confirming UK Government support such as indirect tax holidays and staff furlough; reviewing correspondence relating to the availability of the Group's financing arrangements, including the covenant waivers obtained by the Group in relation to its financing facility and the availability of CCFF funding; understanding and challenging the level of further mitigations available to the Group beyond those included within the forecast; and considering the results of the reverse stress tests performed; and — evaluating the Group's disclosures on going concern against the requirements of IAS 1 Key observations We are satisfied that the Directors’ conclusion that there are no material uncertainties over the Group and Parent Company's ability to continue as a going concern is appropriate and the associated disclosures are in accordance with the accounting standards. 6. Our application of materiality 6.1. Materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determi ined materiality for the financial statements as a whole as follows: 34 Marks and Spencer ple INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MARKS AND SPENCER PLC. Group financial statements Parent Company financial statements Materiality £18.0 million (2019: £20.0 million) £16.2 million (2019: £18.0 million) Basis for We considered the following metrics: We considered the following metrics: determining * — Adjusted profit before tax * — Adjusted profit before tax materiality * — Earnings before interest, tax, depreciation and amortisation «© Revenue Using professional judgement we determined materiality to be £18.0m. * — Earnings before interest, tax, depreciation and amortisation e Revenue Using professional judgement we have capped materiality at 90% of Group materiality Rationale for the benchmark applied In determining our benchmark for materiality we considered a number of different metrics used by investors and other readers of the financial statements. This approach is a change from the prior year (which was based on adjusted profit before tax, but excluding the impact of certain adjusting items) to reflect the volatility in the results of the Group arising from the impact of Covid-19. Group materiality represents: Metric % Adjusted profit before tax 45 Earnings before interest, tax, | 2.0 depreciation and amortisation Revenue 0.18 In determining our benchmark for materiality we considered a number of different metrics used by investors and other readers of the financial statements. This approach is a change from the prior year (which was based on revenue) to reflect the volatility in the results of the Parent Company arising from the impact of Covid-19, 6.2. Performance materiality We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Group performance materiality was set at 50% of Group materiality for the 2020 audit (2019: 60%). We have reduced the percentage used, primarily in response to the impact that Covid-19 has had on the Group's internal control environment and financial close process. In determining performance materiality, we considered the following factors: the pervasive impact of Covid-19 on the financial statements, the judgements taken by management and the associated disclosures; © ourcumulative knowledge of the Group and its environment, including industry wide pressure on retailers; * the changes to management personnel; * the level of centralisation in the Group's financial reporting controls and processes; and * the level of misstatements identified in prior periods. 63. Error reporting threshold We agreed with the directors that we would report all audit differences in excess of £0.9 million (2019: £1.0 million), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the directors on disclosure matters that we identified when assessing the overall presentation of the financial statements. 7. An overview of the scope of our audit Our audit was scoped by obtaining an understanding of the Group and its environment, including group-wide controls, and assessing the risks of material misstatement at the Group level. 35 Marks and Spencer ple INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MARKS AND SPENCER PLC. Components were selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identified. Based on our assessment we have focused our audit on the UK business which was subject to full audit procedures. We have performed our full audit scope of the UK component using a materiality of £16.2 million (or 90% of Group materiality) (2019: £18.0 million) as this makes up substantially all of the Group's operations (91% of the Group's revenue, 2019: 91%). India and Ireland have been removed from full-scope audit procedures in the current period, owing to their financial insignificance in the context of the Group as a whole. All wholly owned and associate businesses, including the Irish and Indian components, were subject to analytical review procedures performed by the Group audit team. Whilst we audit the revenues received by the Group from franchise operations, which account for 4% (2019: 4%) of the Group's revenue, we do not audit the underlying franchise operations as part of our group audit. We have also tested the consolidation process and carried out analytical procedures in forming our conclusion that there were no significant risks of material misstatement remaining in the consolidated financial information arising from the components not subject to a full audit. 36 Marks and Spencer ple INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MARKS AND SPENCER PLC. * any matters we identified having obtained and reviewed the Group's documentation of their policies and procedures relating to: © identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance; © detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; and othe internal controls established to mitigate risks of fraud or non-compliance with laws and regulations; and * the matters discussed among the audit engagement team and involving relevant internal specialists, including tax, valuations, pensions, IT and financial instruments specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud. As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the areas in which management is required to exercise significant judgement, such as the disclosure of adjusting items. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override. We also obtained an understanding of the legal and regulatory framework that the Group operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act, Financial Conduct Authority regulations, pensions and tax legislation. In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the Group's ability to operate or to avoid a material penalty. These included the competition and anti-bribery laws, data protection, Groceries Supply Code of Practice, and employment, environmental and health and safety regulations. 11.2. Audit response to risks identified Asa result of performing the above, we identified the disclosure of adjusting items as a key audit matter related to the potential risk of fraud. The key audit matters section of our report explains this matter in more detail and also describes the specific procedures we performed in response to that key audit matter. In addition to the above, our procedures to respond to risks identified included the following: * reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements; * — enquiring of management, the M&S Group plc Audit Committee and in-house and external legal counsel concerning actual and potential litigation and claims; performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; * reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC; and * in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists audit teams, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. Report on other legal and regulatory requirements 12. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: 39 Marks and Spencer ple INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MARKS AND SPENCER PLC. . the information given in the strategic report and the directors’ report for the financial period for which the financial statements are prepared is consistent with the financial statements; and * the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors’ report. 13. Matters on which we are required to report by exception 13.1. Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: * we have not received all the information and explanations we require for our audit; or * adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or © the Parent Company financial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. 13.2. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made. We have nothing to report in respect of this matter. 14. Other matters 14.1. Auditor tenure Following the recommendation of the M&S Group plc Audit Committee, we were appointed by the Shareholders on 8 July 2014 to audit the financial statements for the period ending 28 March 2015 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 6 years, covering the periods ending 28 March 2015 to 28 March 2020. 14.2. Consistency of the audit report with the additional report to the Audit Committee Our audit opinion is consistent with the additional report to the Audit Committee of M&S Group plc we are required to provide in accordance with ISAs (UK). 15. Use of our report This report is made solely to the Parent Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. A Gh Richard Muschamp FCA (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor London 17 August 2020 40 Marks and Spencer plc 41 Consolidated income statement 52 weeks ended 28 March 2020 52 weeks ended 30 March 2019 (Restated) Adjusting items Results before adjusting items Adjusting items Total Results before adjusting items Total Notes £m £m £m £m £m £m Revenue 2, 3 10,181.9 - 10,181.9 10,377.3 - 10,377.3 Operating profit 2, 3, 5 587.5 (342.6) 244.9 725.6 (403.4) 322.2 Finance income 5, 6 44.0 2.9 46.9 34.8 - 34.8 Finance costs 6 (231.6) - (231.6) (248.7) - (248.7) Profit before tax 4, 5 399.9 (339.7) 60.2 511.7 (403.4) 108.3 Income tax expense 7 (83.4) 47.3 (36.1) (105.1) 62.9 (42.2) Profit for the year 316.5 (292.4) 24.1 406.6 (340.5) 66.1 Attributable to: Owners of the parent 312.8 (292.4) 20.4 403.0 (340.5) 62.5 Non-controlling interests 3.7 - 3.7 3.6 - 3.6 316.5 (292.4) 24.1 406.6 (340.5) 66.1 Comparative information has been restated for the impact of IFRS 16 (see note 28). Consolidated statement of comprehensive income 52 weeks ended 52 weeks ended 28 March 2020 30 March 2019 (Restated) Notes £m £m Profit for the year 24.1 66.1 Other comprehensive income: Items that will not be reclassified subsequently to profit or loss Remeasurements of retirement benefit schemes 10 927.9 (79.9) Tax (charge)/credit on retirement benefit schemes (196.7) 14.0 731.2 (65.9) Items that may be reclassified subsequently to profit or loss Foreign currency translation differences - movements recognised in other comprehensive income 5.1 (14.6) - reclassified and reported in profit or loss 2.9 - Cash flow hedges - fair value movements recognised in other comprehensive income 20 140.3 132.0 - reclassified and reported in profit or loss (18.4) (16.0) Tax charge on cash flow hedges (27.0) (19.0) 102.9 82.4 Other comprehensive income for the year, net of tax 834.1 16.5 Total comprehensive income for the year 858.2 82.6 Attributable to: Owners of the parent 854.5 79.0 Non-controlling interests 3.7 3.6 858.2 82.6 Comparative information has been restated for the impact of IFRS 16 (see note 28). Marks and Spencer plc 44 Consolidated statement of cash flows 52 weeks ended 52 weeks ended 28 March 2020 30 March 2019 (Restated) Notes £m £m Cash flows from operating activities Cash generated from operations 25 1,064.7 1,350.4 Income tax paid (91.6) (105.7) Net cash inflow from operating activities 973.1 1,244.7 Cash flows from investing activities Proceeds on property disposals 2.7 48.1 Purchase of property, plant and equipment (251.0) (217.8) Purchase of intangible assets (77.6) (95.1) Sale/(purchase) of current financial assets 130.1 (128.1) Purchase of investments in associates and joint ventures (2.5) (2.5) Interest received 10.4 7.4 Net cash used in investing activities (187.9) (388.0) Cash flows from financing activities Interest paid1 (224.2) (229.0) Repayment of borrowings - (46.7) Issuance of Medium Term Notes 250.0 1.4 Redemption of Medium Term Notes (400.0) - Repayment of lease liabilities (201.4) (170.1) Payment of liability to the Marks & Spencer UK Pension Scheme (63.5) (61.6) Equity dividends paid 8 (193.8) (305.0) Purchase of Marks and Spencer Group plc shares by employee trust (8.9) (5.5) Cash received from settlement of derivatives 7.7 - Movement in parent company and fellow subsidiaries of the parent company loans2 (0.6) 2.1 Net cash used in financing activities (834.7) (814.4) Net cash (outflow)/inflow from activities (49.5) 42.3 Effects of exchange rate changes 0.5 (0.2) Opening net cash 213.1 171.0 Closing net cash 26 164.1 213.1 1Includes interest paid on the partnership liability to the Marks and Spencer UK Pension Scheme of £8.4m (last year: £10.3m) and interest paid on lease liabilities of £134.3m (last year: £142.6m (restated)). 2During the year, the Company has received and paid cash balances in relation to the rights issue by Marks and Spencer Group plc (£574.4m) and acquisition of Ocado Retail Limited by a fellow subsidiary of Marks and Spencer Group plc (£577.8m) respectively. These balances are presented on a net basis within the movement in parent in parent company and fellow subsidiary loans, detail can be seen in the Marks and Spencer Group plc Annual Report 2020. Comparative information has been restated for the impact of IFRS 16 (see note 28). Marks and Spencer plc 45 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting Policies General information Marks and Spencer plc (the “Company”) is a public Company limited by shares incorporated in the United Kingdom under the Companies Act and is registered in England and Wales. The address of the Company’s registered office is Waterside House, 35 North Wharf Road, London W2 1NW. The principal activities of the Company and its subsidiaries (the “Group”) and the nature of the Group’s operations is as a Clothing & Home and Food retailer. These financial statements are presented in sterling, which is also the Company’s functional currency, and are rounded to the nearest hundred thousand. Foreign operations are included in accordance with the policies set out within this note. Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRS IC) interpretations, as adopted by the European Union, and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Marks and Spencer Scottish Limited Partnership has taken an exemption under paragraph 7 of the Partnership (Accounts) Regulations 2008 from the requirement to prepare and deliver financial statements in accordance with the Companies Act. The financial statements have been prepared on a going concern basis. In adopting the going concern basis, the Directors have considered the business activities as set out on pages 1 to 5, and the principal risks and uncertainties as set out on pages 12 to 19, including by modelling a Covid-19 scenario. Given the global political and economic uncertainty resulting from the Covid-19 pandemic, coupled with the already fast paced changes taking place across the retail sector, we expect to see significant volatility and business disruption reducing our expected performance in 2020/21. We have already felt the impact of the government’s guidelines on lockdown, with our Food stores open and trading (albeit with social-distancing rules in place), but with Clothing & Home unable to trade from stores from the end of March to mid June, and all sales therefore predominantly coming from online sales and Click & Collect in stores during this period. Stores have now opened, but with social- distancing and other measures in place. The Covid-19 scenario assumed that the government guidelines in place at the period end date continued for a period of at least four months, resulting in a significant decline in sales for the remainder of 2020/21 as follows: • On average, a 70% decline in Clothing & Home sales vs budget for the four months to July 2020, followed by a slow recovery back to budget by February 2021, reducing expected revenue by £1.5bn for the financial year; • A 20% decline in Food sales vs budget for the four months to July, impacting annual revenue by £384m; • International sales following a similar profile to Clothing & Home, with a significant decline in April due to closures, and a recovery back to budget extended to March 2021, impacting annual revenue by £214m. Further downside sensitivities which extend the length of the social-distancing measures or increase the depth of the impact on sales and margin were also considered. In addition, reverse stress testing has also been applied to the model, which represents a significant decline in sales compared to the Covid-19 scenario. Such a scenario, and the sequence of events which could lead to it, is considered to be remote and this has been borne out in trading subsequent to the year end, which has been substantially ahead of the Covid-19 scenario. The Covid-19 scenario reflects the actions already taken by management, including; • Cost saving initiatives, such as reducing marketing spend, freezing pay and recruitment, and technology and operating expenditure cuts; • Reducing the capital expenditure budget to c.£140m; • Reduced the supply pipeline of Clothing & Home stock by c.£560m, and lengthening payment terms; and • Ceasing to pay the final dividend payment for 2019/20 and for 2020/21, resulting in a total anticipated cash saving of c.£340m. The Group will also benefit from c.£172m of business rates relief in 2020/21 and the government’s job retention scheme to help meet the cost of furloughed roles in stores, distribution and support centres, which was forecast to generate cash savings of c.£50m up to 30 June 2020, and subsequent to the year-end has been extended up until October (which will increase the forecast cash savings to c.100m). In addition, the following further steps have also been taken: • Formal agreement has been reached with the lending syndicate of banks providing the £1.1bn revolving credit facility to remove or substantially relax the covenant conditions for the tests arising in September 2020, March 2021, and September 2021; and • The Group confirmed on 23 April 2020 its eligibility under the UK Government's Covid Corporate Financing Facility (CCFF) and allocated an issuer limit of £300m, providing significant further liquidity headroom. The agreement with the banks combined with the other measures taken means that, even under the Covid-19 scenario, the business would continue to have significant liquidity headroom on its existing facilities and against the revolving credit facility financial covenant. As at 28 March 2020 the financial covenant was met. Marks and Spencer plc 46 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting Policies Continued Additionally, the directors have reviewed the performance of the Group in the period since the period end on a regular basis, with actual performance not adverse compared to the Covid-19 scenario. As a result, the Directors believes that the Group is well placed to manage its financing and other significant risks satisfactorily and that the Group will be able to operate within the level of its facilities for the foreseeable future. For this reason, the Directors considers it appropriate for the Group to adopt the going concern basis in preparing its financial statements. New accounting standards adopted by the Group The Group has applied the following new standards and interpretations for the first time for the annual reporting period commencing 31 March 2019: • IFRS 16 Leases • IFRIC 23 Uncertainty over Income Tax Treatments • Amendments to IFRS 9: Prepayment Features with Negative Compensation • Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures • Amendments to IAS 19: Plan Amendment, Curtailment or Settlement • Annual Improvements to IFRS Standards 2015-2017 Cycle (Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23) The Group also elected to adopt the following amendments early: • Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate Benchmark Reform The nature and effect of the changes to the Group’s accounting policies as a result of the adoption of IFRS 16 is described in note 28. The impact of early adopting the amendments to IFRS 9 as a result of interest rate benchmark reform is described in the financial instruments accounting policy and in note 20. The adoption of the other standards and interpretations listed above has not led to any changes to the Group’s accounting policies or had any other material impact on the financial position or performance of the Group. New accounting standards in issue but not yet effective New standards and interpretations that are in issue but not yet effective are listed below: • Amendment to IFRS 16: Covid-19-Related Rent Concessions • Amendments to IAS 1 and IAS 8: Definition of Material • Amendments to IFRS 3: Definition of a Business • Amendments to References to the Conceptual Framework in IFRS Standards • IFRS 17 Insurance Contracts • Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture With the exception of the adoption of the amendment to IFRS 16, the adoption of the above standards and interpretations are not expected to lead to any changes to the Group’s accounting policies or have any other material impact on the financial position or performance of the Group. The amendment to IFRS 16 is effective for periods commencing on or after 1 June 2020. However, the Group is expected to early adopt the amendment for its reporting period commencing 29 March 2020. As a result, the Group will treat rent concessions that occur as a direct consequence of Covid-19, and that meet the relevant criteria, as variable lease payments rather than as lease modifications. The Group is expected to apply the practical expedient to all rent concessions that meet the criteria. In most cases, this will result in a reduction in the lease liabilities and a gain recognised in profit or loss. The Group does not expect this to be material. Alternative Performance Measures In reporting financial information, the Group presents alternative performance measures (APMs), which are not defined or specified under the requirements of IFRS. The Group believes that these APMs, which are not considered to be a substitute for, or superior to, IFRS measures, provide stakeholders with additional helpful information on the performance of the business. These APMs are consistent with how the business performance is planned and reported within the internal management reporting to the Board and Operating Committee. Some of these measures are also used for the purpose of setting remuneration targets. The key APMs that the Group uses include: like-for-like revenue growth; operating profit before adjusting items; profit before tax and adjusting items; net debt; free cash flow; and return on capital employed. Each of these APMs, and others used by the Group, are set out in the Glossary including explanations of how they are calculated and how they can be reconciled to a statutory measure where relevant. The Group reports some financial measures, primarily International sales, on both a reported and constant currency basis. The constant currency basis, which is an APM, retranslates the previous year revenues at the average actual periodic exchange rates used in the current financial year. This measure is presented as a means of eliminating the effects of exchange rate fluctuations on the year-on-year reported results. Marks and Spencer plc 49 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting Policies Continued Acquired intangible assets are tested for impairment as triggering events occur. Any impairment in value is recognised within the income statement. C. Software intangibles - Where computer software is not an integral part of a related item of computer hardware, the software is treated as an intangible asset. Capitalised software costs include external direct costs of goods and services, as well as internal payroll-related costs for employees who are directly associated with the project. Capitalised software development costs are amortised on a straight-line basis over their expected economic lives, normally between 3 and 10 years. Computer software under development is held at cost less any recognised impairment loss. Any impairment in value is recognised within the income statement. Property, plant and equipment The Group’s policy is to state property, plant and equipment at cost less accumulated depreciation and any recognised impairment loss. Property is not revalued for accounting purposes. Assets in the course of construction are held at cost less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs. Depreciation is provided to write off the cost of tangible non-current assets (including investment properties), less estimated residual values on a straight-line basis as follows: • Freehold land – not depreciated. • Buildings – depreciated to their residual value over their estimated remaining economic lives. • Fixtures, fittings and equipment – 3 to 25 years according to the estimated economic life of the asset. Residual values and useful economic lives are reviewed annually. Depreciation is charged on all additions to, or disposals of, depreciating assets in the year of purchase or disposal. Any impairment in value is recognised within the income statement. Leasing The Group recognises a right-of-use asset and corresponding liability at the date at which a leased asset is made available for use by the Group, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low-value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease. Lease liabilities are measured at the present value of the future lease payments, excluding any payments relating to non-lease components. Future lease payments include fixed payments, in-substance fixed payments, and variable lease payments that are based on an index or a rate, less any lease incentives receivable. Lease liabilities also take into account amounts payable under residual value guarantees and payments to exercise options to the extent that it is reasonably certain that such payments will be made. The payments are discounted at the rate implicit in the lease or, where that cannot be readily determined, at an incremental borrowing rate. Right-of-use assets are measured initially at cost based on the value of the associate lease liability, adjusted for any payments made before inception, initial direct costs and an estimate of the dismantling, removal and restoration costs required in the terms of the lease. The Group presents right-of-use assets in ‘property, plant and equipment’ in the consolidated statement of financial position. Subsequent to initial recognition, the lease liability is reduced for payments made and increased to reflect interest on the lease liability (using the effective interest method). The related right-of-use asset is depreciated over the term of the lease or, if shorter, the useful economic life of the leased asset. The lease term shall include the period of an extension option where it is reasonably certain that the option will be exercised. Where the lease contains a purchase option the asset is written off over the useful life of the asset when it is reasonably certain that the purchase option will be exercised. The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: • The lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. • The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used). • A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. Leases for which the Group is a lessor are classified as finance or operating leases. A lease is classified as a finance lease if it transfers substantially all the risks and rewards of ownership to the lessee and classified as an operating lease if it does not. When the Group is an intermediate lessor, it accounts for the head lease and the sub-lease as two separate contracts. The sub-lease is classified as a finance or operating lease by reference to the right-of-use asset arising from the head lease. Amounts due from lessees under finance leases are recognised as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment in the lease. Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Cash and cash equivalents Cash and cash equivalents includes short-term deposits with banks and other financial institutions, with an initial maturity of three months or less and credit card payments received within 48 hours. Inventories Inventories are valued on a weighted average cost basis and carried at the lower of cost and net realisable value. Cost includes all direct expenditure and other attributable costs incurred in bringing inventories to their present location and condition. All inventories are finished Marks and Spencer plc 50 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting Policies Continued goods. Certain purchases of inventories may be subject to cash flow hedges for foreign exchange risk. The initial cost of hedged inventory is adjusted by the associated hedging gain or loss transferred from the cash flow hedge reserve (“basis adjustment”). Provisions Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the best estimate of the expenditure required to settle the obligation at the end of the reporting period, and are discounted to present value where the effect is material. Share-based payments The Group issues equity-settled share-based payments to certain employees. A fair value for the equity-settled share awards is measured at the date of grant. The Group measures the fair value of each award using the Black-Scholes model where appropriate. The fair value of each award is recognised as an expense over the vesting period on a straight-line basis, after allowing for an estimate of the share awards that will eventually vest. The level of vesting is reviewed at each reporting period and the charge is adjusted to reflect actual and estimated levels of vesting. These shares relate to the shares in the parent company, Marks and Spencer Group plc, rather than the Company. Foreign currencies The financial statements are presented in Sterling which is the Company’s functional currency. The results of overseas subsidiaries are translated at the weighted average of monthly exchange rates for revenue and profits. The statements of financial position of overseas subsidiaries are translated at year-end exchange rates. The resulting exchange differences are booked into reserves and reported in the consolidated statement of comprehensive income. On disposal of an overseas subsidiary the related cumulative translation differences recognised in reserves are reclassified to profit or loss and are recognised as part of the gain or loss on disposal. Transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. Foreign currency monetary assets and liabilities held at the end of the reporting period are translated at the closing balance sheet rate. The resulting exchange gain or loss is recognised within the income statement, except when deferred in other comprehensive income and accumulated in the cash flow hedge reserve as qualifying cash flow hedges. Taxation Tax expense comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case the related tax is recognised in other comprehensive income or directly in equity. Provision is made for uncertain tax positions when it is considered probable that there will be a future outflow of funds to a tax authority. The provision is calculated using the single best estimate where that outcome is more likely than not and a weighted average probability in other circumstances. The position is reviewed on an ongoing basis, to ensure appropriate provision is made for each known tax risk. Deferred tax is accounted for using a temporary difference approach, and is the tax expected to be payable or recoverable on temporary differences between the carrying amount of assets and liabilities in the statement of financial position and the corresponding tax bases used in the computation of taxable profit. Deferred tax is calculated based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, applying tax rates and laws enacted or substantively enacted at the end of the reporting period. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the reversal of the temporary difference can be controlled by the Group and it is probable that the difference will not reverse in the foreseeable future. Deferred tax liabilities are not recognised on temporary differences that arise from goodwill which is not deductible for tax purposes. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are not recognised in respect of temporary differences that arise on initial recognition of assets and liabilities acquired other than in a business combination. Financial instruments Financial assets and liabilities are recognised in the Group’s statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets are initially classified as at fair value through profit and loss, fair value through other comprehensive income or amortised cost depending on the Group’s intention with regard to the collection of contractual cash flows (or sale) and whether the financial asset’s cash flows relate solely to the payment of principal and interest. A. Trade and other receivables - Trade receivables are recorded initially at transaction price and subsequently measured at amortised cost. This results in their recognition at nominal value less an allowance for any doubtful debts. The allowance for doubtful debts is recognised based on management’s expectation of losses without regard to whether an impairment trigger happened or not (an “expected credit loss” model). B. Other financial assets - Other financial assets consist of investments in debt and equity securities and short-term investments with a maturity date of over 90 days and are classified as either fair value through other comprehensive income (FVOCI) or fair value through profit and loss (FVPL). Financial assets held at FVOCI are initially measured at fair value, including transaction costs directly attributable to the acquisition of the financial asset. Financial assets held at FVPL are initially recognised at fair value and transaction costs are expensed. Marks and Spencer plc 51 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting Policies Continued Where securities are designated as FVPL, gains and losses arising from changes in fair value are included in the income statement for the period. For equity investments at FVOCI, gains or losses arising from changes in fair value are recognised in other comprehensive income until the security is disposed of, at which time the cumulative gain or loss previously recognised in other comprehensive income and accumulated in the FVOCI reserve is transferred to retained earnings. For debt instruments at FVOCI, gains and losses arising from changes in fair value are recognised in other comprehensive income until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in other comprehensive income and accumulated in equity is reclassified to the income statement. Impairments in debt securities are recognised based on management’s expectation of losses in each investment (“expected credit loss” model). C. Classification of financial liabilities and equity - Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. D. Bank borrowings - Interest-bearing bank loans and overdrafts are initially recorded at fair value, which equals the proceeds received, net of direct issue costs. They are subsequently held at amortised cost. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for using an effective interest rate method and are added to or deducted from the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. E. Loan notes - Long-term loans are initially measured at fair value net of direct issue costs and are subsequently held at amortised cost. If the loan is designated in a fair value hedge relationship, the carrying value of the loan is adjusted to the hedged risk. F. Trade payables - Trade payables are recorded initially at fair value and subsequently measured at amortised cost. Generally, this results in their recognition at their nominal value. G. Equity instruments - Equity instruments issued by the Group are recorded at the consideration received, net of direct issue costs. Derivative financial instruments and hedging activities The Group primarily uses interest rate swaps, cross-currency swaps and forward foreign currency contracts to manage its exposures to fluctuations in interest rates and foreign exchange rates. These instruments are initially recognised at fair value on the trade date and are subsequently remeasured at their fair value at the end of the reporting period. The method of recognising the resulting gain or loss is dependent on whether the derivative is designated as a hedging instrument and the nature of the item being hedged. The Group designates certain hedging derivatives as either: • A hedge of a highly probable forecast transaction or change in the cash flows of a recognised asset or liability (a cash flow hedge). • A hedge of the exposure to change in the fair value of a recognised asset or liability (a fair value hedge). At the inception of a hedging relationship, the hedging instrument and the hedged item are documented, along with the risk management objectives and strategy for undertaking various hedge transactions and prospective effectiveness testing is performed. During the life of the hedging relationship, prospective effectiveness testing is performed to ensure that the instrument remains an effective hedge of the transaction. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. In September 2019, the IASB issued Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7. These amendments modify specific hedge accounting requirements to allow hedge accounting to continue for affected hedges during the period of uncertainty before the hedged items or hedging instruments affected by the current interest rate benchmarks are amended as a result of the on-going interest rate benchmark reforms. The application of the amendments impacts the Group’s accounting in relation to a sterling denominated fixed rate debt which it fair value hedge accounts using sterling fixed to GBP LIBOR interest rate swaps. The amendments permit continuation of hedge accounting even if in the future the hedged benchmark interest rate, GBP LIBOR, may no longer be separately identifiable. However, this relief does not extend to the requirement that the designated interest rate risk component must continue to be reliably measurable. If the risk component is no longer reliably measurable, the hedging relationship is discontinued. The Group has chosen to early apply the amendments to IFRS 9 for the reporting period ended 28 March 2020, which are mandatory for annual reporting periods beginning on or after 1 January 2020. Adopting these amendments allows the Group to continue hedge accounting during the period of uncertainty arising from interest rate benchmark reforms. A. Cash flow hedges Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised in other comprehensive income. The element of the change in fair value which relates to the currency spread is recognised in the cost of hedging reserve, with the remaining change in fair value recognised in the hedging reserve and any ineffective portion is recognised immediately in the income statement in finance costs. If the firm commitment or forecast transaction that is the subject of a cash flow hedge results in the recognition of a non-financial asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in other comprehensive income and accumulated in the cash flow hedge reserve are removed directly from equity and included in the initial measurement of the asset or liability. For hedges that do not result in the recognition of an asset or a liability, amounts deferred in the cash flow hedge reserve are recognised in the income statement in the same period in which the hedged items affect net profit or loss. Marks and Spencer plc 54 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting Policies Continued The assumptions most likely to have a material impact are closure dates and changes to future sales. See notes 5 and 14 for further detail. Useful lives and residual values of property, plant and equipment and intangibles Depreciation and amortisation are provided to write down the cost of property, plant and equipment and certain intangibles to their estimated residual values over their estimated useful lives, as set out above. The selection of the residual values and useful lives gives rise to estimation uncertainty, especially in the context of changing economic and market factors, the channel shift from stores to online, increasing technological advancement and the Group’s ongoing strategic transformation programmes. The useful lives of property, plant and equipment and intangibles are reviewed by management annually. See notes 13 and 14 for further details. Refer to the UK store estate programme section above for specific sources of estimation uncertainty in relation to the useful lives of property, plant and equipment for stores identified as part of the UK store estate programme. Due to the nature of the Group’s property, plant and equipment, it is not practicable to provide a meaningful sensitivity analysis. Impairment of property, plant and equipment and intangibles Property, plant and equipment and computer software intangibles are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill and indefinite life brands are reviewed for impairment on an annual basis. When a review for impairment is conducted, the recoverable amount is determined based on the higher of value in use and fair value less costs to sell. The value in use method requires the Group to determine appropriate assumptions (which are sources of estimation uncertainty) in relation to the cash flow projections over the three-year strategic plan period, the long-term growth rate to be applied beyond this three-year period and the risk-adjusted pre-tax discount rate used to discount the assumed cash flows to present value. In light of the ongoing Covid- 19 pandemic, the Group’s cash flow projections over the three-year strategic plan period have been revised and include a Covid-19 overlay in year 1 (the Covid-19 scenario), focusing on the external impact of social-distancing measures, and the internally controllable mitigating actions the Group is taking to protect the business. The assumption that cash flows continue into perpetuity (with the exception of stores identified as part of the UK store estate programme) is a source of significant estimation certainty. A future change to the assumption of trading into perpetuity for any Cash-Generating Unit (CGU) would result in a reassessment of useful economic lives and residual value and could give rise to a significant impairment of property, plant and equipment and intangibles particularly where the store carrying value exceeds fair value less cost to sell. See notes 13 and 14 for further details on the Group's assumptions and associated sensitivities. Inventory provisioning The Group sells Clothing & Home merchandise that are subject to changing consumer demands and seasonal trends. As a direct result of the restrictions on “non-essential” trade imposed in response to the Covid-19 pandemic, our ability to sell through existing Clothing & Home stock has been significantly impacted. Accordingly, the Group has had to review its inventory levels in light of future expectations of sell- through, impacting the recoverability of the cost of inventories and the level of provisioning required. When calculating inventory provisions, management has considered the nature and condition of inventory, as well as applying assumptions around when trade restrictions might be eased leading to resumption of sales. See note 5 for further details on the assumptions and associated sensitivities. Post-retirement benefits The determination of pension net interest income and the defined benefit obligation of the Group’s defined benefit pension schemes depends on the selection of certain assumptions which include the discount rate, inflation rate and mortality rates. Differences arising from actual experiences or future changes in assumptions will be reflected in subsequent periods. A minority of the assets of the scheme are relatively illiquid and in the past historical pricing has been used to value these asset classes at year-end (typically pricing from the most recent 31 December). Covid-19 has led to significant market falls for some asset classes. Asset values have been reduced using movements in a market index for listed private equity as a proxy for actual performance of private equity assets and information from managers for adjustments to secure income assets. Management has considered reasonably possible changes in these key sources of estimation uncertainty. A further change of 10% in private equity values would change asset values by £14.0m and a 0.5% change in secure income assets would change asset values by £3.0m. See note 10 for further details on the impact of changes in the key assumptions and estimates. Marks and Spencer plc 55 NOTES TO THE FINANCIAL STATEMENTS 2 Segmental Information IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reporting on components of the Group that are regularly reviewed by the chief operating decision-maker to allocate resources to the segments and to assess their performance. The chief operating decision-maker has been identified as the Operating Committee. The Operating Committee reviews the Group’s internal reporting in order to assess performance and allocate resources across each operating segment. During the year, the Group has completed a comprehensive review of the way in which costs are allocated between our businesses. As a result, a detailed and more accurate cost allocation methodology now exists which allows the Operating Committee to review performance by business down to Operating profit, with financial and management information presented in the way that best: reflects how we manage the business; allows management to take fully informed decisions; and therefore holds management appropriately to account. As a result, during 2019/20, the composition of the Group’s operating segments has changed. The Group now recognises three operating segments, being UK Clothing & Home, UK Food and International (previously UK and International), with reporting on all three segments down to Operating profit before adjusting items. These new reportable segments reflect key pillars of our transformation programme and the enhanced focus on managing each of the three core business areas. The Group’s reportable operating segments have therefore been identified as follows: • UK Clothing & Home – comprises the retailing of womenswear, menswear, lingerie, kidswear and home products through UK retail stores and online. • UK Food – includes the results of the UK retail food business and UK Food franchise operations, with the following five main categories: protein deli and dairy; produce; ambient and in-store bakery; meals, dessert and frozen; and hospitality and ‘Food on the Move’. • International – consists of Marks and Spencer owned businesses in Europe and Asia and the international franchise operations. Other business activities and operating segments, including M&S Bank and M&S Energy, are combined and presented in “All other segments”. M&S Bank and M&S Energy were previously reported within the old UK segment but are now presented within “All other segments” as the business activities are fundamentally different to the three core reportable segments. Finance income and costs are not allocated to segments as each is managed on a centralised basis. As the Group’s reportable segments have been changed, the comparative information for 2019 has been restated. The Operating Committee assesses the performance of the operating segments based on a measure of operating profit before adjusting items. This measurement basis excludes the effects of adjusting items from the operating segments. The following is an analysis of the Group’s revenue and results by reportable segment: Marks and Spencer plc 56 NOTES TO THE FINANCIAL STATEMENTS 2 Segmental Information Continued 52 weeks ended 28 March 2020 52 weeks ended 30 March 2019 (Restated1) UK Clothing & Home UK Food International All other segments Group UK Clothing & Home UK Food International2,3 All other segments Group £m £m £m £m £m £m £m £m £m £m Revenue 3,209.1 6,028.2 944.6 - 10,181.9 3,499.8 5,903.4 974.1 - 10,377.3 Operating profit before adjusting items4 223.6 236.4 110.7 16.8 587.5 355.2 212.9 130.5 27.0 725.6 Finance income 44.0 34.8 Finance costs (231.6) (248.7) Profit before tax and adjusting items 223.6 236.4 110.7 16.8 399.9 355.2 212.9 130.5 27.0 511.7 Adjusting items (339.7) (403.4) Profit before tax 223.6 236.4 110.7 16.8 60.2 355.2 212.9 130.5 27.0 108.3 1 Prior year comparatives have also been restated for the adoption of IFRS 16 Leases (see note 28). 2 The reporting of results from certain international M&S.com websites has been transferred from UK Clothing & Home (previously UK) to International to align reporting with the day-to-day management of these operations, resulting in revenue of £37.5m and operating profit of £2.9m being transferred. 3 International operating profit was previously reported as £127.0m and has been restated to £130.5m due to the adoption of IFRS 16 (increased by £13.2m), a reallocation of central costs between the Group’s reportable segments (decreased by £12.6m) and the impact of footnote 2 (increased by £2.9m). 4 Operating profit before adjusting items is stated as gross profit less operating costs prior to adjusting items. At reportable segment level costs are allocated where directly attributable or based on an appropriate cost driver for the cost. Other segmental information 52 weeks ended 28 March 2020 52 weeks ended 30 March 2019 (Restated1) UK Clothing & Home UK Food International All other segments Group UK Clothing & Home UK Food International All other segments Group £m £m £m £m £m £m £m £m £m £m Additions to property, plant & equipment and intangible assets (excluding goodwill and right-of-use assets) 166.5 170.1 15.7 - 352.3 140.6 142.5 13.9 - 297.0 Depreciation and amortisation2 (350.6) (283.4) (34.6) - (668.6) (430.4) (323.8) (35.5) - (789.7) Impairment and asset write-offs2 (69.9) (45.3) (10.3) - (125.5) (104.3) (139.8) (0.5) - (244.6) 1 Prior year comparatives have also been restated for the adoption of IFRS 16 Leases (see note 28). 2 These costs are allocated where directly attributable or based on an appropriate cost driver for the cost. Segment assets and liabilities, including investments in associates and joint ventures, are not disclosed because they are not reported to or reviewed by the Operating Committee. Marks and Spencer plc 59 NOTES TO THE FINANCIAL STATEMENTS 5 Adjusting items continued The charge primarily relates to impairment of buildings and fixtures and fittings and depreciation as a result of shortening the useful economic life of stores based on the latest approved exit routes. Refer to notes 14 and 21 for further detail on these charges. Further material charges relating to the closure and re-configuration of the UK store estate are anticipated as the programme progresses, the quantum of which is subject to change throughout the programme period as decisions are taken in relation to the size of the store estate and the specific stores affected. Following restatement for IFRS 16 and the updated view of store closure costs, future charges of up to c.£110m are estimated within the next two financial years, giving post IFRS 16 total programme charges of up to £680m in line with previous disclosures. Strategic programmes – Organisation (£13.8m) During 2016/17, the Group announced a wide-ranging strategic review across a number of areas of the business which included UK organisation and the programme to centralise our London Head Office functions into one building. As part of the wide-ranging strategic review, a further announcement was made in 2017/18 to reduce Group operating costs by £350m by the end of 2021. Prior to the onset of the Covid-19 pandemic, the Group had been on track to deliver the operating cost savings. As part of our commitment to the transformation strategy and delivering the cost reduction programme, further reviews of our organisational structure have been performed in order to streamline structures and improve operational efficiency. This has resulted in a reduction of roles and a charge of £10.8m recognised in the period for redundancy costs associated with these changes. In addition, a further £3.0m of costs have been recognised in the period reflecting an updated view of costs associated with centralising the Group’s London Head Office functions. As the Group executes the three phases of the transformation strategy further material organisation costs are likely to occur in order to meet the transformation objective. These costs are considered to be adjusting items as the costs are part of the strategic programme, significant in quantum with £73.4m of costs (after restatement for IFRS 16) incurred to date, and are consistent with the disclosure of other similar charges in prior years. Strategic programmes – Operational transformation (£11.6m) The Group is undertaking a number of key transformation initiatives with the aim of re-engineering end-to-end supply chain, removing costs, complexity and working capital. Part of this transformation has included a fundamental review of the Group’s UK Clothing & Home and UK Food end-to-end processes. A charge of £11.6m has been recognised primarily for consultancy costs for the transformation and simplification of our supply chain and operations across UK Clothing & Home and UK Food. These costs are considered to be adjusting items as they relate to a strategic programme and the total costs are significant in quantum (£28.0m to date), and as a result not considered to be normal operating costs of the business. Further operational transformation initiatives are planned for 2020/21 which will result in additional related charges within adjusting items. Strategic programmes – IT restructure (£0.4m) In 2017/18, as part of the five-year transformation strategy, the Group announced a technology transformation programme to create a more agile, faster and commercial technology function. A charge of £0.4m has been recognised in the period relating primarily to transition costs associated with the implementation of a new technology operating model. 2019/20 is the final year of the IT restructure programme. These costs are considered to be an adjusting item as they relate to a significant strategic initiative of the Group which over the prior two years has been significant in value and nature to the results of the Group (2018/19: £15.6m and 2017/18: £15.5m). Strategic programmes – UK logistics (£10.2m) In 2017/18, as part of the previously announced long-term strategic programme to transition to a single-tier UK distribution network, the Group announced the opening of a new Clothing & Home distribution centre in Welham Green in 2019. As a direct result, the Group announced the closure of two existing distribution centres. A net charge of £10.2m has been recognised in the period for redundancy, accelerated depreciation and project costs. In February 2020, the Group announced the next phase of the single tier programme with the closure of two further sites expected across 2020/21 and 2021/22. Further charges are expected in 2020/21 of c.£13m resulting in a total programme cost of c.£52m. The Group considers these costs to be adjusting items as they are significant in quantum and relate to a significant strategic initiative of the Group. Treatment of the costs as being adjusting items is consistent with the treatment of charges in previous periods in relation to the creation of a single-tier logistics network. Strategic programmes – Changes to pay and pensions (£2.9m) In May 2016, the Group announced proposals for a fairer, simpler and more consistent approach to pay and premia as well as proposals to close the UK DB pension scheme to future accrual, effective from 1 April 2017. As part of these proposals, the Group committed to making transition payments to impacted employees in relation to the closure of the UK DB scheme, c.£25m in total over the three years commencing 2017/18. 2019/20 represents the final year of these payments, with a charge in the period in relation to these transition payments to employees of £2.9m, taking the total programme cost to £178m. As previously disclosed, the Group considers the costs directly associated with the closure of the UK DB scheme to be an adjusting item on the basis that they relate to a significant cost, impacting the Group results. Treatment of the transition payments made in the period within adjusting items is consistent with disclosure of the same costs in 2018/19, 2017/18 and the original disclosure of the UK DB scheme closure costs in 2016/17. Marks and Spencer plc 60 NOTES TO THE FINANCIAL STATEMENTS 5 Adjusting items continued Strategic programmes – International store closures and impairments (£2.2m) In 2016/17, the Group announced its intention to close its owned stores in 10 international markets. A net charge of £2.2m has been recognised in the year, reflecting an updated view of the estimated final closure costs for certain markets and those costs which can only be recognised as incurred, taking the programme cost to date to £145m. The net charge is considered to be an adjusting item as it is part of a strategic programme which over the three years of charges has been significant in both quantum and nature to the results of the Group. No further significant charges are expected. Store impairments and other property charges (£78.5m) The Group has recognised a number of charges in the period associated with reductions to the carrying value of items of property, plant and equipment. In response to the ongoing pressures impacting the retail industry, as well as reflecting the Group’s strategic focus towards growing online market share, and in light of the ongoing Covid-19 pandemic, the Group has revised future cash flow projections for UK and international stores (excluding those stores which have been captured as part of the UK store estate programme). As a result, store impairment testing has identified stores where the current and anticipated future performance does not support the carrying value of the stores. A charge of £78.5m (of which, £24.2m represents the directly attributable incremental impairment due to Covid-19 (see below for further details)) has been incurred primarily in respect of the impairment of assets associated with these stores. Refer to note 14 for further details on the impairments. The charges have been classified as an adjusting item on the basis of the significant quantum of the charge in the period to the results of the Group. M&S Bank charges incurred in relation to insurance mis-selling and Covid-19 forward economic guidance provision (£12.6m) The Group has an economic interest in Marks and Spencer Financial Services plc, a wholly owned subsidiary of HSBC UK Bank plc, trading as M&S Bank, by way of a Relationship Agreement that entitles the Group to a 50% share of the profits of M&S Bank after appropriate deductions. The Group does not share in any losses of M&S Bank and is not obliged to refund any profit share received from HSBC, although future income may be impacted by significant one-off deductions. Since the year ended 31 December 2010, M&S Bank has recognised in its audited financial statements an estimated liability for redress to customers in respect of possible mis-selling of financial products. The Group’s profit share income from M&S Bank has been reduced by the deduction of the estimated liability in both the current and prior years. In addition, further charges have been recognised by M&S Bank in relation to forward economic guidance provisions recognised as a result of Covid-19. In line with the accounting treatment under the Relationship Agreement, there is a cap on the amount of charges that can be offset against the profit share in any one year, whereby excess liabilities carried forward are deducted from the Group’s future profit share from M&S Bank. The deduction in the period is £12.6m. The Group considers this cost to be an adjusting item, despite its recurring nature, as the charges are significant in nature and value in each period to the results of the Group. While the August 2019 deadline to raise potential mis-selling claims has now passed, costs relating to the estimated liability for redress are expected to continue into 2020/21 and beyond as the Group’s share of the total charge since September 2013 of £327.6m exceeds the total offset against profit share of £242.7m to date. The Group therefore expects future adjusting items charges of c.£100m - predominantly related to PPI mis-selling claim liabilities - which will be offset against the share of M&S Bank profits in future years. Establishing the investment in Ocado Retail Limited by the Ultimate Parent Group (£1.2m) In the prior year, the Group recognised in adjusting items £3.4m of due diligence charge relating to the Ultimate Parent Group’s investment in Ocado Retail. As part of the preparation for the launch in September 2020, the Group has incurred £1.2m of one-off charges that will not be part of the day-to-day operational costs of our business with Ocado Retail. An estimated further £1m–2m of “getting ready” costs are expected in H1 2020/21 prior to launch in September 2020. These “getting ready” costs, combine with the costs recognised in 2018/19 relating to setting up the investment in Ocado Retail, to bring the total expected one- off charges relating to Ocado Retail up to in the range of £6m-7m. These costs are adjusting items as they relate to a major transaction made by the Ultimate Parent Group and but for the transaction the business would not have incurred these costs and as a result prior to the Ocado “go-live” in September 2020 are not considered to be normal operating costs of the business. Directly attributable gains/(expenses) resulting from the Covid-19 pandemic In March 2020, following the declaration by the World Health Organisation of the Covid-19 global pandemic and subsequent UK government restrictions, while the Group has been able to continue to trade its Food business (albeit with social-distancing rules in place), Clothing & Home has been unable to trade from full-line stores for the period from March to mid-June, with any sales therefore predominantly coming from online sales and Click & Collect in stores. All M&S Outlet stores and a number of Food franchise stores have also closed. All stores have now reopened, but with social distancing and other measures in place. Given the global political and economic uncertainty resulting from the Covid-19 pandemic, coupled with the already fast paced changes taking place across the retail sector, the Group expects to see significant volatility and business disruption, reducing the expected performance in 2020/21. As set out in the basis of preparation on page 45, the Board has approved a Covid-19 scenario budget and three-year plan, which assumes that the pandemic results in a significant decline in sales for the remainder of 2020/21. As a result, in order to improve the transparency and usefulness of the financial information presented and improve year-on-year comparability, the Group has identified charges of £212.8m relating to directly attributable gains and expenses resulting from the Covid-19 Marks and Spencer plc 61 NOTES TO THE FINANCIAL STATEMENTS 5 Adjusting items continued pandemic. The charges relate to three separately identifiable areas of accounting judgement and estimates: the write-down of inventories to net realisable value; impairments of intangible assets and property, plant and equipment; and onerous contract provisions, cancellation charges and one-off costs. Should the estimated charges prove to be in excess of the amounts required, the release of any amounts previously provided would be treated as adjusting items. The impact that Covid-19 has had on underlying trading is not recognised within adjusting items. Write-down of inventories to net realisable value (£157.0m) The Group has performed a detailed assessment of all retail inventory, including all items in our stores, warehouses and outlets, taking into consideration the period of trading disruption, current sales and sell through plans and considered the impact on the stock holding at year end. The review concluded that there was a need to provide for items from previous seasons which are unlikely to be saleable when stores reopen; that items in the summer sale are likely to be cleared below cost and the need to provide for hibernated stock (stock that will be stored within our warehouses) at reduced prices when we look to sell it in Spring/Summer 2021. The Group has recognised an incremental write-down of inventory to net realisable value of £157.0m (UK Clothing & Home: £145.3m; UK Food: £6.0m and International: £5.7m), reflecting management’s best estimate of the impact on the Group of the Covid-19 pandemic. The total UK Clothing & Home inventory provisions represent 33% of UK Clothing & Home inventory. A 5% increase in the UK Clothing & Home inventory provision would result in a reduction in inventory held on the balance sheet of £26.0 m and would result in a corresponding reduction to recognised profit before tax in 2019/20. Impairments of intangible assets and property, plant and equipment (£49.2m) As a direct result of the Covid-19 pandemic, all impairment assessments were reperformed using the cash flows resulting from the Board- approved Covid-19 scenario detailed above. Incremental impairment charges as a direct result of Covid-19 have been recognised for the following assets: Goodwill – per una (£13.4m); Strategic programme – UK store estate (£11.6m); and Store impairments (£24.2m). Refer to notes 13 and 14 for further details on the impairment charges relating to per una goodwill and stores, as well as note C6 of the Company accounts. Onerous contract provisions, cancellation charges and one-off gains/costs (£6.6m) The Group has incurred a total of £6.6m of one-off charges relating to onerous contract and other provisions, and cancellation charges incurred pre-year end as a result of the disruption caused by Covid-19 to normal operating activities. In addition, a number of projects have been cancelled, leading to the impairment and write-off of intangible assets in the course of construction recognised up to 28 March 2020. The £212.8m directly attributable net charges from the Covid-19 pandemic are considered to be adjusting items as they meet the Group’s established definition, being both significant in nature and value to the results of the Group in the current period. Further charges are anticipated during 2020/21 to reflect actions that will be taken as a direct result of the length of time that the government restrictions are in place, and trade and consumer behaviour is impacted. Any future credits relating to these items will also be classified as adjusting. 6 Finance income/costs 2020 2019 (Restated) £m £m Bank and other interest receivable 8.6 7.6 Other finance income 5.9 0.4 Pension net finance income (see note 10F) 23.6 25.8 Interest income of subleases 5.9 1.0 Finance income before adjusting items 44.0 34.8 Interest on bank borrowings - (0.6) Interest payable on syndicated bank facility (2.3) (2.3) Interest payable on Medium Term Notes (78.2) (77.4) Interest payable on lease liabilities (139.3) (148.2) Ineffectiveness on hedge accounting - (3.5) Unwind of discount on provisions (4.9) (7.9) Unwind of discount on partnership liability to the Marks & Spencer UK Pension Scheme (see note 11) (6.9) (8.8) Finance costs before adjusting items (231.6) (248.7) Net finance costs before adjusting items (187.6) (213.9) Additional finance income of £2.9m (last year: £nil) relating to forecast purchases no longer expected to occur have been incurred and included within adjusting items as detailed in note 5. Marks and Spencer plc 64 NOTES TO THE FINANCIAL STATEMENTS 9 Employees A. Aggregate remuneration The aggregate remuneration and associated costs of Group employees (including Operating Committee) were: 2020 2019 Total Total £m £m Wages and salaries 1,263.7 1,293.2 Social security costs 80.0 85.0 Pension costs 72.9 77.4 Share-based payments (see note 13) 18.5 19.2 Employee welfare and other personnel costs 51.8 53.8 Capitalised staffing costs (22.5) (17.6) Total aggregate remuneration1 1,464.4 1,511.0 1 Excludes amounts recognised within adjusting items of £23.1m (last year: £64.9m) which predominantly relate to wages and salaries (see notes 3 and 5). Details of key management compensation are given in note 27. B. Average monthly number of employees 2020 2019 UK stores - management and supervisory categories 5,278 5,480 - other 62,027 63,957 UK head office - management and supervisory categories 2,947 2,968 - other 764 832 UK operations - management and supervisory categories 115 81 - other 1,302 1,066 Overseas 5,598 5,713 Total average number of employees 78,031 80,097 The average number of full-time equivalent employees is 53,988 (last year: 55,440). 2020 £’000 2019 £’000 Highest paid director 1,211.0 1,517.0 Aggregate emoluments of all other directors 975.5 1,059.2 Two directors (last year: two) accrued retirement benefits under a defined benefit scheme. One directors (last year: two) exercised share options in relation to the Group’s long-term incentive plans. Three directors (last year: four) were awarded share options in relation to the Group’s long-term incentive plan. Marks and Spencer plc 65 NOTES TO THE FINANCIAL STATEMENTS 10 Retirement benefits The Group provides pension arrangements for the benefit of its UK employees through the Marks & Spencer UK Pension Scheme (a DB arrangement) and Your M&S Pension Saving Plan (a defined contribution (DC) arrangement). The UK DB pension scheme operated on a final pensionable salary basis and is governed by a Trustee board which is independent of the Group. The UK DB scheme closed to future accrual on 1 April 2017. There will be no further service charges relating to the scheme and no future monthly employer contributions for current service. At year end, the UK DB pension scheme had no active members (last year: nil), 55,887 deferred members (last year: 58,079) and 52,165 pensioners (last year: 52,217). The most recent actuarial valuation of the Marks & Spencer UK Pension Scheme was carried out as at 31 March 2018 and showed a funding surplus of £652m. This is an improvement on the previous position at 31 March 2015 (statutory surplus of £204m), primarily due to lower assumed life expectancy. The Company and Trustee have confirmed, in line with the current funding arrangement, that no further contributions will be required to fund past service as a result of this valuation (other than those already contractually committed under the existing Marks and Spencer Scottish Limited Partnership arrangements – see note 11). The DC plan is a pension plan under which the Group pays contributions to an independently administered fund. Such contributions are based upon a fixed percentage of employees’ pay. The Group has no legal or constructive obligations to pay further contributions to the fund once the contributions have been paid. Members’ benefits are determined by the amount of contributions paid by the Group and the member, together with the investment returns earned on the contributions arising from the performance of each individual’s investments and how each member chooses to receive their retirement benefits. As a result, actuarial risk (that benefits will be lower than expected) and investment risk (that assets invested in will not perform in line with expectations) fall on the employee. At the year end, the defined contribution arrangement had some 52,059 active members (last year: 53,536) and some 33,578 deferred members (last year: 26,709). The Group also operates a small funded DB pension scheme in the Republic of Ireland. This scheme closed to future accrual on 31 October 2013. Other retirement benefits also include a UK post-retirement healthcare scheme and unfunded retirement benefits. The total Group retirement benefit cost was £49.2m (last year: £69.5m). Of this, income of £20.2m (last year: income of £4.5m) relates to the UK DB pension scheme, costs of £65.6m (last year: costs of £68.7m) to the UK DC plan and costs of £3.8m (last year: costs of £5.3m) to other retirement benefit schemes. In April 2019, the Scheme purchased additional pensioner buy-in policies with two insurers for approximately £1.4bn. Together with the two policies purchased in March 2018, the Scheme has now, in total, insured around two thirds of the pensioner cash flow liabilities for pensions in payment. The buy-in policies cover specific pensioner liabilities and pass all risks to an insurer in exchange for a fixed premium payment, thus reducing the Group’s exposure to changes in longevity, interest rates, inflation and other factors. On 26 October 2018, the High Court issued a judgement in a claim involving Lloyds Banking Group’s DB pension schemes. This judgement concluded that the schemes should be amended in order to equalise pension benefits for men and women in relation to guaranteed minimum pension benefits. The issues determined by the judgement resulted in an increase in the liabilities of the Marks & Spencer UK DB Pension Scheme of £18.0m, which was recognised in the results as a past service cost in the prior year. The Group is monitoring the impact of Covid-19 on the DB pension schemes. The DB pension schemes have not factored any impact of Covid-19 into the demographic assumptions. In the future, demographic assumptions may be updated for any material event (including, if relevant, Covid-19). A. Pensions and other post-retirement liabilities 2020 2019 £m £m Total market value of assets 10,653.8 10,224.7 Present value of scheme liabilities (8,743.3) (9,301.3) Net funded pension plan asset 1,910.5 923.4 Unfunded retirement benefits (3.9) (3.5) Post-retirement healthcare (4.0) (5.6) Net retirement benefit surplus 1,902.6 914.3 Analysed in the statement of financial position as: Retirement benefit asset 1,915.0 931.5 Retirement benefit deficit (12.4) (17.2) Net retirement benefit surplus 1,902.6 914.3 In the event of a plan wind-up, the pension scheme rules provide M&S with an unconditional right to a refund of surplus assets assuming the full settlement of plan liabilities. In the ordinary course of business, the Trustees have no rights to wind up or change the benefits due to members of the scheme. As a result, any net surplus in the UK DB pension scheme is recognised in full. Marks and Spencer plc 66 NOTES TO THE FINANCIAL STATEMENTS 10 Retirement benefits continued B. Financial assumptions The financial assumptions for the UK DB pension scheme and the most recent actuarial valuations of the other post-retirement schemes have been updated by independent qualified actuaries to take account of the requirements of IAS 19 Employee Benefits in order to assess the liabilities of the schemes and are as follows: 2020 2019 % % Rate of increase in pensions in payment for service 1.9 - 2.7 2.1-3.3 Discount rate 2.40 2.45 Inflation rate for RPI 2.70 3.25 Long-term healthcare cost increases 6.70 7.25 C. Demographic assumptions The UK demographic assumptions are mainly in line with those adopted for the last formal actuarial valuation of the scheme performed as at 31 March 2018. The UK post-retirement mortality assumptions are based on an analysis of the pensioner mortality trends under the scheme for the period to March 2018. The specific mortality rates used are based on the VITA lite tables, with future projections based on up-to-date industry models, parameterised to reflect scheme data. The life expectancies underlying the valuation are as follows: 2020 2019 Current pensioners (at age 65) – male 22.2 22.0 – female 24.9 24.9 Future pensioners - currently in deferred status (at age 65) – male 24.0 23.8 – female 26.8 26.7 D. Sensitivity analysis The table below summarises the estimated impact of changes in the principal actuarial assumptions on the UK DB pension scheme surplus: 2020 2019 £m £m Increase/(decrease) in scheme surplus caused by a decrease in the discount rate of 0.25% 50.0 (70.0) Increase in scheme surplus caused by a decrease in the discount rate of 0.50% 100.0 N/A Increase in scheme surplus caused by a decrease in the discount rate of 1.00% 190.0 N/A Decrease in scheme surplus caused by a decrease in the inflation rate of 0.25% (50.0) (25.0) Decrease in scheme surplus caused by a decrease in the inflation rate of 0.50% (100.0) N/A Increase in scheme surplus caused by a decrease in the average life expectancy of one year 240.0 315.0 The discount rate sensitivity is comparable to the sensitivity quoted last year-end. However, the sign has changed from a reduction in surplus to an increase in surplus, as the ‘IAS19 over-hedge’ on gilt yields has increased materially over the year. Consequently, assets are now projected to grow by more than liabilities in this scenario, whereas last year assets were projected to grow by less than liabilities. Given changes in inflation and discount rate assumptions over the past year, the range of reasonably possible outcomes has been updated to reflect this. The sensitivity analysis above is based on a change in one assumption while holding all others constant. Therefore interdependencies between the assumptions have not been taken into account within the analysis. E. Analysis of assets The investment strategy of the UK DB pension scheme is driven by its liability profile, including its inflation-linked pension benefits. In addition to its interest in the Scottish Limited Partnership (refer to note 11), the scheme invests in different types of bonds (including corporate bonds and gilts) and derivative instruments (including inflation, interest rate, cross-currency and total return swaps) in order to align movements in the value of its assets with movements in its liabilities arising from changes in market conditions. Broadly, the scheme has hedging that covers 106% of interest rate movements and 106% of inflation movements, as measured on the Trustees’ funding assumptions which use a discount rate derived from gilt yields. By funding its DB pension schemes, the Group is exposed to the risk that the cost of meeting its obligations is higher than anticipated. This could occur for several reasons, for example: • Investment returns on the schemes’ assets may be lower than anticipated, especially if falls in asset values are not matched by similar falls in the value of the schemes’ liabilities. • The level of price inflation may be higher than that assumed, resulting in higher payments from the schemes. • Scheme members may live longer than assumed - for example, due to advances in healthcare. Members may also exercise (or not exercise) options in a way that leads to increases in the schemes’ liabilities - for example, through early retirement or commutation of pension for cash. • Legislative changes could also lead to an increase in the schemes’ liabilities. In addition, the Group is exposed to additional risks through its obligation to the UK DB pension scheme via its interest in the Scottish Limited Partnership (see note 11). In particular, under the legal terms of the Partnership, a default by the Group on the rental payments to Marks and Spencer plc 69 NOTES TO THE FINANCIAL STATEMENTS 12 Share-based payments This year, a charge of £18.5m was recognised for share-based payments (last year: charge of £19.2m). Of the total share-based payments charge, £7.6m (last year: £9.2m) relates to the Save As You Earn share option scheme and a charge of £4.9m (last year: £4.1m) relates to the Performance Share Plan. The remaining charge of £6.0m (last year: £5.9m) is spread over the other share plans. Further details of the operation of the Group share plans are provided in the Remuneration Report on pages 81 to 92 of the Marks and Spencer Group plc Annual Report 2020 which does not form part of this report. These shares relate to the shares in the parent company, Marks and Spencer Group plc, rather than the Company. A. Save As You Earn scheme The Save As You Earn (SAYE) scheme was approved by shareholders for a further 10 years at the 2017 Annual General Meeting (AGM). Under the terms of the scheme, the Board may offer options to purchase ordinary shares in Marks and Spencer Group plc once in each financial year to those employees who enter into Her Majesty’s Revenue & Customs (HMRC) approved SAYE savings contract. The Company has chosen to cap the maximum monthly saving amount at £250 which is below the £500 per month allowed under HMRC-approved schemes. The price at which options may be offered is 80% of the average mid-market price for three consecutive dealing days preceding the offer date. The options may normally be exercised during the six-month period after the completion of the SAYE contract. 2020 2019 Number of options Weighted average exercise price Number of options Weighted average exercise price Outstanding at beginning of the year 38,023,501 267.9p 43,731,657 285.4p Granted 1 34,087,655 237.6p 10,337,468 247.0p Exercised (49,610) 250.2p (241,813) 260.1p Forfeited (15,727,568) 237.9p (10,455,905) 274.0p Expired (3,194,037) 380.2p (5,347,906) 358.7p Outstanding at end of year 53,139,941 190.7p 38,023,501 267.9p Exercisable at end of year 11,272,515 249.6p 2,542,320 421.0p 1 The number of shares granted in the year ended 28 March 2020 includes 1,413,958 shares granted by Marks and Spencer Group plc for the rights issue which completed in June 2019. For SAYE share options exercised during the period, the weighted average share price at the date of exercise was 265.7p (last year: 290.8p). The fair values of the options granted during the year have been calculated using the Black-Scholes model assuming the inputs shown below: 2020 2019 3-year plan 3-year plan Grant date Dec 19 Nov 18 Share price at grant date 189p 309p Exercise price 151p 247p Option life in years 3 years 3 years Risk-free rate 0.5% 0.8% Expected volatility 27.6% 27.9% Expected dividend yield 5.7% 6.1% Fair value of option 33p 54p Volatility has been estimated by taking the historic volatility in the Marks and Spencer Group plc share price over a three-year period. The resulting fair value is expensed over the service period of three years on the assumption that 10% (last year: 10%) of options will lapse over the service period as employees leave the Group. Outstanding options granted under the UK Employee SAYE Scheme are as follows: Weighted average remaining Number of options contractual life (years) Options granted1 2020 2019 2020 2019 Option price 2 January 2016 3,720 2,436,408 - 0.3 416p January 2017 11,344,003 17,140,666 0.3 1.3 250p January 2018 5,557,053 8,711,023 1.3 2.3 251p January 2019 4,910,783 9,735,404 2.3 3.3 238p February 2020 31,324,382 - 3.3 - 151p 53,139,941 38,023,501 2.4 1.9 191p 1 For the purpose of the above table the option granted date is the contract start date. 2 The option price for the SAYE schemes for January 2016, January 2017, January 2018 and January 2019 have been adjusted downwards to reflect the impact of the rights issue by Marks and Spencer Group plc which completed in June 2019. Marks and Spencer plc 70 NOTES TO THE FINANCIAL STATEMENTS 12 Share-based payments continued B. Performance Share Plan* The Performance Share Plan (PSP) is the primary long-term incentive plan for approximately 170 of the most senior managers within the Group. It was first approved by shareholders at the 2005 AGM and again at the 2015 AGM. Under the plan, annual awards, based on a percentage of salary, may be offered. The extent to which an award vests is measured over a three-year period against financial targets which for 2019/20 included earnings per share (EPS), return on capital employed (ROCE), and total shareholder return (TSR) of Marks and Spencer Group plc. The value of any dividends earned on the vested shares during the three years may also be paid on vesting. Further details are set out in the Remuneration Report on pages 81 to 92 of the Marks and Spencer Group plc Annual Report 2020 which does not form part of this report. Awards under this plan have been made in each year since 2005. During the year, 12,924,621 shares (last year: 8,006,094) were awarded under the plan. The weighted average fair value of the shares awarded was 161.0p (last year: 264.2p). As at 28 March 2020, 20,502,705 shares (last year: 17,296,405) were outstanding under the plan. The number of options in all plans were adjusted as a result of the rights issue by Marks and Spencer Group plc which completed in June 2019. C. Deferred Share Bonus Plan* The Deferred Share Bonus Plan (DSBP) was first introduced in 2005/06 as part of the Annual Bonus Scheme. It is now operated for approximately 40 of the most senior managers within the Group. As part of the plan, the managers are required to defer a proportion of any bonus paid into shares which will be held for three years. There are no further performance conditions on these shares, other than continued employment within the Group and the value of any dividends earned on the vested shares during the deferred period may also be paid on vesting. More information is available in relation to this plan within the Remuneration Report on pages 81 to 92 of the Marks and Spencer Group plc Annual Report 2020 which does not form part of this report. During the year, no shares (last year: no shares) have been awarded under the plan in relation to the annual bonus. As at 28 March 2020, 1,359,166 shares (last year: 2,595,337) were outstanding under the plan. The number of options in all plans were adjusted as a result of the rights issue by Marks and Spencer Group plc which completed in June 2019. D. Restricted Share Plan* The Restricted Share Plan (RSP) was established in 2000 as part of the reward strategy for retention and recruitment of senior managers who are vital to the success of the business. The plan operates for the senior management team. Awards vest at the end of the restricted period (typically between one and three years) subject to the participant still being in employment of the Company on the relevant vesting date. The value of any dividends earned on the vested shares during the restricted period may also be paid on vesting. More information is available in relation to this plan within the Remuneration Report on pages 81 to 92 of the Marks and Spencer Group plc Annual Report 2020 which does not form part of this report. During the year, 3,645,421 shares (last year: 1,710,368) have been awarded under the plan. The weighted average fair value of the shares awarded was 150.0p (last year: 295.2p). As at 28 March 2020, 4,896,084 shares (last year: 2,364,783) were outstanding under the plan. The number of options in all plans were adjusted as a result of the rights issue by Marks and Spencer Group plc which completed in June 2019. E. Republic of Ireland Save As You Earn scheme Sharesave, the Company’s Save As You Earn scheme was introduced in 2009 to all employees in the Republic of Ireland for a 10-year period, after approval by shareholders at the 2009 AGM and again at the 2019 AGM. The scheme is subject to Irish Revenue rules which limit the maximum monthly saving to €500 per month. The Company chose in 2009 to set a monthly savings cap of €320 per month to align the maximum savings amount to that allowed within the UK scheme. The price at which options may be offered is 80% of the average mid-market price for three consecutive dealing days preceding the offer date. The options may normally be exercised during the six-month period after the completion of the SAYE contract. During the year, 327,689 options (last year: 169,422) were granted, at a fair value of 33.4p (last year: 53.6p). As at 28 March 2020, 790,977 options (last year: 672,203) were outstanding under the scheme. The number of options granted in January 2016, January 2017, January 2018 and January 2019 have been adjusted upwards to reflect the impact of the rights issue by Marks and Spencer Group plc which completed in June 2019. F. Marks and Spencer Employee Benefit Trust The Marks and Spencer Employee Benefit Trust (the “Trust”) holds 1,557,996 (last year: 1,712,922) shares with a book value of £3.4m (last year: £5.1m) and a market value of £1.5m (last year: £4.8m). These shares were acquired by the Trust in the market and are shown as a reduction in retained earnings in the consolidated statement of financial position. Awards are granted to employees at the discretion of Marks and Spencer plc and the Trust agrees to satisfy the awards in accordance with the wishes of Marks and Spencer plc under the senior executive share plans described above. Dividends are waived on all of these shares. G. ShareBuy ShareBuy, the Company’s Share Incentive Plan, enables the participants to buy shares directly from their gross salary. This scheme does not attract an IFRS 2 charge. *All awards both this year and last year were conditional shares. For the purposes of calculating the number of shares awarded, the share price used is the average of the mid-market price for the five consecutive dealing days preceding the grant date. Marks and Spencer plc 71 NOTES TO THE FINANCIAL STATEMENTS 13 Intangible assets Goodwill Brands Computer software Computer software under development Total £m £m £m £m £m At 31 March 2018 Cost 136.4 112.3 1,400.0 65.6 1,714.3 Accumulated amortisation and impairments (59.0) (104.2) (928.1) (23.8) (1,115.1) Net book value 77.4 8.1 471.9 41.8 599.2 Year ended 30 March 2019 Opening net book value 77.4 8.1 471.9 41.8 599.2 Additions - - 10.3 84.8 95.1 Transfers and reclassifications - - 81.0 (75.7) 5.3 Asset write-offs - - (5.9) (8.4) (14.3) Amortisation charge - (5.3) (179.1) - (184.4) Exchange difference 0.1 - (1.1) - (1.0) Closing net book value 77.5 2.8 377.1 42.5 499.9 At 30 March 2019 Cost 136.5 112.3 1,402.2 74.6 1,725.6 Accumulated amortisation, impairments and write-offs (59.0) (109.5) (1,025.1) (32.1) (1,225.7) Net book value 77.5 2.8 377.1 42.5 499.9 Year ended 28 March 2020 Opening net book value 77.5 2.8 377.1 42.5 499.9 Additions - - 1.1 76.5 77.6 Transfers and reclassifications - - 91.8 (91.4) 0.4 Asset impairments (13.4) - - - (13.4) Asset write-offs - - (0.5) - (0.5) Amortisation charge - (2.8) (162.0) - (164.8) Exchange difference (0.1) - - - (0.1) Closing net book value 64.0 - 307.5 27.6 399.1 At 28 March 2020 Cost 136.4 112.3 1,495.1 59.7 1,803.5 Accumulated amortisation and impairments and write-offs (72.4) (112.3) (1,187.6) (32.1) (1,404.4) Net book value 64.0 - 307.5 27.6 399.1 Goodwill related to the following assets and groups of Cash Generating Units (CGUs): per una India Other Total goodwill £m £m £m £m Net book value at 30 March 2019 69.5 7.3 0.7 77.5 Asset impairments (13.4) - - (13.4) Exchange difference - (0.1) - (0.1) Net book value at 28 March 2020 56.1 7.2 0.7 64.0 Impairment testing Goodwill is not amortised but is tested annually for impairment with the recoverable amount being determined from value in use calculations. Goodwill for India is monitored by management at a country level, including the combined retail and wholesale businesses, and has been tested for impairment on that basis. The per una brand is a definite life intangible asset amortised on a straight-line basis over a period of 15 years. The brand intangible was acquired for a cost of £80.0m, and is held at a net book value of £nil (last year: £2.8m). The per una goodwill and brand are considered together for impairment testing purposes and are therefore tested annually for impairment. The cash flows used for impairment testing are based on the Group’s latest budget and forecast cash flows, covering a three-year period, which have regard to historical performance and knowledge of the current market, together with the Group’s views on the future achievable growth and the impact of committed cash flows. The cash flows include ongoing capital expenditure required to maintain the store network, but exclude any growth capital initiatives not committed. The Board-approved Budget and Three-Year Plan reflect a more conservative view of the short-term future performance of the per una assets and the Board-approved Covid-19 scenario further significantly reduces sales and profits in 2020/21. A proportion of UK Clothing & Home operating costs are allocated to per una based on the sales mix. Cash flows beyond this three-year period are extrapolated using a long-term growth rate based on the Group’s current view of achievable long-term growth. The Group’s current view of achievable long-term growth for per una is 0.7%, which is a reduction from the overall Group Marks and Spencer plc 74 NOTES TO THE FINANCIAL STATEMENTS 14 Property, plant and equipment continued Right-of-use assets From 31 March 2019, the Group has adopted IFRS 16 Leases. Refer to notes 1 and 28 for the accounting policy and restatements respectively. The right-of-use assets recognised on adoption of the new leasing standard are reflected in the underlying asset classes of property, plant and equipment. Set out below are the carrying amounts of right-of-use assets recognised and the movements during the period: Right-of-use assets Land and buildings Fixtures, fittings and equipment Total £m £m £m As at 31 March 2018 1,762.5 46.8 1,809.3 Additions 187.1 1.3 188.4 Transfers and reclassifications 4.6 - 4.6 Disposals (68.6) - (68.6) Right-of-use asset impairments (93.2) - (93.2) Depreciation charge (153.2) (10.5) (163.7) Exchange difference (1.4) - (1.4) As at 30 March 2019 1,637.8 37.6 1,675.4 Additions 140.3 40.4 180.7 Transfers and reclassifications 0.2 (0.2) - Disposals (18.9) - (18.9) Right-of-use asset impairments (34.2) - (34.2) Depreciation charge (155.9) (18.7) (174.6) Exchange difference 1.8 0.1 1.9 As at 28 March 2020 1,571.1 59.2 1,630.3 Impairment of property, plant and equipment and right-of-use assets For impairment testing purposes, the Group has determined that each store is a separate CGU, with the exception of Outlets stores, which are considered together as one CGU. Click & Collect sales are included in the cash flows of the relevant CGU. Each CGU is tested for impairment at the balance sheet date if any indicators of impairment have been identified. Stores identified within the Group’s UK store estate programme are automatically tested for impairment (see note 5). The UK government trade restrictions implemented on 23 March 2020 as a result of the Covid-19 pandemic are considered an impairment trigger and as a result all stores have been tested for impairment. The value in use of each CGU is calculated based on the Group’s latest budget and forecast cash flows, covering a three-year period, which have regard to historic performance and knowledge of the current market, together with the Group’s views on the future achievable growth and the impact of committed initiatives. The cash flows include ongoing capital expenditure required to maintain the store network, but exclude any growth capital initiatives not committed. Cash flows beyond this three-year period are extrapolated using a long-term growth rate based on management’s future expectations, with reference to forecast GDP growth. These growth rates do not exceed the long-term growth rate for the Group’s retail businesses in the relevant territory. If the CGU relates to a store which the Group has identified as part of the UK store estate programme, the value in use calculated has been modified by estimation of the future cash flows up to the point where it is estimated that trade will cease and then estimation of the timing and amount of costs associated with closure detailed fully in note 5. The forecasts used to calculate the value in use have been updated to take into account the Board-approved Covid-19 scenario. This assumes a significant impact on 2020/21 revenues and profits. The key assumptions in the value in use calculations are the growth rates of sales and gross profit margins, changes in the operating cost base, long-term growth rates and the risk-adjusted pre-tax discount rate. The pre-tax discount rates are derived from the Group’s weighted average cost of capital, which has been calculated using the capital asset pricing model, the inputs of which include a country risk-free rate, equity risk premium, Group size premium and a risk adjustment (beta). The pre-tax discount rates range from 12% to 17% (last year: 9% to 21%). If the CGU relates to a store which the Group has identified as part of the UK store estate programme, the additional key assumptions in the value in use calculations are costs associated with closure, the disposal proceeds from store exits and the timing of the store exits. Impairments – UK stores (excluding the UK store estate programme) During the year, the Group has recognised an impairment charge of £69.3m as a result of UK store impairment testing unrelated to the UK store estate programme (last year: £103.0m (restated)). These stores were impaired to their ‘value in use’ recoverable amount of £105.5m, which is their carrying value at year end. These impairments have been recognised within adjusting items (see note 5). For UK stores, cash flows beyond the three-year period are extrapolated using the Group’s current view of achievable long-term growth of 2%, adjusted to 0% where management believes the current trading performance and future expectations of the store do not support the growth rate of 2%. The rate used to discount the forecast cash flows for UK stores is 8.6% (last year: 9.1%). As disclosed in the accounting policies (note 1), the cash flows used within the impairment model are based on assumptions which are sources of estimation uncertainty and small movements in these assumptions could lead to further impairments. Management has performed sensitivity analysis on the key assumptions in the impairment model using reasonably possible changes in these key assumptions across the UK store portfolio. Marks and Spencer plc 75 NOTES TO THE FINANCIAL STATEMENTS 14 Property, plant and equipment continued A reduction in sales of 5% from the three-year plan in years 2 and 3 to reflect a potential recession would result in an increase in the impairment charge of £72.7m and a 20 basis point reduction in gross profit margin throughout the plan period would increase the impairment charge by £2.5m. In combination, a 1% fall in sales and a 10 basis point fall in gross profit margin would increase the impairment charge by £7.1m. Reasonably possible changes of the other key assumptions, including a 50 basis point increase in the discount rate or reducing the long term growth rate to 0% across all stores, would not result in a significant increase to the impairment charge, either individually or in combination. Impairments – UK store estate programme During the year, the Group has recognised an impairment charge of £75.2m and impairment reversals of £51.0m relating to the on-going UK store estate programme (last year: £83.4m (restated)). These stores were impaired to their ‘value in use’ recoverable amount of £289.0m, which is their carrying value at year end. The impairment charge relates to the store closure programme and has been recognised within adjusting items (see note 5). Where the planned closure date for a store is outside the three-year plan period, no growth rate is applied. The rate used to discount the forecast cash flows for UK stores is 8.6% (last year: 9.1%). As disclosed in the accounting policies (note 1), the cash flows used within the impairment models for the UK store estate programme are based on assumptions which are sources of estimation uncertainty and small movements in these assumptions could lead to further impairments. Management has performed sensitivity analysis on the key assumptions in the impairment model using reasonably possible changes in these key assumptions across the UK store estate programme. A delay of 12 months in the probable date of each store exit would result in a decrease in the impairment charge of £36.8m. A 5% reduction in planned sales in years 2 and 3 (where relevant) would result in an increase in the impairment charge of £22.9m. Neither a 50 basis point increase in the discount rate, a 20 basis point reduction in management gross margin during the period of trading nor a 2% increase in the costs associated with exiting a store would result in a significant increase to the impairment charge, individually or in combination with the other reasonably possible scenarios considered. Impairments – International stores During the year, the Group has recognised an impairment charge of £9.0m in Ireland and £0.2m in the Czech Republic as a result of store impairment testing (last year: £nil). For Irish and Czech Republic stores, cash flows beyond the three-year period are extrapolated using a long-term growth rate of 0%. The rate used to discount the forecast cash flows for Irish stores is 14.1% (last year: 10.4%) and for Czech Republic stores is 12.4% (last year: 10.7%). As disclosed in the accounting policies (note 1), the cash flows used within the impairment model are based on assumptions which are sources of estimation uncertainty and small movements in these assumptions could lead to further impairments. Management has performed sensitivity analysis on the key assumptions in the impairment model using reasonably possible changes in these key assumptions. For Irish stores, a reduction in sales of 5% from the three-year plan in years 2 and 3 to reflect a potential recession would result in an increase in the impairment charge of £6.5m. Reasonably possible changes in other key assumptions, including a 20 basis point reduction in gross profit margin throughout the plan period, a 50 basis point increase in the discount rate or a 1% fall in sales combined with a 10 basis point fall in gross profit margin would not result in a significant increase to the impairment charge. Reasonably possible changes in key assumptions for Czech Republic stores do not lead to a significant increase in the impairment charge. 15 Other financial assets 2020 2019 £m £m Non-current Unlisted investments 9.7 9.9 Other investments1 1.5 4.8 11.2 14.7 Current Short-term investments2 11.7 141.8 Amounts owed by fellow subsidiaries of the parent company 10.5 - Amounts owed by parent company 2,543.4 2,548.5 2,565.6 2,690.3 1 Other investments represents shares in Marks and Spencer Group plc held for issue against employee schemes. 2 Includes £5.8m (last year: £5.0m) of money market deposits held in an escrow account. Upon transition to IFRS 9, non-current unlisted investments were irrevocably designated as fair value through other comprehensive income. Other financial assets are measured at fair value with changes in their value taken to the income statement. Marks and Spencer plc 76 NOTES TO THE FINANCIAL STATEMENTS 16 Trade and other receivables 2020 2019 (Restated) £m £m Non-current Trade receivables 0.2 0.1 Lease receivables - net 69.2 72.3 Other receivables 2.2 2.0 Prepayments 191.0 198.6 262.6 273.0 Current Trade receivables 150.8 121.8 Less: provision for impairment of receivables (4.0) (3.2) Trade receivables - net 146.8 118.6 Lease receivables - net 0.1 0.2 Other receivables 29.5 30.5 Prepayments 84.8 89.6 Accrued income 25.3 28.3 286.5 267.2 The directors consider that the carrying amount of trade and other receivables approximates their fair value. These balances are subject to an assessment of expected credit loss (see note 20). Included in accrued income is £17.4m (last year: £21.9m) of accrued supplier income relating to rebates that have been earned but not yet invoiced. Supplier income that has been invoiced but not yet settled against future trade creditor balances is included within trade creditors where there is a right to offset. The remaining amount is immaterial. The impact on inventory is immaterial as these rebates relate to food stock which has been sold through by the year end. The maturity analysis of the Group's lease receivables is as follows: 2020 2019 £m £m Timing of cash flows Within one year 7.1 1.2 Between one and two years 4.7 3.5 Between two and three years 4.7 4.8 Between three and four years 4.7 4.8 Between four and five years 4.7 4.8 More than five years 135.0 144.5 Total undiscounted cash flows 160.9 163.6 Effect of discounting (86.9) (91.1) Present value of lease payments receivable 74.0 72.5 Less: provision for impairment of receivables (4.7) - Net investment in the lease 69.3 72.5 17 Cash and cash equivalents Cash and cash equivalents are £248.4m (last year: £285.4m). The carrying amount of these assets approximates their fair value. The effective interest rate on short-term bank deposits is 0.42% (last year: 0.74%). These deposits have an average maturity of 3 days (last year: 9 days). Marks and Spencer plc 79 NOTES TO THE FINANCIAL STATEMENTS 20 Financial instruments Treasury policy The Group operates a centralised treasury function to manage the Group’s funding requirements and financial risks in line with the Board- approved treasury policies and procedures, and their delegated authorities. The Group’s financial instruments, other than derivatives, comprise borrowings, cash and liquid resources and various items, such as trade receivables and trade payables that arise directly from its operations. The main purpose of these financial instruments is to finance the Group’s operations. The Group treasury function also enters into derivative transactions, principally interest rate swaps, cross-currency swaps and forward currency contracts. The purpose of these transactions is to manage the interest rate and foreign currency risks arising from the Group’s operations and financing. It remains the Group’s policy not to hold or issue financial instruments for trading purposes, except where financial constraints necessitate the need to liquidate any outstanding investments. The treasury function is managed as a cost centre and does not engage in speculative trading. Financial risk management The principal financial risks faced by the Group are liquidity and funding, interest rate, foreign currency and counterparty risks. The policies and strategies for managing these risks are summarised on the following pages: (a) Liquidity and funding risk The risk that the Group could be unable to settle or meet its obligations as they fall due: • The Group’s funding strategy ensures a mix of funding sources offering sufficient headroom, maturity and flexibility, and cost- effectiveness to match the requirements of the Group. • Marks and Spencer plc is financed by a combination of retained profits, bank borrowings, Medium Term Notes and committed syndicated bank facilities. • Operating subsidiaries are financed by a combination of retained profits, bank borrowings and intercompany loans. At year end, the Group had a committed syndicated bank revolving credit facility of £1.1bn set to mature on 15 April 2023. The facility contains only one financial covenant, being the ratio of earnings before interest, tax, depreciation and amortisation; to net interest plus depreciation on right-of-use assets under IFRS 16. The covenant is measured semi-annually. The Group was not in breach of this covenant at the reporting date. Due to uncertainty around the ramifications of the Covid-19 pandemic on the reported covenant, formal agreement has been reached with the lending syndicate of banks to substantially relax or remove the covenant conditions for the tests arising in September 2020, March 2021, and September 2021. The Group also has a number of uncommitted facilities available to it. At year end, these amounted to £50m (last year: £100m), all of which are due to be reviewed within a year. At the balance sheet date, a sterling equivalent of £nil (last year: £nil) was drawn under the committed facilities and £nil (last year: £nil) was drawn under the uncommitted facilities. In addition to the existing borrowings, the Group has a Euro Medium Term Note programme of £3bn, of which £1.3bn (last year: £1.4bn) was in issuance as at the balance sheet date. Marks and Spencer plc 80 NOTES TO THE FINANCIAL STATEMENTS 20 Financial instruments continued The contractual maturity of the Group’s non-derivative financial liabilities (excluding trade and other payables of £1,326,7m (last year: £1,349.6m) (see note 18) and derivatives is as follows: Bank loans and overdrafts Medium Term Notes Lease liabilities (Restated) Partnership liability to the Marks & Spencer UK Pension Scheme (note 11) Total borrowings and other financial liabilities (Restated) Cash inflow on derivatives1 Cash outflow on derivatives1 Total derivative assets and liabilities £m £m £m £m £m £m £m £m Timing of cash flows Within one year (72.3) (487.2) (312.2) (71.9) (943.6) 1,591.0 (1,564.6) 26.4 Between one and two years - (62.7) (320.4) (71.9) (455.0) 228.6 (217.0) 11.6 Between two and five years - (751.3) (846.4) (143.6) (1,741.3) 282.4 (241.4) 41.0 More than five years - (895.5) (3,814.7) - (4,710.2) 230.8 (191.5) 39.3 (72.3) (2,196.7) (5,293.7) (287.4) (7,850.1) 2,332.8 (2,214.5) 118.3 Effect of discounting - 572.4 2,716.9 15.0 3,304.3 At 30 March 2019 (72.3) (1,624.3) (2,576.8) (272.4) (4,545.8) Timing of cash flows Within one year (84.3) (71.9) (340.2) (71.9) (568.3) 1,972.0 (1,898.0) 74.0 Between one and two years - (371.9) (329.4) (71.9) (773.2) 183.5 (167.2) 16.3 Between two and five years - (451.6) (834.2) (71.9) (1,357.7) 296.8 (238.4) 58.4 More than five years - (1,164.0) (3,674.2) - (4,838.2) 235.3 (188.3) 47.0 Total undiscounted cash flows (84.3) (2,059.4) (5,178.0) (215.7) (7,537.4) 2,687.6 (2,491.9) 195.7 Effect of discounting - 523.2 2,616.0 8.3 3,147.5 At 28 March 2020 (84.3) (1,536.2) (2,562.0) (207.4) (4,389.9) 1Derivative cash flows are disclosed on a gross basis and comparative amounts have been adjusted to reflect this. (b) Counterparty risk Counterparty risk exists where the Group can suffer financial loss through the default or non-performance of the counterparties with whom it transacts. Exposures are managed in accordance with the Group treasury policy which limits the value that can be placed with each approved counterparty to minimise the risk of loss. The minimum long-term rating for all counterparties is long-term Standard & Poor’s (S&P)/Moody’s A-/A3 (BBB+/Baa1 for committed lending banks). In the event of a rating by one agency being different from the other, reference will be made to Fitch to determine the casting vote of the rating group. In the absence of a Fitch rating the lower agency rating will prevail. Limits are reviewed regularly by senior management. The credit risk of these financial instruments is estimated as the fair value of the assets resulting from the contracts. The below credit ratings are at the reporting date. Senior management performs a daily review of all counterparty positions and as of August 2020 there have been no breaches to any counterparty limits. Marks and Spencer plc 81 NOTES TO THE FINANCIAL STATEMENTS 20 Financial instruments continued The table below analyses the Group’s short-term investments and derivative assets by credit exposure excluding bank balances, store cash and cash in transit. Credit rating of counterparty AAA AA+ AA AA- A+ A A- BBB+ Total £m £m £m £m £m £m £m £m £m Short-term investments1 - - - 16.4 168.3 83.9 - 0.7 269.3 Net derivative assets2 - - - 16.9 21.0 11.8 - 0.3 50.0 At 30 March 2019 - - - 33.3 189.3 95.7 - 1.0 319.3 AAA AA+ AA AA- A+ A A- BBB+ Total £m £m £m £m £m £m £m £m £m Short term investments1 - - - 42.4 59.4 15.7 - 3.6 121.1 Net derivative assets2 - - - 79.2 66.2 26.8 - - 172.2 At 28 March 2020 - - - 121.6 125.6 42.5 - 3.6 293.3 1 Includes cash on deposit and money market funds held by Marks and Spencer Scottish Limited Partnership, Marks and Spencer plc and Marks and Spencer General Insurance. Excludes cash in hand and in transit £139.0m (last year £157.9m). 2 Standard & Poor’s equivalent rating shown as reference to the majority credit rating of the counterparty from either Standard & Poor’s, Moody’s or Fitch where applicable. The Group has a very low retail credit risk due to transactions principally being of high volume, low value and short maturity. The maximum exposure to credit risk at the balance sheet date was as follows: trade receivables £146.8m (last year: £121.8m), lease receivables £69.3m (last year: £72.5m), other receivables £31.7m (last year: £32.5m), cash and cash equivalents £248.4m (last year: £285.4m) and derivatives £172.2m (last year: £50.0m). Impairment of financial assets The credit risk management practices of the Group include internal review and reporting of the ageing of trade and other receivables by days past due by a centralised accounts receivable function, and grouped by respective contractual revenue stream, along with liaison with the debtors by the credit control function. The Group applies the IFRS 9 simplified approach in measuring expected credit losses which use a lifetime expected credit loss allowance for all trade receivables and lease receivables. To measure expected credit losses, trade receivables have been grouped by shared credit risk characteristics along the lines of differing revenue streams such as international franchise, food, UK franchise, corporate and sundry, as well as by geographical location and days past due. In addition to the expected credit losses calculated using a provision matrix, the Group may provide additional provision for the receivables of particular customers if the deterioration of financial position was observed. The expected loss rates are determined based on the average write-offs as a proportion of average debt over a period of 36 months prior to the reporting date. The historical loss rates are adjusted for current and forward-looking information where significant. The Group considers GDP growth, unemployment, sales growth and bankruptcy rates of the countries in which goods are sold to be the most relevant factors and, where the impact of these is significant, adjusts the historical loss rates based on expected changes in these factors. The forward-looking macro-economic data incorporated into the UK and International calculations represented the best available relevant information at the reporting date. This resulted in increased provisions for the financial year by £0.9m to reflect a lower expected recovery of trade receivables. Historical experience has indicated that debts aged 180 days or over are generally not recoverable. The Group has incorporated this into the expected loss model through a uniform loss rate for ageing buckets below 180 days dependent on the revenue stream and country and providing for 100% of debt aged over 180 days past due. Where the Group specifically holds insurance or holds the legal right of offset with debtors which are also creditors, the loss provision is applied only to the extent of the uninsured or net exposure. Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there may be no reasonable expectation of recovery include the failure of the debtor to engage in a payment plan, and failure to make contractual payments within 180 days past due. Marks and Spencer plc 84 NOTES TO THE FINANCIAL STATEMENTS 20 Financial instruments continued The effective interest rates at the balance sheet date were as follows: 2020 2019 % % Committed and uncommitted borrowings N/A N/A Medium Term Notes 4.6% 4.8% Leases 5.5% 5.6% The interest rate swaps are recognised at fair value. The Group has considered and elected to apply credit/debit valuation adjustments, owing to the swaps’ relative materiality and longer dated nature. The contractual terms on £150m of the £175m notional of interest rate swaps relating to the 2025 debt allow for early termination every five years (next optional termination date April 2023). Variable interest periods on the pay legs are six-monthly compared with 12-monthly on the receive fixed legs and related debt. This will cause ineffectiveness of the hedging relationship. The Group is exposed to GBP LIBOR within a fair value hedge accounting relationship, which is subject to interest rate benchmark reform. The Group has closely monitored the market and the output from the various industry working groups managing the transition to new benchmark interest rates. This includes announcements made by LIBOR regulators (including the Financial Conduct Authority (FCA)) regarding the transition away from GBP LIBOR to the Sterling Overnight Index Average Rate (SONIA). The FCA has made clear that, at the end of 2021, it will no longer seek to persuade, or compel, banks to submit to LIBOR. In response to the announcements, the Group has identified where LIBOR exposures are within the business and will prepare and deliver an action plan to enable the smooth transition to alternative benchmark rates under the governance of the Head of Treasury. The Group aims to have its transition and fallback plans in place by the end of 2020. For the Group’s derivatives, the International Swaps and Derivatives Association’s (ISDA) fall-back clauses were made available at the end of 2019 and the Group will begin discussions with its banks with the aim of implementing this language into its ISDA agreements. Below are details of the hedging instruments and hedged items in scope of the IFRS 9 amendments due to interest rate benchmark reform. The terms of the hedged items listed match those of the corresponding hedging instruments. Hedge type Instrument type Maturing in Nominal Hedged item Fair value hedge Pay six-month GBP LIBOR, receive sterling fixed interest rate swaps 2025 £175m Sterling fixed rate issued debt of the same maturity and nominal of the swap The Group will continue to apply the amendments to IFRS 9 until the uncertainty arising from the interest rate benchmark reforms that the Group is exposed to ends. The Group has assumed that this uncertainty will not end until the Group’s contracts that reference LIBORs are amended to specify the date on which the interest rate benchmark will be replaced, the alternative benchmark rate and the relevant spread adjustment. This will, in part, be dependent on the introduction of fallback clauses which have yet to be added to the Group’s contracts and the negotiation with lenders. Marks and Spencer plc 85 NOTES TO THE FINANCIAL STATEMENTS 20 Financial instruments continued Derivative financial instruments The below table illustrates the effects of hedge accounting on the consolidated statement of financial position and consolidated income statement through detailing separately by risk category and each type of hedge the details of the associated hedging instrument and hedged item. 30 March 2019 Current Non Current Forward foreign exchange contracts Forward foreign exchange contracts Interest rate swaps Cross- currency swaps Forward foreign exchange contracts Interest rate swaps £m £m £m £m £m £m Hedging risk strategy Cash flow hedges Held for trading Fair value hedges Cash flow hedges Cash flow hedges Fair value hedges Notional / currency legs 1,423.6 129.0 200.0 193.5 203.0 175.0 Carrying amount assets / (liabilities) 27.4 0.3 5.3 4.0 (1.6) 14.6 Maturity date to Mar 2020 to Mar 2020 Dec 2019 Dec 2037 to Sep 2020 Jun 2025 Hedge ratio 100% 100% 100% 100% 100% 100% Description of hedged item Highly probable transactional FX exposures Inter-company loans/ deposits GBP fixed rate borrowing USD fixed rate borrowing Highly probable transactional FX exposures GBP fixed rate borrowing Change in fair value of hedging instrument1 95.9 (1.5) (5.0) (7.9) 2.0 0.5 Change in fair value of hedged item used to determine hedge effectiveness (95.9) 5.4 5.0 4.4 (2.0) (0.4) Weighted average hedge rate for the year GBP/EUR 1.12, GBP/USD 1.35 N/A 3.4% 7.3% GBP/EUR 1.12, GBP/USD 1.32 3.2% Amounts recognised within finance costs in profit and loss - 3.9 - (3.5) - 0.1 Balance on cash flow hedge reserve at 30 March 2019 (12.8) N/A N/A (8.4) 1.7 N/A Balance on cost of hedging reserve at 30 March 2019 - N/A N/A (14.6) - N/A 28 March 2020 Current Non Current Forward foreign exchange contracts Forward foreign exchange contracts Interest rate swaps Cross- currency swaps Forward foreign exchange contracts Interest rate swaps £m £m £m £m £m £m Hedging risk strategy Cash flow hedges Held for trading Fair value hedges Cash flow hedges Cash flow hedges Fair value hedges Notional / currency legs 1,699.3 157.0 - 193.5 173.6 175.0 Carrying amount assets / (liabilities) 60.8 (0.3) - 83.8 9.5 18.4 Maturity date to Feb 2021 to Oct 2020 - Dec 2037 to Aug 2021 Jun 2025 Hedge ratio 100% 100% - 100% 100% 100% Description of hedged item Highly probable transactional FX exposures Inter-company loans/deposits GBP fixed rate borrowing USD fixed rate borrowing Highly probably transactional FX exposures GBP fixed rate borrowing Change in fair value of hedging instrument1 33.4 (0.6) - 79.7 11.1 3.8 Change in fair value of hedged item used to determine hedge effectiveness1 (30.5) 4.0 - (79.7) (11.1) (3.8) Weighted average hedge rate for the year GBPUSD 1.3; GBPEUR1.15 N/A - 7.5% GBPUSD 1.32; GBPEUR1.15 3.3% Amounts recognised within finance costs in profit and loss 2.9 3.4 - 5.92 - - Balance on cash flow hedge reserve at 28 March 2020 (37.3) N/A N/A (40.1) (9.8) N/A Balance on cost of hedging reserve at 28 March 2020 - N/A N/A (7.1) - N/A 1The £(0.6)m fair value change represented in the fair value movement of the forward contracts under the held for trading strategy is used to economically hedge for certain intercompany loans/deposits which are represented in the £4.0m as the net foreign exchange gains and losses under this strategy. 2The £5.9m gain represents previously recognised hedge ineffectiveness that reversed out during the financial year. Marks and Spencer plc 86 NOTES TO THE FINANCIAL STATEMENTS 20 Financial instruments continued 28 March 2020 30 March 2019 Notional value Fair value Notional value Fair value Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities £m £m £m £m £m £m £m £m Current Forward foreign exchange contracts - cash flow hedges 1,385.0 314.3 71.0 (10.2) 1,073.8 349.8 34.3 (6.9) - held for trading 61.9 95.1 2.5 (2.8) 53.9 75.1 0.7 (0.4) Interest rate swaps - fair value hedges - - - - 200.0 - 5.3 - 1,446.9 409.4 73.5 (13.0) 1,327.7 424.9 40.3 (7.3) Non-current Cross currency swaps - cash flow hedges 193.5 - 83.8 - - 193.5 4.7 (0.7) Forward foreign exchange contracts - cash flow hedges 153.1 20.5 10.2 (0.7) 84.8 118.2 0.5 (2.1) Interest rate swaps - fair value hedges 175.0 - 18.4 - 175.0 - 14.6 - 521.6 20.5 112.4 (0.7) 259.8 311.7 19.8 (2.8) The Group’s hedging reserves disclosed in the consolidated statement of changes in equity, relate to the following hedging instruments: Cost of hedging reserve FX derivatives Cost of hedging reserve CCIRS1 Deferred tax Total cost of hedging reserve Hedge reserve FX derivatives Hedge reserve CCIRS Hedge reserve gilt locks Deferred tax Total hedge reserve £m £m £m £m £m £m £m £m £m Opening balance 1 April 2018 0.8 (13.9) 2.4 (10.7) 57.5 35.9 0.4 (17.8) 76.0 Add: Change in fair value of hedging instrument recognised in OCI2 - - - - (111.3) (19.2) - - (130.5) Add: Costs of hedging deferred and recognised in OCI (0.8) (0.7) - (1.5) - - - - - Less: Reclassified to the cost of inventory - - - - 42.7 - - - 42.7 Less: Reclassified from OCI to profit or loss - - - - - 15.8 - - 15.8 Less: Reclassified from OCI to profit or loss - included in finance costs - - - - - 0.4 (0.2) 10.4 10.6 Less: Deferred tax - - 0.5 0.5 - - - - - Closing balance 30 March 2019 - (14.6) 2.9 (11.7) (11.1) 32.9 0.2 (7.4) 14.6 Opening balance 31 March 2019 - (14.6) 2.9 (11.7) (11.1) 32.9 0.2 (7.4) 14.6 Add: Change in fair value of hedging instrument recognised in OCI - - - - (59.2) (88.6) - - (147.8) Add: Costs of hedging deferred and recognised in OCI - 7.5 - 7.5 - - - - - Less: Reclassified to the cost of inventory - - - - 21.8 - - - 21.8 Less: Reclassified from OCI to profit or loss - included in finance costs - - - - 2.9 15.6 (0.1) - 18.4 Less: Deferred tax - - (1.5) (1.5) - - - 24.4 24.4 Closing balance 28 March 2020 - (7.1) 1.4 (5.7) (45.6) (40.1) 0.1 17.0 (68.6) 1Cross-currency interest rate swaps 2 Other comprehensive income Marks and Spencer plc 89 NOTES TO THE FINANCIAL STATEMENTS 20 Financial instruments continued At the end of the reporting period, the Group held the following financial instruments at fair value: 2020 2019 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total £m £m £m £m £m £m £m £m Assets measured at fair value Financial assets at fair value through profit or loss - trading derivatives - 2.5 - 2.5 - 0.7 - 0.7 Derivatives used for hedging - 183.4 - 183.4 - 59.5 - 59.5 Short-term investments - 11.7 - 11.7 - 141.8 - 141.8 Unlisted investments1 - - 9.7 9.7 - - 9.9 9.9 Liabilities measured at fair value Financial liabilities at fair value through profit or loss - trading derivatives - (2.8) - (2.8) - (0.4) - (0.4) Derivatives used for hedging - (10.9) - (10.9) - (9.7) - (9.7) 1There were no transfers between the levels of the fair value hierarchy. The Group holds £9.7m in unlisted equity securities measured at fair value through other comprehensive income (last year: £9.9m) (see note 16) which is a level 3 instrument. The fair value of this investment is determined with reference to the net asset value of the entity in which the investment is held, which in turn derives the majority of its net asset value through a third party property valuation. The Marks & Spencer UK Pension Scheme holds a number of financial instruments which make up the pension asset of £10,653.8m (last year: £10,224.7m). Level 1 and Level 2 financial assets measured at fair value through other comprehensive income amounted to £6,328.7m (last year: £7,008.6m). Additionally, the scheme assets include £4,325.1m (last year: £3,216.1m) of Level 3 financial assets. See note 10 for information on the Group’s retirement benefits. The following table represents the changes in Level 3 instruments held by the Pension Schemes: 2020 2019 £m £m Opening balance 3,216.1 2,836.9 Fair value (loss)/gain recognised in other comprehensive income (130.1) 136.3 Additional investment 1,239.1 242.9 Closing balance 4,325.1 3,216.1 Fair value of financial instruments With the exception of the Group’s Medium Term Notes and the Partnership liability to the Marks & Spencer UK Pension Scheme (note 11), there were no material differences between the carrying value of non-derivative financial assets and financial liabilities and their fair values as at the balance sheet date. The carrying value of the Group’s Medium Term Notes (level 1 equivalent) was £1,536.2m (last year £1,673.8m), the fair value of this debt was £1,531.4m (last year £1,724.0m). Capital policy The Group’s objectives when managing capital (defined as net debt plus equity) are to safeguard its ability to continue as a going concern in order to provide optimal returns for shareholders and to maintain an efficient capital structure to reduce the cost of capital. In doing so, the Group’s strategy is to maintain a capital structure commensurate with an investment grade credit rating and to retain appropriate levels of liquidity headroom to ensure financial stability and flexibility. To achieve this strategy, the Group regularly monitors key credit metrics such as the gearing ratio, cash flow to net debt and fixed charge cover to maintain this position. In addition, the Group ensures a combination of appropriate committed short-term liquidity headroom with a diverse and balanced long-term debt maturity profile. As at the balance sheet date, the Group’s average debt maturity profile was six years (last year: five years). As one of several actions taken by rating agencies in response to the Covid-19 pandemic, the Group credit rating was reduced to Ba1 (negative outlook) with Moody’s and BB+ (negative watch) with Standard & Poor’s. In order to maintain or realign the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Marks and Spencer plc 90 NOTES TO THE FINANCIAL STATEMENTS 21 Provisions Property Restructuring Other 2020 2019 ( (Restated) £m £m £m £m £m At 30 March 2019 120.5 21.5 7.3 149.3 148.0 Provided in the year 32.7 10.9 0.7 44.3 98.5 Released in the year (65.7) (2.5) (0.9) (69.1) (57.5) Utilised during the year (15.5) (17.9) (1.7) (35.1) (67.1) Exchange differences - 0.6 - 0.6 (0.3) Discount rate unwind 4.9 - - 4.9 7.9 Reclassification to trade and other payables (16.9) - - (16.9) 19.8 At 28 March 2020 60.0 12.6 5.4 78.0 149.3 Analysed as: Current 21.5 76.6 Non-current 56.5 72.7 Property provisions relate to dilapidations primarily arising as a result of the closure of stores in the UK, as part of the UK store estate strategic programme, together with the centralisation of the London Head Office functions into one building. These provisions are expected to be utilised over the period to the end of each specific lease (up to 10 years). Restructuring provisions relate to the estimated costs associated with the International exit strategy and the strategic programme to transition to a single-tier UK distribution network. These provisions are expected to be utilised within the next year and over the period of closure of sites. Other provisions include amounts in respect of potential liabilities for employee-related matters. The release during the prior year related to the finalisation of charges for certain employee-related matters provided for during 2018. See note 5 for further information on these provisions. 22 Deferred tax Deferred tax is provided under the balance sheet liability method using the tax rate at which the balances are expected to unwind of 19% as applicable (last year: 19% and 17%) for UK differences and local tax rates for overseas differences. Details of the changes to the UK corporation tax rate and the impact on the Group are described in note 7. The movements in deferred tax assets and liabilities (after the offsetting of balances within the same jurisdiction as permitted by IAS 12 Income Taxes) during the year are shown below. Deferred tax assets/(liabilities) Land and buildings temporary differences Capital allowances in excess of depreciation Pension temporary differences Other short-term temporary differences Total UK deferred tax Overseas deferred tax Total £m £m £m £m £m £m £m At 1 April 2018 (33.9) (30.2) (208.0) 109.8 (162.3) (3.7) (166.0) Credited/(charged) to income statement 3.8 24.1 (1.6) 8.1 34.4 5.3 39.7 Credited/(charged) to equity/other comprehensive income - - 14.4 (11.7) 2.7 (0.2) 2.5 At 30 March 2019 (30.1) (6.1) (195.2) 106.2 (125.2) 1.4 (123.8) At 31 March 2019 (30.1) (6.1) (195.2) 106.2 (125.2) 1.4 (123.8) Credited/(charged) to income statement 1.8 5.9 (7.1) 13.4 14.0 (2.2) 11.8 Credited/(charged) to equity/other comprehensive income - - (196.5) (24.4) (220.9) 0.5 (220.4) At 28 March 2020 (28.3) (0.2) (398.8) 95.2 (332.1) (0.3) (332.4) Other short-term temporary differences relate mainly to employee share options, financial instruments and IFRS 16. The deferred tax liability on land and buildings temporary differences is reduced by the benefit of capital losses with a gross value of £335.7m (last year: £321.7m) and a tax value of £63.8m (last year: £61.1m). From 1 April 2020, the UK rules restricting the use of brought forward losses to 50% of profits or gains in excess of £5m p.a. were extended to include capital losses. It is considered that the full benefit of the losses will continue to be recoverable due to the quantum of the gains and the group’s ability to exercise a level of control over when gains are crystallised. Due to uncertainty over their future use, no benefit has been recognised in respect of trading losses carried forward in overseas jurisdictions with a gross value of £9.5m (last year: £70.5m) and a tax value of £2.6m (last year: £14.5m). No deferred tax is recognised in respect of undistributed earnings of overseas subsidiaries and joint ventures with a gross value of £27.0m (last year: £44.5m) unless a material liability is expected to arise on distribution of these earnings under applicable tax legislation. There is a potential tax liability in respect of undistributed earnings of £2.6m (last year: £2.7m) however this has not been recognised on the basis that the distribution can be controlled by the Group. Marks and Spencer plc 91 NOTES TO THE FINANCIAL STATEMENTS 23 Ordinary share capital 2020 2019 Shares £m Shares £m Issued and fully paid ordinary shares of 25p each 2,850,039,477 712.5 2,850,039,477 712.5 24 Contingencies and commitments A. Capital commitments 2020 2019 £m £m Commitments in respect of properties in the course of construction 78.7 90.1 Software capital commitments 8.6 6.8 87.3 96.9 B. Other material contracts In the event of termination of our trading arrangements with certain warehouse operators, the Group has a number of options and commitments to purchase some property, plant and equipment, at values ranging from historical net book value to market value, which are currently owned and operated by the warehouse operators on the Group’s behalf. These options and commitments would have an immaterial impact on the Group’s Statement of Financial Position. See note 11 for details on the partnership arrangement with the Marks & Spencer UK Pension Scheme. 25 Analysis of cash flows given in the statement of cash flows Cash flows from operating activities 2020 2019 (Restated) £m £m Profit on ordinary activities after taxation 24.1 66.1 Income tax expense 36.1 42.2 Finance costs 231.6 248.7 Finance income (46.9) (34.8) Operating profit 244.9 322.2 (Increase)/decrease in inventories (29.3) 73.8 Increase in receivables (9.2) (81.7) (Decrease)/increase in payables (10.0) 69.0 Adjusting items net cash outflows1,2 (74.8) (99.3) Depreciation, amortisation and write-offs 632.5 702.6 Non-cash share based payment expense 18.5 19.2 Defined benefit pension funding (37.9) (37.9) Adjusting items M&S Bank3 (12.6) (20.9) Adjusting operating profit items 342.6 403.4 Cash generated from operations 1,064.7 1,350.4 1Excludes £11.3m (last year: £nil) of surrender payments included within repayment of lease liabilities in the consolidated statement of cash flows relating to leases within the UK store estate programme. 2 Adjusting items net cash outflows relate to the utilisation of the provisions for International store closures and impairments, strategic programme costs associated with the UK store estate, organisation, operational transformation, UK logistics, IT restructure, changes to pay and pensions, store impairments and property charges, GMP and other pension equalisation, and establishing the investment in Ocado Retail Limited by the Ultimate Parent Group. 3 Adjusting items M&S Bank relates to M&S Bank income recognised in operating profit offset by charges incurred in relation to the insurance mis-selling provision, which is a non-cash item. Marks and Spencer plc 94 NOTES TO THE FINANCIAL STATEMENTS 28 Impact of new accounting standards adopted in the year The Group applied IFRS 16 Leases for the first time. The Group applied the standard using the fully retrospective method, with the date of initial application of 31 March 2019, and has restated its results for comparative periods as if the Group had always applied the new standard. The Group recognises a right-of-use asset and corresponding liability at the date at which a leased asset is made available for use by the Group, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low-value assets. Previously, rental costs under operating leases were charged to the consolidated income statement in equal annual amounts over the lease term. The impact of adopting IFRS 16 on the Group’s consolidated income statement, consolidated statement of comprehensive income, consolidated statement of financial position and consolidated statement of cash flows is presented in the following tables. Consolidated income statement 52 weeks ended 30 March 2019 (Restated) Profit before adjusting items Adjusting items Total As reported Impact of IFRS 16 Restated As reported Impact of IFRS 16 Restated As reported Impact of IFRS 16 Restated £m £m £m £m £m £m £m £m £m Revenue 10,377.3 - 10,377.3 - - - 10,377.3 - 10,377.3 Operating profit 601.0 124.6 725.6 (414.5) 11.1 (403.4) 186.5 135.7 322.2 Finance income 33.8 1.0 34.8 - - - 33.8 1.0 34.8 Finance costs (111.6) (137.1) (248.7) - - - (111.6) (137.1) (248.7) Profit before tax 523.2 (11.5) 511.7 (414.5) 11.1 (403.4) 108.7 (0.4) 108.3 Income tax expense (105.1) - (105.1) 54.5 8.4 62.9 (50.6) 8.4 (42.2) Profit for the year 418.1 (11.5) 406.6 (360.0) 19.5 (340.5) 58.1 8.0 66.1 Attributable to: Owners of the parent 414.3 (11.3) 403.0 (360.0) 19.5 (340.5) 54.3 8.2 62.5 Non-controlling interest 3.8 (0.2) 3.6 - - - 3.8 (0.2) 3.6 418.1 (11.5) 406.6 (360.0) 19.5 (340.5) 58.1 8.0 66.1 Marks and Spencer plc 95 NOTES TO THE FINANCIAL STATEMENTS 28 Impact of new accounting standards adopted in the year continued Consolidated statement of comprehensive income 52 weeks ended 30 March 2019 As reported Impact of IFRS 16 Restated £m £m £m Profit for the year 58.1 8.0 66.1 Other comprehensive income: Items that will not be reclassified to profit or loss Remeasurements of retirement benefit schemes (79.9) - (79.9) Tax credit on items that will not be reclassified 14.0 - 14.0 (65.9) - (65.9) Items that may be reclassified subsequently to profit or loss Foreign currency translation differences - movements recognised in other comprehensive income (15.4) 0.8 (14.6) Cash flow hedges - fair value movements in other comprehensive income 132.0 - 132.0 - reclassified and reported in profit or loss (16.0) - (16.0) Tax charge on cash flow hedges (19.0) - (19.0) 81.6 0.8 82.4 Other comprehensive income for the year, net of tax 15.7 0.8 16.5 Total comprehensive income for the year 73.8 8.8 82.6 Attributable to: Owners of the parent 70.0 9.0 79.0 Non-controlling interests 3.8 (0.2) 3.6 73.8 8.8 82.6 Marks and Spencer plc 96 NOTES TO THE FINANCIAL STATEMENTS 28 Impact of new accounting standards adopted in the year continued Consolidated statement of financial position As at 30 March 2019 As at 1 April 2018 As previously reported Impact of IFRS 16 Restated As previously reported Impact of IFRS 16 Restated £m £m £m £m £m £m Assets Non-current assets Property, plant and equipment 4,028.5 1,633.8 5,662.3 4,393.9 1,795.7 6,189.6 Trade and other receivables 200.7 72.3 273.0 209.0 0.5 209.5 Other non-current assets 1,485.4 - 1,485.4 1,635.5 - 1,635.5 5,714.6 1,706.1 7,420.7 6,238.4 1,796.2 8,034.6 Current assets Trade and other receivables 322.5 (55.3) 267.2 308.4 (56.0) 252.4 Other current assets 3,716.4 - 3,716.4 3,560.1 - 3,560.1 4,038.9 (55.3) 3,983.6 3,868.5 (56.0) 3,812.5 Total assets 9,753.5 1,650.8 11,404.3 10,106.9 1,740.2 11,847.1 Liabilities Current liabilities Trade and other payables 1,461.3 (36.9) 1,424.4 1,405.9 (28.8) 1,377.1 Borrowings and other financial liabilities 513.1 181.3 694.4 125.6 158.1 283.7 Provisions 124.5 (47.9) 76.6 98.8 (42.6) 56.2 Current tax liabilities 26.2 - 26.2 50.0 - 50.0 Other current liabilities 79.2 - 79.2 145.7 - 145.7 2,204.3 96.5 2,300.8 1,826.0 86.7 1,912.7 Non-current liabilities Trade and other payables 322.4 (306.8) 15.6 333.8 (317.5) 16.3 Borrowings and other financial liabilities 1,279.5 2,349.0 3,628.5 1,670.6 2,383.9 4,054.5 Provisions 250.1 (177.4) 72.7 193.1 (101.3) 91.8 Deferred tax liabilities 222.6 (98.8) 123.8 256.6 (90.6) 166.0 Other non-current liabilities 220.5 - 220.5 316.8 - 316.8 2,295.1 1,766.0 4,061.1 2,770.9 1,874.5 4,645.4 Total liabilities 4,499.4 1,862.5 6,361.9 4,596.9 1,961.2 6,558.1 Net assets 5,254.1 (211.7) 5,042.4 5,510.0 (221.0) 5,289.0 Equity Issued share capital 712.5 - 712.5 712.5 - 712.5 Share premium account 386.1 - 386.1 386.1 - 386.1 Capital redemption reserve 8.0 - 8.0 8.0 - 8.0 Hedging reserve (14.6) - (14.6) (76.0) - (76.0) Cost of hedging reserve 11.7 - 11.7 10.7 - 10.7 Foreign exchange reserve (44.7) 0.8 (43.9) (29.3) - (29.3) Retained earnings 4,195.2 (212.3) 3,982.9 4,500.5 (221.0) 4,279.5 Total shareholders’ equity 5,254.2 (211.5) 5,042.7 5,512.5 (221.0) 5,291.5 Non-controlling interests in equity (0.1) (0.2) (0.3) (2.5) - (2.5) Total equity 5,254.1 (211.7) 5,042.4 5,510.0 (221.0) 5,289.0