Financial Statements

2. Critical accounting estimates and judgements in applying accounting policies

The preparation of financial statements in conformity with IFRS as adopted by the EU requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The judgements, estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below.

a) Adoption of accounting policy due to the related balances being immaterial in previous periods

IAS 2 'Inventories'. Previously, certain non-reclaimable duty and freight costs were expensed as incurred by the Group on the basis that they were not considered to be material. In the current period, the Group has adopted a policy of including all non-reclaimable duty and freight costs incurred in getting inventories into the Group's distribution centres into the cost of inventory. Freight costs incurred for moving inventories internally between distribution centres, stores and other locations are expensed as incurred.

In accordance with IAS 8, 'Accounting Policies, Changes in Accounting Estimates and Errors', a circumstance where an accounting policy is introduced to account for transactions that were not material in a prior period is not a change in accounting policy. The application of such a policy is then made on a prospective basis and this is the approach that has been adopted by the Group.

The impact of adopting this new policy is to increase the value of inventories by £3.5m as at 1 May 2011, of which £1.6m relates to all prior periods, of which £0.2m relates to the previous financial year.

The impact of the new inventory accounting policy on gross profit is as follows:

52 weeks ended
1 May 2011
52 weeks ended
2 May 2010
£m £m
Revenue 237.9 139.4
Cost of sales prior to impact of new inventory accounting policy relating to prior periods (106.7) (66.1)
Gross profit before impact of new inventory accounting policy relating to prior periods 131.2 73.3
Impact of new inventory accounting policy relating all to prior periods 1.6 -
Gross profit 132.8 73.3

b) Recoverability of deferred tax assets

The Group has recognised a significant deferred tax asset in its financial statements which requires judgement for determining the extent of its recoverability at each balance sheet date. The Group assesses recoverability with reference to Board approved forecasts of future taxable profits. These forecasts require the use of assumptions and estimates. The Group's subsidiaries will need to make taxable profits of at least £170.7m over the next 19 years (2010: £186m over 20 years) to obtain the full tax deduction against the amortisation of goodwill and intangible assets.