GSK

Business Context and Reporting Period

This Form 6-K filing by GlaxoSmithKline plc (GSK) covers the period ending February 10, 2005. The document presents unaudited consolidated financial results for the full years 2003 and 2004, as well as quarterly data for 2004, restated from UK Generally Accepted Accounting Principles (UK GAAP) to International Financial Reporting Standards (IFRS). The transition to IFRS is effective January 1, 2005, with a transition date of January 1, 2003. The filing includes detailed reconciliations of income statements, balance sheets, and cash flow statements to reflect IFRS requirements, including specific adjustments for share-based payments, goodwill, pensions, and customer allowances.

Key Financial Metrics (Full Year 2004 IFRS)

Material Changes and Accounting Adjustments

The primary material change in this filing is the restatement of financial results from UK GAAP to IFRS. Key adjustments impacting the 2004 full-year results include:

• Turnover Reduction: Turnover decreased by £373 million under IFRS due to the reclassification of customer allowances (marketing and promotional payments to retailers) from expenses to a deduction from turnover, aligning with US GAAP best practices.
• Share-Based Payments: A charge of £309 million was recognized for share-based payments under IFRS 2, compared to a lower charge under UK GAAP. This significantly impacted trading profit.
• Goodwill: Goodwill amortization was reversed under IFRS (as goodwill is not amortized but tested for impairment), increasing profit before tax by £12 million for the year.
• Pensions and OPEBs: Adjustments were made to recognize pension surpluses and deficits on the balance sheet. An amendment to IAS 19 allowed for the recognition of actuarial gains/losses outside the income statement, affecting the balance sheet provisions.
• Tax Rate Increase: The effective tax rate increased from 27.8% (UK GAAP) to 30.4% (IFRS), partly due to non-recurring deferred tax charges on intercompany items treated differently under IFRS.

Guidance, Outlook, and Risks

The filing includes a cautionary statement regarding forward-looking statements, noting that actual results may differ materially due to risks and uncertainties. Specific risks and contingencies mentioned include:

• Accounting Transition: The move to IFRS involves significant changes in presentation and measurement, particularly regarding financial instruments (IAS 32/39) and share-based payments (IFRS 2).
• Financial Instruments: While comparative periods (2003/2004) remain on UK GAAP for financial instruments, an adjustment to fair value will occur on the opening balance sheet for 2005. Potential impacts include a reduction in profit before tax of approximately £98 million if IAS 39 rules were applied to 2004, primarily due to the Quest Diagnostics collar and Theravance options.
• Regulatory and Tax: The filing notes uncertainty regarding the accounting treatment of potential receipts from the US Government under the Medicare Prescription Drug, Improvement and Modernization Act.

Investor Verification Checklist

• IFRS vs. UK GAAP Reconciliation: Verify the specific impact of the £373 million turnover reduction due to customer allowances on gross margin calculations.
• Share-Based Payment Charges: Confirm the trajectory of the share-based payment charge, which is expected to reduce to £200-£250 million in 2005 as 2001 grants vest.
• Deferred Tax Implications: Review the non-recurring £110 million deferred tax charge related to intercompany items and its impact on the 30.4% effective tax rate.
• Pension Provisions: Examine the increase in pension and OPEB provisions on the balance sheet (e.g., £1,734 million increase at year-end 2004) and the treatment of actuarial gains/losses.
• Financial Instrument Valuation: Assess the potential impact of the transition to IAS 39 on the valuation of the Quest Diagnostics equity collar and Theravance options in future reporting periods.