GSK

Business Context and Reporting Period

Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Full Year 2003, Quarter 1 2004, Quarter 2 2004, and Half-Year 2004.
Key Context: This filing presents unaudited consolidated financial results restated from UK Generally Accepted Accounting Principles (UK GAAP) to International Financial Reporting Standards (IFRS). The transition date for IFRS adoption is January 1, 2003. The company intends to fully report under IFRS starting January 1, 2005.

Key Financial Metrics (IFRS Basis)

Balance Sheet Highlights (IFRS Basis)

• Total Assets (June 30, 2004): £21,954 million
• Total Liabilities (June 30, 2004): £16,657 million
• Net Assets (June 30, 2004): £5,297 million
• Cash and Cash Equivalents (June 30, 2004): £2,529 million (includes reclassification of liquid investments)
• Long-term Borrowings (June 30, 2004): £4,908 million

Material Changes and Accounting Adjustments

The primary material change in this filing is the restatement of financial data from UK GAAP to IFRS. Key adjustments impacting reported figures include:

• Revenue Recognition: Customer allowances (marketing/promotional payments to retailers) are now deducted from turnover rather than recorded as expenses, reducing reported turnover by £181 million for the first half of 2004.
• Share-based Payments: IFRS 2 requires charging the fair value of equity instruments to the income statement. This resulted in a significant charge of £181 million for the first half of 2004, largely due to retrospective recognition of options granted in 2001.
• Goodwill: Goodwill is no longer amortized under IFRS (indefinite life), reversing the amortization charge previously recorded under UK GAAP.
• Intangible Assets: Amortization of product-related assets commences only upon regulatory approval, leading to a reduction in amortization charges for assets in development. Conversely, the acquired rights to "Coreg" are now capitalized and amortized over 8 years.
• Pensions: Actuarial gains and losses are smoothed through the income statement over employees' service lives rather than recognized immediately.

Outlook, Risks, and Management Commentary

• Forward-Looking Statements: The company cautions that actual results may differ materially from projections due to risks described in the 2003 Form 20-F.
• Financial Instruments: GSK intends to take an IFRS 1 exemption for financial instruments in comparative periods (2003-2004), keeping them on a UK GAAP basis. A full adjustment to fair value (IAS 32/39) will occur on January 1, 2005. Management estimates this would have reduced pre-tax profit by £92 million in the first half of 2004, primarily due to the Quest Diagnostics collar and Theravance options.
• Taxation: The effective tax rate is forecast at 27.7% for 2004. Actual rates may vary based on share-based payment tax effects and intercompany profit in inventory.
• Future Reporting: Results for Q3 and Q4 2004 restated to IFRS are scheduled for publication on February 10, 2005.

Investor Verification Checklist

• IFRS Transition Impact: Verify the specific impact of the £181 million revenue reduction due to customer allowance reclassification on gross margin trends.
• Share-Based Payment Volatility: Confirm the expected reduction in share-based payment charges to £200-£250 million in 2005 as the 2001 "catch-up" grants vest.
• Financial Instrument Valuation: Assess the potential £92 million pre-tax profit reduction in 2005 when IAS 39 fair value rules are fully applied to financial instruments.
• Goodwill Impairment: Monitor future annual impairment testing of goodwill, which is no longer amortized but subject to write-downs if value declines.
• Cash Flow Reclassification: Note that cash and cash equivalents figures have increased due to the reclassification of liquid investments with maturities under three months.