Accounting policies of the company

Basis of preparation

The financial statements are prepared on a going concern basis under the historical cost convention, modified to include revaluations to fair value of certain financial instruments, in accordance with the Companies Act 2006 and UK GAAP.

By virtue of section 408 of the Companies Act 2006 the company is exempt from presenting a profit and loss account. The company has taken advantage of the exemption from preparing a cash flow statement under the provisions of FRS 1 (Revised 1996) and the exemption contained in FRS 8 and has not separately disclosed transactions with subsidiary undertakings.

The following paragraphs describe the significant accounting policies under UK GAAP, which have been consistently applied.

Investments

Investments in subsidiaries are stated at cost less any provision for permanent diminution in value. They are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable.

Dividends paid and received

The interim dividend is included in the financial statements in the period in which it is approved by the directors, and the final dividend in the period in which it is approved by shareholders at the annual general meeting. Dividends received are included in the financial statements in the period in which they are receivable.

Share-based payments – employee benefits

The fair value of share options or share grants is initially measured at grant date, based on the binomial or Monte Carlo model, and is recognised as a cost to the company or an addition to the cost of investment in the subsidiary in which the relevant employees work, over the vesting period of the option or share grant, with a corresponding adjustment to reserves. Any payments received from the company’s subsidiaries in respect of these share-based payments result in a reduction in the cost of investment. Shares of Diageo plc held by the company directly or by share trusts for the purpose of fulfilling obligations in respect of various employee share plans around the group are deducted from equity in the balance sheet. Any surplus or deficit arising on the sale of the Diageo plc shares held by the company is included as an adjustment to reserves.

Foreign currencies

Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at closing rates at the balance sheet date.

Pensions and other post employment benefits

Diageo operates a number of defined benefit pension plans. It is not possible to allocate the assets and liabilities of these pension plans between individual companies and therefore the company accounts for them as defined contribution plans. Contributions payable in respect of defined contribution plans are charged to operating profit as incurred.

The company operates a number of post employment benefit plans which are unfunded. For these plans, the amount charged in the profit and loss account is equivalent to the expected increase in the plans’ liabilities over the year. Any changes in the liabilities over the year due to changes in assumptions or experience within the plans are recognised in shareholders’ equity. The liability recognised on the balance sheet represents the present value of the obligations under the plans, net of related deferred tax.

Taxation

Tax is provided at the amounts expected to be paid applying tax rates that have been enacted or substantively enacted by the balance sheet date.

Full provision for deferred tax is made for timing differences between the recognition of gains and losses in the financial statements and their recognition in tax computations, using appropriate tax rates. The company does not discount these balances. Deferred tax assets are only recognised to the extent that it is more likely than not that they will be recovered. No deferred tax liability is provided in respect of any future remittance of earnings of foreign subsidiaries or associates where no commitment has been made to remit such earnings.

Financial instruments

The company’s accounting policies for financial instruments under UK GAAP, namely FRS 25 – Financial instruments: presentation, FRS 26 – Financial instruments: measurement and FRS 29 – Financial instruments: disclosures, are the same as the group’s accounting policies under IFRS, namely IAS 32 – Financial instruments: presentation, IAS 39 – Financial instruments: recognition and measurement and IFRS 7 – Financial instruments: disclosures. These policies are set out under the heading ‘Derivative financial instruments’ in the ‘Accounting policies of the group’. As consolidated financial information has been disclosed under IFRS 7 in note 22 to the consolidated financial statements, the parent company is exempt from the disclosure requirements of FRS 29.