Notes to the consolidated financial statements
Year ended 31 July 2009

1. Critical accounting estimates and judgements

The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions in certain circumstances that affect reported amounts. The most sensitive estimates affecting the financial statements are in the areas of assessing the recoverability of receivables, the net realisable value of inventory, the impairment of goodwill and long-lived intangible assets, the reserves in respect of self-insured insurance, the consideration received from vendors, onerous lease provisions, taxation and the cost and liability for pensions and other post-retirement benefits.

Allowance for doubtful accounts

Provision is made against accounts that in the estimation of management may be impaired. Within each of the businesses assessment is made locally of the recoverability of accounts receivable based on a range of factors including the age of the receivable and the creditworthiness of the customer. The provision is assessed monthly with a detailed formal review of balances and security being conducted at the full year and half year. Determining the recoverability of an account involves estimation as to the likely financial condition of the customer and their ability to subsequently make payment. If the Group is cautious as to the financial condition of the customer the Group may provide for accounts that are subsequently recovered. Similarly if the Group is optimistic as to the financial condition of the customer the Group may not provide for an account that is subsequently determined to be irrecoverable. Furthermore, while the Group has a large geographically dispersed customer base, a slowdown in the markets in which the Group operates may result in higher than expected uncollectible amounts and therefore higher (or lower) than anticipated charges for irrecoverable receivables. The amount relating to continuing operations charged to the income statement in 2009 in respect of doubtful accounts represented 0.9 per cent of revenue (2008: 0.5 per cent).

Wolseley held a provision for impairment of receivables at 31 July 2009 amounting to £81 million (2008: £79 million).

Inventories

For financial reporting purposes the Group evaluates its inventory to ensure it is carried at the lower of cost or net realisable value. Provision is made against slow moving, obsolete and damaged inventories. Damaged inventories are identified and written down through the inventory counting procedures conducted within each business. Provision for slow moving and obsolete inventories is assessed by each business as part of their ongoing financial reporting. Obsolescence is assessed based on comparison of the level of inventory holding to the projected likely future sales. Future sales are assessed based on historical experience, and adjusted where the manufacturer has indicated that it will no longer continue to manufacture the particular item. To the extent that future events impact the saleability of inventory these provisions could vary significantly. For example, changes in specifications or regulations may render inventory, previously considered to have a realisable value in excess of cost, obsolete and requiring such inventory to be fully written off. The Group held allowances in respect of inventory balances at 31 July 2009 amounting to £151 million (2008: £160 million).

Impairment of long-lived assets

Wolseley periodically evaluates the net realisable value of long-lived assets, including goodwill, other intangible assets and tangible fixed assets, relying on a number of factors, including operating results, business plans and projected future cash flows.

Assets that have an indefinite useful life, such as goodwill, are not subject to amortisation and are tested annually for impairment and whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are tested for impairment whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. The value in use is in most cases based on the discounted present value of the future cash flows expected to arise from the cash generating unit to which the goodwill relates, or from the individual asset or asset group. Estimates are used in deriving these cash flows and the discount rate.

As disclosed in notes 14, 15 and 16, the Group has charged £879 million in respect of the impairment of long-lived assets during the year ended 31 July 2009 (2008: £186 million).

The results of these tests for impairment are sensitive to the assumptions made in the value in use calculations. The Group has estimated the effect of increasing the discount rate by one percentage point, and of decreasing the trading margin for each asset group by one percentage point in the final year of the cash flow forecast. The additional impairment charge that would arise under either of these alternative assumptions is less than 5 per cent of the carrying amount of goodwill and acquired intangible assets of £2,057 million at 31 July 2009.

Self-insured insurance

The Group operates a captive insurance company, Wolseley Insurance Limited, which is registered and operational in the Isle of Man. This company provides reinsurance exclusively to certain companies within the Group, principally to cover US casualty and global property damage risks. Provision is made based on actuarial assessment of the liabilities arising from the insurance coverage provided. The actuarial assessment of the reserve for future claims necessarily includes estimates as to the likely trend of future claims’ costs and the estimates as to the emergence of further claims subsequent to the year end. An actuarial review of claims is performed annually. To the extent that actual claims differ from those projected the provisions could vary significantly. At 31 July 2009, the provision for claims arising from this insurance was £57 million (2008: £51 million).

Consideration received from vendors

The Group enters into agreements with many of its vendors providing for inventory purchase rebates primarily upon achievement of specified volume purchasing levels with many of these agreements applying to sales in a calendar year. For certain agreements the rebate rises as a proportion of purchases as higher quantities or values of purchases are made. The Group accrues the receipt of vendor rebates as part of its cost of sales for products sold, taking into consideration cumulative purchases of inventory to date and projected purchases through to the end of the qualifying period. Rebates are accrued for each reporting period with an extensive reassessment of the rebates earned being performed at the end of the financial year and half way through the financial year. The Group has agreements with numerous and geographically dispersed suppliers, but a slow down in the markets in which the Group operates, or a significant change in the profile of products purchased may result in purchases for the remainder of the year differing significantly from those projected. Consequently the rebate actually received may vary from that accrued in the financial statements.

Onerous lease provisions

When the present value of the future cash flows receivable from the operation of leased assets is less than the present value of the rental payments to which the Group is committed, the Group applies the shortfall firstly against the carrying amount of the assets, and then provides for any further onerous element of the contract. Determining the amount of such provision requires estimating the future net cash flows receivable in respect of these assets, and in the particular case where the leased properties are vacant this requires assessing the likely period for which the property will remain vacant, the cost of any works required to enhance its marketability and the rental income receivable when the property is sublet. To the extent that actual cash flows received differ from those estimated, the amount of provision recognised could differ materially. During the year ended 31 July 2009 the number of vacant properties has increased significantly due to branch closures. At 31 July 2009, the provision for onerous leases was £124 million.

Impairment of construction loan receivables and foreclosed properties held for sale

A provision for impairment of construction loan receivables is made when management estimates that the present value of future cash flows recoverable in respect of these receivables is less than the carrying amount. Determining the amount of such provision requires estimating the amount and timing of such future cash flows, which requires an assessment of

• the financial condition of the debtor;
• the ability of the debtor to meet contractual payments; and
• in the event that the Group forecloses on the property on which the receivable is secured, the likely cost of enhancing the marketability of the property, the likely disposal proceeds, and the likely period for which the property will be held to maximise such proceeds.

To the extent that actual amounts recovered differ from those estimated, the amount of provision recognised could differ materially. At 31 July 2009, the provision for impairment of construction loans receivables was £39 million (2008: £18 million) and the provision against foreclosed properties held for sale was £18 million (2008: £4 million).

Taxation

Accruals for tax contingencies require management to make judgements and estimates in relation to tax audit issues and exposures. Amounts accrued are based on management’s interpretation of country-specific tax law and the likelihood of settlement. Tax benefits are not recognised unless the tax positions are probable of being sustained. Once considered to be probable, management reviews each material tax benefit to assess whether a provision should be taken against full recognition of the benefit on the basis of the potential settlement through negotiation and/or litigation. All such provisions are included in creditors due within one year. Any recorded exposure to interest on tax liabilities is provided for in the tax charge.

Pensions and other post-retirement benefits

The Group operates defined benefit pension schemes in the United Kingdom and in a number of overseas locations that are accounted for using methods that rely on actuarial assumptions to estimate costs and liabilities for inclusion in the financial statements. These actuarial assumptions include discount rates, assumed rates of return, salary increases and mortality rates, and are disclosed in note 32.

While management believes that the actuarial assumptions are appropriate, any significant changes to those used would affect the balance sheet and income statement. The Group considers that the most sensitive assumptions are the discount rate and life expectancy. The Group has estimated the sensitivity of the financial statements to changes in these assumptions as follows:

Effect of a change in discount rate	(Increase)/ decrease in liability 2009 £m
Increase of 0.5%	92
Decrease of 0.5%	(104)
Effect of an increase in life expectancy
Increase of one year	(34)

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