1 principal accounting policies

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union (EU) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of certain financial instruments, share based payments and retirement benefit obligations.

In preparing the consolidated financial statements the comparative amounts have been restated to reflect the Plastic Packaging Closures division as a discontinued operation.

The Group has adopted the following new and revised IFRS as of 1 January 2010.

1. IFRS3 (Revised) ‘Business Combinations’. This revision to an existing standard continues to apply the acquisition method to business combinations with certain changes which could impact the accounting for the Group’s acquisitions. For example, all payments to purchase a business must be recorded at fair value at the acquisition date with cash contingent payments classified as debt and subsequently remeasured through the consolidated income statement. In addition, all transaction costs must be expensed in the consolidated income statement. This revision has no impact on these consolidated financial statements.
2. IAS27 (Revised) ‘Consolidated and Separate Financial Statements’. This revision to an existing standard requires an entity to attribute comprehensive income to the parent company and any non controlling interests, even if this results in the non controlling interests having a deficit balance. It specifies that changes in a parent company’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary, whereby at the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. This revision does not have a material impact on these consolidated financial statements.

The following accounting standards and amendments to existing standards are not yet effective and have not been early adopted by the Group.

1. IFRS9 ‘Financial Instruments’, issued in November 2009, is the first step in the process to replace IAS39 ‘Financial Instruments: Recognition and Measurement’. The standard introduces new requirements for classifying and measuring financial assets. The Group intends to adopt IFRS9 no later than the accounting period beginning on 1 January 2013, subject to endorsement by the EU.
2. IAS24 (Revised) ‘Related Party Disclosures’, issued in November 2009, clarifies the definition of a related party and the disclosure of transactions between the Group and its subsidiaries and its associates. The Group intends to adopt IAS24 (Revised) for the accounting period beginning on 1 January 2011, subject to endorsement by the EU.

There are no other IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.

key estimates and assumptions

The preparation of consolidated financial statements in accordance with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, events or actions, actual results may ultimately differ from those estimates. The key estimates and assumptions used in these consolidated financial statements are set out below.

goodwill impairment testing

Goodwill is tested at least annually for impairment in accordance with the accounting policy for goodwill. The recoverable amounts of cash generating units relating to continuing operations are determined based on value in use calculations. These calculations require the use of estimates which include cash flow projections for each cash generating unit and discount rates based on the Group’s weighted average cost of capital, adjusted for specific risks associated with particular cash generating units. For details of impairment testing in 2010 and 2009 see note 12 to the consolidated financial statements. The accounting policies for goodwill and impairment testing are set out below.

retirement benefits

The consolidated financial statements include costs in relation to, and provision for, retirement benefit obligations. There are two principal funded defined benefit pension plans, in the UK and US, and an unfunded retiree medical plan in the US. The costs and the present value of any related pension assets and liabilities depend on factors such as life expectancy of the members, the salary progression of current employees, the returns that plan assets generate and the discount rate used to calculate the present value of the liabilities. The Group uses estimates based on previous experience and external actuarial advice in determining these future cash flows and in determining the discount rate. If the discount rates were to fall by 0.5%, the net liabilities of the plans at 31 December 2010 would rise by approximately £110m (2009: £105m). If equity values were to fall by 10%, then the plan assets at 31 December 2010 would fall by approximately £100m (2009: £100m). The accounting policy for retirement benefit obligations is set out below and details of the assumptions used for the two principal pension plans and the retiree medical plan are set out in note 26 to the consolidated financial statements.

income taxes

Judgement is required in determining the provision for income taxes. There are many transactions and calculations whose ultimate tax treatment is uncertain. The Group recognises liabilities for anticipated tax issues based on estimates of whether additional taxes are likely to be due. The Group recognises deferred tax assets and liabilities based on estimates of future taxable income and recoverability. Where a change in circumstance occurs, or the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax balances in the year in which that change or outcome is known. The accounting policy for income taxes is set out below.

basis of consolidation

The consolidated financial statements comprise Rexam PLC and all its subsidiaries, together with the Group’s share of the results of its associates and joint ventures. The financial statements of subsidiaries, associates and joint ventures are prepared as of the same reporting date using consistent accounting policies. Intercompany balances and transactions, including any unrealised profits arising from intercompany transactions, are eliminated in full.

Subsidiaries are entities where the Group has the power to govern the financial and operating policies, generally accompanied by a share of more than 50% of the voting rights. Subsidiaries are consolidated from the date on which control is transferred to the Group and are included until the date on which the Group ceases to control them. Associates are entities over which the Group has significant influence but not control, generally accompanied by a share of between 20% and 50% of the voting rights. Joint ventures are entities over which the Group has joint control, whereby the strategic, financial and operating decisions relating to the venture require the unanimous consent of the parties sharing control and are generally accompanied by a 50% share of voting rights. Investments in associates and joint ventures are accounted for using the equity method. If the Group’s share of losses in an associate or joint venture equals or exceeds its investment in the associate or joint venture, the Group does not recognise further losses unless it has incurred obligations or made payments on behalf of the associate or joint venture.

All acquisitions are accounted for by applying the purchase method. The cost of an acquisition is measured as the aggregate of the fair values, at the acquisition date, of the assets given, liabilities incurred or assumed, and equity instruments issued by the Group. The identifiable assets, liabilities and contingent liabilities of the acquiree are measured initially at fair value at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of the acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is recognised as goodwill.

foreign currencies

The financial statements for each of the Group’s subsidiaries, associates and joint ventures are prepared using their functional currency. The functional currency is the currency of the primary economic environment in which an entity operates. Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Exchange differences resulting from the settlement of such transactions and from the translation at exchange rates ruling at the balance sheet date of monetary assets and liabilities denominated in currencies other than the functional currency are recognised directly in the consolidated income statement. Exceptions to this are where the monetary items form part of the net investment in a foreign operation or designated as hedges of a net investment, or designated as cash flow hedges. Such exchange differences are initially recognised in equity.

The presentation currency of the Group is sterling. The balance sheets of foreign operations are translated into sterling using the exchange rate at the balance sheet date and the income statements are translated into sterling using the average exchange rate for the year. Where this average is not a reasonable approximation of the cumulative effect of the rate prevailing on the transaction date, the exchange rate on the transaction date is used. Exchange differences on translation into sterling arising since 1 January 2004 are recognised as a separate component of equity. On disposal of a subsidiary, any cumulative exchange differences held in equity are recycled to the consolidated income statement.

On the repayment of a quasi equity loan, the proportionate share of the cumulative amount of the exchange differences on the loan recognised in other comprehensive income is not reclassified to the consolidated income statement unless the Group loses control over the entity to which the quasi equity loan related.

The principal exchange rates against sterling used in these consolidated financial statements are as follows:

The cost of intangible assets acquired in an acquisition is the fair value at acquisition date. The cost of separately acquired intangible assets, including computer software, comprises the purchase price and any directly attributable costs of preparing the asset for use. Computer software development costs that are directly associated with the implementation of major business systems are capitalised as intangible assets. Expenditure on research is recognised as an expense in the consolidated income statement as incurred. Expenditure incurred on other development projects is capitalised as an intangible asset if it is probable that the expenditure will generate future economic benefits and can be measured reliably.

The amortisation of certain acquired intangible assets, comprising acquired customer contracts and relationships and technology and patents, is separately disclosed within operating profit on the face of the consolidated income statement.

property, plant and equipment

Property, plant and equipment is carried at cost less accumulated depreciation and accumulated impairment losses. Cost comprises purchase price and directly attributable costs. Freehold land and assets under construction are not depreciated. For all other property, plant and equipment, depreciation is calculated on a straight line basis to allocate cost, less residual value of the assets, over their estimated useful lives as follows:

Residual values and useful lives are reviewed at least at each financial year end.

impairment of assets

This policy applies to all assets except inventories, deferred tax assets, financial assets and non current assets classified as held for sale. At each balance sheet date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes an estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is written down to its recoverable amount. Recoverable amount is the higher of fair value less costs to sell and value in use and is determined for an individual asset (see also accounting policy for assets and liabilities classified as held for sale and discontinued operations below). If the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, the recoverable amount of the cash generating unit to which the asset belongs is determined. Discount rates reflecting the asset specific risks and the time value of money are used for the value in use calculation. When an asset is written down to its recoverable amount the impairment loss is recognised in the consolidated income statement in the year in which it is incurred. Impairment losses incurred in a cash generating unit or group of cash generating units are applied against the carrying amount of any goodwill allocated to the units. Where no goodwill exists, the impairment losses reduce the other non current assets of the cash generating units. Should circumstances change which result in a reversal of a previous impairment, the value of the asset is increased and the reversal is recognised in the consolidated income statement in the year in which it occurs. The increase in the carrying amount of the asset is limited to the amount which would have been recorded had no impairment been recognised in prior years. Impairment losses applied to goodwill are not reversed.

inventories

Inventories are measured at the lower of cost and net realisable value. Cost is determined on a first in first out or a weighted average cost basis. Cost comprises directly attributable purchase and conversion costs and an allocation of production overheads based on normal operating capacity. Net realisable value is the estimated selling price less estimated costs to completion and selling costs.

cash and cash equivalents

Cash and cash equivalents for the purposes of the consolidated cash flow statement comprise cash at bank and in hand, money market deposits and other short term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts are presented in borrowings within current liabilities in the consolidated balance sheet.

assets and liabilities classified as held for sale and discontinued operations

Assets and liabilities are classified as held for sale when their carrying amount is to be recovered principally through a sale transaction and the sale is highly probable. Assets and liabilities classified as held for sale are stated at the lower of carrying amount and fair value less costs to sell. They are not depreciated or amortised. Operations are classified as discontinued when they are either disposed or are part of a single coordinated plan to dispose, and represent a major line of business or geographical area of operation.

grants

Grants received in respect of property, plant and equipment are capitalised and released to the consolidated income statement in equal instalments over the estimated useful lives of the related assets.

leases

Leases are classified as finance leases where substantially all the risks and rewards of ownership are transferred to the Group. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Lease payments are apportioned between the liability and finance charge to produce a constant rate of interest on the finance lease balance outstanding. Assets capitalised under finance leases are depreciated over the shorter of the useful life of the asset and the lease term. Leases other than finance leases are classified as operating leases. Payments made under operating leases are recognised as an expense in the consolidated income statement on a straight line basis over the lease term. Any incentives to enter into operating leases are recognised as a reduction of rental expense over the lease term on a straight line basis.

income taxes

The tax expense represents the sum of current tax, non current tax and deferred tax.

Current tax and non current tax are based on taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

Deferred tax is recognised in full, using the liability method, on temporary differences arising between the tax base of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax arising from initial recognition of an asset or liability in a transaction, other than an acquisition, that at the time of the transaction affects neither accounting nor taxable profit or loss, is not recognised. Deferred tax is measured using tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the asset is realised or the liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Tax is recognised in the consolidated income statement, unless the tax relates to items recognised directly in equity, in which case the tax is recognised directly in equity through the consolidated statement of comprehensive income.

provisions

Provisions are recognised when a present obligation exists in respect of a past event and where the amount can be reliably estimated. Provisions for restructuring are recognised for direct expenditure on business reorganisations where plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been undertaken on or before the balance sheet date. Provisions are discounted where the time value of money is considered to be material.

dividends

Final equity dividends to the shareholders of Rexam PLC are recognised in the period that they are approved by the shareholders. Interim equity dividends are recognised in the period that they are paid.

financial instruments

Financial instruments that are measured at fair value are disclosed in the consolidated financial statements in accordance with the following fair value measurement hierarchy:

1. quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
2. inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
3. inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.

Derivative financial instruments are measured at fair value. Derivative financial instruments utilised by the Group include interest rate swaps, cross currency swaps, forward foreign exchange contracts and forward aluminium, resin and energy commodity contracts.

Certain derivative financial instruments are designated as hedges in line with the Group’s risk management policies. Hedges are classified as follows:

1. fair value hedges where they hedge the exposure to changes in the fair value of a recognised asset or liability.
2. cash flow hedges where they hedge exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction.
3. net investment hedges where they hedge exposure to changes in the value of the Group’s interests in the net assets of foreign operations.

For fair value hedges, any gain or loss from remeasuring the hedging instrument at fair value is recognised in the consolidated income statement. Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and similarly recognised in the consolidated income statement.

For cash flow hedges and net investment hedges, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in equity, with any ineffective portion recognised in the consolidated income statement. When hedged cash flows result in the recognition of a non financial asset or liability, the associated gains or losses previously recognised in equity are included in the initial measurement of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the consolidated income statement in the same period in which the hedged cash flows affect the consolidated income statement.

Any gains or losses arising from changes in fair value of derivative financial instruments not designated as hedges are recognised immediately in the consolidated income statement.

Gains and losses on derivative financial instruments related to operating activities are included in operating profit when recognised in the consolidated income statement. Gains and losses on derivative financial instruments related to financing activities are included in interest when recognised in the consolidated income statement.

Borrowings are measured at amortised cost except where they are hedged by an effective fair value hedge, in which case the carrying value is adjusted to reflect the fair value movements associated with the hedged risk. Where borrowings are used to hedge the Group’s interests in the net assets of foreign operations, the portion of the exchange gain or loss on the borrowings that is determined to be an effective hedge is recognised in equity.

Upfront fees paid on the establishment of loan facilities are initially capitalised as transaction costs of the loan and amortised in interest over the expected term of the loan. Ongoing commitment fees are expensed in interest as incurred.

Available for sale financial assets are measured at fair value. Unrealised gains and losses are recognised in equity except for impairment losses, interest and dividends arising from those assets which are recognised in the consolidated income statement.

Trade and other receivables are initially measured at fair value and subsequently measured at amortised cost less any provision for impairment. They are discounted when the time value of money is considered material. Trade and other payables are measured at cost.

2 segment analysis

For internal reporting, Rexam is organised into three operating segments for Beverage Cans based on the geographical locations of Europe and Asia, North America and South America, and into one operating segment for Plastic Packaging. For external reporting, the three operating segments for Beverage Cans are combined into one reportable segment.

Beverage Cans comprise aluminium and steel cans for a wide variety of beverages including carbonated soft drinks, energy drinks and beer. Plastic Packaging comprises rigid plastic products for customers in the Healthcare and Personal Care markets.

The Closures division has been reported as discontinued operations in the segment information set out below. Previously this division was reported as part of Plastic Packaging.

(i) segment information 2010

Share of post tax profits of associates and joint ventures from continuing operations are wholly attributable to Beverage Cans. Segment assets are disclosed after deducting inter segment assets of £2m for Beverage Cans and £1m for Plastic Packaging. Segment liabilities are disclosed after deducting inter segment liabilities of £1m for Beverage Cans and £2m for Plastic Packaging. The assets of associates and joint ventures are wholly attributable to Beverage Cans.

Underlying operating profit comprises operating profit from continuing operations before exceptional items and the amortisation of certain acquired intangible assets. Underlying operating profit from continuing operations is included as it is felt that adjusting operating profit for exceptional items and the amortisation of certain acquired intangible assets provides a better indication of the Group’s performance. Underlying return on sales comprises underlying operating profit from continuing operations divided by sales from continuing operations.

Non specific central costs are allocated on the basis of net assets excluding investments in associates and joint ventures, net borrowings and tax.

Unallocated assets comprise derivative financial instrument assets, deferred tax assets, pension assets and cash and cash equivalents which are used as part of the Group’s financing offset arrangements. Unallocated liabilities comprise borrowings, derivative financial instrument liabilities, current and non current tax, deferred tax liabilities and retirement benefit obligations.

(ii) segment information 2009 – restated

Share of post tax profits of associates and joint ventures from continuing operations are wholly attributable to Beverage Cans. Segment assets are disclosed after deducting inter segment assets of £2m for Beverage Cans and £2m for Plastic Packaging. Segment liabilities are disclosed after deducting inter segment liabilities of £3m for Beverage Cans and £1m for Plastic Packaging. The assets of associates and joint ventures are wholly attributable to Beverage Cans.

(iii) geographic and other information

Sales are stated by external customer location. One customer, principally in Beverage Cans, contributed sales of £1,394m (2009: £1,459m), and another Beverage Cans customer contributed sales of £610m (2009: £478m).

Unallocated non current assets comprise derivative financial instrument assets, pension assets and deferred tax assets.

3 operating expenses

Operating expenses include research and development expenditure of £16m from continuing operations and £3m from discontinued operations (2009: £16m and £4m); and fair value gains on forward foreign exchange contracts not hedge accounted of £3m from continuing operations (2009: losses £3m).

4 employee costs and numbers

(i) employee benefit expense

Key management comprises all directors of Rexam PLC and band 1 executives. For details of directors’ remuneration see the remuneration report.

(iii) average number of employees

Included in statutory audit fees payable to associate members of PricewaterhouseCoopers LLP are £0.2m in relation to discontinued operations (2009: £0.2m). Included in other fees in respect of services required by legislation in 2009 was £1.0m relating to work performed on the rights issue which was charged to the share premium account.