Acquisition of SmithKline Beecham
Under US GAAP, the financial statements of GlaxoSmithKline prior to the merger are those of Glaxo Wellcome, the US GAAP accounting acquirer. The acquisition of SmithKline Beecham is accounted for under the purchase method as of the date of the merger, 27th December 2000.

Purchase accounting adjustments
In order to determine the proper allocation of purchase price related to the acquired assets of SmithKline Beecham under US GAAP purchase accounting, the cost of acquisition is calculated using the market value of the shares issued, the fair value of vested options exchanged and direct external acquisition costs and then allocated to the fair value of net assets acquired. As a result of the fair value exercise, increases in the values of SmithKline Beecham’s inventory, tangible fixed assets, investments and pension obligations were recognised and fair market values attributed to their other intangible assets, mainly product rights (inclusive of patents and trademarks), assembled SmithKline Beecham workforce and in-process research and development, together with appropriate deferred taxation effects. The difference between the cost of acquisition and the fair value of the assets and liabilities of SmithKline Beecham has been recorded as goodwill. The amount allocated to in-process research and development is required under US GAAP to be expensed immediately in the first reporting period after the business combination, which for GlaxoSmithKline was the period ended 31st December 2000. Fair value adjustments to the recorded amount of inventory will be expensed in the period the inventory will be utilised and additional amortisation and depreciation will be recorded in respect of the fair value adjustments to tangible and intangible assets and the resulting goodwill over the periods of their respective economic useful lives.

The adjustments to the assets and liabilities of SmithKline Beecham to reflect the fair values and allocation of the excess purchase consideration over the fair value of net assets acquired, based on management best estimates of fair value, are summarised in the table opposite and discussed below:

The disclosures required by FAS132 are included in this Note.

Stock-based compensation
Under UK GAAP share options are accounted for as equity when exercised, valued at the issuance price. Under US GAAP, the Group applies FAS 123 ‘Accounting for stock-based compensation’ and related accounting interpretations in accounting for its option plans which require options to be fair valued at their grant date and included in profit and loss over the vesting period of the options. As a result of the merger certain of the Group’s options vested immediately requiring the acceleration of compensation expense. The amount of stock-based compensation expense related to this accelerated vesting was £83 million. The disclosures required by FAS 123 are included in Note 33. Additionally, the Group is entitled to receive a tax deduction for the amount treated as compensation under US tax rules for employee stock options which have been exercised by US employees during the year. Under UK GAAP this is treated as a reduction of tax expense whereas under US GAAP this amount is credited to equity.

Employee Share Ownership Trust (ESOT)
Under UK GAAP shares of the Group’s stock held by the ESOT are recorded at cost and accounted for as fixed asset investments. Projected losses on the exercise of the options covered by the shares are recorded through the profit and loss account over the life of the options. Under US GAAP shares of the Group’s stock purchased by the ESOT are accounted for within shareholders’ equity. Gains or losses arising on subsequent issuance of the shares to employees to satisfy share options are recorded as adjustments to shareholders’ equity.

Foreign currency hedging
The Group enters into forward exchange contracts and other financial instruments which, under UK GAAP, are treated as hedges of future income. The matching principle is used to match the gain or loss under these hedging contracts to the foreign currency transaction or profits to which they relate. Under US GAAP, these instruments do not qualify for hedge accounting and any unrealised gain or loss on hedges of future profits of transactions must be valued at the year end at market rates and recognised in the net income of the current year.

Ordinary dividends
Under UK GAAP, ordinary dividends proposed are provided for in the year in respect of which they are recommended by the Board of Directors for approval by the shareholders. Under US GAAP, such dividends are not provided for until declared by the Board of Directors.

Deferred taxation
Under UK GAAP, deferred taxation is only accounted for to the extent that it is probable that taxation liabilities or benefits will become payable or crystallise within the foreseeable future. Under US GAAP FAS 109 ‘Accounting for income taxes’ requires that deferred taxation is accounted for on all temporary differences and a valuation adjustment to be provided on a full liability basis, and established in respect of those deferred assets where it is more likely than not that some portion will not be realised.

Exceptional items
Items classified as exceptional under UK GAAP do not meet the definition of extraordinary under US GAAP and are therefore classified as operating expense.

Consolidated statement of cash flows
The US GAAP cash flow statement reports changes in cash and cash equivalents, which includes short-term highly liquid investments. Only three categories of cash flows are reported: operating activities (including tax and interest); investing activities (including capital expenditures, acquisitions and disposals together with cash flows from available for sale current asset investments); and financing activities (including dividends paid). A statement of cash flows is presented above.

Cash and cash equivalents
Under UK GAAP the cash balance includes only cash at bank and other cash balances. Under US GAAP cash and cash equivalents include cash at bank and certain liquid investments with original maturities of three months or less.

Comprehensive income statement
The requirement of FAS 130 ‘Reporting comprehensive income’ to provide a comprehensive income statement is met under UK GAAP by the Statement of total recognised gains and losses. A statement of comprehensive income under US GAAP for the three years in the period ending 31st December 2000 is presented above. Under US GAAP the statement includes the net impact of gains and losses on equity and liquid investments and translation adjustments.

Recent FASB pronouncements
FAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’, as deferred by FAS 137, as amended by FAS 138 in June 2000, is required to be implemented with effect from 1st January 2001. FAS 133 requires that all derivative instruments be recorded as assets or liabilities on the balance sheet and measured at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Group has undertaken a review of its derivative instruments and contracts which may contain possible embedded derivatives. The fair value and book value of derivative instruments in respect of financial assets and liabilities as at 31st December 2000 is disclosed in the ‘Classification and fair values of financial assets and liabilities’ table in Note 34. It is not expected that the adoption of FAS 133 for derivatives or embedded derivatives will have a material impact on the financial results or financial position of the Group in 2001.

In September 2000 the FASB issued FAS 140, ‘Accounting for Transfers and Servicing of Financial Assets and Extinguishing of Liabilities’, which will be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after 31st March 2001. The statement provides accounting and reporting standards for transfers, transfers and servicing of financial assets and extinguishments of liabilities. It is not expected that the adoption of the statement will have a material effect on the company’s results of operations or financial position.

ADS Shares held by the Employee Share Ownership Trusts are excluded.

UK segment
Information is given separately in respect of the UK, which, although included in the Group’s Europe market region, is considered the Group’s home segment for the purposes of segmental reporting.