2. Segmental information

The Group's sales are derived from the retailing of jewelry, watches and associated services. The Group is managed as two geographical operating segments, being the US and UK divisions. These segments represent channels of distribution that offer similar merchandise and service and have similar marketing and distribution strategies. Both divisions are managed by executive committees, which report under IFRS through the Group Chief Executive to the board of directors of the Group. Each divisional executive committee is responsible for operating decisions within guidelines set by the board of directors of the Group. The performance of each segment is regularly evaluated based on sales and operating income. The operating segments do not include income taxes or certain Group costs, and there are no material transactions between the operating segments.

The accounting policies of the segments are the same as those used by the Group to report under IFRS. Presented below is a reconciliation of IFRS segment performance to the equivalent amounts determined in accordance with US GAAP.

(1) Unallocated principally relates to Group costs.

(a) Returns provision. Historically the Group did not record a reserve for sales returns as the financial statement impact was not material. The Group revised this policy on the adoption of IFRS, recognizing a sales returns reserve as an adjustment to opening retained earnings. Under US GAAP, this adjustment was recorded as a reduction to cost of sales in 2005/06 as the impact was not material, individually or in the aggregate, quantitatively or qualitatively, to the financial statements as a whole.

(b) Pensions. Under IFRS actuarial gains and losses are immediately recognized in the Statement of Recognized Income and Expense. Under US GAAP, the Group recognizes actuarial gains and losses, outside the 10 per cent corridor, in the income statement using the guidance in SFAS statement No. 87, "Employers Accounting for Pensions" ("SFAS 87"), which provides for the amortization of these amounts through operating income over the average service lives of the employees. Subsequent to the adoption of SFAS 158, actuarial gains and losses are recorded in other comprehensive income/(loss) and amortized under the existing SFAS 87 amortization policy. Additionally, US GAAP expected return on pension asset and interest charges are required in operating profit but are included in finance income and expense under IFRS.

(c) Sale and leaseback transactions. Under IFRS, sale and leaseback transactions of freehold and long leasehold properties result in a full gain in the financial year in which the transaction took place whilst under US GAAP the gain is recognized in equal installments over the life of the lease.

(d) Share based payment expense. Certain share schemes are subject to a condition that they may not vest unless the growth in related performance conditions exceeds the scheme target growth adjusted by movements in the relevant UK or US Retail Price Index over the same period. Under IFRS, these awards are treated as equity awards whilst under US GAAP, these awards are treated as liability awards. In addition, under IFRS, employers' social security liability arising from share-based payment transactions is recognized over the same period or periods as the share-based payment charge. Under US GAAP, employers' payroll taxes due on the exercise of share options are recognized as an expense when the liability arises, which is generally the option exercise date.

(e) Asset retirement obligations. Where quantifiable, the discounted cost of decommissioning assets installed in leasehold premises is included in the cost of the asset and appropriate decommissioning provisions are recognized. Prior to 2005/06 a provision for decommissioning assets was not recorded. As of 29 January 2006, this is consistent under both IFRS and US GAAP.

(f) Goodwill. This balance represents the unamortized balance of goodwill under US GAAP in excess of the balance under IFRS. As the Group has elected not to restate its prior business combinations on transition to IFRS, goodwill arising on acquisitions before 1 January 1998 remains fully written-off against equity consistent with the approach under prior GAAP, as it stood prior to the transition to IFRS. On acquisitions subsequent to 1 January 1998, until adoption of IFRS, goodwill was amortized over 20 years. Under US GAAP goodwill was amortized over 40 years through 3 February 2002.

(g) Depreciation of properties. This adjustment represents a historical difference between IFRS and US GAAP on certain freehold and long leasehold properties as these properties were not depreciated under UK GAAP and these balances were used on adoption of IFRS.

(h) Revaluation of properties. Certain properties were restated on the basis of appraised values on adoption of IFRS as deemed cost. Under US GAAP, historical cost is used.

(i) Derivatives. Under IFRS the fair value of a cash flow hedge on inventory purchases is recorded as a reduction to the inventory. Under US GAAP, the fair value of cash flow hedges is recorded in accumulated other comprehensive income and released to cost of sales when the associated inventory is sold. Prior to 2007/08 the impact of this adjustment was not material quantitatively or qualitatively to the financial statements.

(j) Receivables securitization. In 2005/06, under IFRS, securitized US receivables of $251.0 million were included within trade debtors and bank loans, as the related financing was of a revolving nature and therefore not considered to be an outright sale of such accounts receivable. Under US GAAP these amounts qualified for off-balance sheet treatment. This was because the receivables were first sold to a special purpose entity, Sterling Jewelers Receivables Corporation, which then sold on the receivables to a qualifying special purpose unconsolidated trust, Sterling Jewelers Receivables Master Trust. The trust was legally isolated from the Group; the majority of the interest in the US receivables portfolio held by the trust were principally sold on to institutional investors in the form of fixed-rate investor certificates; and the Group did not maintain control over the receivables portfolio transferred to the trust.

(k) Deferred taxation. Represents the deferred tax impact of the adjustments and reclassifications made from IFRS to US GAAP.

The Group's sales by product are presented below:

Sales to any individual customer were not significant to the consolidated sales of the Group.