Edgar Filing: DIAGEO PLC

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 20-F/A

Amendment No. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: 30 June 2007

Commission file number: 1-10691

DIAGEO plc
(Exact name of Registrant as specified in its charter)

England
(Jurisdiction of incorporation or organization)

8 Henrietta Place, London, W1G 0NB, England
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
American Depositary Shares		New York Stock Exchange
Ordinary shares of 28¹⁰¹/108 pence each		New York Stock Exchange*

*: Not for trading, but only in connection with the registration of American Depositary Shares representing such ordinary shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the Annual Report: 2,931,085,864 ordinary shares of 28¹⁰¹/108 pence each.

Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ý No o

If this report is an annual or transition report, indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No ý

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý Accelerated filer o Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP o International Financial Reporting Standards as issued by the International Accounting Standards Board ý Other o

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow.

Item 17 o Item 18 o

If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

This document and the Annual Report on Form 20-F filed with the SEC on 17 September 2007 (the "Original 20-F") comprise the annual report on Form 20-F for the year ended 30 June 2007 of Diageo plc (the 2007 Form 20-F). Reference is made in the Original 20-F to the cross reference to Form 20-F table on pages 226 to 228 thereof (the Form 20-F Cross reference table). The 2007 Form 20-F includes only (i) the information in the Original 20-F that is referenced in the Form 20-F Cross reference table (except to the extent such information is amended herein), (ii) the cautionary statement concerning forward-looking statements on pages 25 and 26 of the Original 20-F, (iii) the Exhibits to the Original 20-F, and (iv) the entirety of this amendment, and only those materials shall be deemed to be filed with the Securities and Exchange Commission for any purpose, including incorporation by reference into the Registration Statements on Form F-3 (File Nos. 333-10410, 333-14100, 333-110804 and 333-132732) and Registration Statements on Form S-8 (File Nos. 333-08090, 333-08092, 333-08094, 333-08096, 333-08098, 333-08102, 333-08104, 333-08106, 333-09770, 333-11460 and 333-11462), and any other documents, including documents filed by Diageo plc pursuant to the Securities Act of 1933, as amended, which purport to incorporate by reference the 2007 Form 20-F.

Contents

2		Explanatory Note
3		Consolidated financial statements
4		Report of independent registered public accounting firm
5		Consolidated income statement
6		Consolidated statement of recognised income and expense
7		Consolidated balance sheet
8		Consolidated cash flow statement
9		Accounting policies of the group
15		Notes to the consolidated financial statements
100		Principal group companies
		Exhibits
		Exhibit 12.3
		Exhibit 12.4
		Exhibit 13.3
		Exhibit 13.4
		Exhibit 15.2

Explanatory Note

The sole purpose of this amendment to Diageo plc's Annual Report on Form 20-F for the year ended 30 June 2007 is to amend the consolidated financial statements that were originally approved on 29 August 2007 to include an unreserved and explicit statement of compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) as well as to include a re-issued audit report on the consolidated financial statements that includes an opinion on compliance with IFRS as issued by the IASB.

In its Form 20-F filed on 17 September 2007 Diageo plc stated in the 'basis of preparation' note that it prepared its consolidated financial statements in accordance with IFRS as endorsed and adopted for use in the European Union (EU). The company stated in Note 35 to its consolidated financial statements that it had prepared its consolidated financial statements in accordance with IFRS as adopted by the EU and that the consolidated financial statements would have been no different had the group applied IFRS as issued by the IASB.

The amendment to Item 18 revises the 'basis of preparation' portion of the accounting policies of the Group to provide an unreserved and explicit statement of compliance with IFRS as issued by the IASB and also revises Note 35 to give an unreserved and explicit statement as to compliance with IFRS as issued by the IASB. A re-issued audit report dated 29 August 2007 is also included whereby KPMG Audit Plc have opined as to compliance with IFRS as issued by the IASB, as stated therein.

Material information as to events occurring subsequent to 29 August 2007 is disclosed in Diageo plc's current reports on Form 6-K dated 5 March 2008, which are incorporated by reference herein.

Diageo plc is including certain mandatory certifications of the chief executive officer and the chief financial officer, which are included as Exhibits.

This amendment amends 'Item 18 – Financial Statements' and 'Item 19 – Exhibits'.

Other than as expressly set forth above, this Form 20-F/A does not, and does not purport to, amend, update or restate the information in any other Item of the Form 20-F filed on 17 September 2007 or reflect any events that have occurred after the Form 20-F was filed.

The consolidated financial statements are prepared in accordance with IFRS as endorsed and adopted for use in the EU and IFRS as issued by the IASB. References to IFRS hereafter should be construed as references to IFRS as adopted by the EU and IFRS as issued by the IASB.

Contents – Consolidated financial statements
Year ended 30 June 2007

4		Report of independent registered public accounting firm
5		Consolidated income statement
6		Consolidated statement of recognised income and expense
7		Consolidated balance sheet
8		Consolidated cash flow statement
9		Accounting policies of the group
15		Notes to the consolidated financial statements
100		Principal group companies

Report of independent registered public accounting firm

The Board of Directors and Shareholders of Diageo plc.

We have audited the accompanying consolidated balance sheets of Diageo plc and subsidiaries as of 30 June 2007 and 30 June 2006, and the related consolidated income statements, consolidated statements of recognised income and expense, and consolidated cash flow statements for each of the years in the three year period ended 30 June 2007. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Diageo plc and subsidiaries as of 30 June 2007 and 30 June 2006 and the results of their operations and their cash flows for each of the years in the three year period ended 30 June 2007 in conformity with International Financial Reporting Standards (IFRS) as adopted by the European Union and IFRS as issued by the International Accounting Standards Board (IASB).

As identified in the accounting policies of the group in the consolidated financial statements, the company has changed its method of accounting for certain financial instruments with effect from 1 July 2005.

IFRS as adopted by the European Union and IFRS as issued by the IASB vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 35 to the consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Diageo plc's internal control over financial reporting as of 30 June 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated 29 August 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.

KPMG Audit Plc
Chartered Accountants

London, England
29 August 2007

Consolidated income statement

	Notes	Year ended 30 June 2007		Year ended 30 June 2006		Year ended 30 June 2005
		£ million		£ million		£ million
Sales	2	9,917		9,704		8,968
Excise duties	3	(2,436	)	(2,444	)	(2,291	)

Net sales		7,481		7,260		6,677
Cost of sales	3,5	(3,003	)	(2,921	)	(2,632	)

Gross profit		4,478		4,339		4,045
Marketing expenses	3	(1,162	)	(1,127	)	(1,013	)
Other operating expenses	3,5	(1,157	)	(1,168	)	(1,301	)

Operating profit	2	2,159		2,044		1,731
Sale of General Mills and other businesses	5	(1	)	157		214
Interest receivable	6	111		51		121
Interest payable	6	(362	)	(244	)	(271	)
Other finance income	6	55		24		26
Other finance charges	6	(16	)	(17	)	(17	)
Share of associates' profits after tax	7	149		131		121

Profit before taxation		2,095		2,146		1,925
Taxation	8	(678	)	(181	)	(599	)

Profit from continuing operations		1,417		1,965		1,326
Discontinued operations	9	139		—		73

Profit for the year		1,556		1,965		1,399

Attributable to:
Equity shareholders of the parent company		1,489		1,908		1,344
Minority interests		67		57		55

		1,556		1,965		1,399

Basic earnings per share	10
Continuing operations		50.2p		67.2p		42.8p
Discontinued operations		5.2p		—		2.4p

		55.4p		67.2p		45.2p

Diluted earnings per share	10
Continuing operations		49.9p		66.9p		42.8p
Discontinued operations		5.1p		—		2.4p

		55.0p		66.9p		45.2p

Average shares		2,688m		2,841m		2,972m

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated statement of recognised
income and expense

	Year ended 30 June 2007		Year ended 30 June 2006		Year ended 30 June 2005
	£ million		£ million		£ million
Exchange differences on translation of foreign operations excluding borrowings	(269	)	(76	)	116
Exchange differences on borrowings and derivative net investment hedges	199		52
Effective portion of changes in fair value of cash flow hedges
– gains taken to equity	28		39
– transferred to income statement	35		4
Fair value movement on available for sale securities	—		(148	)
Actuarial gains/(losses) on post employment plans	328		459		(238	)
Tax on items taken directly to equity	(99	)	(97	)	33
Net income/(expense) recognised directly in equity	222		233		(89	)
Profit for the year	1,556		1,965		1,399

Total recognised income and expense for the year	1,778		2,198		1,310

Attributable to:
Equity shareholders of the parent company	1,719		2,146		1,250
Minority interests	59		52		60

Total recognised income and expense for the year	1,778		2,198		1,310

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated balance sheet

	Notes	30 June 2007				30 June 2006
		£ million		£ million		£ million		£ million
Non-current assets
Intangible assets	11	4,383				4,534
Property, plant and equipment	12	1,932				1,952
Biological assets	13	12				13
Investments in associates	14	1,436				1,341
Other investments	16	128				69
Other receivables	18	17				12
Other financial assets	21	52				42
Deferred tax assets	25	771				1,113
Post employment benefit assets	4	38				14

				8,769				9,090
Current assets
Inventories	17	2,465				2,386
Trade and other receivables	18	1,759				1,681
Other financial assets	21	78				71
Cash and cash equivalents	19	885				699

				5,187				4,837

Total assets				13,956				13,927

Current liabilities
Borrowings and bank overdrafts	20	(1,535	)			(759	)
Other financial liabilities	21	(43	)			(36	)
Trade and other payables	23	(1,888	)			(1,803	)
Corporate tax payable	8	(673	)			(681	)
Provisions	24	(60	)			(56	)

				(4,199	)			(3,335	)
Non-current liabilities
Borrowings	20	(4,132	)			(4,001	)
Other financial liabilities	21	(104	)			(78	)
Other payables	23	(38	)			(37	)
Provisions	24	(274	)			(306	)
Deferred tax liabilities	25	(582	)			(674	)
Post employment benefit liabilities	4	(457	)			(815	)

				(5,587	)			(5,911	)

Total liabilities				(9,786	)			(9,246	)

Net assets				4,170				4,681

Equity
Called up share capital		848				883
Share premium		1,341				1,340
Other reserves		3,186				3,168
Retained deficit		(1,403	)			(889	)

Equity attributable to equity shareholders of the parent company				3,972				4,502
Minority interests				198				179

Total equity	26			4,170				4,681

The accompanying notes are an integral part of these consolidated financial statements.

These consolidated financial statements were approved by a duly appointed and authorised committee of the board of directors on 29 August 2007 and were signed on its behalf by PS Walsh and NC Rose, directors.

Consolidated cash flow statement

	Notes	Year ended 30 June 2007				Year ended 30 June 2006				Year ended 30 June 2005
		£ million		£ million		£ million		£ million		£ million		£ million
Cash flows from operating activities
Profit for the year		1,556				1,965				1,399
Discontinued operations		(139	)			—				(73	)
Taxation		678				181				599
Share of associates' profits after tax		(149	)			(131	)			(121	)
Net interest and other net finance income		212				186				141
Losses/(gains) on disposal of businesses		1				(157	)			(214	)
Depreciation and amortisation		210				214				241
Movements in working capital		(180	)			(192	)			89
Dividend income and other items	27	83				133				212

Cash generated from operations				2,272				2,199				2,273
Interest received				42				64				146
Interest paid				(279	)			(235	)			(325	)
Dividends paid to equity minority interests				(41	)			(40	)			(49	)
Taxation paid				(368	)			(393	)			(320	)

Net cash from operating activities				1,626				1,595				1,725
Cash flows from investing activities
Disposal of property, plant and equipment		69				16				18
Purchase of property, plant and equipment		(274	)			(257	)			(294	)
Net (purchase)/disposal of other investments		(6	)			7				(6	)
Payment into escrow in respect of the UK pension fund		(50	)			—				—
Disposal of businesses	28	4				772				1,194
Purchase of businesses	29	(70	)			(209	)			(258	)

Net cash (outflow)/inflow from investing activities				(327	)			329				654
Cash flows from financing activities
Proceeds from issue of share capital		1				3				6
Net purchase of own shares for share schemes		(25	)			(32	)			(29	)
Own shares repurchased		(1,405	)			(1,407	)			(710	)
Net increase/(decrease) in loans		1,226				309				(379	)
Redemption of guaranteed preferred securities		—				—				(302	)
Equity dividends paid		(858	)			(864	)			(849	)

Net cash used in financing activities				(1,061	)			(1,991	)			(2,263	)

Net increase/(decrease) in net cash and cash equivalents				238				(67	)			116
Exchange differences				(50	)			(11	)			(55	)
Net cash and cash equivalents at beginning of the year				651				729				668

Net cash and cash equivalents at end of the year				839				651				729

Net cash and cash equivalents consist of:
Cash and cash equivalents	19			885				699				787
Bank overdrafts	20			(46	)			(48	)			(58	)

				839				651				729

The accompanying notes are an integral part of these consolidated financial statements.

Accounting policies of the group

Basis of preparation

The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed and adopted for use in the European Union (EU) and IFRS as issued by the International Accounting Standards Board (IASB). References to IFRS hereafter should be construed as references to both IFRS as adopted by the EU and IFRS as issued by the IASB.

The consolidated financial statements are prepared on a going concern basis under the historical cost convention, except that biological assets and certain financial instruments are stated at their fair value.

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The critical accounting policies, which the directors consider are of greater complexity and/or particularly subject to the exercise of judgement, are set out with related disclosures in 'Critical accounting policies' in the Business review section of this Annual Report.

Business combinations

The consolidated financial statements include the results of the company and its subsidiaries together with the group's attributable share of the results of associates and joint ventures. The results of subsidiaries sold or acquired are included in the income statement up to, or from, the date that control passes.

On the acquisition of a business, or of an interest in an associate or joint venture, fair values, reflecting conditions at the date of acquisition, are attributed to the net assets including identifiable intangible assets acquired. Adjustments to fair values include those made to bring accounting policies into line with those of the group.

Sales

Sales comprise revenue from the sale of goods, royalties receivable and rents receivable. Revenue from the sale of goods includes excise and import duties which the group pays as principal but excludes amounts collected on behalf of third parties, such as value added tax. Sales are recognised depending upon individual customer terms at the time of despatch, delivery or some other specified point when the risk of loss transfers. Provision is made for returns where appropriate. Sales are stated net of price discounts, allowances for customer loyalty and certain promotional activities and similar items.

Advertising

Advertising production costs are charged in the income statement when the advertisement is first shown to the public.

Research and development

Research expenditure in respect of new drinks products and package design is written off in the period in which it is incurred. Any subsequent development expenditure in the period leading up to product launch that meets the recognition criteria set out in the relevant standard is capitalised. If capitalised, any intangible asset is amortised on a straight-line basis over the period of the expected benefit.

Accounting policies of the group (continued)

Share-based payments – employee benefits

The fair value of equity-settled share options granted is initially measured at grant date based on the binomial or Monte Carlo models and is charged in the income statement over the vesting period.

Shares of Diageo plc held by the company for the purpose of fulfilling obligations in respect of various employee share plans around the group are deducted from equity in the consolidated balance sheet. Any surplus or deficit arising on the sale of the Diageo plc shares held by the group is included as an adjustment to reserves.

Pensions and other post employment benefits

The group's principal pension funds are defined benefit plans. In addition the group has defined contribution plans, unfunded post employment medical benefit liabilities and other unfunded defined benefit post employment liabilities. For defined benefit plans, the amount charged in the income statement is the cost of accruing pension benefits promised to employees over the year, plus any fully vested benefit improvements granted to members by the group during the year. It also includes a credit equivalent to the group's expected return on the pension plans' assets over the year, offset by a charge equal to the expected increase in the plans' liabilities over the year. The difference between the fair value of the plans' assets and the present value of the plans' liabilities is disclosed as an asset or liability on the consolidated balance sheet. Any differences between the expected return on assets and that actually achieved, and any changes in the liabilities over the year due to changes in assumptions or experience within the plans, are recognised in the statement of recognised income and expense.

Contributions payable by the group in respect of defined contribution plans are charged to operating profit as incurred.

Exceptional items

Exceptional items are those that in management's judgement need to be disclosed by virtue of their size or incidence. Such items are included within the income statement caption to which they relate, and are separately disclosed either in the notes to the consolidated financial statements or on the face of the consolidated income statement.

Foreign currencies

Items included in the financial statements of the group's subsidiaries, associates and joint ventures are measured using the currency of the primary economic environment in which each entity operates (its functional currency). The consolidated financial statements are presented in sterling, which is the functional currency of the parent company.

The income statements and cash flows of overseas entities are translated into sterling at weighted average rates of exchange, other than substantial transactions that are translated at the rate on the date of the transaction. The adjustment to closing rates is taken to reserves.

Balance sheets are translated at closing rates. Exchange differences arising on the re-translation at closing rates of the opening balance sheets of overseas entities are taken to reserves, as are exchange differences arising on related foreign currency borrowings and financial instruments designated as net investment hedges, to the extent that they are effective. Tax charges and credits arising on such items are also taken to reserves. Other exchange differences are taken to the income statement.

The results, assets and liabilities of operations in hyper-inflationary economies are adjusted to reflect the changes in the purchasing power of the local market currency of the entity.

Accounting policies of the group (continued)

Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. If hedged forward, the impact of hedging is recognised, where permitted, under hedge accounting (refer to accounting policy for derivative financial instruments).

Brands, goodwill and other intangible assets

When the cost of an acquisition exceeds the fair values attributable to the group's share of the net assets acquired, the difference is treated as purchased goodwill. Goodwill arising on acquisitions prior to 1 July 1998 was eliminated against reserves, and this goodwill has not been restated. Goodwill arising subsequent to 1 July 1998 has been capitalised.

Acquired brands and other intangible assets are recognised when they are controlled through contractual or other legal rights, or are separable from the rest of the business, and the fair value can be reliably measured.

Goodwill and intangible assets that are regarded as having indefinite useful economic lives are not amortised. Intangible assets that are regarded as having limited useful economic lives are amortised on a straight-line basis over those lives. Assets with indefinite lives are reviewed for impairment annually and other assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. To ensure that goodwill and intangible assets are not carried at above their recoverable amounts, impairment reviews are carried out comparing the net carrying value with the recoverable amount, where the recoverable amount is the higher of value in use or fair value less cost to sell. Amortisation and any impairment write downs are charged in the income statement.

Computer software is amortised on a straight-line basis to estimated residual value over its expected useful life, expected to be up to five years. Residual values and useful lives are reviewed each year.

Property, plant and equipment

Land and buildings are stated at cost less depreciation. Freehold land is not depreciated. Leaseholds are depreciated over the unexpired period of the lease. Other property, plant and equipment are depreciated on a straight-line basis to estimated residual values over their expected useful lives, and these values and lives are reviewed each year. Subject to these reviews, the estimated useful lives fall within the following ranges: industrial and other buildings – 10 to 50 years; plant and machinery – 5 to 25 years; fixtures and fittings – 5 to 10 years; and casks and containers – 15 to 20 years.

Reviews are carried out if there is some indication that impairment may have occurred, to ensure that property, plant and equipment are not carried at above their recoverable amounts.

Leases

Where the group has substantially all the risks and rewards of ownership of an asset subject to a lease, the lease is treated as a finance lease. Other leases are treated as operating leases, with payments and receipts taken to the income statement on a straight-line basis over the life of the lease.

Agriculture

Grape cultivation by the group's wine business is accounted for as an agricultural activity. Accordingly the group's biological assets (grape vines) are carried at fair value which is computed on the basis of a discounted cash flow computation. Agricultural produce (harvested grapes) is valued at market value on transfer into inventory.

Accounting policies of the group (continued)

Associates and joint ventures

An associate is an undertaking in which the group has a long-term equity interest and over which it has the power to exercise significant influence. The group's interest in the net assets of associates is included in investments in the consolidated balance sheet and its interest in their results is included in the income statement below the group's operating profit. Joint ventures, where there is contractual joint control over the entity, are accounted for by including on a line-by-line basis the attributable share of the results, assets and liabilities.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost includes raw materials, direct labour and expenses, an appropriate proportion of production and other overheads, but not borrowing costs. Cost is calculated on an actual usage basis for maturing inventories and on a first in, first out basis for other inventories.

Financial assets

Trade receivables Trade receivables are non-interest bearing and are stated at their nominal amount that is usually the original invoiced amount less provisions made for bad and doubtful receivables. Estimated irrecoverable amounts are based on the ageing of the receivable balances and historical experience. Individual trade receivables are written off when management deems them not to be collectable.

Cash and cash equivalents Cash and cash equivalents comprise cash in hand and deposits which are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value and have an original maturity of three months or less at acquisition, including money market deposits, commercial paper and investments.

Financial liabilities

Borrowings Borrowings are initially measured at cost (which is equal to fair value at inception), and are subsequently measured at amortised cost using the effective interest rate method. Any difference between the proceeds, net of transaction costs, and the settlement or redemption of borrowings is recognised over the term of the borrowings using the effective interest rate method. The fair value adjustments for all loans designated as hedged items in a fair value hedge are shown separately as a net figure.

Trade payables Trade payables are non-interest bearing and are stated at their nominal value.

Derivative financial instruments

The group uses derivative financial instruments to hedge its exposures to fluctuations in interest and exchange rates. The derivative instruments used by Diageo consist mainly of currency forwards, foreign currency swaps, interest rate swaps and cross currency interest rate swaps.

From 1 July 2005, derivative financial instruments are recognised in the balance sheet at fair value that is calculated using discounted cash flow techniques or option pricing models (such as Black Scholes) consistently for similar types of instruments. Both techniques take into consideration assumptions based on market data. Changes in the fair value of derivatives that do not qualify for hedge accounting treatment are charged or credited in the income statement.

Accounting policies of the group (continued)

The purpose of hedge accounting is to mitigate the impact of potential volatility in the income statement of the group of changes in exchange or interest rates or commodity prices, by matching the impact of the hedged item and the hedging instrument in the income statement. To qualify for hedge accounting, the hedging relationship must meet several conditions with respect to documentation, probability of occurrence, hedge effectiveness and reliability of measurement. At the inception of the transaction, the group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge transactions. This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions. The group also documents its assessment, both at the hedge inception and on a quarterly basis, as to whether the derivatives that are used in hedging transactions have been, and are likely to continue to be, effective in offsetting changes in fair value or cash flows of hedged items.

Diageo designates derivatives which qualify as hedges for accounting purposes as either: (a) a hedge of the fair value of a recognised asset or liability (fair value hedge); (b) a hedge of a forecast transaction or the cash flow risk from a change in interest rates or exchange rates (cash flow hedge); or (c) a hedge of a net investment in foreign operations.

The method of recognising the resulting gains or losses from movements in fair values is dependent on whether the derivative contract is designated to hedge a specific risk and qualifies for hedge accounting.

Derivative financial instruments are used to manage the currency and/or interest rate risks to which the fair value of certain assets and liabilities are exposed. From 1 July 2005, changes in the fair value of derivatives that are fair value hedges are recognised in the income statement, along with any changes in the relevant fair value of the underlying hedged asset or liability that is attributable to the hedged risk. If such a hedge relationship is de-designated, fair value movements on the derivative continue to be taken to the income statement while any fair value adjustments made to the underlying hedged item to that date are amortised through the income statement over its remaining life.

Derivative financial instruments are used to hedge the currency risk of highly probable future foreign currency cash flows, as well as the cash flow risk from changes in interest rates and exchange rates. From 1 July 2005, the effective part of the changes in fair value of cash flow hedges is recognised in the statement of recognised income and expense, while any ineffective part is recognised immediately in the income statement. Amounts recorded in the statement of recognised income and expense are transferred to the income statement in the same period in which the underlying interest or foreign exchange exposure affects the income statement.

Net investment hedges take the form of either foreign currency borrowings or derivatives. All foreign exchange gains or losses arising on translation of net investments are recorded in the statement of recognised income and expense and included in cumulative translation differences. Liabilities used as hedging instruments in a net investment hedge are revalued at closing exchange rates. The resulting gains or losses are taken to the statement of recognised income and expense to the extent that they are effective, with any ineffectiveness recognised in the income statement. Foreign exchange contracts hedging net investments in overseas businesses are revalued at fair value. Effective fair value movements are taken to the statement of recognised income and expense, with any ineffectiveness recognised in the income statement.

Accounting policies of the group (continued)

Year ended 30 June 2005 Financial instruments in the year ended 30 June 2005 remain recorded in accordance with the previous UK GAAP accounting policies as follows.

Instruments accounted for as hedges were structured so as to reduce the market risk associated with the underlying transaction being hedged and were designated as a hedge at the inception of the contract. If the underlying transaction to a hedge ceased to exist, the hedge was terminated and the profit or loss was recognised immediately. If the hedge transaction was terminated, the profit or loss was held in the balance sheet and amortised over the life of the original underlying transaction.

Receipts and payments on interest rate instruments were recognised on an accruals basis over the life of the instrument. Foreign exchange contracts hedging net investments in overseas businesses were revalued at closing rates and exchange differences arising were taken to reserves. Gains and losses on contracts hedging forecast transactional cash flows, and on option instruments hedging the sterling value of foreign currency denominated income, were recognised in the hedged periods.

Cash flows associated with derivative financial instruments were classified in the cash flow statement in a manner consistent with those of the transactions being hedged. Finance costs associated with debt issuances were charged to the profit and loss account over the life of the issue.

The cumulative adjustment from UK GAAP to IFRS has been reflected in the consolidated balance sheet at 1 July 2005.

Taxation

Current tax payable is based on taxable profit for the year. This requires an estimation of the current tax liability together with an assessment of the temporary differences which arise as a consequence of different accounting and tax treatments.

Full provision for deferred tax is made for temporary differences between the carrying value of assets and liabilities in the consolidated financial statements and their tax bases. The amount of deferred tax reflects the expected recoverable amount and is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets are not recognised where it is more likely than not that the asset will not be realised in the future. No deferred tax liability is provided in respect of any future remittance of earnings of foreign subsidiaries where the group is able to control the remittance of earnings and it is probable that such earnings will not be remitted in the foreseeable future, or where no liability would arise on the remittance.

Tax benefits are not recognised unless it is probable that the tax positions are sustainable. 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 potential settlement through negotiation and/or litigation. Any interest and penalties on tax liabilities are provided for in the tax charge.

Discontinued operations

Disposal groups are classified as discontinued operations where they represent a major line of business or geographical area of operations.

Notes to the consolidated financial statements

1 New accounting policies

The following interpretations, issued by the International Financial Reporting Interpretations Committee (IFRIC), are effective for the first time in the current financial year and have been adopted by the group with no significant impact on its consolidated results or financial position:

IFRIC 4 – Determining whether an arrangement contains a lease (effective for annual periods beginning on or after 1 January 2006).

IFRIC 5 – Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds (effective for annual periods beginning on or after 1 January 2006).

IFRIC 6 – Liabilities arising from participating in a specific market: waste electrical and electronic equipment (effective for annual periods beginning on or after 1 December 2005).

IFRIC 7 – Applying the restatement approach under IAS 29 – Financial reporting in hyperinflationary economies (effective for annual periods beginning on or after 1 March 2006).

IFRIC 8 – Scope of IFRS 2 – Accounting for share-based payments (effective for annual periods beginning on or after 1 May 2006).

IFRIC 9 – Reassessment of embedded derivatives (effective for annual periods beginning on or after 1 June 2006).

In August 2005, the International Accounting Standards Board (IASB) issued IFRS 7 – Financial instruments: disclosures, which contained new regulations concerning the disclosure of financial instruments. IFRS 7 replaces the disclosure regulations of IAS 32 – Financial instruments: disclosure and presentation and must be applied to reporting periods that commence on or after 1 January 2007. Diageo adopted IFRS 7 early in its 2006 financial statements and applied the exemptions under IFRS 1, IFRS 7 and IAS 32 not to restate comparative information in respect of IFRS 7, IAS 32 and IAS 39 – Financial instruments: recognition and measurement. As a consequence, financial instruments are included in the 2005 comparative information in accordance with UK GAAP, whereas they are accounted for in accordance with IAS 39 in the 2006 and 2007 results. In accordance with the transitional provisions of IFRS, this was treated as a change in accounting policy. The accounting policies for financial instruments under IAS 39 and, for the year ended 30 June 2005, under UK GAAP are detailed in 'Accounting policies of the group'. The adjustments made to net assets as a result of adopting IAS 39 on 1 July 2005 are detailed in note 34. If the group had not taken this exemption, a number of financial instruments would have been recognised or revalued in the opening balance sheet at 1 July 2004 and accounted for under IAS 39 during the year ended 30 June 2005.

The following standards and interpretations, issued by the IASB or IFRIC, have not yet been adopted by the group:

Amendment to IAS 1 – Presentation of financial statements: capital disclosures (effective for annual periods beginning on or after 1 January 2007).

Amendment to IAS 23 – Borrowing costs (effective for annual periods beginning on or after 1 January 2009).

IFRS 8 – Operating segments (effective for annual periods beginning on or after 1 January 2009).

IFRIC 11 – Group and treasury share transactions (effective for annual periods beginning on or after 1 March 2007).

IFRIC 12 – Service concession arrangements (effective for annual periods beginning on or after 1 January 2008).

Notes to the consolidated financial statements (continued)

1 New accounting policies (continued)

IFRIC 13 – Customer loyalty programmes (effective for annual periods beginning on or after 1 July 2008).

IFRIC 14 – IAS 19: The limit on a defined benefit asset, minimum funding requirements and their interaction (effective for annual periods beginning on or after 1 January 2008).

The amendment to IAS 1 requires additional disclosures on the objectives, policies and processes for managing capital. Appropriate additional disclosures will be included in the 2008 Annual Report.

The amendment to IAS 23 generally eliminates the option to expense borrowing costs attributable to the acquisition, construction or production of a qualifying asset as incurred, and instead requires the capitalisation of such borrowing costs as part of the cost of specific assets. The group is currently assessing the impact of the amendment on the results and net assets of the group.

IFRS 8 contains requirements for the disclosure of information about an entity's operating segments and also about the entity's products and services, the geographical areas in which it operates, and its major customers. The standard is concerned only with disclosure and replaces IAS 14 – Segment reporting. The group is currently assessing the impact this standard would have on the presentation of its consolidated results.

The group does not currently believe the adoption of the interpretations would have a material impact on the consolidated results or financial position of the group reported in these financial statements.

2 Segmental information

Continuing operations Diageo is an international manufacturer and distributor of premium drinks. The group produces, markets and distributes a wide range of premium brands, including Smirnoff vodka, Johnnie Walker scotch whiskies, Guinness stout, Baileys Original Irish Cream liqueur, Captain Morgan rum, J&B scotch whisky and Tanqueray gin. In addition, Diageo also owns the distribution rights for the José Cuervo tequila brands in the United States and other countries.

Diageo also owns a number of investments in unconsolidated associates, the principal investment being a 34% interest in Moët Hennessy, the spirits and wines subsidiary of LVMH Moët Hennessy – Louis Vuitton SA. Moët Hennessy is based in France and is a leading producer and exporter of champagne and cognac.

Following the reorganisation in January 2007 of the way in which the business is managed, continuing operations now comprise the following segments: Diageo North America (United States and Canada), Diageo Europe (all European countries and territories including Russia), Diageo International (Africa, Latin America, Caribbean, Global Travel and Middle East), Diageo Asia Pacific (Greater China, India, Japan, Korea, South East Asia and Australia), Moët Hennessy and Corporate and other. The comparative information for prior years has been restated to reflect the current organisation.

Corporate revenues and costs are in respect of central costs, including finance, human resources and legal, as well as certain information system, service centre, facilities and employee costs that are not directly allocated to the geographical operating units. They also include the revenues and costs related to rents receivable in respect of properties not used by Diageo in the manufacture, sale or distribution of premium drinks, exchange movements on short term intercompany balances and the results of Gleneagles Hotel.

Notes to the consolidated financial statements (continued)

2 Segmental information (continued)

Discontinued operations Included within discontinued operations are transactions relating to the disposal of the group's quick service restaurants business (Burger King, sold on 13 December 2002), and to the disposal of the group's packaged food business (Pillsbury, sold on 31 October 2001).

In the year ended 30 June 2007, a tax benefit of £82 million arose from the recognition of capital losses arising on the prior year disposals of the Pillsbury and Burger King businesses. In addition, a tax credit of £57 million arose following resolution with tax authorities of various audit issues (2005 – £20 million tax credit in respect of the Pillsbury disposal).

In the year ended 30 June 2005, a gain of £53 million arose from the release of provisions held by Diageo as a result of the refinancing of Burger King on a stand-alone basis. In connection with the disposal of Burger King, Diageo guaranteed up to $850 million (£459 million) of Burger King's external borrowings. On 13 July 2005, Burger King refinanced its external borrowings on a stand-alone basis, releasing Diageo from its obligations under guarantees relating to that debt, and repaid in full the subordinated debt and associated interest owed to Diageo.

Notes to the consolidated financial statements (continued)

(i) Segmental information – Continuing operations

	North America		Europe		Inter- national		Asia Pacific		Moët Hennessy	Corporate and other		Total
	£ million		£ million		£ million		£ million		£ million	£ million		£ million
2007
Sales	2,915		3,765		2,031		1,131		—	75		9,917

Operating profit/(loss) before exceptional items	850		723		499		196		—	(149	)	2,119
Exceptional items credited to operating profit	—		—		—		—		—	40		40

Operating profit/(loss)	850		723		499		196		—	(109	)	2,159
Sale of investments and businesses	—		—		1		—		—	(2	)	(1	)
Share of associates' profits after tax	—		5		7		1		136	—		149

Profit/(loss) before interest, net finance income and tax	850		728		507		197		136	(111	)	2,307
Depreciation	(30	)	(83	)	(39	)	(23	)	—	(6	)	(181	)
Intangible asset amortisation	(7	)	(15	)	(1	)	(3	)	—	(3	)	(29	)
Capital expenditure on segment assets	19		63		53		20		—	170		325
Segment assets	832		1,041		789		369		—	312		3,343
Investments in associates	10		22		19		37		1,348	—		1,436
Unallocated assets	—		—		—		—		—	9,177		9,177

Total assets	842		1,063		808		406		1,348	9,489		13,956

Segment liabilities	262		616		244		130		—	425		1,677
Unallocated liabilities	—		—		—		—		—	8,109		8,109

Total liabilities	262		616		244		130		—	8,534		9,786

2006
Sales	2,968		3,834		1,784		1,042		—	76		9,704

Operating profit/(loss)	829		737		445		199		—	(166	)	2,044
Sale of investments and businesses	—		1		—		—		—	156		157
Share of associates' profits after tax	—		5		4		—		122	—		131

Profit/(loss) before interest, net finance income and tax	829		743		449		199		122	(10	)	2,332
Depreciation	(31	)	(85	)	(48	)	(17	)	—	(5	)	(186	)
Intangible asset amortisation	(8	)	(14	)	(1	)	(3	)	—	(2	)	(28	)
Capital expenditure on segment assets	28		246		61		17		—	111		463
Segment assets	872		1,171		770		350		—	238		3,401
Investments in associates	—		19		19		—		1,303	—		1,341
Unallocated assets	—		—		—		—		—	9,185		9,185

Total assets	872		1,190		789		350		1,303	9,423		13,927

Segment liabilities	260		628		218		118		—	440		1,664
Unallocated liabilities	—		—		—		—		—	7,582		7,582

Total liabilities	260		628		218		118		—	8,022		9,246

Notes to the consolidated financial statements (continued)

(i) Segmental information – Continuing operations (continued)

2005
Sales	2,622		3,860		1,552		872		—	62		8,968

Operating profit/(loss) before exceptional items	779		702		427		188		—	(164	)	1,932
Exceptional items (charged)/credited to operating profit	(30	)	(26	)	4		—		—	(149	)	(201	)

Operating profit/(loss)	749		676		431		188		—	(313	)	1,731
Sale of investments and businesses	2		(8	)	—		(1	)	—	221		214
Share of associates' profits after tax	—		3		5		—		113	—		121

Profit/(loss) before interest, net finance income and tax	751		671		436		187		113	(92	)	2,066
Depreciation	(44	)	(79	)	(34	)	(15	)	—	(6	)	(178	)
Exceptional accelerated depreciation	—		(29	)	—		—		—	—		(29	)
Intangible asset amortisation	(7	)	(16	)	(3	)	(3	)	—	—		(29	)
Goodwill impairment charge	—		(5	)	—		—		—	—		(5	)
Capital expenditure on segment assets	136		140		93		24		—	123		516
Segment assets	872		1,055		779		324		—	373		3,403
Investments in associates	—		19		22		—		1,220	—		1,261
Unallocated assets	—		—		—		—		—	9,257		9,257

Total assets	872		1,074		801		324		1,220	9,630		13,921

Segment liabilities	257		660		240		103		—	502		1,762
Unallocated liabilities	—		—		—		—		—	7,533		7,533

Total liabilities	257		660		240		103		—	8,035		9,295

(a)

The segmental analysis of sales and operating profit/(loss) is based on the location of the third party customers.

(b)

The group interest expense is managed centrally and is not attributable to individual activities.

(c)

Segmental information for the 'Corporate and other' segment, which includes unallocated assets and liabilities, is as follows:

•: Sales, operating profit/(loss), profit/(loss) before interest, net finance income and tax, depreciation and amortisation comprise central items not readily allocable to the group's operating segments.
•: The operating loss of £109 million (2006 – £166 million; 2005 – £313 million) includes an exceptional credit of £40 million in respect of the sale of the site of the former brewery at Park Royal (2006 – £nil; 2005 – exceptional charge of £149 million in respect of the commitment for payments to the Thalidomide Trust).
•: The loss on sale of investments and businesses of £2 million (2006 – gain of £156 million; 2005 – gain of £221 million) includes £nil (2006 – £151 million; 2005 – £221 million) from the sale of General Mills shares.

Notes to the consolidated financial statements (continued)

(i) Segmental information – Continuing operations (continued)

•: Capital expenditure on segment assets of £170 million (2006 – £111 million; 2005 – £123 million) includes expenditure on intangible assets and property, plant and equipment of £138 million (2006 – £109 million; 2005 – £117 million) in respect of unallocated assets relating to the worldwide supply of product which is not readily allocable to the group's operating segments.
•: Segment assets of £312 million (2006 – £238 million; 2005 – £373 million) comprise: property, plant and equipment of £80 million (2006 – £64 million; 2005 – £108 million); inventories of £61 million (2006 – £15 million; 2005 – £nil); and other assets of £171 million (2006 – £159 million; 2005 – £265 million).
•: Unallocated assets of £9,177 million (2006 – £9,185 million; 2005 – £9,257 million) comprise: brands of £4,085 million (2006 – £4,283 million; 2005 – £4,176 million); property, plant and equipment of £1,144 million (2006 – £1,114 million; 2005 – £1,149 million); the net investment in General Mills of £nil (2006 – £nil; 2005 – £508 million); maturing inventories of £1,582 million (2006 – £1,483 million; 2005 – £1,410 million); cash and cash equivalents of £885 million (2006 – £699 million; 2005 – £787 million); and other assets of £1,481 million (2006 – £1,606 million; 2005 – £1,227 million). Brands that are capitalised in the balance sheet are sold throughout the world and are not readily allocable to North America, Europe, International and Asia Pacific. Property, plant and equipment, maturing inventories and other assets classified as unallocated are principally located in Scotland and are not readily allocable to the group's operating segments.
•: Segment liabilities of £425 million (2006 – £440 million; 2005 – £502 million) comprise trade and other payables of £258 million (2006 – £270 million; 2005 – £320 million) and provisions of £167 million (2006 – £170 million; 2005 – £182 million).
•: Unallocated liabilities of £8,109 million (2006 – £7,582 million; 2005 – £7,533 million) comprise: external borrowings of £5,667 million (2006 – £4,760 million; 2005 – £4,546 million); corporate tax payable of £673 million (2006 – £681 million; 2005 – £777 million); post employment benefit liabilities of £457 million (2006 – £815 million; 2005 – £1,306 million); and other liabilities of £1,312 million (2006 – £1,326 million; 2005 – £904 million).

(d): The weighted average exchange rates used in the translation of income statements were US dollar – £1 = $1.93 (2006 – £1 = $1.78; 2005 – £1 = $1.86) and euro – £1 = €1.48 (2006 – £1 = €1.46; 2005 – £1 = €1.46). Exchange rates used to translate assets and liabilities at the balance sheet date were US dollar – £1 = $2.01 (2006 – £1 = $1.85; 2005 – £1 = $1.79) and euro – £1 = €1.48 (2006 – £1 = €1.45; 2005 – £1 = €1.48). The group uses foreign exchange transaction hedges to mitigate the effect of exchange rate movements.

Notes to the consolidated financial statements (continued)

(ii) Geographical information

	Great Britain	Rest of Europe	North America	Asia Pacific	Latin America	Rest of World	Total
	£ million	£ million	£ million	£ million	£ million	£ million	£ million
2007
Sales	1,470	2,442	2,958	1,179	813	1,055	9,917
Long-lived assets	2,070	614	2,551	675	54	363	6,327
Segment assets	468	895	813	371	182	614	3,343
Capital expenditure on segment assets	131	53	59	22	9	51	325

2006
Sales	1,549	2,428	2,999	1,085	671	972	9,704
Long-lived assets	1,975	652	2,782	704	54	332	6,499
Segment assets	711	775	807	347	168	593	3,401
Capital expenditure on segment assets	70	247	64	17	13	52	463

2005
Sales	1,553	2,421	2,658	918	564	854	8,968
Long-lived assets	1,784	661	2,838	690	51	318	6,342
Segment assets	723	642	987	324	144	583	3,403
Capital expenditure on segment assets	83	152	158	24	8	91	516

(a): The geographical analysis of sales is based on the location of the third party customers and an allocation of certain corporate items. Certain businesses, for internal management purposes, have been reported within the appropriate region in the geographical analysis above. Corporate sales of £75 million (2006 – £76 million; 2005 – £62 million) are included in Great Britain.
(b): Long-lived assets comprise intangible assets and property, plant and equipment after amortisation and depreciation, respectively, and biological assets. Brands are included at net book value in the geographical regions in which the brands originated.
(c): The geographical analysis of segment assets and related capital expenditure is based on the geographical location of the assets and excludes investments in associates and assets and capital expenditure which are not readily allocable to the group's operating segments.
(d): Exports from the United Kingdom were £2,316 million (2006 – £1,952 million; 2005 – £1,898 million).

Notes to the consolidated financial statements (continued)

3 Operating costs


	2007		2006		2005
	£ million		£ million		£ million
Excise duties	2,436		2,444		2,291
Cost of sales	3,003		2,921		2,632
Marketing expenses	1,162		1,127		1,013
Other operating expenses	1,157		1,168		1,301

	7,758		7,660		7,237

Comprising:
Excise duties – United States	443		457		428
– Other	1,993		1,987		1,863
Change in inventories	(65	)	(6	)	(84	)
Raw materials and consumables	1,692		1,729		1,545
Advertising, marketing and promotion	1,162		1,127		1,013
Other external charges	1,345		1,225		1,306
Staff costs (note 4)	993		952		884
Depreciation and other amounts written off non-current assets	210		214		241
(Gains)/losses on disposal of property	(62	)	4		(7	)
Net foreign exchange losses/(gains)	55		(22	)	53
Other operating income	(8	)	(7	)	(5	)

	7,758		7,660		7,237

(a): Other external charges Other external charges include operating lease rentals for plant and equipment of £7 million (2006 – £5 million; 2005 – £6 million), other operating lease rentals (mainly properties) of £58 million (2006 – £64 million; 2005 – £70 million), research and development expenditure of £17 million (2006 – £18 million; 2005 – £16 million), and maintenance and repairs of £53 million (2006 – £45 million; 2005 – £51 million).
(b): Exceptional operating costs In the year ended 30 June 2007, gains on disposal of property of £62 million include an exceptional operating gain of £40 million in respect of the sale of the site of the former brewery at Park Royal. There were no exceptional operating items in the year ended 30 June 2006. Exceptional operating costs for continuing operations in the year ended 30 June 2005 amounted to £201 million as follows: other external charges £172 million; staff costs £5 million, and amounts written off assets £31 million, offset by £7 million gains on disposal of property.
(c): Auditor fees The fees of the principal auditor of the group, KPMG Audit Plc, and its affiliates were as follows:

	United Kingdom	Rest of World	2007	2006	2005
	£ million	£ million	£ million	£ million	£ million
Audit of these financial statements	0.8	—	0.8	0.9	0.8
Audit of financial statements of subsidiaries pursuant to legislation	1.4	2.8	4.2	2.9	2.9
Other services pursuant to such legislation	1.7	0.8	2.5	3.2	1.8
Other services relevant to taxation	0.2	0.8	1.0	1.4	1.4
All other services	0.6	0.5	1.1	0.3	0.2

	4.7	4.9	9.6	8.7	7.1

Notes to the consolidated financial statements (continued)

3 Operating costs (continued)

For the year ended 30 June 2007, other services pursuant to such legislation relate principally to reporting required under section 404 of US Sarbanes-Oxley Act (2006 – principally to advisory services in respect of Diageo's preparedness for Sarbanes-Oxley Act section 404). Other services relevant to taxation comprise principally tax compliance services and tax advice. All other services relate principally to advisory services in respect of due diligence, services in relation to acquisitions and disposals, and audit services in respect of employee pension funds and benefit plans of £0.3 million (2006 – £0.3 million; 2005 – £0.2 million).

Under SEC regulations, the auditor fees of £9.6 million (2006 – £8.7 million; 2005 – £7.1 million) are required to be presented as follows: audit £7.1 million (2006 – £4.4 million; 2005 – £4.1 million); other audit-related £1.1 million (2006 – £2.6 million; 2005 – £1.6 million); tax £1.0 million (2006 – £1.4 million; 2005 – £1.4 million); and all other fees £0.4 million (2006 – £0.3 million; 2005 – £nil).

In addition to the amounts above, £0.1 million (2006 – £0.3 million; 2005 – £0.2 million) was charged in relation to the audit by firms other than KPMG.

4 Employees

	2007	2006	2005
Average number of employees
Full time	22,086	21,972	22,333
Part time	434	647	633

	22,520	22,619	22,966

	2007	2006	2005
	£ million	£ million	£ million
Aggregate remuneration
Wages and salaries	796	761	708
Share-based incentive plans	25	26	28
Employer's social security	68	59	59
Employer's pension	97	99	84
Other post employment	7	7	5

	993	952	884

Of the charge to the consolidated income statement for the year ended 30 June 2007: in respect of post employment benefits, £43 million (2006 – £45 million; 2005 – £41 million) has been included in cost of sales and £61 million (2006 – £61 million; 2005 – £48 million) has been included in other operating expenses; and in respect of share-based incentive plans, £5 million (2006 – £5 million; 2005 – £6 million) has been included in cost of sales and £20 million (2006 – £21 million; 2005 – £22 million) has been included in other operating expenses.

Retirement benefits The group operates a number of pension plans throughout the world, devised in accordance with local conditions and practices.

Notes to the consolidated financial statements (continued)

4 Employees (continued)

The larger plans are generally of the defined benefit type and are funded by payments to separately administered funds or insurance companies. The principal plans are in the United Kingdom, Ireland, United States and Canada. All valuations were performed by independent actuaries using the projected unit method to determine pension costs. The most recent full valuations of the significant defined benefit pension plans were carried out as follows: United Kingdom on 31 March 2006; United States on 1 January 2007; and Ireland on 31 December 2006. The measurement dates used to calculate the disclosures in the consolidated financial statements are the respective balance sheet dates. In the United Kingdom, the Diageo Pension Scheme closed to new members in November 2005. New employees in the United Kingdom now become members of the Diageo Lifestyle Plan, which is also a defined benefit pension plan.

The assets of the principal pension plans are held in separate funds administered by trustees to meet long term pension liabilities to past and present employees. The trustees are required to act in the best interests of the plans' beneficiaries. The two largest pension plans are the Diageo Pension Scheme in the United Kingdom and the Guinness Ireland Pension Scheme in Ireland. For the Diageo Pension Scheme in the United Kingdom, the trustee is Diageo Pension Trust Limited. The appointment of the directors to the board is determined by the Scheme's trust documentation. There is a policy that one-third of all directors should be nominated by members of the Scheme. Two member nominated directors have recently been appointed from the pensioner member community and two from the active member community. For the Guinness Ireland Pension Scheme, the appointment of trustees is strictly a company decision. Currently the company makes three nominations and appoints three further candidates nominated by representative groupings. The chairman is a former employee of the company and is viewed as independent.

The group also operates a number of plans, primarily in the United States, which provide employees with post employment benefits in respect of medical costs. These plans are generally unfunded. In addition, there are a number of other plans which provide post employment benefits other than pensions and medical benefits. These plans are also included in the figures presented below.

(a): The following weighted average assumptions were used to determine the group's deficit/surplus in the main post employment plans at 30 June in the relevant year. The assumptions used to calculate the charge/credit in the consolidated income statement for the year to 30 June are based on the assumptions disclosed as at the previous 30 June.

	United Kingdom			Ireland			United States
	2007	2006	2005	2007	2006	2005	2007	2006	2005
	%	%	%	%	%	%	%	%	%
Rate of general increase in salaries	4.2	3.8	3.9	4.2	4.0	4.0	3.3	3.4	3.0
Rate of increase to pensions in payment	3.3	2.9	2.6	2.3	2.1	2.1	—	—	—
Rate of increase to deferred pensions	3.2	2.8	2.5	2.2	2.0	2.1	—	—	—
Medical inflation	n/a	n/a	n/a	n/a	n/a	n/a	10.0	9.0	10.0
Discount rate for plan liabilities	5.8	5.2	4.9	5.3	4.8	4.0	6.2	6.3	5.0
Inflation	3.2	2.8	2.5	2.2	2.0	2.0	2.3	2.4	2.0

For the UK and US plans, there are, in addition to the above percentages, age related promotional salary increases. The 2007 assumption for medical inflation in the United States reduces by 0.5% per year to 5% (2006 and 2005 – 1% per year to 5%).

Notes to the consolidated financial statements (continued)

4 Employees (continued)

In assessing the group's post retirement liabilities, the mortality assumption for the largest plan (which is in the United Kingdom) is based on the mortality experience of that plan. This mortality experience analysis was carried out in 2006 as part of the triennial funding valuation of that plan. The assumption is based on the PA92 birth year tables with scaling factors based on the experience of the plan. The assumption also allows for future improvements in life expectancy in line with the medium cohort effect. The mortality assumptions for the other plans around the world are based on relevant standard mortality tables in each country.

For the main UK and Irish pension funds, the table below illustrates the expected age at death of an average worker who retires currently at the age of 65, and one who is currently aged 45 and subsequently retires at the age of 65:

	United Kingdom			Ireland
	2007 Age	2006 Age	2005 Age	2007 Age	2006 Age	2005 Age
Retiring currently at age 65
Male	84.4	84.3	83.5	85.3	84.0	84.0
Female	87.1	87.1	86.4	87.9	86.9	86.9
Currently aged 45, retiring at age 65
Male	86.7	86.7	85.2	87.1	84.8	84.8
Female	89.4	89.4	88.1	89.7	87.8	87.8

Notes to the consolidated financial statements (continued)

4 Employees (continued)

(b): The amounts charged in respect of post employment plans to the consolidated income statement and consolidated statement of recognised income and expense for the three years ended 30 June 2007 are set out below:

	United Kingdom		Ireland		United States and other		Total
	£ million		£ million		£ million		£ million
2007
Operating profit
Current service cost	(57	)	(17	)	(24	)	(98	)
Past service cost	(4	)	—		—		(4	)

Total charge to operating profit	(61	)	(17	)	(24	)	(102	)
Net credit/(cost) to other finance income (note 6(ii))	36		17		(5	)	48

Charge before taxation	(25	)	—		(29	)	(54	)

Consolidated statement of recognised income and expense
Actual return on post employment plan assets	374		150		44		568
Expected return on post employment plan assets	(230	)	(70	)	(24	)	(324	)

Actual return less expected return on post employment plan assets	144		80		20		244
Experience gains and losses arising on the plan liabilities	(100	)	7		(17	)	(110	)
Changes in assumptions underlying the present value of the plan liabilities	200		10		(21	)	189

Actuarial gain recognisable in the reconciliation of the assets and liabilities	244		97		(18	)	323
Changes in the recognisable surplus of the plans with a surplus restriction	—		—		5		5

Total gain/(loss) recognisable in the consolidated statement of recognised income and expense	244		97		(13	)	328

2006
Operating profit
Current service cost	(58	)	(22	)	(24	)	(104	)
Past service cost	(1	)	(1	)	—		(2	)
Gains on curtailments	1		—		—		1

Total charge to operating profit	(58	)	(23	)	(24	)	(105	)
Net credit/(cost) to other finance income (note 6(ii))	14		11		(6	)	19

Charge before taxation	(44	)	(12	)	(30	)	(86	)

Consolidated statement of recognised income and expense
Actual return on post employment plan assets	513		84		15		612
Expected return on post employment plan assets	(191	)	(60	)	(24	)	(275	)

Actual return less expected return on post employment plan assets	322		24		(9	)	337
Experience gains and losses arising on the plan liabilities	(29	)	(14	)	(12	)	(55	)
Changes in assumptions underlying the present value of the plan liabilities	(2	)	149		36		183

Actuarial gain recognisable in the reconciliation of the assets and liabilities	291		159		15		465
Changes in the recognisable surplus of the plans with a surplus restriction	—		—		(6	)	(6	)

Total gain recognisable in the consolidated statement of recognised income and expense	291		159		9		459

Notes to the consolidated financial statements (continued)

4 Employees (continued)

	United Kingdom		Ireland		United States and other		Total
	£ million		£ million		£ million		£ million
2005
Operating profit
Current service cost	(58	)	(15	)	(20	)	(93	)
Past service cost	(2	)	(10	)	—		(12	)
Gains on curtailments	18		—		1		19
Losses on settlements	—		—		(2	)	(2	)

Total charge to operating profit	(42	)	(25	)	(21	)	(88	)
Net credit/(cost) to other finance income (note 6(ii))	4		9		(4	)	9

Charge before taxation	(38	)	(16	)	(25	)	(79	)

Consolidated statement of recognised income and expense
Actual return on post employment plan assets	318		129		30		477
Expected return on post employment plan assets	(194	)	(62	)	(24	)	(280	)

Actual return less expected return on post employment plan assets	124		67		6		197
Experience gains and losses arising on the plan liabilities	3		(15	)	(12	)	(24	)
Changes in assumptions underlying the present value of the plan liabilities	(171	)	(198	)	(50	)	(419	)

Actuarial loss recognisable in the reconciliation of the assets and liabilities	(44	)	(146	)	(56	)	(246	)
Changes in the recognisable surplus of the plans with a surplus restriction	—		—		8		8

Total loss recognisable in the consolidated statement of recognised income and expense	(44	)	(146	)	(48	)	(238	)

Total cumulative gain/(loss) recognised in the consolidated statement of recognised income and expense
At 1 July 2004	—		—		—		—
Recognised in the year	(44	)	(146	)	(48	)	(238	)

At 30 June 2005	(44	)	(146	)	(48	)	(238	)
Recognised in the year	291		159		9		459

At 30 June 2006	247		13		(39	)	221
Recognised in the year	244		97		(13	)	328

At 30 June 2007	491		110		(52	)	549

Included in the total cumulative gain recognised at 30 June 2007 is a cumulative gain of £7 million (2006 – £2 million; 2005 – £8 million) in respect of changes in the surplus restriction.

Notes to the consolidated financial statements (continued)

4 Employees (continued)

(c) The expected long term rates of return and fair values of the assets of the significant defined benefit post employment plans were as follows:

	United Kingdom			Ireland			United States and other			Total
	Expected long term rates of return	Fair value		Expected long term rates of return	Fair value		Expected long term rates of return	Fair value		Expected long term rates of return	Fair value
	%	£ million		%	£ million		%	£ million		%	£ million
2007
Fair value of plan assets
Equities	8.4	1,988		8.0	574		8.4	230		8.3	2,792
Bonds	5.6	749		4.8	325		5.5	116		5.4	1,190
Property	7.4	455		7.0	161		11.6	11		7.4	627
Other	5.8	299		3.0	83		6.2	28		5.3	410

		3,491			1,143			385			5,019
Present value of funded plan liabilities		(3,702	)		(1,125	)		(464	)		(5,291	)
Present value of unfunded plan liabilities		(64	)		—			(66	)		(130	)

(Deficit)/surplus in post employment plans		(275	)		18			(145	)		(402	)
Surplus restriction		—			—			(17	)		(17	)

Post employment benefit liabilities		(275	)		18			(162	)		(419	)

2006
Fair value of plan assets
Equities	7.8	2,504		7.6	759		8.5	213		7.8	3,476
Bonds	4.9	224		4.4	146		5.6	125		4.9	495
Property	6.8	389		6.6	138		11.6	10		6.8	537
Other	4.1	93		2.8	16		5.8	30		4.3	139

		3,210			1,059			378			4,647
Present value of funded plan liabilities		(3,688	)		(1,149	)		(363	)		(5,200	)
Present value of unfunded plan liabilities		(73	)		—			(151	)		(224	)

Deficit in post employment plans		(551	)		(90	)		(136	)		(777	)
Surplus restriction		—			—			(24	)		(24	)

Post employment benefit liabilities		(551	)		(90	)		(160	)		(801	)

2005
Fair value of plan assets
Equities	7.5	2,254		6.9	712		8.0	215		7.4	3,181
Bonds	4.7	128		3.4	159		5.1	112		4.3	399
Property	6.5	322		5.9	120		12.1	10		6.5	452
Other	3.8	82		2.0	9		3.5	13		3.6	104

		2,786			1,000			350			4,136
Present value of funded plan liabilities		(3,562	)		(1,238	)		(373	)		(5,173	)
Present value of unfunded plan liabilities		(76	)		—			(163	)		(239	)

Deficit in post employment plans		(852	)		(238	)		(186	)		(1,276	)
Surplus restriction		—			—			(18	)		(18	)

Post employment benefit liabilities		(852	)		(238	)		(204	)		(1,294	)

Notes to the consolidated financial statements (continued)

4 Employees (continued)

Included in the post employment plan deficit of £402 million (2006 – £777 million; 2005 – £1,276 million) is £111 million (2006 – £101 million; 2005 – £95 million) in respect of post employment medical benefit liabilities and £40 million (2006 – £41 million; 2005 – £43 million) in respect of other non pension post employment liabilities.

Included in other assets in the United Kingdom at 30 June 2007 is cash of approximately £350 million intended for subsequent investment in bonds. The expected long term rate of return on other assets in the UK has been adjusted to reflect this.

Included in the plan assets above is £1 million (2006 – £7 million; 2005 – £19 million) invested in the ordinary shares of Diageo plc.

Post employment benefit assets and liabilities are recognised in the consolidated balance sheet, depending on whether an individual plan is in surplus or deficit, as follows:

	2007		2006
	£ million		£ million
Non-current assets	38		14
Non-current liabilities	(457	)	(815	)

	(419	)	(801	)

The expected long term rates of return for equities have been determined by reference to government bond rates (minimum risk rates) in the countries in which the plans are based. As at 30 June 2007, to reflect the additional risks associated with equities, expected long term rates of return on equities include a risk premium of 3.25% per year (2006 and 2005 – 3.25% per year) in excess of the expected return from government bonds. This risk premium is a long term assumption which is set after taking actuarial advice and considering the assumptions used by other FTSE 100 companies. The expected long term rates of return for other assets are determined in a similar way, by using an appropriate risk premium relative to government bonds in the relevant country.

The group's investment strategy for its funded post employment plans is decided locally by the trustees of the plan and/or Diageo, as appropriate, and takes account of the relevant statutory requirements. The group's objective for the investment strategy is to achieve a target rate of return in excess of the return on the liabilities, while taking an acceptable amount of investment risk relative to the liabilities. This objective is implemented by using specific allocations to a variety of asset classes that are expected over the long term to deliver the target rate of return. Most investment strategies have significant allocations to equities, with the intention that this will result in the ongoing cost to the group of the post employment plans being lower over the long term, and will be within acceptable boundaries of risk. Each investment strategy is also designed to control investment risk by managing allocations to asset classes, geographical exposures and individual stock exposures.

Notes to the consolidated financial statements (continued)

4 Employees (continued)

In the United Kingdom, as at 30 June 2007, the target investment allocations for the Diageo Pension Scheme were approximately 55% of the assets in equities, 30% in bonds, 10% in property and 5% in other assets (2006 – 85%, 5%, 10% and nil, respectively). In addition, the UK Diageo Pension Scheme uses interest rate and inflation swaps to help manage the mismatch between the Scheme's assets and the present value of its liabilities. At 30 June 2007, approximately 40% (2006 – 40%) of the Scheme's liabilities were hedged against future movements in interest rates and inflation through the use of swaps and the fair value of these swaps was a liability of £64 million (2006 – asset of £3 million).This amount is included in other assets in the table of fair value of plan assets. For the principal Irish pension plan, as at 30 June 2007, the target investment allocations were approximately 45% of the assets in equities, 40% in bonds and 15% in property (2006 – 70%, 20% and 10%, respectively).

The trustees of the UK pension plans and principal Irish pension plan continue to review their investment strategies and have been using a phased approach to increase asset diversification and, subject to solvency triggers, a phased approach to progressively reduce risk by increasing the bond allocation and introducing swap investments. During the year ended 30 June 2007, approximately 20% of the assets globally were transferred out of equities into either bonds or cash to be invested in bonds.

The discount rate is based on the yields of high quality, long dated, fixed income investments of similar duration to the liabilities. For the UK pension plans, which represent approximately 70% of total post employment benefit liabilities, the discount rate is based on the i-Box over 15-year AA sterling corporate bond index at 30 June rounded to the nearest 0.1%.A similar process is used to determine the discount rate for the non-UK plans.

The percentages of investments at fair value held by the pension plans at 30 June 2007 and 30 June 2006, analysed by category, were as follows:

	United Kingdom	Ireland	United States and other	Total
	%	%	%	%
2007
Equities	57	50	60	56
Bonds	21	29	30	24
Property	13	14	3	12
Other	9	7	7	8

	100	100	100	100

2006
Equities	78	72	56	75
Bonds	7	14	33	10
Property	12	13	3	12
Other	3	1	8	3

	100	100	100	100

Notes to the consolidated financial statements (continued)

4 Employees (continued)

(d) Movements in the present value of plan liabilities during the three years ended 30 June 2007:

	United Kingdom		Ireland		United States and other		Total
	£ million		£ million		£ million		£ million
Present value of plan liabilities at 1 July 2004	3,374		994		444		4,812
Exchange differences	—		4		15		19
Acquisition of businesses	—		—		3		3
Current service cost	58		15		20		93
Past service cost	2		10		—		12
Interest cost	190		53		28		271
Actuarial loss	168		213		62		443
Employee contributions	8		2		1		11
Benefits paid	(144	)	(53	)	(38	)	(235	)
Curtailments	(18	)	—		(1	)	(19	)
Settlements	—		—		2		2

Present value of plan liabilities at 30 June 2005	3,638		1,238		536		5,412
Exchange differences	—		25		(8	)	17
Acquisition of businesses	8		—		1		9
Current service cost	58		22		24		104
Past service cost	1		1		—		2
Interest cost	177		49		30		256
Actuarial loss/(gain)	31		(135	)	(24	)	(128	)
Employee contributions	8		2		1		11
Benefits paid	(153	)	(53	)	(38	)	(244	)
Curtailments	(1	)	—		—		(1	)
Settlements	(6	)	—		(8	)	(14	)

Present value of plan liabilities at 30 June 2006	3,761		1,149		514		5,424
Exchange differences	—		(25	)	(34	)	(59	)
Current service cost	57		17		24		98
Past service cost	4		—		—		4
Interest cost	194		53		29		276
Actuarial (gain)/loss	(100	)	(17	)	38		(79	)
Employee contributions	10		2		—		12
Benefits paid	(160	)	(54	)	(41	)	(255	)

Present value of plan liabilities at 30 June 2007	3,766		1,125		530		5,421

For the year ended 30 June 2007, benefits paid include £6 million in respect of post employment medical benefits in the United States. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 established a prescription drug benefit as well as a federal subsidy to sponsors of retiree healthcare benefit plans which provide a prescription drug benefit that is at least equivalent to Medicare's prescription drug coverage. A subsidy of £0.4 million has been received in the year ended 30 June 2007.

Notes to the consolidated financial statements (continued)

4 Employees (continued)

(e) Movements in the fair value of plan assets during the three years ended 30 June 2007:

	United Kingdom		Ireland		United States and other		Total
	£ million		£ million		£ million		£ million
Fair value of plan assets at 1 July 2004	2,499		906		315		3,720
Exchange differences	—		6		10		16
Acquisition of businesses	—		—		3		3
Expected return on plan assets	194		62		24		280
Actuarial gain	124		67		6		197
Contributions by the group	105		10		29		144
Employee contributions	8		2		1		11
Benefits paid	(144	)	(53	)	(38	)	(235	)

Fair value of plan assets at 30 June 2005	2,786		1,000		350		4,136
Exchange differences	—		21		(7	)	14
Acquisition of businesses	6		—		—		6
Reclassification from current assets	—		—		18		18
Expected return on plan assets	191		60		24		275
Actuarial gain/(loss)	322		24		(9	)	337
Contributions by the group	56		5		47		108
Employee contributions	8		2		1		11
Benefits paid	(153	)	(53	)	(38	)	(244	)
Settlements	(6	)	—		(8	)	(14	)

Fair value of plan assets at 30 June 2006	3,210		1,059		378		4,647
Exchange differences	—		(22	)	(26	)	(48	)
Expected return on plan assets	230		70		24		324
Actuarial gain	144		80		20		244
Contributions by the group	57		8		30		95
Employee contributions	10		2		—		12
Benefits paid	(160	)	(54	)	(41	)	(255	)

Fair value of plan assets at 30 June 2007	3,491		1,143		385		5,019

Notes to the consolidated financial statements (continued)

4 Employees (continued)

The group has agreed a deficit funding plan with the trustees of the UK Diageo Pension Scheme (the Scheme), which provides for the group to fund the Scheme deficit over a four year period beginning in the year ended 30 June 2007. For these purposes, the value of the deficit, calculated using the trustees' actuarial valuation of the Scheme, was ascertained through the triennial valuation as at 31 March 2006. Following the completion of that valuation, Diageo has undertaken to make an annual £50 million cash contribution in each of the four years of the funding plan, and the first payment of £50 million was made in the year ended 30 June 2007. Payments are made into an escrow account subject to an agreement between the group and the trustees, with release from escrow to either the group or the trustees determined by an agreed formula in the light of the actuarial valuation of the Scheme as at 31 March 2009. Investment returns on the funds held in escrow accrue to the group. This amount held in escrow is included in other investments on the consolidated balance sheet and is not included in the table above. In addition to the deficit funding, Diageo continues to make a cash contribution in respect of current service cost based on the trustees' valuation; this contribution is expected to be £50 million in the year ending 30 June 2008. Funding arrangements will be reviewed and adjusted in the light of future triennial actuarial valuations.

Contributions to other plans in the year ending 30 June 2008 are expected to be approximately £40 million.

(f) The future benefits expected to be paid by the post employment plans, up to 30 June 2017, are as follows:

	Payments due in the year ending 30 June
	2008	2009	2010	2011	2012	2013–2017
	£ million	£ million	£ million	£ million	£ million	£ million
United Kingdom – pension benefits	162	166	170	175	180	971
– other	2	2	2	2	2	7
Ireland – pension benefits	55	56	56	56	57	298
United States and Canada – pension benefits	32	32	31	31	30	125
– other	5	5	6	6	6	38
Other countries – pension benefits	8	8	8	8	8	39
– other	3	3	3	3	3	14

	267	272	276	281	286	1,492

Notes to the consolidated financial statements (continued)

4 Employees (continued)

(g) Changes in the assumptions used for determining post employment costs and liabilities may have a material impact on the income statement and balance sheet. For the significant assumptions, the following sensitivity analysis gives an estimate of these impacts for the year ended 30 June 2007:

	2007
	£ million
A 0.5% decrease in the discount rate would have the following approximate effect:
Increase in annual post employment cost	7
Increase in post employment deficit	407
A 1% decrease in the expected rates of return on plan assets would have the following approximate effect:
Increase in annual post employment cost	45
A one year increase in life expectancy would have the following approximate effect:
Increase in annual post employment cost	11
Increase in post employment deficit	173
A 0.5% increase in inflation would have the following approximate effect:
Increase in annual post employment cost	31
Increase in post employment deficit	350
A 1% decrease in medical care inflation would have the following approximate effect:
Decrease in annual post employment cost	(1	)
Decrease in post employment deficit	(11	)

(h) Information on transactions between the group and its pension plans is given in note 31.

(i) The group also has a number of defined contribution plans, for which the total cost charged to the income statement of £2 million (2006 – £1 million; 2005 – £1 million) represents contributions payable to these plans by the group at rates specified in the rules of the plans.

5 Exceptional items

IAS 1 – Presentation of financial statements requires material items of income and expense to be disclosed separately. Exceptional items are items which, in management's judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.

In the three years ended 30 June 2007, the following exceptional items arose in respect of continuing operations:

	2007		2006	2005
	£ million		£ million	£ million
Items included in operating profit (note (i))	40		—	(201	)
Sale of General Mills and other businesses (note (ii))	(1	)	157	214

	39		157	13

In the year ended 30 June 2006 there were exceptional tax credits of £315 million (2005 – exceptional tax credits £78 million) – see note 8 for further details of exceptional tax items in prior years.

Notes to the consolidated financial statements (continued)

5 Exceptional items (continued)

(i) Items included in operating profit

		2007	2006	2005
		£ million	£ million	£ million
Cost of sales
	Park Royal brewery accelerated depreciation(a)	—	—	(29	)
Other operating expenses
	Disposal of Park Royal property(b)	40	—	—
	Seagram integration costs(c)	—	—	(30	)
	Thalidomide Trust(d)	—	—	(149	)
	Disposal of other property	—	—	7

		40	—	(201	)

(a): In the year ended 30 June 2005, the charge for accelerated depreciation of the Park Royal brewery of £29 million related to the closure of that facility in June 2005. The original announcement of this closure was in April 2004.
(b): In the year ended 30 June 2007, operating profit included an exceptional gain in respect of the sale of the site of the former brewery at Park Royal. The land was sold for £49 million, offset by £9 million expenditure in the year on preparing the site for sale.
(c): A number of the former Seagram spirits and wine businesses were acquired on 21 December 2001. In the three and a half years to 30 June 2005, a total of £411 million was charged to the income statement for the integration of the businesses, principally in respect of Diageo North America, and 2,350 jobs were terminated. No amounts were charged to the income statement in respect of the Seagram integration in the years ended 30 June 2007 and 30 June 2006.

An analysis of the movement in the Seagram integration liability since 1 July 2004 is as follows:

	Liability at 1 July 2004	Charged to income statement in year ended 30 June 2005	Cash payments		Liability at 30 June 2005	Cash payments		Liability at 30 June 2006	Cash payments		Liability at 30 June 2007
	£ million	£ million	£ million		£ million	£ million		£ million	£ million		£ million
Employee related	8	5	(5	)	8	(7	)	1	(1	)	—
Distributor rationalisation	1	—	(1	)	—	—		—	—		—
Lease terminations	4	4	(6	)	2	(1	)	1	(1	)	—
Legal and professional	10	2	(5	)	7	(6	)	1	(1	)	—
Other	5	17	(19	)	3	(2	)	1	(1	)	—

	28	28	(36	)	20	(16	)	4	(4	)	—

Asset write downs		2

		30

Notes to the consolidated financial statements (continued)

5 Exceptional items (continued)

(d): In the year ended 30 June 2005, operating costs included an exceptional charge of £149 million in respect of payments to the Thalidomide Trust. It is expected that the future annual payment will be approximately £7 million per year. This amount will be index-linked and is expected to be a final settlement payable over the period to 2037. Provision has been made for the discounted value of these payments.

(ii) Sale of General Mills and other businesses In the year ended 30 June 2007 the group made a loss on the sale of businesses of £1 million (2006 – gains £6 million; 2005 – loss £7 million). In the year ended 30 June 2006, the group made a £151 million profit on the sale of 25 million shares in General Mills (2005 – £221 million profit on the disposal of 54 million shares).

6 Interest and other finance income and charges

	2007		2006		2005
	£ million		£ million		£ million
(i) Net interest
Interest receivable	78		27		121
Fair value gain on interest rate instruments	33		24

Total interest income	111		51		121

Interest payable on bank loans and overdrafts	(16	)	(6	)	(15	)
Interest payable on all other borrowings	(316	)	(223	)	(256	)
Fair value loss on interest rate instruments	(30	)	(15	)

Total interest expense	(362	)	(244	)	(271	)

	(251	)	(193	)	(150	)

(ii) Other finance income
Interest on post employment plan liabilities	(276	)	(256	)	(271	)
Expected return on post employment plan assets	324		275		280

Net finance income in respect of post employment plans	48		19		9
Investment income – dividends receivable from General Mills	—		5		17
Net exchange movements on short term intercompany loans	6		—		—
Net exchange movements on net debt not meeting hedge accounting criteria	1		—		—

	55		24		26

(iii) Other finance charges
Other unwinding of discounts	(16	)	(15	)	(7	)
Finance charge on finance lease obligations	—		—		(1	)
Other charges	—		—		(1	)
Net exchange movements on short term intercompany loans	—		(2	)	(8	)

	(16	)	(17	)	(17	)

Notes to the consolidated financial statements (continued)

7 Associates

	2007		2006		2005
	£ million		£ million		£ million
Share of sales	782		734		677
Share of operating costs	(549	)	(524	)	(492	)

Share of operating profit	233		210		185
Share of net interest payable	(12	)	(10	)	(2	)
Share of taxation	(72	)	(69	)	(62	)

Share of profits attributable to equity shareholders	149		131		121
Dividends received by the group	(119	)	(106	)	(105	)

Share of profits retained by associates	30		25		16

The dividends received by the group in the year ended 30 June 2007 include £42 million (2006 – £39 million; 2005 – £41 million) of receipts from Moët Hennessy in respect of amounts payable to the tax authorities.

Information on transactions between the group and its associates is given in note 31. Summarised financial information for the group's investments in associates is presented below:

(a) Moët Hennessy Moët Hennessy prepares its financial statements under IFRS in euros to 31 December each year. Summary information for Moët Hennessy for the three years ended 30 June 2007, in each year aggregating the results for the six month period ended 31 December with that of the following six months ended 30 June, translated at £1 = €1.48 (2006 – £1 = €1.46;2005 – £1 = €1.46), is set out below:

	2007		2006		2005
	€ million	£ million	€ million	£ million	€ million	£ million
Sales	3,066	2,072	2,795	1,914	2,382	1,632
Profit for the year	594	401	522	358	467	320

After adjustments to align Moët Hennessy's accounting policies with those of the group, the group's 34% share of operating profit and of profit after tax of Moët Hennessy were £218 million and £136 million, respectively (2006 – £198 million and £122 million, respectively; 2005 – £173 million and £113 million, respectively).

(b) Other associates For all of the group's investments in associates other than Moët Hennessy, summarised financial information, aggregating 100% of the sales and results of each associate, is presented below:

	2007	2006	2005
	£ million	£ million	£ million
Sales	378	399	398
Profit for the year	60	47	36

Notes to the consolidated financial statements (continued)

8 Taxation

(i) Analysis of taxation charge in the year

	2007		2006		2005
	£ million		£ million		£ million
Current tax
Current year	387		302		303
Benefit of previously unrecognised tax losses	—		(1	)	—
Adjustments in respect of prior periods	6		(38	)	(27	)

	393		263		276

Deferred tax
Origination and reversal of temporary differences	233		24		176
Benefit of previously unrecognised tax losses	(12	)	(11	)	—
Changes in tax rates	93		19		97
Adjustments in respect of prior periods	(29	)	(114	)	50

	285		(82	)	323

Taxation on profit from continuing operations	678		181		599

Adjustments in respect of prior periods for current tax comprise a UK credit of £18 million (2006 – £67 million charge; 2005 – £55 million charge) and an overseas charge to tax of £24 million (2006 – £105 million credit; 2005 – £82 million credit).

The taxation charge includes the following items: in the year ended 30 June 2007, a net tax charge of £24 million from intra group reorganisations of brand businesses, a reduction in the carrying value of deferred tax assets of £74 million primarily following a reduction in tax rates, and a provision for settlement of tax liabilities related to the GrandMet/Guinness merger of £64 million; in the year ended 30 June 2006, an exceptional tax credit of £315 million arose as a consequence of the agreement with fiscal authorities of the carrying values of certain brands, which resulted in an increase to the group's deferred tax assets of £313 million; and in the year ended 30 June 2005, there were £58 million of tax credits on exceptional operating items and £20 million of tax credits on exceptional prior year business disposals.

	2007	2006		2005
	£ million	£ million		£ million
Current tax
United Kingdom	49	121		98
Overseas	344	142		178

	393	263		276

Deferred tax
United Kingdom	38	13		(41	)
Overseas	247	(95	)	364

	285	(82	)	323

Taxation on profit from continuing operations	678	181		599

Notes to the consolidated financial statements (continued)

8 Taxation (continued)

(ii) Factors affecting tax charge for the year

	2007		2006		2005
	£ million		£ million		£ million
Profit from continuing operations before taxation	2,095		2,146		1,925

Notional charge at UK corporation tax rate of 30%	629		644		578
Elimination of notional tax on share of associates' profits after tax	(45	)	(39	)	(35	)
Differences in effective overseas tax rates	(35	)	(54	)	(31	)
Items not chargeable	(59	)	(73	)	(94	)
Items not deductible	205		45		61
Benefit of previously unrecognised tax losses	(12	)	(12	)	—
Deferred tax on intra group transfers	(75	)	(197	)	—
Changes in tax rates	93		19		97
Adjustments in respect of prior periods	(23	)	(152	)	23

Tax charge for the year	678		181		599

(iii) Factors that may affect future tax charges As a group involved in worldwide operations, Diageo is subject to several factors which may affect future tax charges, principally the levels and mix of profitability in different jurisdictions, transfer pricing policies and tax rates imposed.

(iv) Corporate tax payable The current corporate tax liability of £673 million (2006 – £681 million) represents the amount of taxes payable in respect of current and prior periods that exceed payments made, and includes any interest and penalties payable thereon.

(v) Material tax liabilities In the past, the group has undergone significant restructuring involving the acquisition and disposal of material businesses and the transfer of businesses intra group. As a consequence of this restructuring, a number of potential tax exposures have arisen. In addition, as the group operates throughout the world, it faces a number of potential transfer pricing issues in many jurisdictions relating to goods, services and financing. The issues are often complex, inter-related and can take many years to resolve. The group has a liability (after applicable reliefs) of £377 million (2006 – £393 million) for these exposures, which is included in corporate tax payable in current liabilities. The decrease is due to a number of audit settlements offset by changes to estimates in relation to existing audits and identification of new exposures.

The group has a number of tax audits ongoing worldwide but does not currently expect material additional tax exposures to arise, above the amounts provided, as and when audits are concluded.

Provision is also made for penalties and interest on tax liabilities, and these are included in corporate tax payable in current liabilities and in the corporation tax charge.

9 Discontinued operations

Notes to the consolidated financial statements (continued)

9 Discontinued operations (continued)

10 Earnings per share

	2007	2006	2005
	£ million	£ million	£ million
Profit attributable to equity shareholders
Continuing operations	1,350	1,908	1,271
Discontinued operations	139	—	73

	1,489	1,908	1,344

Pence per share
Continuing operations
– basic earnings	50.2p	67.2p	42.8p
– diluted earnings	49.9p	66.9p	42.8p
Continuing and discontinued operations
– basic earnings	55.4p	67.2p	45.2p
– diluted earnings	55.0p	66.9p	45.2p

Excluding shares held by share trusts and treasury shares, the weighted average number of shares for the year ended 30 June 2007 was 2,688 million (2006 – 2,841 million; 2005 – 2,972 million). The effect of dilutive potential ordinary shares was to increase the weighted average number of shares for the year ended 30 June 2007 by 19 million to 2,707 million (2006 – increase by 11 million to 2,852 million; 2005 – increase by 1 million to 2,973 million).

Notes to the consolidated financial statements (continued)

11 Intangible assets

	Brands		Goodwill		Other intangibles		Computer software		Total
	£ million		£ million		£ million		£ million		£ million
Cost
At 30 June 2005	4,176		128		64		120		4,488
Exchange differences	(55	)	—		—		(2	)	(57	)
Acquisition of businesses	144		43		—		—		187
Other movements	18		(15	)	(6	)	16		13

At 30 June 2006	4,283		156		58		134		4,631
Exchange differences	(218	)	(4	)	(1	)	(6	)	(229	)
Acquisition of businesses	20		28		—		—		48
Transfers	—		—		—		37		37
Other movements	—		—		1		9		10

At 30 June 2007	4,085		180		58		174		4,497

Amortisation and impairment loss
At 30 June 2005	—		16		22		41		79
Exchange differences	—		—		—		(1	)	(1	)
Amortisation for the year	—		—		5		23		28
Other movements	—		—		(8	)	(1	)	(9	)

At 30 June 2006	—		16		19		62		97
Exchange differences	—		(1	)	(1	)	(4	)	(6	)
Amortisation for the year	—		—		5		24		29
Other movements	—		—		—		(6	)	(6	)

At 30 June 2007	—		15		23		76		114

Carrying amount
At 30 June 2007	4,085		165		35		98		4,383

At 30 June 2006	4,283		140		39		72		4,534

At 30 June 2005	4,176		112		42		79		4,409

(a): Brands are stated at fair value on acquisition. The principal acquired brands are as follows:

	Product	Currency of investment	Remaining amortisation period	Carrying amount
				£ million
Johnnie Walker	Whisky	Sterling	Indefinite life	625
Smirnoff	Vodka	US dollar	Indefinite life	411
Crown Royal	Whisky	US dollar	Indefinite life	728
Captain Morgan	Rum	US dollar	Indefinite life	598
Windsor Premier	Whisky	Korean won	Indefinite life	468

Notes to the consolidated financial statements (continued)

11 Intangible assets (continued)

Capitalised brands are regarded as having indefinite useful economic lives and have not been amortised. These brands are protected in all of the major markets where they are sold by trademarks, which are renewable indefinitely. There are not believed to be any legal, regulatory or contractual provisions that limit the useful lives of these brands. The nature of the premium drinks industry is that obsolescence is not a common issue, with indefinite brand lives being commonplace, and Diageo has a number of brands that were originally created more than 100 years ago. Accordingly the directors believe that it is appropriate that the brands are treated as having indefinite lives for accounting purposes.

Impairment reviews are carried out annually to ensure that intangible assets, including brands, are not carried at above their recoverable amounts. In particular, the group performs a discounted cash flow analysis to compare discounted estimated future operating cash flows with the net carrying value of each acquired brand. The analysis is based on forecast cash flows for the next financial year, with terminal values being calculated using the long term growth rate (the real gross domestic product (GDP) growth rate of the country plus its inflation rate) of the principal countries in which the majority of the profits of each brand are generated. The estimated cash flows are discounted at the group's weighted average cost of capital in the relevant country. Any impairment write downs identified are charged to the income statement. The test is dependent on management estimates and judgments, in particular in relation to the forecasting of future cash flows, and the discount rate applied to these cash flows. Management has concluded that no reasonably possible change in the key assumptions on which it has determined the recoverable amounts of acquired brands would cause their carrying values to exceed their recoverable amounts.

(b) The group tests goodwill annually for impairment, or more frequently if there are indications that goodwill is impaired. The goodwill is allocated to cash generating units and a discounted cash flow analysis is computed to compare discounted estimated future operating cash flows with the net carrying value of each business. The analysis is based on forecast cash flows for the next financial year, with terminal values being calculated using the long term growth rate (the real GDP growth rate of the country plus its inflation rate) of the relevant country. The estimated cash flows are discounted at the group's weighted average cost of capital in the relevant country. Any impairment write downs identified are charged to the income statement. The test is dependent on management estimates and judgments, in particular in relation to the forecasting of future cash flows, and the discount rate applied to these cash flows. Management has concluded that no reasonably possible change in the key assumptions on which it has determined the recoverable amount of goodwill would cause its carrying value to exceed its recoverable amount.

(c) Other intangible assets, principally comprising distribution rights, are amortised on a straight-line basis over the length of the distribution arrangements, generally between 10 and 20 years.

(d) Computer software includes £19 million in respect of projects in the course of development.

Notes to the consolidated financial statements (continued)

12 Property, plant and equipment

	Land and buildings		Plant and equipment		Fixtures and fittings		Under construction		Total
	£ million		£ million		£ million		£ million		£ million
Cost
At 30 June 2005	813		1,622		155		187		2,777
Exchange differences	(7	)	(4	)	(2	)	(1	)	(14	)
Acquisition of businesses	11		14		—		—		25
Other additions	11		97		14		110		232
Disposals	(10	)	(78	)	(18	)	(4	)	(110	)
Transfers	40		92		5		(137	)	—

At 30 June 2006	858		1,743		154		155		2,910
Exchange differences	(26	)	(48	)	(4	)	(4	)	(82	)
Additions	14		88		16		144		262
Disposals	(10	)	(90	)	(12	)	(2	)	(114	)
Transfers	47		41		4		(129	)	(37	)

At 30 June 2007	883		1,734		158		164		2,939

Depreciation
At 30 June 2005	127		652		79		—		858
Depreciation charge for the year	25		142		19		—		186
Disposals	(3	)	(74	)	(9	)	—		(86	)

At 30 June 2006	149		720		89		—		958
Exchange differences	(5	)	(23	)	(2	)	—		(30	)
Depreciation charge for the year	33		126		22		—		181
Disposals	(3	)	(90	)	(9	)	—		(102	)

At 30 June 2007	174		733		100		—		1,007

Carrying amount
At 30 June 2007	709		1,001		58		164		1,932

At 30 June 2006	709		1,023		65		155		1,952

At 30 June 2005	686		970		76		187		1,919

(a): The net book value of land and buildings comprises freeholds of £689 million (2006 – £689 million), long leaseholds of £16 million (2006 – £18 million) and short leaseholds of £4 million (2006 – £2 million). Depreciation was not charged on £187 million (2006 – £186 million) of land.
(b): Included in the total net book value of property, plant and equipment is £16 million (2006 – £14 million) in respect of assets held under finance leases; depreciation for the year on these assets was £4 million (2006 – £4 million).
(c): Transfers represent assets brought into use during the year, of which £37 million was in respect of computer software.

Notes to the consolidated financial statements (continued)

13 Biological assets

	Grape vines
	£ million
Fair value
At 30 June 2005	14
Exchange differences	(1	)
Harvested grapes transferred to inventories	(19	)
Changes in fair value	19

At 30 June 2006	13
Exchange differences	(1	)
Harvested grapes transferred to inventories	(19	)
Changes in fair value	19

At 30 June 2007	12

(a): Biological assets comprise grape vines and grapes on the vine. At 30 June 2007, grape vines comprise approximately 1,910 hectares (2006 – 1,769 hectares) of vineyards, ranging from newly established vineyards to vineyards that are 88 years old.
(b): There are no outstanding commitments for the acquisition or development of vineyards.

14 Investments in associates

	Moët Hennessy		Other associates		Total
	£ million		£ million		£ million
Cost less provisions
At 30 June 2005	1,220		41		1,261
Adoption of IAS 39	(6	)	—		(6	)

At 1 July 2005 as adjusted	1,214		41		1,255
Exchange differences	25		(3	)	22
Share of retained profits	64		—		64

At 30 June 2006	1,303		38		1,341
Exchange differences	(25	)	—		(25	)
Additions	—		48		48
Share of retained profits	70		4		74
Disposals	—		(2	)	(2	)

At 30 June 2007	1,348		88		1,436

Investments in associates comprise the cost of shares, less goodwill written off on acquisitions prior to 1 July 1998, of £922 million (2006 – £892 million) plus the group's share of post acquisition reserves of £514 million (2006 – £449 million).

Notes to the consolidated financial statements (continued)

14 Investments in associates (continued)

(a) Moët Hennessy Moët Hennessy prepares its financial statements under IFRS in euros to 31 December each year. A summary of Moët Hennessy's consolidated balance sheet as at 30 June 2007 and 30 June 2006, translated at £1 = €1.48 (2006 – £1 = €1.45), is set out below:

	2007				2006
	€ million		£ million		€ million		£ million
Non-current assets	4,095		2,768		2,517		1,736
Current assets	4,489		3,032		4,011		2,766

Total assets	8,584		5,800		6,528		4,502

Current liabilities	(1,609	)	(1,087	)	(1,323	)	(913	)
Non-current liabilities	(1,111	)	(750	)	(866	)	(597	)

Total liabilities	(2,720	)	(1,837	)	(2,189	)	(1,510	)

Net assets attributable to equity shareholders of the company	5,864		3,963		4,339		2,992

The 34% net investment in Moët Hennessy has been accounted for by aggregating the group's share of the net assets of Moët Hennessy with fair value adjustments on acquisition, principally in respect of Moët Hennessy's brands.

(b) Other associates For all of the group's investments in associates other than Moët Hennessy, summarised financial information, aggregating 100% of the assets and liabilities of each associate, is presented below:

	2007		2006
	£ million		£ million
Non-current assets	172		165
Current assets	198		102

Total assets	370		267

Current liabilities	(109	)	(84	)
Non-current liabilities	(25	)	(12	)

Total liabilities	(134	)	(96	)

Net assets	236		171

Included in other associates is a 17% effective interest held indirectly in Sichuan ShuiJingFang Joint Stock Co Ltd ('ShuiJingFang'), a manufacturer and distributor of Chinese white spirits, which is quoted on the Shanghai Stock Exchange. At 30 June 2007, ShuiJingFang's share price was RMB15 which valued the group's interest at £83 million.

Notes to the consolidated financial statements (continued)

15 Investments in joint ventures

The group consolidates its attributable share of the results and net assets of joint ventures on a line-by-line basis, measured according to the terms of the arrangements. The group's principal joint ventures that are consolidated on a proportional basis are as follows:

	Country of incorporation	Country of operation	Percentage of equity owned	Principal activities
Don Julio BV	Netherlands	Mexico	50%	Production, marketing and distribution of premium drinks
Guinness Anchor Berhad	Malaysia	Malaysia	50%	Production, marketing and distribution of premium drinks
Moët Hennessy Diageo (China) Co Ltd	China	China	50%	Marketing and distribution of premium drinks
MHD Diageo Moët Hennessy KK	Japan	Japan	50%	Marketing and distribution of premium drinks

In addition, the group consolidates on a proportional basis a number of other joint ventures involved in the production, marketing and distribution of premium drinks in Europe, South Africa and the Far East.

Included in the consolidated financial statements are the following amounts that represent the group's interest in the results and assets and liabilities of joint ventures:

	2007		2006		2005
	£ million		£ million		£ million
Sales	479		428		365
Operating costs	(449	)	(394	)	(334	)

Profit before tax	30		34		31

	2007		2006
	£ million		£ million
Non-current assets	74		84
Current assets	208		190

Total assets	282		274

Current liabilities	(89	)	(76	)
Non-current liabilities	(68	)	(84	)

Total liabilities	(157	)	(160	)

Net assets	125		114

Notes to the consolidated financial statements (continued)

16 Other investments

	General Mills		Loans and other		Total
	£ million		£ million		£ million
Cost less provisions or fair value
At 30 June 2005	508		211		719
Adoption of IAS 39	148		—		148

At 1 July 2005 as adjusted	656		211		867
Exchange differences	—		3		3
Fair value movements included in equity	33		—		33
Additions	—		16		16
Disposals and repayments	(689	)	(161	)	(850	)

At 30 June 2006	—		69		69
Exchange differences	—		(2	)	(2	)
Additions	—		77		77
Disposals and repayments	—		(16	)	(16	)

At 30 June 2007	—		128		128

(a) General Mills At 30 June 2005, the group owned 25 million shares in General Mills. With effect from 1 July 2005, the group adopted the provisions of IAS 39 and the shares were reclassified as an investment available for sale and restated to fair value. During the year ended 30 June 2006, the 25 million shares in General Mills were sold.

(b) Loans Included within loans at 30 June 2005 was $266 million (£148 million) receivable in respect of the disposal of Burger King. The loan earned interest at 9%, which was rolled up until the loan and associated interest were repaid in full when Burger King refinanced its credit facilities on 13 July 2005.

(c) Other Other investments at 30 June 2007 include £50 million (2006 and 2005 – £nil) paid into an escrow account and invested subject to an agreement between the group and the trustees of the Diageo Pension Scheme in the United Kingdom. This amount is not available for the general use of the group (see note 4).

17 Inventories

	2007	2006
	£ million	£ million
Raw materials and consumables	239	236
Work in progress	14	17
Maturing inventories	1,745	1,644
Finished goods and goods for resale	467	489

	2,465	2,386

Notes to the consolidated financial statements (continued)

17 Inventories (continued)

Inventories are disclosed net of provisions for obsolescence, an analysis of which is as follows:

	2007		2006		2005
	£ million		£ million		£ million
Balance at beginning of the year	44		45		49
Exchange differences	(2	)	—		(1	)
Income statement charge	9		2		5
Written off	(8	)	(3	)	(8	)

	43		44		45

18 Trade and other receivables

	2007		2006
	Current assets	Non-current assets	Current assets	Non-current assets
	£ million	£ million	£ million	£ million
Trade receivables	1,380	—	1,332	—
Other receivables	288	12	260	8
Prepayments and accrued income	91	5	89	4

	1,759	17