Financial Statements

Notes to the Group financial statements

for the year ended 31 March 2006

31. Share-based payment arrangements

(a) Options in respect of the Ordinary shares of the Company

During the year ended 31 March 2006, GUS plc had three share option arrangements for its employees. Details of these share option arrangements are as follows:

(i) Summary of arrangements

Arrangements	The 1998 Approved and Non-Approved Executive Share Option Schemes	The North America Stock Option Plan	Savings related share option schemes
Nature	Grant of options	Grant of options	'Save as you earn' scheme
Vesting Conditions:
– Service period	3 years	1, 2 and 3 years	3 or 5 years
– Performance/Other	EPS growth performance condition1	n/a	Saving obligation over the vesting period
Expected outcome of meeting performance criteria (at grant date)	Condition is satisfied	n/a	n/a
Maximum term	10 years	6 years	3.5 or 5.5 years
Method of settlement	Share distribution	Share distribution	Share distribution
Expected departures	5%	1 year – 0%	3 years2 – 30%
(at grant date)		2 years – 15%	5 years2 – 50%
		3 years – 20%
Option exercise price calculation3	Market price over the 3 dealing days preceding the grant	Market price over the 3 dealing days preceding the grant	20% discount to market price over the 3 dealing days preceding the grant
1 The performance condition for the Executive Share Option Scheme requires average Benchmark EPS growth to exceed the average growth in the general index of retail prices by at least 4% p.a. over a 3 year period. The period of assessment commences at the beginning of the financial year of grant. This is not a market based performance condition as defined by IFRS 2. 2 The stated values for expected departures include participants that do not meet the saving requirement of the scheme. 3 Three day averages are calculated by taking middle market quotations of a GUS plc share from the London Stock Exchange.

Options were exercised throughout the year. The weighted average share price during the year was £9.32 (2005: £8.71).

(ii) Information relating to option valuation techniques

The Company uses the Black Scholes model to determine an appropriate value of the option grants. Inputs into the model are calculated as follows:

Expected volatility – Calculated as an average over the expected life with an assumption made for volatility in each year of the expected life. Volatility in the first year is assumed to be the same as implied volatility on grant date. Volatility for year 4 and beyond is assumed to remain at the long run (10 year observed) historic volatility. Linear interpolation is assumed for years 2 and 3.

Expected dividend yield – Yields are based on the current consensus analyst forecast figures at the time of grant. The inputs utilised are an average of the forecast over the next three financial years.

Risk-free interest rate – Rates are obtained from the UK government Debt Management Office website which details historical prices and yields for gilt strips.

Expected option life to exercise – The Executive Share Option Scheme has an expected life of four years, the North American Stock Option Plan has an expected life of 3.75 years and the Sharesave Schemes have expected lives of either three or five years.

Share price on grant date – The closing price on the day the options are granted.

Option exercise price – Exercise price as stated in the term of each award.

The weighted average estimated fair values and the inputs into the Black-Scholes models are as follows:

	The 1998 Approved and Non-Approved Executive Share Option Schemes		The North America Stock Option Plan		Savings related share option schemes
	Weighted average 2006	Weighted average 2005	Weighted average 2006	Weighted average 2005	Weighted average 2006	Weighted average 2005
Fair value (£)	1.60	1.71	1.52	1.65	2.46	2.42
Share price on grant date (£)	8.53	8.26	8.48	8.25	8.96	8.46
Exercise price (£)	8.61	8.12	8.59	8.10	6.87	6.48
Expected volatility	27.8%	27.0%	27.4%	27.0%	25.5%	25.6%
Expected dividend yield	4.0%	3.8%	4.0%	3.8%	3.8%	3.9%
Risk free interest rate	4.3%	5.2%	4.3%	5.2%	4.1%	5.1%
Expected option life to exercise	4 years	4 years	3.75 years	3.75 years	3.56 years	3.45 years

Options granted during 2006 had a weighted average fair value of £1.82 (2005: £1.94).

(iii) Reconciliation of movement in the number of share options

	Number of options	Weighted average exercise price	Number of options	Weighted average exercise price
		£		£
	2006	2006	2005	2005
Outstanding at beginning of year	27,741,725	6.34	29,682,249	5.71
New grants	8,335,298	8.12	8,285,234	7.55
Forfeitures1	(1,469,207)	6.53	(1,940,133)	5.96
Exercised options	(5,881,782)	6.09	(8,237,057)	5.40
Expired options	(525,869)	6.60	(48,567)	5.49
Outstanding at end of year	28,200,165	6.90	27,741,725	6.34
Exercisable at end of year	5,928,451	6.41	4,925,280	6.03
1 For the Sharesave schemes, this includes non-leavers who have failed the savings requirement.

(iv) Share options outstanding at the end of the year

Share options outstanding at the end of the year had the following exercise prices and remaining contractual lives:

As at 31 March 2006						As at 31 March 2005
		Weighted average exercise	Weighted average remaining lives					Weighted average exercise	Weighted average remaining lives
Range of exercise	Number of					Range of exercise	Number of
prices £	options	price £	Expected years	Contractual years		prices £	options	price £	Expected years	Contractual years
0 – 6	5,171,594	4.56	0.7	1.4		0 – 6	7,508,503	4.69	1.4	2.6
6 – 7	12,437,703	6.61	1.2	4.8		6 – 7	14,890,809	6.53	1.6	5.7
7 – 8	100,535	7.57	1.6	6.6		7 – 8	116,387	7.57	2.6	7.7
8 – 9	10,490,333	8.39	3.9	6.0		8 – 9	5,217,655	8.11	3.1	8.1

(b) Share awards in respect of the Ordinary shares of the Company

(i) Summary of arrangements

Arrangements	Co-Investment Plan – Matching Shares	Performance Share Plan
Nature of arrangement	Grant of shares1	Grant of shares
Vesting Conditions:
– Service period	4 years	3 years
– Performance	Benchmark profit performance of Group/Division assessed against specified targets	Distribution percentage determined by ranking ‘Total shareholder return’relative to a comparator group
Expected outcome of meeting performance criteria (at grant date)	Participants meet target performance	Currently 60%2
Maximum term	6 years	3 years
Method of settlement	Share distribution	Share distribution
Expected departures (at grant date)	7%	5%
1 The Matching Shares are a nil consideration option and have been classified as an award of shares because the nature of the award is the same. 2 The Performance Share Plan performance condition is considered a ‘Market-based’ performance condition under IFRS 2. It has been valued using a Monte Carlo simulation with historic volatilities and correlations measured over the three year period preceding valuation. On conversion to IFRS, the fair value of awards was calculated as 60% of the share price at date of grant. The performance condition was initially valued at 60% on conversion to IFRS accounting standards. This valuation will be applied to all new grants for a three year period (until 2007). In 2007 the Monte Carlo simulation will be re-run. The revaluation will be brought forward if factors arise that suggest an earlier re-run is warranted.

The grant date for the Co-Investment plan is the start of the financial year in which performance is assessed. This is before the quantity of the share award is determined. The underlying value of the award is known at the grant date, subject to the outcome of the performance condition. The value of awarded shares reflects the performance outcome at the date of issue to participants.

(ii) Information relating to share grant valuation techniques

The value of awards is determined as the observed market closing rate on the date awarded grants are issued to participants. For the Co-Investment scheme, this occurs after the first year of performance is assessed. The Performance Share Plan’s market based performance condition is included in the fair value measurement on grant date and is not revised for actual performance.

Under the share awards, participants have an entitlement to dividend distributions from the issue date until point of vesting. The observed market rate on the day of valuation is considered inclusive of future dividend distributions. No modifications are made for dividend distributions or other factors.

There were 2,635,145 shares granted during 2006 (2005: 2,432,536), with a weighted average award fair value of £7.69 (2005: £7.28).

(c) Summary of the total cost of share-based compensation in respect of Ordinary shares in the Company

	2006 £m	2005 £m
Share option awards	13	11
Share grant awards	16	13
Total expense recognised (all equity settled)	29	24