6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

7 August 2020

Commission File Number 1-10691

DIAGEO plc

(Translation of registrant’s name into English)

Lakeside Drive, Park Royal, London NW10 7HQ, England

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F  ☒             Form 40-F  ☐

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

This report on Form 6-K shall be deemed to be filed and incorporated by reference in the registration statement on Form F-3 (File No. 333-224340) and Form S-8 (File Nos. 333-223071, 333-153481, 333-154338, 333-162490, 333-169934, 333-182315, 333-206290) and to be a part thereof from the date on which this report is furnished, to the extent not superseded by documents or reports subsequently filed or furnished.

Cautionary statement concerning forward-looking statements

This document contains ‘forward-looking’ statements. These statements can be identified by the fact that they do not relate only to historical or current facts. In particular, forward-looking statements include all statements that express forecasts, expectations, plans, outlook, objectives and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of changes in interest or exchange rates, the availability or cost of financing to Diageo, anticipated cost savings or synergies, expected investments, the completion of any strategic transactions or restructuring programmes, anticipated tax rates, changes in the international tax environment, expected cash payments, outcomes of litigation or regulatory enquiries, anticipated changes in the value of assets and liabilities related to pension schemes and general economic conditions. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including factors that are outside Diageo’s control.

Factors that could cause actual results and developments to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:

• economic, political, social or other developments in countries and markets in which Diageo operates (including as a result of the Covid-19 pandemic), which may contribute to a reduction in demand for Diageo’s products, adverse impacts on Diageo’s customer, supplier and/or financial counterparties, or the imposition of import, investment or currency restrictions (including the potential impact of any global, regional or local trade wars or any tariffs, duties or other restrictions or barriers imposed on the import or export of goods between territories, including but not limited to, imports into and exports from the United States and the European Union and/or the United Kingdom);

• the impact of the Covid-19 pandemic, or other epidemics or pandemics, on Diageo’s business, financial condition, cash flows and results of operation;

• the negotiating process surrounding, as well as the final terms of, the United Kingdom’s future trading relationships with the European Union and other countries, which could lead to a sustained period of economic and political uncertainty and complexity whilst successor trading arrangements with other countries are negotiated, finalised and implemented, potentially adversely impacting economic conditions in the United Kingdom and Europe more generally as well as Diageo’s business operations and financial performance;

• changes in consumer preferences and tastes, including as a result of changes in demographics, evolving social trends (including any shifts in consumer tastes towards small-batch craft alcohol, lower or no alcohol, or other alternative products), changes in travel, holiday or leisure activity patterns, weather conditions, health concerns, pandemics and/or a downturn in economic conditions;

• changes in the domestic and international tax environment, including as a result of the OECD Base Erosion and Profit Shifting Initiative and EU anti-tax abuse measures, leading to uncertainty around the application of existing and new tax laws and unexpected tax exposures;

• the effects of climate change, or legal, regulatory or market measures intended to address climate change, on Diageo’s business or operations, including on the cost and supply of water;

• changes in the cost of production, including as a result of increases in the cost of commodities, labour and/or energy or as a result of inflation;

• any litigation or other similar proceedings (including with tax, customs, competition, environmental, anti-corruption or other regulatory authorities), including litigation directed at the beverage alcohol industry generally or at Diageo in particular;

• legal and regulatory developments, including changes in regulations relating to production, distribution, importation, marketing, advertising, sales, pricing, labelling, packaging, product liability, antitrust, labour, compliance and control systems, environmental issues and/or data privacy;

• the consequences of any failure by Diageo or its associates to comply with anti-corruption, sanctions, trade restrictions or similar laws and regulations, or any failure of Diageo’s related internal policies and procedures to comply with applicable law or regulation;

• the consequences of any failure of internal controls, including those affecting compliance with existing or new accounting and/or disclosure requirements;

• Diageo’s ability to maintain its brand image and corporate reputation or to adapt to a changing media environment;

• contamination, counterfeiting or other circumstances which could harm the level of customer support for Diageo’s brands and adversely impact its sales;

• increased competitive product and pricing pressures, including as a result of actions by increasingly consolidated competitors or increased competition from regional and local companies, that could negatively impact Diageo’s market share, distribution network, costs and/or pricing;

• any disruption to production facilities, business service centres or information systems, including as a result of cyber attacks;

• increased costs for, or shortages of, talent, as well as labour strikes or disputes;

• Diageo’s ability to derive the expected benefits from its business strategies, including in relation to expansion in emerging markets, acquisitions and/or disposals, cost savings and productivity initiatives or inventory forecasting;

• fluctuations in exchange rates and/or interest rates, which may impact the value of transactions and assets denominated in other currencies, increase Diageo’s cost of financing or otherwise adversely affect Diageo’s financial results;

• movements in the value of the assets and liabilities related to Diageo’s pension plans;

• Diageo’s ability to renew supply, distribution, manufacturing or licence agreements (or related rights) and licences on favourable terms, or at all, when they expire; or

• any failure by Diageo to protect its intellectual property rights.

All oral and written forward-looking statements made on or after the date of this document and attributable to Diageo are expressly qualified in their entirety by the above factors and by the principal risks set out in the ‘Risk factors’ section in Diageo’s Annual Report on Form 20-F, filed with the Securities and Exchange Commission on August 5, 2019. Any forward-looking statements made by or on behalf of Diageo speak only as of the date they are made. Diageo does not undertake to update forward-looking statements to reflect any changes in Diageo’s expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. The reader should, however, consult any additional disclosures that Diageo may make in any documents which it publishes and/or files with the U.S. Securities and Exchange Commission (SEC). All readers, wherever located, should take note of these disclosures.

This document includes names of Diageo’s products, which constitute trademarks or trade names which Diageo owns, or which others own and license to Diageo for use. All rights reserved. ^© Diageo plc 2020.

The information in this document does not constitute an offer to sell or an invitation to buy shares in Diageo plc or an invitation or inducement to engage in any other investment activities.

This document may include information about Diageo’s target debt rating. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organisation. Each rating should be evaluated independently of any other rating.

Past performance cannot be relied upon as a guide to future performance.

Filings Assurance Committee

The Filings Assurance Committee of the company, which is chaired by the Chief Financial Officer and includes the Chief Executive, is responsible for implementing and monitoring the processes which are designed to ensure that the company complies with relevant UK, US and other regulatory reporting and filing provisions, including those imposed by the U.S. Sarbanes-Oxley Act of 2002 or derived from it. As at the end of the period covered by the Form 20-F for the year ended 30 June 2020, the Filings Assurance Committee of the company, with the participation of the Chief Executive and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of disclosure controls and procedures. These are defined as those controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarised and reported within the time periods specified in the Commission’s rules and forms and include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports of the company is accumulated and communicated to management, including the Chief Executive and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the date of the evaluation, the Chief Executive and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the company files or submits under the Exchange Act is recorded, processed, summarised and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to the management of the company, including the company’s Chief Executive and the Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

Management’s report on internal control over financial reporting

Management, under the supervision of the Chief Executive and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over the group’s financial reporting.

Diageo’s internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the EU and IFRS as issued by the International Accounting Standards Board (IASB); provide reasonable assurance that receipts and expenditures are made only in accordance with authorisation of management and the directors of the company; and provide reasonable assurance regarding prevention or timely detection of any unauthorised acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Management has assessed the effectiveness of Diageo’s internal control over financial reporting (as defined in Rules 13(a)-13(f) and 15(d)-15(f) under the United States Securities Exchange Act of 1934) based on the framework in the document ‘Internal Control – Integrated Framework’, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on this assessment, management concluded that, as at 30 June 2020, internal control over financial reporting was effective.

Any internal control framework, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of controls and procedures and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, who also audit the group’s consolidated financial statements, has audited the effectiveness of the group’s internal control over financial reporting, and has issued an unqualified report thereon, which is included below.

Changes in internal control over financial reporting

During the year ended June 30, 2020, there were no changes in internal control over financial reporting that have materially affected or are reasonably likely to materially affect the effectiveness of internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Diageo plc

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheet of Diageo plc and its subsidiaries (collectively, the “Company”) as of 30 June 2020 and 2019, and the related consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and the consolidated statement of cash flows for each of the three years in the period ended 30 June 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of 30 June 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of 30 June 2020 and 2019 , and the results of its operations and its cash flows for each of the three years in the period ended 30 June 2020 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of 30 June 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in note 1f to the consolidated financial statements, the Company changed the manner in which it accounted for leases in the period ended 30 June 2020 due to the adoption of IFRS 16.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on internal control over financial reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Impairment assessment of indefinite-lived brand intangible assets and goodwill

As described in note 9 to the consolidated financial statements, the Company’s consolidated indefinite-lived brand intangibles balance and goodwill balance as at 30 June 2020 were £7,755 million and £1,912 million respectively. Management conducts impairment tests for indefinite-lived brand intangibles and goodwill annually, or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. The individual brands, other intangibles with indefinite useful lives and their associated tangible fixed assets are aggregated and tested as separate cash-generating units. Goodwill is attributed to each of the markets. Separate tests are carried out for each cash-generating unit and for each of the markets. The impairment test compares the net carrying value of the cash-generating unit for indefinite-lived brand intangibles and market for goodwill with the recoverable amount. Value in use and fair value less costs of disposal were both considered for these reviews and any impairment charge was based on these. The tests are dependent on management’s estimates in respect of the forecasting of future cash flows, the discount rates applicable to the future cash flows and what expected growth rates are reasonable. Judgment is required in determining the cash-generating units. The value in use calculations are based on discounted forecast cash flows using the assumption that cash flows continue in perpetuity at the terminal growth rate of each country or region. Cash flows are

extrapolated up to five years using expected growth rates in line with management’s best estimates. Growth rates reflect expectations of sales growth, operating costs and margin, based on past experience and external sources of information. Where applicable, multiple cash flow scenarios were populated to predict the potential outcome, considering the increased risk of uncertainty around the duration and severity of the Covid-19 pandemic in the different markets. The five-year forecast period is extended by up to an additional ten years at acquisition date for some indefinite-lived intangible assets and goodwill when management believes that this period is justified by the maturity of the market and expects to achieve growth in excess of the terminal growth rate driven by Diageo’s sales, marketing and distribution expertise. Cash flows beyond the five-year period are projected using steady or progressively declining growth rates. These rates do not exceed the annual growth rate of the real gross domestic product (GDP) aggregated with the long-term annual inflation rate of the country or region. Cash flows for the subsequent years after the forecast period are extrapolated based on a terminal growth rate which does not exceed the long-term annual inflation rate of the country or region. The determination of discounted future cash flows include significant management judgments and assumptions, including sales growth, operating costs, margin, discount rates and terminal growth rates.

The principal consideration for our determination that performing procedures related to the impairment assessment of indefinite-lived brand intangible assets and goodwill is a critical audit matter are there was significant judgment made by management when developing its assessment of the recoverable amount for the cash-generating units. This in turn led to a high degree of auditor judgment, subjectivity and effort in evaluating management’s significant assumptions, including future cash flows, discount rates, and expected growth rates. In addition, the audit effort involved the use of professionals with specialised skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill and indefinite-lived brand intangible assets impairment tests, including controls over the determination of recoverable amounts. These procedures also included, among others, testing management’s process for determining the recoverable amount of goodwill and indefinite-lived brand intangible assets, evaluating the appropriateness of the methodology used in the impairment models, testing the completeness, accuracy, and relevance of underlying data used in the models, and evaluating the significant assumptions used by management, including the forecasted cash flows, discount rates, expected growth rates, as well as management’s sensitivities and related financial statement disclosures. Evaluating the reasonableness of management’s assumptions involved 1) evaluating key market-related assumptions (including the growth rates, discount rate and management’s estimates of the duration and severity of the impact of the Covid-19 pandemic on cash flows) used in the models to external data, 2) performing a retrospective comparison of forecasted cash flows to actual past performance and previous forecasts, 3) performing sensitivity analyses, and 4) using professionals with specialised skill and knowledge to assist in the evaluation of the discount rates.

Taxation - Provisions for tax uncertainties

As described in note 7 and note 18 to the consolidated financial statements, the Company has a number of ongoing tax audits worldwide for which provisions are recognised based on management’s best estimates and judgments concerning the ultimate outcome. As at 30 June 2020 the current tax asset of £190 million and tax liability of £246 million includes £189 million of provisions for tax uncertainties. The Company operates in a large number of markets with complex tax and legislative regimes that are open to subjective interpretation. Management is required to estimate the amount that should be recognised as a tax liability or tax asset in many countries which are subject to tax audits which by their nature are often complex and can take several years to resolve. Tax provisions are based on management’s judgment and interpretation of country specific tax law and the likelihood of settlement. As disclosed by management, the actual tax liabilities could differ from the provision for tax uncertainties and in such event the Company would be required to make an adjustment in a subsequent period which could have a material impact on the Company’s profit for the year.

The principal consideration for our determination that performing procedures related to the provision for tax uncertainties is a critical audit matter are there was significant judgement made by management in determining the provisions for tax uncertainties, including a high degree of estimation uncertainty due to the number and complexity of tax laws, frequency of tax audits and potential for adjustments which could have a material impact on the Company’s profit for the year as a result of such audits. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the timely identification and accurate measurement of provisions for tax uncertainties. Also, the evaluation of audit evidence related to the provisions for tax uncertainties required significant auditor judgment as the nature of the evidence is often subjective, and the audit effort involved the use of professionals with specialised skill and knowledge to assist in evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification and recognition of the liabilities for uncertain tax positions, and controls addressing completeness of the uncertain tax positions, as well as controls over measurement of the liabilities. These procedures also included, among others, (i) testing the information used in the calculation of the liability for uncertain tax positions; (ii) testing the calculation of the liability for

uncertain tax positions by jurisdiction, including management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained; (iii) testing the completeness of management’s assessment of both the identification of uncertain tax positions and possible outcomes of each uncertain tax position; and (iv) evaluating the status and results of tax audits with the relevant tax authorities and (v) evaluating the sufficiency of the Company’s related disclosures. Professionals with specialised skill and knowledge were used to assist in the evaluation of the completeness and measurement of the Company’s uncertain tax positions, including evaluating the reasonableness of management’s assessment of whether tax positions are more-likely-than-not of being sustained, the application of relevant tax laws, and estimated interest and penalties, as well as evaluating the sufficiency of the Company’s related financial statement disclosures.

Legal contingent liabilities and proceedings

As described in note 18 to the consolidated financial statements, the Company records provisions for the anticipated settlement costs of legal disputes against the Company where it is considered to be probable that a liability exists and a reliable estimate can be made of the likely outcome. The Company discloses where it is possible that a settlement may be reached or it is not possible to make a reliable estimate of the estimated financial effect, but no provision is created.

The principal consideration for our determination that performing procedures related to legal contingent liabilities and proceedings is a critical audit matter are there was significant judgment made by management in assessing the likelihood that a legal dispute will succeed, or a liability will arise, and an estimate to quantify the possible range of any settlement. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing audit procedures and evaluating management’s assessments of the contingencies associated with the disputes.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s evaluation of legal disputes, including controls over determining whether a loss is probable and whether the amount of loss can be reliably estimated, as well as financial statement disclosures. These procedures also included, among others, obtaining and evaluating the letters of audit inquiry with external legal counsel, evaluating the reasonableness of management’s assessment regarding whether it is probable that a liability exists and a reliable estimate can be made of the likely outcome, and evaluating the sufficiency of the Company’s legal disclosures.

/s/PricewaterhouseCoopers LLP

London, United Kingdom

7 August 2020

We have served as the company’s auditor since 2015.

Financial statements and notes on the financial statements

Financial statements

Consolidated income statement

	Notes		Year ended 30 June 2020 £ million			Year ended 30 June 2019 £ million			Year ended 30 June 2018 £ million
Sales		2		17,697			19,294			18,432
Excise duties		3		(5,945	)		(6,427	)		(6,269	)
Net sales		2		11,752			12,867			12,163
Cost of sales		3		(4,654	)		(4,866	)		(4,634	)
Gross profit				7,098			8,001			7,529
Marketing		3		(1,841	)		(2,042	)		(1,882	)
Other operating items		3		(3,120	)		(1,917	)		(1,956	)
Operating profit				2,137			4,042			3,691
Non-operating items		4		(23	)		144			—
Finance income		5		366			442			243
Finance charges		5		(719	)		(705	)		(503	)
Share of after tax results of associates and joint ventures		6		282			312			309
Profit before taxation				2,043			4,235			3,740
Taxation		7		(589	)		(898	)		(596	)
Profit for the year				1,454			3,337			3,144
Attributable to:
Equity shareholders of the parent company				1,409			3,160			3,022
Non-controlling interests				45			177			122
			1,454			3,337			3,144
			million			million			million
Weighted average number of shares
Shares in issue excluding own shares				2,346			2,418			2,484
Dilutive potential ordinary shares				8			10			11
			2,354			2,428			2,495
			pence			pence			pence
Basic earnings per share				60.1			130.7			121.7
Diluted earnings per share				59.9			130.1			121.1

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

7

Financial statements (continued)

Consolidated statement of comprehensive income

	Year ended 30 June 2020 £ million			Year ended 30 June 2019 £ million			Year ended 30 June 2018 £ million
Other comprehensive income
Items that will not be recycled subsequently to the income statement
Net remeasurement of post employment plans
Group		38			33			456
Associates and joint ventures		(14	)		2			2
Non-controlling interests		—			—			1
Tax on post employment plans		(21	)		1			(91	)
	3			36			368
Items that may be recycled subsequently to the income statement
Exchange differences on translation of foreign operations
Group		(104	)		274			(631	)
Associates and joint ventures		82			19			3
Non-controlling interests		(37	)		55			(72	)
Net investment hedges		(227	)		(93	)		91
Exchange loss recycled to the income statement
On translation of foreign operations		4			—			—
Tax on exchange differences - group		4			(19	)		7
Tax on exchange differences - non-controlling interests		—			—			2
Effective portion of changes in fair value of cash flow hedges
Hedge of foreign currency debt of the group		221			180			(64	)
Transaction exposure hedging of the group		(43	)		(86	)		22
Hedges by associates and joint ventures		6			(6	)		(15	)
Commodity price risk hedging of the group		(11	)		(9	)		—
Recycled to income statement - hedge of foreign currency debt of the group		(75	)		(82	)		6
Recycled to income statement - transaction exposure hedging of the group		42			45			(7	)
Recycled to income statement - commodity price risk hedging of the group		8			—			—
Tax on effective portion of changes in fair value of cash flow hedges		(23	)		(11	)		14
Hyperinflation adjustment		(18	)		(22	)		11
Tax on hyperinflation adjustment		4			6			(11	)
		(167	)		251			(644	)
Other comprehensive (loss)/profit, net of tax, for the year		(164	)		287			(276	)
Profit for the year		1,454			3,337			3,144
Total comprehensive income for the year		1,290			3,624			2,868
Attributable to:
Equity shareholders of the parent company		1,282			3,392			2,815
Non-controlling interests		8			232			53
Total comprehensive income for the year		1,290			3,624			2,868

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

8

Financial statements (continued)

Consolidated balance sheet

			30 June 2020						30 June 2019
	Notes		£ million			£ million			£ million			£ million
Non-current assets
Intangible assets		9		11,300						12,557
Property, plant and equipment		10		4,926						4,455
Biological assets				51						34
Investments in associates and joint ventures		6		3,557						3,173
Other investments		12		41						49
Other receivables		14		46						53
Other financial assets		15		686						404
Deferred tax assets		7		119						138
Post employment benefit assets		13		1,111						1,060
							21,837						21,923
Current assets
Inventories		14		5,772						5,472
Trade and other receivables		14		2,111						2,694
Corporate tax receivable		7		190						83
Assets held for sale				—						65
Other financial assets		15		75						127
Cash and cash equivalents		16		3,323						932
							11,471						9,373
Total assets							33,308						31,296
Current liabilities
Borrowings and bank overdrafts		16		(1,995	)					(1,959	)
Other financial liabilities		15		(389	)					(307	)
Share buyback liability		17		—						(26	)
Trade and other payables		14		(3,683	)					(4,202	)
Liabilities held for sale				—						(32	)
Corporate tax payable		7		(246	)					(378	)
Provisions		14		(183	)					(99	)
							(6,496	)					(7,003	)
Non-current liabilities
Borrowings		16		(14,790	)					(10,596	)
Other financial liabilities		15		(393	)					(124	)
Other payables		14		(175	)					(222	)
Provisions		14		(293	)					(317	)
Deferred tax liabilities		7		(1,972	)					(2,032	)
Post employment benefit liabilities		13		(749	)					(846	)
							(18,372	)					(14,137	)
Total liabilities							(24,868	)					(21,140	)
Net assets							8,440						10,156
Equity
Share capital		17		742						753
Share premium				1,351						1,350
Other reserves				2,272						2,372
Retained earnings				2,407						3,886
Equity attributable to equity shareholders of the parent company							6,772						8,361
Non-controlling interests		17					1,668						1,795
Total equity							8,440						10,156

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

9

Financial statements (continued)

These consolidated financial statements have been approved by a duly appointed and authorised committee of the Board of Directors and were signed on its behalf by Ivan Menezes and Kathryn Mikells, Directors and dated 7 August 2020.

10

Financial statements (continued)

Consolidated statement of changes in equity

						Other reserves					Retained earnings/(deficit)
	Share capital £ million			Share premium £ million		Capital redemption reserve £ million		Hedging and exchange reserve £ million			Own shares £ million			Other retained earnings £ million			Total £ million			Equity attributable to parent company shareholders £ million			Non- controlling interests £ million			Total equity £ million
At 30 June 2017		797			1,348		3,146		(453	)		(2,176	)		7,651			5,475			10,313			1,715			12,028
Adoption of IFRS 15		—			—		—		—			—			(89	)		(89	)		(89	)		(2	)		(91	)
Adoption of IFRS 9 by associate		—			—		—		(3	)		—			3			3			—			—			—
Profit for the year		—			—		—		—			—			3,022			3,022			3,022			122			3,144
Other comprehensive (loss)/income		—			—		—		(574	)		—			367			367			(207	)		(69	)		(276	)
Total comprehensive (loss)/income for the year		—			—		—		(574	)		—			3,389			3,389			2,815			53			2,868
Employee share schemes		—			—		—		—			32			(7	)		25			25			—			25
Share-based incentive plans		—			—		—		—			—			39			39			39			—			39
Share-based incentive plans in respect of associates		—			—		—		—			—			4			4			4			—			4
Tax on share-based incentive plans		—			—		—		—			—			(2	)		(2	)		(2	)		—			(2	)
Shares issued		—			1		—		—			—			—			—			1			—			1
Purchase of non-controlling interests		—			—		—		—			—			(72	)		(72	)		(72	)		70			(2	)
Disposal of non-controlling interests		—			—		—		—			—			—			—			—			(1	)		(1	)
Purchase of right issue of non-controlling interests		—			—		—		—			—			(5	)		(5	)		(5	)		31			26
Change in fair value of put option		—			—		—		—			—			7			7			7			—			7
Share buyback programme		(17	)		—		17		—			—			(1,507	)		(1,507	)		(1,507	)		—			(1,507	)
Dividends paid		—			—		—		—			—			(1,581	)		(1,581	)		(1,581	)		(101	)		(1,682	)
At 30 June 2018		780			1,349		3,163		(1,030	)		(2,144	)		7,830			5,686			9,948			1,765			11,713
Profit for the year		—			—		—		—			—			3,160			3,160			3,160			177			3,337
Other comprehensive income		—			—		—		212			—			20			20			232			55			287
Total comprehensive income for the year		—			—		—		212			—			3,180			3,180			3,392			232			3,624
Employee share schemes		—			—		—		—			118			(49	)		69			69			—			69
Share-based incentive plans		—			—		—		—			—			49			49			49			—			49
Share-based incentive plans in respect of associates		—			—		—		—			—			3			3			3			—			3
Tax on share-based incentive plans		—			—		—		—			—			20			20			20			—			20
Shares issued		—			1		—		—			—			—			—			1			—			1
Purchase of non-controlling interests (note 8)		—			—		—		—			—			(694	)		(694	)		(694	)		(90	)		(784	)
Non-controlling interest in respect of new subsidiary		—			—		—		—			—			—			—			—			2			2
Change in fair value of put option		—			—		—		—			—			(3	)		(3	)		(3	)		—			(3	)
Share buyback programme		(27	)		—		27		—			—			(2,801	)		(2,801	)		(2,801	)		—			(2,801	)
Dividends paid		—			—		—		—			—			(1,623	)		(1,623	)		(1,623	)		(114	)		(1,737	)
At 30 June 2019		753			1,350		3,190		(818	)		(2,026	)		5,912			3,886			8,361			1,795			10,156
Profit for the year		—			—		—		—			—			1,409			1,409			1,409			45			1,454
Other comprehensive loss		—			—		—		(116	)		—			(11	)		(11	)		(127	)		(37	)		(164	)
Total comprehensive (loss)/income for the year		—			—		—		(116	)		—			1,398			1,398			1,282			8			1,290
Employee share schemes		—			—		—		—			90			(36	)		54			54			—			54
Share-based incentive plans		—			—		—		—			—			2			2			2			—			2
Share-based incentive plans in respect of associates		—			—		—		—			—			4			4			4			—			4
Tax on share-based incentive plans		—			—		—		—			—			1			1			1			—			1
Share based payments and purchase of treasury shares in respect of subsidiaries		—			—		—		—			—			(1	)		(1	)		(1	)		—			(1	)
Shares issued		—			1		—		—			—			—			—			1			—			1
Transfers		—			—		—		5			—			(5	)		(5	)		—			—			—
Purchase of non-controlling interests (note 8)		—			—		—		—			—			(39	)		(39	)		(39	)		(23	)		(62	)
Non-controlling interest in respect of new subsidiary		—			—		—		—			—			—			—			—			5			5
Change in fair value of put option		—			—		—		—			—			9			9			9			—			9
Share buyback programme		(11	)		—		11		—			—			(1,256	)		(1,256	)		(1,256	)		—			(1,256	)
Dividends declared		—			—		—		—			—			(1,646	)		(1,646	)		(1,646	)		(117	)		(1,763	)
At 30 June 2020		742			1,351		3,201		(929	)		(1,936	)		4,343			2,407			6,772			1,668			8,440

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

11

Financial statements (continued)

Consolidated statement of cash flows

			Year ended 30 June 2020						Year ended 30 June 2019						Year ended 30 June 2018
	Notes		£ million			£ million			£ million			£ million			£ million			£ million
Cash flows from operating activities
Profit for the year				1,454						3,337						3,144
Taxation				589						898						596
Share of after tax results of associates and joint ventures				(282	)					(312	)					(309	)
Net finance charges				353						263						260
Non-operating items				23						(144	)					—
Operating profit							2,137						4,042						3,691
Increase in inventories				(366	)					(434	)					(271	)
Decrease/(increase) in trade and other receivables				523						11						(202	)
(Decrease)/increase in trade and other payables and provisions				(485	)					201						314
Net increase in working capital							(328	)					(222	)					(159	)
Depreciation, amortisation and impairment				1,839						374						493
Dividends received				4						168						159
Post employment payments less amounts included in operating profit				(109	)					(121	)					(108	)
Other items				(14	)					64						10
							1,720						485						554
Cash generated from operations							3,529						4,305						4,086
Interest received				185						216						167
Interest paid				(493	)					(468	)					(418	)
Taxation paid				(901	)					(805	)					(751	)
							(1,209	)					(1,057	)					(1,002	)
Net cash inflow from operating activities							2,320						3,248						3,084
Cash flows from investing activities
Disposal of property, plant and equipment and computer software				14						32						40
Purchase of property, plant and equipment and computer software				(700	)					(671	)					(584	)
Movements in loans and other investments				—						(1	)					(17	)
Sale of businesses and brands		8		11						426						4
Acquisition of businesses		8		(130	)					(56	)					(594	)
Net cash outflow from investing activities							(805	)					(270	)					(1,151	)
Cash flows from financing activities
Share buyback programme		17		(1,282	)					(2,775	)					(1,507	)
Proceeds from issue of share capital				1						1						1
Net sale of own shares for share schemes				54						50						8
Dividends paid to non-controlling interests				(111	)					(112	)					(80	)
Purchase of shares of non-controlling interests		8		(62	)					(784	)					—
Rights issue proceeds from non-controlling interests				—						—						26
Proceeds from bonds		16		5,188						2,766						2,612
Repayment of bonds		16		(820	)					(1,168	)					(1,571	)
Net movements in other borrowings				(285	)					721						(26	)
Equity dividends paid		17		(1,646	)					(1,623	)					(1,581	)
Net cash inflow/(outflow) from financing activities							1,037						(2,924	)					(2,118	)
Net increase/(decrease) in net cash and cash equivalents		16					2,552						54						(185	)
Exchange differences							(120	)					(26	)					(39	)
Net cash and cash equivalents at beginning of the year							721						693						917
Net cash and cash equivalents at end of the year							3,153						721						693
Net cash and cash equivalents consist of:
Cash and cash equivalents		16					3,323						932						874
Bank overdrafts		16					(170	)					(211	)					(181	)
							3,153						721						693

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

12

Financial statements (continued)

Accounting information and policies

Introduction

This section describes the basis of preparation of the consolidated financial statements and the group’s accounting policies that are applicable to the financial statements as a whole. Accounting policies, critical accounting estimates and judgements that are specific to a note are included in the note to which they relate. This section also explains new accounting standards, amendments and interpretations, that the group has adopted in the current financial year or will adopt in subsequent years.

1. Accounting information and policies

(a) Basis of preparation

The consolidated financial statements are prepared in accordance with the Companies Act 2006 and International Financial Reporting Standards (IFRS) and related interpretations as adopted for use in the European Union (EU) and as issued by the International Accounting Standards Board (IASB). IFRS as adopted by the EU differs in certain respects from IFRS as issued by the IASB. The differences have no impact on the group’s consolidated financial statements for the years presented. The consolidated financial statements are prepared on a going concern basis under the historical cost convention, unless stated otherwise in the relevant accounting policy.

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 year. Actual results could differ from those estimates.

(b) Going concern

The potential financial impact of the Covid-19 pandemic has been modelled in our cash flow projections and stress tested by including several severe but plausible downside scenarios which are linked to our principal risks. In our downside Covid-19 scenario, we have considered the key impacts of the pandemic for each region including the potential restrictions on the sale of our products in both on-trade and off-trade channels. We have then considered the expected duration of those restrictions, as well as a forecast for the length of time to recovery (a return to 2019 volumes), based on industry projections. As a result of these factors, in our severe but plausible scenarios, we do not anticipate that the on-trade business recovers to volumes experienced in the year ending 30 June 2019 within the next 18 month period. Even with these negative sensitivities for each region taken into account, the group’s cash position is still considered to remain strong, as we have protected our liquidity by increasing the level of committed facilities and accelerating certain bond issuance programmes. Mitigating actions, should they be required, are all within management’s control and could include reduced advertising and promotion spend, dividend cash payments, non-essential overheads and non-committed capital expenditure in the next 12 months. Having considered the outcome of these assessments, it is deemed appropriate to prepare the consolidated financial statements on a going concern basis.

(c) Consolidation

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. A subsidiary is an entity controlled by Diageo plc. The group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Where the group has the ability to exercise joint control over an entity but has rights to specified assets and obligations for liabilities of that entity, the entity is included on the basis of the group’s rights over those assets and liabilities.

13

Financial statements (continued)

(d) 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 non-sterling 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. Exchange differences arising on the retranslation to closing rates are taken to the exchange reserve.

Assets and liabilities are translated at closing rates. Exchange differences arising on the retranslation at closing rates of the opening balance sheets of overseas entities are taken to the exchange reserve, as are exchange differences arising on 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 the exchange reserve. Gains and losses accumulated in the exchange reserve are recycled to the income statement when the foreign operation is sold. Other exchange differences are taken to the income statement. Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction.

The principal foreign exchange rates used in the translation of financial statements for the three years ended 30 June 2020, expressed in US dollars and euros per £1, were as follows:

	2020		2019		2018
US dollar
Income statement and cash flows(i)		1.26		1.29		1.35
Assets and liabilities(ii)		1.23		1.27		1.32
Euro
Income statement and cash flows(i)		1.14		1.13		1.13
Assets and liabilities(ii)		1.09		1.12		1.13

(i) Weighted average rates

(ii) Year end rates

The group uses foreign exchange hedges to mitigate the effect of exchange rate movements. For further information see note 15.

(e) Critical accounting estimates and judgements

Details of critical estimates and judgements which the directors consider could have a significant impact upon the financial statements are set out in the related notes as follows:

• Exceptional items – management judgement whether exceptional or not – page 213

• Taxation – management judgement of whether a provision is required and management estimate of amount of corporate tax payable or receivable, the recoverability of deferred tax assets and expectation on manner of recovery of deferred taxes – pages 219 and 220

• Brands, goodwill and other intangibles – management judgement of the assets to be recognised and synergies resulting from an acquisition. Management judgement and estimate are required in determining future cash flows and appropriate applicable assumptions to support the intangible asset value – page 228

• Post employment benefits – management judgement in determining whether a surplus can be recovered and management estimate in determining the assumptions in calculating the liabilities of the funds – page 239

• Contingent liabilities and legal proceedings – management judgement in assessing the likelihood of whether a liability will arise and an estimate to quantify the possible range of any settlement and significant unprovided tax matters where maximum exposure is provided for each – page 269

14

Financial statements (continued)

Venezuela is a hyper-inflationary economy where the government maintains a regime of strict currency controls with multiple foreign currency rate systems. Access to US dollars on these exchange systems is very limited. The foreign currency denominated transactions and balances of the group’s Venezuelan operations are translated into the local functional currency (Venezuelan bolivar) at the rate they are expected to be settled, applying the most appropriate official exchange rate (DICOM). For consolidation purposes, the group converts its Venezuelan operations using management’s estimate of the exchange rate considering forecast inflation and the most appropriate official exchange rate. The exchange rate used to translate the results of the group’s Venezuelan operations was VES/£ 10,024,865 for the year ended 30 June 2020 (2019—VES/£ 403,700). Movement in the price index for the year ended 30 June 2020 was 2,464% (2019—1,087,262%). The inflation rate used by the group is provided by an independent valuer, because no reliable, official published rate is available that is representative of the situation in Venezuela.

The following table presents the contribution of the group’s Venezuelan operations to the consolidated income statement, cash flow statement and net assets for the year ended 30 June 2020 and 30 June 2019 and with the amounts that would have resulted if the official DICOM exchange rate had been applied:

	Year ended 30 June 2020				Year ended 30 June 2019
	At estimated exchange rate		At DICOM exchange rate		At estimated exchange rate		At DICOM exchange rate
	10,024,865 VES/£		252,558 VES/£		403,700 VES/£		8,553 VES/£
	£ million		£ million		£ million		£ million
Net sales		—		3		—		3
Operating profit		—		10		—		2
Other finance income - hyperinflation adjustment		6		222		10		455
Net cash inflow from operating activities		—		6		—		5
Net assets		48		1,893		56		2,643

(f) New accounting standards and interpretations

The following amendments to the accounting standards, issued by the IASB which have been endorsed by the EU, have been adopted by the group from 1 July 2019 with no impact on the group’s consolidated results, financial position or disclosures:

• Amendments to IAS 28 - Long-term Interests in Associates and Joint Ventures

• Amendments to IFRS 9 - Prepayment Features with Negative Compensation

• Improvements to IFRS 3 and IFRS 11 - Business combinations and Joint arrangements - Accounting for previously held interests

• Improvements to IAS 12 - Income taxes - Accounting for income tax consequences of payments on financial instruments that are classified as equity

• Improvements to IAS 23 - Borrowing costs on completed qualifying assets

The following amendments and standards issued by the IASB which have been endorsed by the EU, have been adopted by the group:

IFRS 15 – Revenue from contracts with customers. The group adopted IFRS 15 from 1 July 2017 by applying the modified retrospective transition method, recognising the cumulative effect of initially applying IFRS 15 as an adjustment to the balance of retained earnings as at 1 July 2017. Retained earnings for the year ended 30 June 2017 was not restated.

IFRS 16 – Leases. The group adopted IFRS 16 from 1 July 2019 by applying the modified retrospective method, meaning that the figures, as at, and for the years ended 30 June 2018 and 2019 have not been restated. IFRS 16 replaced existing lease guidance including IAS 17—Leases, IFRIC 4, SIC-15 and SIC-27. Information in respect of the adoption of IFRS 16 is included in note 11.

Amendments to IAS 19 - Plan Amendment, Curtailment or Settlement.The amendment requires the remeasurement of service cost and interest charge for the rest of the period following plan amendments, settlements and curtailments using actuarial assumptions prevailing at the date of these events. The amendment is applicable to Diageo from 1 July 2019 on a prospective basis and has resulted in an additional service cost of £1 million following the remeasurement of the Irish Scheme.

15

Financial statements (continued)

The following amendment and standard, issued by the IASB has not been adopted by the group:

IFRS 17 – Insurance contracts (effective in the year ending 30 June 2022) is ultimately intended to replace IFRS 4.

Based on a preliminary assessment the group believes that the adoption of IFRS 17 will not have a significant impact on its consolidated results or financial position.

Amendments to IFRS 9, IAS 39 and IFRS 7 - Interest rate benchmark reform (phase 1). The amendment provides temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by interbank offered rate (IBOR) reform. The reliefs have the effect that IBOR reform should not generally cause hedge accounting to terminate.

There are a number of other amendments and clarifications to IFRS, effective in future years, which are not expected to significantly impact the group’s consolidated results or financial position.

16

Financial statements (continued)

Results for the year

Introduction

This section explains the results and performance of the group for the three years ended 30 June 2020. Disclosures are provided for segmental information, operating costs, exceptional items, finance income and charges, the group’s share of results of associates and joint ventures, taxation. For associates, joint ventures and taxation, balance sheet disclosures are also provided in this section.

2. Segmental information

Accounting policies

Sales comprise revenue from contracts with customers from the sale of goods, royalties and rents receivable. Revenue from the sale of goods includes excise and other duties which the group pays as principal but excludes duties and taxes collected on behalf of third parties, such as value added tax. Sales are recognised as or when performance obligations are satisfied by transferring control of a good or service to the customer, which is determined considering, among other factors, the delivery terms agreed with customers. For the sale of goods the transfer of control occurs, when the significant risks and rewards of ownership are passed to the customer. Based on the shipping terms agreed with customers, the transfer of control of goods occurs at the time of dispatch for the majority of sales. Where the transfer of control is subsequent to the dispatch of goods, the time between dispatch and receipt by the customer is generally less than 5 days. The group includes in sales the net consideration to which it expects to be entitled. Sales are recognised to the extent that it is highly probable that a significant reversal will not occur. Therefore, sales are stated net of expected price discounts, allowances for customer loyalty and certain promotional activities and similar items. Generally, payment of the transaction price is due within credit terms that are consistent with industry practices, with no element of financing.

Net sales are sales less excise duties. Diageo incurs excise duties throughout the world. In the majority of countries excise duties are effectively a production tax which becomes payable when the product is removed from bonded premises and is not directly related to the value of sales. It is generally not included as a separate item on external invoices; increases in excise duty are not always passed on to the customer and where a customer fails to pay for products received the group cannot reclaim the excise duty. The group therefore recognises excise duty, unless it regards itself as an agent of the regulatory authorities, as a cost to the group.

Advertising costs, point of sale materials and sponsorship payments are charged to marketing in operating profit when the company has a right of access to the goods or services acquired.

Diageo is an international manufacturer and distributor of premium drinks. Diageo also owns a number of investments in associates and joint ventures as set out in note 6.

The segmental information presented is consistent with management reporting provided to the Executive Committee (the chief operating decision maker).

The Executive Committee considers the business principally from a geographical perspective based on the location of third party sales and the business analysis is presented by geographical segment. In addition to these geographical selling segments, a further segment reviewed by the Executive Committee is the International Supply Centre (ISC), which manufactures products for other group companies and includes the production sites in the United Kingdom, Ireland, Italy, Guatemala and Mexico.

Continuing operations also include the Corporate function. Corporate revenues and costs are in respect of central costs, including finance, marketing, corporate relations, human resources and legal, as well as certain information systems, facilities and employee costs that are not allocable to the geographical segments or to the ISC. They also include rents receivable and payable in respect of properties not used by the group in the manufacture, sale or distribution of premium drinks.

Diageo uses shared services operations to deliver transaction processing activities for markets and operational entities. These centres are located in Hungary, Kenya, Colombia, the Philippines and India. The captive business service centers in Budapest and Bangalore also perform certain central finance activities, including elements of financial planning and reporting and treasury. The costs of shared service operations are recharged to the regions.

17

Financial statements (continued)

As part of the annual planning process a budget exchange rate is set each year equal to the prior year’s weighted average rate. This rate is used for management reporting purposes and, in order to ensure a consistent basis on which performance is measured through the year, the prior period results are restated to the budget rate as well. Segmental information for net sales and operating profit before exceptionals are reported on a consistent basis with our management reporting. The adjustments required to retranslate the segmental information to actual exchange rates and to reconcile it to the group’s reported results are shown in the tables below. The comparative segmental information, prior to retranslation, has not been restated at the current year’s budgeted exchange rates but is presented at the budgeted rates for the respective year.

In addition, for management reporting purposes Diageo presents separately the results of acquisitions and disposals completed in the current and prior year from the results of the geographical segments. The impact of acquisitions and disposals on net sales and operating profit is disclosed under the appropriate geographical segments in the following tables at budgeted exchange rates.

(a) Segmental information for the consolidated income statement

	North America £ million			Europe and Turkey £ million			Africa £ million			Latin America and Caribbean £ million			Asia Pacific £ million			ISC £ million			Eliminate inter- segment sales £ million			Total operating segments £ million			Corporate and other £ million			Total £ million
2020
Sales		5,222			4,697			1,911			1,184			4,645			1,343			(1,343	)		17,659			38			17,697
Net sales
At budgeted exchange rates(i)		4,445			2,501			1,300			944			2,253			1,439			(1,341	)		11,541			38			11,579
Acquisitions and disposals		32			10			50			—			1			—			—			93			—			93
ISC allocation		11			60			4			10			12			(98	)		—			(1	)		1			—
Retranslation to actual exchange rates		135			(4	)		(8	)		(46	)		4			2			(2	)		81			(1	)		80
Net sales		4,623			2,567			1,346			908			2,270			1,343			(1,343	)		11,714			38			11,752
Operating profit/(loss)
At budgeted exchange rates(i)		2,007			730			116			254			498			45			—			3,650			(152	)		3,498
Acquisitions and disposals		(1	)		(4	)		—			—			—			—			—			(5	)		—			(5	)
ISC allocation		6			26			2			5			6			(45	)		—			—			—			—
Fair value remeasurement of contingent consideration		(10	)		(4	)		—			7			—			—			—			(7	)		—			(7	)
Fair value remeasurement of biological assets		—			—			—			9			—			—			—			9			—			9
Retranslation to actual exchange rates		32			9			(17	)		(27	)		(3	)		—			—			(6	)		5			(1	)
Operating profit/(loss) before exceptional items		2,034			757			101			248			501			—			—			3,641			(147	)		3,494
Exceptional items		54			(62	)		(145	)		(6	)		(1,198	)		—			—			(1,357	)		—			(1,357	)
Operating profit/(loss)		2,088			695			(44	)		242			(697	)		—			—			2,284			(147	)		2,137
Non-operating items																													(23	)
Net finance charges																													(353	)
Share of after tax results of associates and joint ventures
Moët Hennessy																													285
Other																													(3	)
Profit before taxation																													2,043

18

Financial statements (continued)

	North America £ million		Europe and Turkey £ million			Africa £ million		Latin America and Caribbean £ million		Asia Pacific £ million			ISC £ million			Eliminate inter- segment sales £ million			Total operating segments £ million			Corporate and other £ million			Total £ million
2019
Sales		5,074		5,132			2,235		1,444		5,356			1,739			(1,739	)		19,241			53			19,294
Net sales
At budgeted exchange rates(i)		4,034		2,951			1,529		1,095		2,656			1,843			(1,738	)		12,370			54			12,424
Acquisitions and disposals		88		1			1		1		1			—			—			92			—			92
ISC allocation		11		63			5		15		11			(105	)		—			—			—			—
Retranslation to actual exchange rates		327		(76	)		62		19		20			1			(1	)		352			(1	)		351
Net sales		4,460		2,939			1,597		1,130		2,688			1,739			(1,739	)		12,814			53			12,867
Operating profit/(loss)
At budgeted exchange rates(i)		1,755		972			257		312		671			139			—			4,106			(186	)		3,920
Acquisitions and disposals		29		(1	)		—		—		—			—			—			28			—			28
ISC allocation		13		72			6		32		16			(139	)		—			—			—			—
Retranslation to actual exchange rates		151		(29	)		12		21		16			—			—			171			(3	)		168
Operating profit/(loss) before exceptional items		1,948		1,014			275		365		703			—			—			4,305			(189	)		4,116
Exceptional items		—		(18	)		—		—		(35	)		—			—			(53	)		(21	)		(74	)
Operating profit/(loss)		1,948		996			275		365		668			—			—			4,252			(210	)		4,042
Non-operating items																										144
Net finance charges																										(263	)
Share of after tax results of associates and joint ventures
Moët Hennessy																										310
Other																										2
Profit before taxation																										4,235

19

Financial statements (continued)

	North America £ million			Europe and Turkey £ million		Africa £ million			Latin America and Caribbean £ million			Asia Pacific £ million			ISC £ million			Eliminate inter- segment sales £ million			Total operating segments £ million			Corporate and other £ million			Total £ million
2018
Sales		4,671			5,232		2,083			1,352			5,042			1,457			(1,457	)		18,380			52			18,432
Net sales
At budgeted exchange rates(i)		4,138			2,821		1,467			1,064			2,555			1,512			(1,425	)		12,132			48			12,180
Acquisitions and disposals		50			—		—			—			—			—			—			50			—			50
ISC allocation		11			53		4			11			8			(87	)		—			—			—			—
Retranslation to actual exchange rates		(83	)		58		20			(6	)		(60	)		32			(32	)		(71	)		4			(67	)
Net sales		4,116			2,932		1,491			1,069			2,503			1,457			(1,457	)		12,111			52			12,163
Operating profit/(loss)
At budgeted exchange rates(i)		1,925			941		180			298			588			112			—			4,044			(160	)		3,884
Acquisitions and disposals		4			—		—			—			—			—			—			4			—			4
ISC allocation		14			67		5			14			12			(112	)		—			—			—			—
Retranslation to actual exchange rates		(61	)		20		6			(4	)		(32	)		—			—			(71	)		2			(69	)
Operating profit/(loss) before exceptional items		1,882			1,028		191			308			568			—			—			3,977			(158	)		3,819
Exceptional items		—			—		(128	)		—			—			—			—			(128	)		—			(128	)
Operating profit/(loss)		1,882			1,028		63			308			568			—			—			3,849			(158	)		3,691
Non-operating items																												—
Net finance charges																												(260	)
Share of after tax results of associates and joint ventures
Moët Hennessy																												305
Other																												4
Profit before taxation																												3,740

(i) These items represent the IFRS 8 performance measures for the geographical and ISC segments.

(1) The net sales figures for ISC reported to the Executive Committee primarily comprise inter-segment sales and these are eliminated in a separate column in the above segmental analysis. Apart from sales by the ISC segment to the other operating segments, inter-segmental sales are not material.

(2) The group’s net finance charges are managed centrally and are not attributable to individual operating segments.

(3) Approximately 45% of annual net sales occurred in the last four months of the calendar year 2019.

(b) Other segmental information

	North America £ million			Europe and Turkey £ million			Africa £ million			Latin America and Caribbean £ million			Asia Pacific £ million			ISC £ million			Corporate and other £ million			Total £ million
2020
Capital expenditure		145			24			128			48			59			191			105			700
Depreciation and intangible asset amortisation		(68	)		(37	)		(103	)		(21	)		(59	)		(119	)		(73	)		(480	)
Underlying impairment		—			(7	)		—			(7	)		—			—			—			(14	)
Exceptional impairment of tangible assets		—			—			(139	)		—			(1	)		—			—			(140	)
Exceptional impairment of intangible assets		—			—			—			—			(1,205	)		—			—			(1,205	)
2019
Capital expenditure		150			32			160			48			40			197			44			671
Depreciation and intangible asset amortisation		(51	)		(18	)		(81	)		(13	)		(42	)		(110	)		(59	)		(374	)
2018
Capital expenditure		132			22			163			44			44			131			48			584
Depreciation and intangible asset amortisation		(44	)		(20	)		(77	)		(7	)		(42	)		(110	)		(68	)		(368	)
Exceptional impairment of tangible assets		—			—			(35	)		—			—			—			—			(35	)
Exceptional impairment of intangible assets		—			—			(90	)		—			—			—			—			(90	)

20

Financial statements (continued)

(c) Category and geographical analysis

	Category analysis										Geographic analysis
	Spirits £ million		Beer £ million		Ready to drink £ million		Other £ million		Total £ million		Great Britain £ million		United States £ million		Nether- lands £ million		India £ million		Rest of World £ million		Total £ million
2020
Sales(i)		14,158		2,342		966		231		17,697		1,684		4,839		62		2,783		8,329		17,697
Non-current assets(ii), (iii)												1,911		5,028		2,661		2,758		7,563		19,921
2019
Sales(i)		15,283		2,758		945		308		19,294		1,706		4,724		70		3,236		9,558		19,294
Non-current assets(ii), (iii)												1,637		4,662		2,525		3,829		7,668		20,321
2018
Sales(i)		14,605		2,647		854		326		18,432		1,630		4,310		63		3,086		9,343		18,432
Non-current assets(ii), (iii)												1,717		4,221		2,367		3,688		7,792		19,785

(i) The geographical analysis of sales is based on the location of third party customers.

(ii) The geographical analysis of non-current assets is based on the geographical location of the assets and comprises intangible assets, property, plant and equipment, biological assets, investments in associates and joint ventures, other investments and non-current other receivables.

(iii) The management information provided to the chief operating decision maker does not include an analysis of assets and liabilities by category and therefore is not disclosed.

3. Operating costs

	2020 £ million			2019 £ million			2018 £ million
Excise duties		5,945			6,427			6,269
Cost of sales		4,654			4,866			4,634
Marketing		1,841			2,042			1,882
Other operating items		3,120			1,917			1,956
	15,560			15,252			14,741
Comprising:
Excise duties
Great Britain		930			898			853
United States		585			587			548
India		1,927			2,202			2,094
Other		2,503			2,740			2,774
Increase in inventories		(275	)		(446	)		(296	)
Raw materials and consumables		2,842			3,007			3,052
Marketing		1,841			2,042			1,882
Other external charges		2,044			2,285			1,849
Staff costs		1,404			1,580			1,509
Depreciation, amortisation and impairment		1,839			374			493
Gains on disposal of properties		(2	)		(5	)		(9	)
Net foreign exchange losses/(gains)		15			(7	)		6
Other operating income		(93	)		(5	)		(14	)
	15,560			15,252			14,741

(a) Other external charges

Other external charges include research and development expenditure in respect of new drinks products and package design of £34 million (2019 – £35 million; 2018 – £36 million) and maintenance and repairs of £105 million (2019 – £103 million; 2018 – £117 million).

21

Financial statements (continued)

(b) Auditor fees

Other external charges include the fees of the principal auditor of the group, PricewaterhouseCoopers LLP and its affiliates (PwC) and are analysed below.

	2020 £ million		2019 £ million		2018 £ million
Audit of these financial statements		5.3		3.8		3.3
Audit of financial statements of subsidiaries		3.6		3.4		3.3
Audit related assurance services(i)		2.4		1.6		1.6
Total audit fees (Audit fees)		11.3		8.8		8.2
Other services relevant to taxation (Tax fees)		—		—		0.1
Other assurance services (Audit related fees)(ii)		0.8		0.7		0.6
All other non-audit fees (All other fees)		—		0.2		1.0
		12.1		9.7		9.9

(i) Audit related assurance services are in respect of reporting under section 404 of the US Sarbanes-Oxley Act and the review of the interim financial information.

(ii) Other assurance services comprise the aggregate fees for assurance and related services that are in respect of the performance of the audit or review of the financial statements and are not reported under ‘total audit fees’.

(1) Disclosure requirements for auditor fees in the United States are different from those required in the United Kingdom. The terminology by category required in the United States is disclosed in brackets in the above table. All figures are the same for the disclosures in the United Kingdom and the United States apart from £0.4 million (2019 – £0.4 million; 2018 – £0.4 million) of the cost in respect of the review of the interim financial information which would be included in audit related fees in the United States rather than audit fees.

Audit services provided by firms other than PwC for the year ended 30 June 2020 were £0.1 million (2019 – £0.1 million; 2018 – £0.1 million). PwC fees for audit services in respect of employee pension plans were £0.3 million for the year ended 30 June 2020 (2019 – £0.3 million; 2018 – £0.3 million).

(c) Staff costs and average number of employees

	2020 £ million		2019 £ million		2018 £ million
Aggregate remuneration
Wages and salaries		1,251		1,344		1,272
Share-based incentive plans		3		50		40
Employer’s social security		79		96		95
Employer’s pension
Defined benefit plans		37		61		73
Defined contribution plans		24		19		18
Other post employment plans		10		10		11
		1,404		1,580		1,509

22

Financial statements (continued)

The average number of employees on a full time equivalent basis (excluding employees of associates and joint ventures) was as follows:

	2020		2019		2018
North America		2,466		2,410		2,406
Europe and Turkey		3,350		3,609		3,747
Africa		4,003		4,338		4,625
Latin America and Caribbean		1,549		1,610		2,536
Asia Pacific		6,559		7,038		8,008
ISC		4,908		4,919		4,227
Corporate and other		4,940		4,496		4,368
		27,775		28,420		29,917

At 30 June 2020 the group had, on a full time equivalent basis, 27,788 (2019 – 28,150; 2018 – 29,362) employees. The average number of employees of the group, including part time employees, for the year was 28,490 (2019 – 29,402; 2018 – 30,761).

(d) Exceptional operating items

Included in other operating items are the following:

	2020 £ million			2019 £ million		2018 £ million
Staff costs
Guaranteed minimum pension equalisation charge		—			21		—
Other external charges		95			53		—
Other operating income		(83	)		—		—
Increase in inventories		—			—		3
Depreciation, amortisation and impairment
Brand, goodwill, tangible and other assets impairment		1,345			—		125
Total exceptional operating items (note 4)		1,357			74		128

4. Exceptional items

Accounting policies

Critical accounting judgements Exceptional items are those that in management’s judgement need to be disclosed separately. Such items are included within the income statement caption to which they relate. It is believed that separate disclosure of exceptional items and the classification between operating and non-operating further helps investors to understand the performance of the group.

Operating items Exceptional operating items are those that are considered to be material and unusual or non-recurring in nature and are part of the operating activities of the group such as impairment of intangible assets and fixed assets, indirect tax settlements, property disposals and changes in post employment plans.

Non-operating items Gains and losses on the sale of businesses, brands or distribution rights, step up gains and losses that arise when an investment becomes an associate or an associate becomes a subsidiary and other material, unusual non-recurring items, that are not in respect of the production, marketing and distribution of premium drinks, are disclosed as non-operating exceptional items below operating profit in the consolidated income statement.

Taxation items Exceptional current and deferred tax items comprising material unusual non-recurring items that impact taxation. Examples include direct tax provisions and settlements in respect of prior years and the remeasurement of deferred tax assets and liabilities following tax rate changes.

23

Financial statements (continued)

	2020 £ million			2019 £ million			2018 £ million
Exceptional operating items
Brand, goodwill, tangible and other assets impairment (a)		(1,345	)		—			(128	)
Donations (b (i))		(89	)		—			—
Obsolete inventories (b (ii))		(30	)		—			—
Substitution drawback (b (iii))		83			—			—
Indirect tax in Korea (c)		24			(35	)		—
Guaranteed minimum pension equalisation (d)		—			(21	)		—
French tax audit penalty (note 7 (b) (ii))		—			(18	)		—
		(1,357	)		(74	)		(128	)
Non-operating items
Step acquisitions (e)		8			—			—
Sale of businesses and brands
United National Breweries (f)		(32	)		(9	)		—
Loss on disposal of associate (g)		(1	)		—			—
Portfolio of 19 brands (h)		2			155			—
USL wine business (i)		—			(2	)		—
		(23	)		144			—
French tax audit interest (note 7 (b) (ii))		—			(9	)		—
Exceptional items before taxation		(1,380	)		61			(128	)
Items included in taxation (note 7 (b))		154			(39	)		203
Total exceptional items		(1,226	)		22			75
Attributable to:
Equity shareholders of the parent company		(1,157	)		(4	)		75
Non-controlling interests		(69	)		26			—
Total exceptional items		(1,226	)		22			75

(a) Value in use calculation and fair value less costs of disposal methodologies were both considered to assess the recoverable amount of the India cash-generating unit. Having considered the volatility in local share prices, the premiums that businesses controlled by large multinationals trade at and other factors, we assessed a range of fair value less costs of disposal with particular focus on the value a third party may pay for a controlling stake in the current environment. The value in use calculation was above our view of fair value less costs of disposal and was therefore used to determine the recoverable amount of this cash-generating unit. Based on this, in the year ended 30 June 2020, an impairment charge of £655 million in respect of the India cash-generating unit containing the India goodwill was recognised in other operating items. Impairment charges of £78 million in respect of the Old Tavern brand, £38 million in respect of the Bagpiper brand and £1 million in respect of fixed assets in India were also recognised in other operating items. Forecast cash flow assumptions were reduced principally due to the general economic downturn further aggravated by the Covid-19 pandemic, including pandemic related recent regulatory changes, negatively impacting both demand and margins.

An impairment charge of £434 million in respect of the Windsor Premier brand was recognised in other operating items. The forecast cash flow assumptions were reduced principally due to the recent regulatory changes limiting trade spend for wholesalers and venues and the Covid-19 pandemic negatively impacting the challenging whisky category in Korea.

For further information see note 9 (d).

Having considered both value in use and fair value less cost of disposal, an impairment of £84 million in respect of the group’s Nigerian tangible fixed assets was recognised in other operating items. The profit generating ability of the assets were reduced principally due to the deteriorated economic outlook as a result of the combination of the oil price crisis in Nigeria and the Covid-19 pandemic.

24

Financial statements (continued)

An impairment of £55 million in respect of the group’s Ethiopian tangible fixed assets was recognised in other operating items. The forecast cash flow assumptions were reduced principally due to the impact of the recent excise duty increase and the Covid-19 pandemic.

For further information see note 10.

In the year ended 30 June 2018, an impairment charge of £128 million in respect of the Meta brand, Ethiopian tangible fixed assets, associated spare parts reported in inventory and goodwill allocated to the Africa Regional Markets cash-generating unit has been recognised in other operating items.

(b) In line with the group’s accounting policy, given the unusual nature and magnitude of the below items, these are reported as exceptional operating items:

(i) Diageo has launched the “Raising the Bar” programme to support pubs and bars to welcome customers back and recover following the Covid-19 pandemic. The programme includes a commitment of $100 million (£81 million) over a period of up to two years from 1 July 2020, to support qualifying outlets across a limited number of iconic global cities and some regional cities in certain key markets.

Diageo has also provided other forms of support to help the communities and the industry during the Covid-19 pandemic. Supporting packages for bartenders and bar owners and donations of grain neutral spirit to produce hand sanitisers amounted to £8 million in the year ended 30 June 2020.

(ii) In the year ended 30 June 2020, an exceptional charge of £30 million was recognised in respect of obsolete inventories that have been or will be destroyed as a direct consequence of the Covid-19 pandemic. The amount comprises of a £23 million inventory provision and £7 million directly attributable to handling and destruction costs.

(iii) In the year ended 30 June 2020, an estimated benefit of $105 million (£83 million) for substitution drawback claims (net of legal and broker fees of $2 million (£2 million)) previously filed and to be filed with the US Government in relation to prior years was recognised in other operating items. Following a recent court decision and a related legal assessment, the collection of the excise duty benefit has become virtually certain.

(c) In the year ended 30 June 2019, the group has recognised a provision of £35 million for indirect tax in respect of certain channel accounts and regulatory change in Korea in respect of prior years.

An assessment was issued by the Korea Tax Authority in the year ended 30 June 2020 that has resulted in the reversal of the prior year’s provision in the amount of £24 million.

(d) On 26 October 2018, the High Court of Justice of England and Wales issued a judgement in a claim between Lloyds Banking Group Pension Trustees Limited (the claimant) and Lloyds Bank plc (defendant) that UK pension schemes should equalise pension benefits for men and women for the calculation of their guaranteed minimum pension liability. The judgement concluded that the claimant has a duty to amend their pension schemes to equalise benefits and provided comments on the method to be adopted to equalise the benefits. This court ruling impacts the majority of companies with a UK defined benefit pension plan that was in existence prior to 1997. For the Diageo Pension Scheme (DPS) an estimate was made of the impact of equalisation which increased the liabilities of the DPS by £21 million, with a corresponding charge to exceptional operating items.

(e) In the year ended 30 June 2020, Diageo completed the acquisition of Seedlip and Anna Seed 83 and acquired controlling interests in certain Distill Ventures entities. As a result of these entities becoming subsidiaries of the group a gain of £8 million arose, being the difference between the book value of the associates prior to the transaction and their fair value. For further information see note 8 (a).

25

Financial statements (continued)

(f) The disposal of United National Breweries was completed in the year ended 30 June 2020, which has resulted in an aggregate exceptional loss of £32 million, including a £4 million cumulative exchange loss in respect of prior years, recycled from other comprehensive income, and an impairment charge recognised in the period. In the year ended 30 June 2019 the group recognised an exceptional loss of £9 million in respect of the disposal of United National Breweries.

(g) In the year ended 30 June 2020, the disposal of an associate, Equal Parts, LLC resulted in an exceptional loss of £1 million.

(h) In the year ended 30 June 2020, the group has reversed $3 million (£2 million) from provisions in relation to the sale of a portfolio of 19 brands to Sazerac on 20 December 2018. The aggregate consideration for the disposal was $550 million (£435 million) resulting in a profit before taxation of $198 million (£155 million) in the year ended 30 June 2019.

See note 8 (b) for further information.

(i) In the year ended 30 June 2019, the disposal of the Indian wine business has resulted in an exceptional loss of £2 million.

Cash payments and receipts included in net cash inflow from operating activities in respect of exceptional items were as follows:

	2020 £ million			2019 £ million			2018 £ million
French tax audit		(88	)		—			—
Thalidomide		(17	)		(15	)		(13	)
Donation		(7	)		—			—
Substitution drawback		26			—			—
UK transfer pricing settlement		—			—			(143	)
Competition authority investigation in Turkey		—			—			(4	)
Total cash payments		(86	)		(15	)		(160	)

5. Finance income and charges

Accounting policies

Net interest includes interest income and charges in respect of financial instruments and the results of hedging transactions used to manage interest rate risk.

Finance charges directly attributable to the acquisition, construction or production of a qualifying asset, being an asset that necessarily takes a substantial period of time to get ready for its intended use or sale, are added to the cost of that asset. Borrowing costs which are not capitalised are recognised in the income statement based on the effective interest method. All other finance charges are recognised primarily in the income statement in the year in which they are incurred.

Net other finance charges include items in respect of post employment plans, the discount unwind of long-term obligations and hyperinflation charges. The results of operations in hyperinflationary economies are adjusted to reflect the changes in the purchasing power of the local currency of the entity before being translated to sterling.

26

Financial statements (continued)

The impact of derivatives, excluding cash flow hedges that are in respect of commodity risk management or those that are used to hedge the currency risk of highly probable future currency cash flows, is included in interest income or interest charge.

	2020			2019			2018
	£ million			£ million			£ million
Interest income		192			232			155
Fair value gain on financial instruments		123			155			61
Total interest income(i)		315			387			216
Interest charge on bank loans, bonds and overdrafts(ii)		(390	)		(349	)		(322	)
Interest charge on leases classified as finance leases under the previous standard		(6	)		(7	)		(9	)
Interest charge on leases (IFRS 16 adoption impact)(iii)		(9	)		—			—
Interest charge on all other borrowings(ii)		(120	)		(122	)		(64	)
Fair value loss on financial instruments		(123	)		(157	)		(62	)
Total interest charges(i)		(648	)		(635	)		(457	)
Net interest charges		(333	)		(248	)		(241	)
Net finance income in respect of post employment plans in surplus (note 13)		26			29			9
Hyperinflation adjustment in respect of Venezuela (note 1)		6			10			18
Interest income in respect of direct and indirect tax		16			16			—
Other finance income		3			—			—
Total other finance income		51			55			27
Net finance charge in respect of post employment plans in deficit (note 13)		(17	)		(22	)		(20	)
Unwinding of discounts		(24	)		(17	)		(14	)
Interest charge in respect of direct and indirect tax		(22	)		(11	)		(10	)
Change in financial liability (Level 3)		(6	)		(8	)		—
Other finance charges (exceptional)(iv)		—			(9	)		—
Guarantee fees		(1	)		—			—
Other finance charges		(1	)		(3	)		(2	)
Total other finance charges		(71	)		(70	)		(46	)
Net other finance charges		(20	)		(15	)		(19	)

(i) Includes £46 million interest income and £(471) million interest charge in respect of financial assets and liabilities that are not measured at fair value through the income statement (2019 - £86 million income and £(439) million charge; 2018 - £73 million income and £(394) million charge).

(ii) The presentation of the years ended 30 June 2019 and 30 June 2018 have been changed due to a reclassification to include £302 million (2018 - £269 million) of interest in respect of bonds formerly included previously in ‘interest charge on all other borrowings’.

(iii) Interest expense of £9 million for the year ended 30 June 2020 in respect of leases that in prior years were classified as operating leases under the previous accounting standard (and were charged to other external charges) and following the adoption of IFRS 16 have now been capitalised.

(iv) In respect of the French tax audit settlement (see note 7(b)(ii)).

27

Financial statements (continued)

6. Investments in associates and joint ventures

Accounting policies

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. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. The group’s interest in the net assets of associates and joint ventures is reported in investments in the consolidated balance sheet and its interest in their results (net of tax) is included in the consolidated income statement below the group’s operating profit. Associates and joint ventures are initially recorded at cost including transaction costs. Investments in associates and joint ventures are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. The impairment review compares the net carrying value with the recoverable amount, where the recoverable amount is the higher of the value in use calculated as the present value of the group’s share of the associate’s future cash flows and its fair value less costs to sell.

Diageo’s principal associate is Moët Hennessy of which Diageo owns 34%. Moët Hennessy is the spirits and wine subsidiary of LVMH Moët Hennessy – Louis Vuitton SA (LVMH). LVMH is based in France and is listed on the Paris Stock Exchange. Moët Hennessy is also based in France and is a producer and exporter of champagne and cognac brands.

A number of joint distribution arrangements have been established with LVMH in Asia Pacific and France, principally covering distribution of Diageo’s Scotch whisky and gin premium brands and Moët Hennessy’s champagne and cognac premium brands. Diageo and LVMH have each undertaken not to engage in any champagne or cognac activities competing with those of Moët Hennessy. The arrangements also contain certain provisions for the protection of Diageo as a non-controlling shareholder in Moët Hennessy.

(a) An analysis of the movement in the group’s investments in associates and joint ventures is as follows:

	Moët Hennessy £ million			Others £ million			Total £ million
Cost less provisions
At 30 June 2018		2,875			134			3,009
Exchange differences		16			3			19
Additions		—			32			32
Share of profit after tax		310			2			312
Disposals		—			(3	)		(3	)
Dividends		(160	)		(8	)		(168	)
Share of movements in other comprehensive income and equity		(1	)		—			(1	)
Step acquisitions		—			(7	)		(7	)
Other(i)		—			(20	)		(20	)
At 30 June 2019		3,040			133			3,173
Exchange differences		78			4			82
Additions		—			47			47
Share of profit after tax		285			(3	)		282
Disposals		—			(1	)		(1	)
Dividends		—			(4	)		(4	)
Share of movements in other comprehensive income and equity		(8	)		—			(8	)
Step acquisitions		—			(11	)		(11	)
Transfer		—			(2	)		(2	)
Other		—			(1	)		(1	)
At 30 June 2020		3,395			162			3,557

(i) Other movements in the year ended 30 June 2019 comprise £20 million of advances promised to associates at 30 June 2019, on achieving certain performance targets which are now only recognised when those targets are achieved. There was a corresponding decrease of £20 million in other payables.

(1) Investment in associates balance includes loans given to and preference shares invested in associates of £82 million (2019 – £55 million).

(2) If certain performance targets are met by associates in the Distill Ventures programmes, an additional £22 million (2019- £31 million) will be invested in those associates.

28

Financial statements (continued)

(b) Income statement information for the three years ended 30 June 2020 and balance sheet information as at 30 June 2020 and 30 June 2019 of Moët Hennessy is as follows:

	2020 £ million		2019 £ million		2018 £ million
Sales		4,425		4,713		4,445
Profit for the year		838		911		897
Total comprehensive income		765		865		799

Moët Hennessy prepares its financial statements under IFRS as endorsed by the EU in euros to 31 December each year. The results are adjusted for alignment to Diageo accounting policies and are a major part of the Wines & Spirits division of LVMH. The results are translated at £1 = €1.14 (2019 – £1 = €1.13; 2018 – £1 = €1.13).

	2020 £ million			2019 £ million
Non-current assets		5,310			4,413
Current assets		8,352			7,564
Total assets		13,662			11,977
Non-current liabilities		(1,480	)		(1,008	)
Current liabilities		(2,197	)		(2,029	)
Total liabilities		(3,677	)		(3,037	)
Net assets		9,985			8,940

(1) Including acquisition fair value adjustments principally in respect of Moët Hennessy’s brands and translated at £1 = €1.09 (2019 – £1 = €1.12).

(c) Information on transactions between the group and its associates and joint ventures is disclosed in note 20.

(d) Investments in associates and joint ventures comprise the cost of shares less goodwill written off on acquisitions prior to 1 July 1998 of £1,312 million (2019 – £1,249 million), plus the group’s share of post acquisition reserves of £2,245 million (2019 – £1,924 million).

(e) The associates and joint ventures have not reported any material contingent liabilities in their latest financial statements.

7. Taxation

Accounting policies

Current tax is based on taxable profit for the year. Taxable profit is different from accounting profit due to temporary differences between accounting and tax treatments, and due to items that are never taxable or tax deductible. Tax benefits are not recognised unless it is probable that the tax positions are sustainable. Once considered to be probable, tax benefits are reviewed each year 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. Tax provisions are included in current liabilities. Penalties and interest on tax liabilities are included in operating profit and finance charges, respectively.

29

Financial statements (continued)

Full provision for deferred tax is made for temporary differences between the carrying value of assets and liabilities for financial reporting purposes and their value for tax purposes. The amount of deferred tax reflects the expected recoverable amount and is based on the expected manner of recovery or settlement of the carrying amount of assets and liabilities, using the basis of taxation enacted or substantively enacted by the balance sheet date. Deferred tax assets are not recognised where it is more likely than not that the assets 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.

Critical accounting estimates and judgements

The group is required to estimate the corporate tax in each of the many jurisdictions in which it operates. Management is required to estimate the amount that should be recognised as a tax liability or tax asset in many countries which are subject to tax audits which by their nature are often complex and can take several years to resolve; current tax balances are based on such estimations. Tax provisions are based on management’s judgement and interpretation of country specific tax law and the likelihood of settlement. However, the actual tax liabilities could differ from the provision and in such event the group would be required to make an adjustment in a subsequent period which could have a material impact on the group’s profit for the year.

The evaluation of deferred tax asset recoverability requires estimates to be made regarding the availability of future taxable income. For brands with an indefinite life, management’s primary intention is to recover the book value through a potential sale in the future, and therefore the deferred tax on the brand value is generally recognised using the appropriate country capital gains tax rate. To the extent brands with an indefinite life have been impaired, management considers this to be an indication of recovery through use and in such a case deferred tax on the brand value is recognised using the appropriate country corporate income tax rate.

(a) Analysis of taxation charge for the year

	United Kingdom								Rest of world									Total
	2020 £ million		2019 £ million			2018 £ million			2020 £ million			2019 £ million			2018 £ million			2020 £ million			2019 £ million			2018 £ million
Current tax
Current year		108		150			131			589			713			503			697			863			634
Adjustments in respect of prior years		6		(3	)		71			(25	)		52			(2	)		(19	)		49			69
		114		147			202			564			765			501			678			912			703
Deferred tax
Origination and reversal of temporary differences		24		29			40			(143	)		(19	)		127			(119	)		10			167
Changes in tax rates		6		(2	)		(11	)		39			(52	)		(360	)		45			(54	)		(371	)
Adjustments in respect of prior years		—		5			95			(15	)		25			2			(15	)		30			97
		30		32			124			(119	)		(46	)		(231	)		(89	)		(14	)		(107	)
Taxation on profit		144		179			326			445			719			270			589			898			596

30

Financial statements (continued)

(b) Exceptional tax (credits)/charges

The taxation charge includes the following exceptional items:

	2020 £ million			2019 £ million			2018 £ million
Brand and tangible asset impairment(i)		(165	)		—			(13	)
Substitution drawback		20			—			—
Obsolete inventories		(7	)		—			—
Other items		(2	)		—			—
French tax audit settlement(ii)		—			61			—
Tax rate change in the Netherlands(iii)		—			(51	)		—
Sale of businesses and brands		—			33			—
Guaranteed minimum pension equalisation		—			(4	)		—
US tax reform(iv)		—			—			(354	)
UK transfer pricing settlement(v)		—			—			143
UK industrial building allowance		—			—			21
		(154	)		39			(203	)

(i) Exceptional tax credit of £165 million consists of the impairment of the Windsor and USL brands of £105 million and £25 million, respectively, exceptional tax credits in respect of fixed assets impairments in Nigeria and Ethiopia of £25 million and £10 million, respectively.

(ii) As disclosed in the 2019 Annual Report, in July 2019 Diageo reached a resolution with the French tax authorities on the treatment of interest costs for all open periods which resulted in a total exceptional charge of €100 million (£88 million), comprising a tax charge of €69 million (£61 million), penalties of €21 million (£18 million) and interest of €10 million (£9 million). This brought to a close all open issues with the French tax authorities for periods up to and including 30 June 2017.

(iii) During the year ended 30 June 2019 the Dutch Senate agreed to a phased reduction in the Dutch corporate tax rate which is effective from 1 January 2020. An exceptional tax credit of £51 million principally arose from remeasuring the deferred tax liabilities in respect of the Ketel One vodka distribution rights from a then anticipated tax rate of 25% to 20.5%. The Dutch Senate subsequently agreed in a tax rate of 21.7% on 19 December 2019. The remeasurement of deferred tax liabilities in the year ended 30 June 2020 was recognised as a current tax charge.

(iv) The exceptional tax credit of £354 million ($478 million) resulted from applying the Tax Cuts and Jobs Act (TCJA), enacted on 22 December 2017, in the United States. The credit principally arose on remeasuring the deferred tax liabilities in respect of intangibles and other assets for the change in the US Federal tax rate from 35% to 21%, resulting in an exceptional tax credit of £363 million ($490 million), which is partially offset by £9 million ($12 million) exceptional tax charge in respect of repatriation of untaxed foreign earnings. In addition, there was a one-off charge of £11 million ($15 million) to other comprehensive income and equity, in respect of the remeasurement of the deferred tax assets on post employment liabilities and share-based incentive plans as a result of applying the provisions of the TCJA.

(v) During 2017 Diageo was in discussions with HMRC to seek clarity on Diageo’s transfer pricing and related issues, and in the first half of the year ending 30 June 2018 a preliminary assessment for diverted profits tax notice was issued. Final charging notices were issued in August 2017 and Diageo paid £107 million in respect of the two years ended 30 June 2016. Diageo agreed in June 2018 with HMRC that diverted profits tax does not apply and at the same time has reached resolution on the transfer pricing issues being discussed. The agreement in respect of transfer pricing covers the period from 1 July 2014 to 30 June 2017 and has resulted in an additional UK tax charge of £143 million. In the year ended 30 June 2018 an additional tax charge of £47 million was recognised in current tax which is based on the approach agreed with HMRC.

(1) Diageo has launched the “Raising the Bar” programme to support pubs and bars to welcome customers back and recover following the Covid-19 pandemic including a commitment of £100 million (£81 million) over a period of up to two years from July 1, 2020. Due to current uncertainty on the precise nature of the spend, it cannot be determined whether the amounts will be deductible for tax purposes in future periods. As a result, no deferred tax asset has been recognized in respect of the provision at the year ended June 30, 2020.

31

Financial statements (continued)

(c) Taxation rate reconciliation and factors that may affect future tax charges

	2020 £ million			2019 £ million			2018 £ million
Profit before taxation		2,043			4,235			3,740
Notional charge at UK corporation tax rate of 19% (2019 – 19%; 2018 – 19%)		388			805			711
Elimination of notional tax on share of after tax results of associates and joint ventures		(54	)		(59	)		(58	)
Differences in overseas tax rates		53			106			134
Effect of intra-group financing		(13	)		(34	)		(61	)
Non taxable gain on disposals of businesses		—			(3	)		—
Step-up gain		(2	)		—			—
Other tax rate and tax base differences		(84	)		(132	)		(109	)
Other items not chargeable		(62	)		(54	)		(79	)
Impairment		135			—			16
Non deductible losses on disposal of businesses		6			—			—
Other non deductible exceptional items		—			12			9
Other items not deductible(i)		211			231			238
Changes in tax rates(ii)		45			(54	)		(371	)
Fair value adjustment in respect of assets held for sale		—			1			—
Adjustments in respect of prior years(iii)		(34	)		79			166
Taxation on profit		589			898			596

(i) Other items not deductible include controlled foreign companies charge, irrecoverable withholding tax and additional state and local taxes.

(ii) Changes in tax rates for the year ended 30 June 2020 mainly due to the Netherlands, UK, India and Kenya. Changes in tax rates for the year ended 30 June 2019 principally arose from the tax rate change in the Netherlands. Changes in tax rates for the year ended 30 June 2018 was mainly due to the application of the TCJA.

(iii) Adjustment in respect of prior years for the year ended 30 June 2019 includes £61 million exceptional tax charge in respect of the French tax audit settlement. The £166 million prior year adjustment for the year ended 30 June 2018 is principally in respect of the exceptional tax charge in respect of the UK transfer pricing agreement.

The table above reconciles the notional taxation charge calculated at the UK tax rate, to the actual total tax charge. As a group operating in multiple countries, the actual tax rates applicable to profits in those countries are different from the UK tax rate. The impact is shown in the table above as differences in overseas tax rates. The group’s worldwide business leads to the consideration of a number of important factors which may affect future tax charges, such as: the levels and mix of profitability in different jurisdictions, transfer pricing regulations, tax rates imposed and tax regime reforms, acquisitions, disposals, restructuring activities, and settlements or agreements with tax authorities.

Significant ongoing changes in the international tax environment and an increase in global tax audit activity means that tax uncertainties and associated risks have been gradually increasing. In the medium term, these risks could result in an increase in tax liabilities or adjustments to the carrying value of deferred tax assets and liabilities. See note 18 (h).

The group has a number of ongoing tax audits worldwide for which provisions are recognised based on best estimates and management’s judgements concerning the ultimate outcome of the audit. As at 30 June 2020 the ongoing audits that are provided for individually are not expected to result in a material tax liability. The current tax asset of £190 million (2019 – £83 million) and tax liability of £246 million (2019 – £378 million) includes £189 million (2019 – £251 million) of provisions for tax uncertainties.

32

Financial statements (continued)

(d) Deferred tax assets and liabilities

The amounts of deferred tax accounted for in the consolidated balance sheet comprise the following net deferred tax assets/(liabilities):

	Property, plant and equipment £ million			Intangible assets £ million			Post employment plans £ million			Tax losses £ million			Other temporary differences(i) £ million			Total £ million
At 30 June 2018		(292	)		(1,812	)		(27	)		32			234			(1,865	)
Exchange differences		(7	)		(47	)		2			1			4			(47	)
Recognised in income statement – continuing operations		(51	)		14			(17	)		(14	)		28			(40	)
Reclassification		(2	)		(3	)		12			3			(10	)		—
Recognised in other comprehensive income and equity		—			—			(8	)		5			(1	)		(4	)
Tax rate change – recognised in income statement		1			51			(1	)		2			1			54
Tax rate change – recognised in other comprehensive income and equity		—			—			1			(5	)		8			4
Acquisition of subsidiaries		—			(5	)		—			—			—			(5	)
Transfer to assets held for sale		2			7			—			—			—			9
At 30 June 2019		(349	)		(1,795	)		(38	)		24			264			(1,894	)
Exchange differences		—			12			1			(1	)		(7	)		5
Recognised in income statement – continuing operations		(10	)		115			(5	)		7			27			134
Reclassification		8			6			—			(3	)		(11	)		—
Recognised in other comprehensive income and equity		—			(3	)		(16	)		34			(33	)		(18	)
Tax rate change – recognised in income statement		11			(52	)		2			—			(6	)		(45	)
Tax rate change – recognised in other comprehensive income and equity		—			—			(16	)		—			—			(16	)
Acquisition of subsidiaries		—			(19	)		—			—			—			(19	)
At 30 June 2020		(340	)		(1,736	)		(72	)		61			234			(1,853	)

(i) Deferred tax on other temporary differences includes fair value movement on cross-currency swaps, interest and finance costs, restructuring provisions, share-based payments and intra group sales of products.

After offsetting deferred tax assets and liabilities where appropriate within territories, the net deferred tax liability comprises:

	2020 £ million			2019 £ million
Deferred tax assets		119			138
Deferred tax liabilities		(1,972	)		(2,032	)
		(1,853	)		(1,894	)

The deferred tax assets of £119 million includes £66 million (2019 – £60 million) arising in jurisdictions with prior year taxable losses. The majority of the asset is in respect of Ireland, where the amounts arose from timing differences on pension funding payments. It is considered more likely than not that there will be sufficient future taxable profits to realise these deferred tax assets, the majority of which can be carried forward indefinitely.

33

Financial statements (continued)

(e) Unrecognised deferred tax assets

Deferred tax assets have not been recognised in respect of the following tax losses:

	2020 £ million		2019 £ million
Capital losses - indefinite		76		62
Trading losses - indefinite		30		70
Trading losses - expiry dates up to 2029		70		53
		176		185

(f) Unrecognised deferred tax liabilities

UK legislation largely exempts overseas dividends remitted from UK tax. A tax liability is more likely to arise in respect of withholding taxes levied by the overseas jurisdiction. Deferred tax is provided where there is an intention to distribute earnings, and a tax liability arises. It is impractical to estimate the amount of unrecognised deferred tax liabilities in respect of these unremitted earnings.

The aggregate amount of temporary differences in respect of investments in subsidiaries, branches, interests in associates and joint ventures for which deferred tax liabilities have not been recognised is approximately £14.7 billion (2019 – £13 billion). Comparatives were restated to include reclassifications between share premium, retained earnings and investments within the US group.

Operating assets and liabilities

Introduction

This section describes the assets used to generate the group’s performance and the liabilities incurred. Liabilities relating to the group’s financing activities are included in section ‘Risk management and capital structure’ and balance sheet information in respect of associates, joint ventures and taxation are covered in section ‘Results for the year’. This section also provides detailed disclosures on the group’s recent acquisitions and disposals, performance and financial position of its defined benefit post employment plans.

8. Acquisition and sale of businesses and purchase of non-controlling interests

Accounting policies

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 acquired or sold are included in the income statement from, or up to, the date that control passes.

Business combinations are accounted for using the acquisition method. Identifiable assets, liabilities and contingent liabilities acquired are measured at fair value at acquisition date. The consideration payable is measured at fair value and includes the fair value of any contingent consideration. Among other factors, the group considers the nature of, and compensation for the selling shareholders’ continuing employment to determine if any contingent payments are for post-combination employee services, which are excluded from consideration.

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 and contingent liabilities acquired. Directly attributable acquisition costs in respect of subsidiary companies acquired are recognised in other external charges as incurred.

34

Financial statements (continued)

The non-controlling interests on the date of acquisition can be measured either at the fair value or at the non-controlling shareholder’s proportion of the net fair value of the identifiable assets assumed. This choice is made separately for each acquisition.

Where the group has issued a put option over shares held by a non-controlling interest, the group derecognises the non-controlling interests and instead recognises a contingent deferred consideration liability for the estimated amount likely to be paid to the non-controlling interest on the exercise of those options. Movements in the estimated liability in respect of put options are recognised in retained earnings.

Transactions with non-controlling interests are recorded directly in retained earnings.

For all entities in which the company, directly or indirectly, owns equity a judgement is made to determine whether the investor controls the investee and therefore should fully consolidate the investee. An assessment is carried out to determine whether the group has the exposure or rights to the variable returns of the investee and has the ability to affect those returns through its power over the investee. To establish control an analysis is carried out of the substantive and protective rights that the group and the other investors hold. This assessment is dependent on the activities and purpose of the investee and the rights of the other shareholders, such as which party controls the board, executive committee and material policies of the investee. Determining whether the rights that the group holds are substantive requires management judgement.

Where less than 50% of the equity of an investee is held, and the group holds significantly more voting rights than any other vote holder or organised group of vote holders this may be an indicator of de facto control. An assessment is needed to determine all the factors relevant to the relationship with the investee to ascertain whether control has been established and whether the investee should be consolidated as a subsidiary. Where voting power and returns from an investment are split equally between two entities then the arrangement is accounted for as a joint venture.

On an acquisition fair values are attributed to the assets and liabilities acquired. This may involve material judgement to determine these values.

35

Financial statements (continued)

(a) Acquisition of businesses

Fair value of net assets acquired and cash consideration paid in respect of the acquisition of businesses and the purchase of shares of non-controlling interests in the three years ended 30 June 2020 were as follows:

	Net assets acquired and consideration
	2020 £ million			2019 £ million			2018 £ million
Brands and other intangibles		102			25			478
Inventories		2			—			4
Other working capital		(3	)		(2	)		2
Deferred tax		(19	)		(5	)		—
Cash		2			—			6
Fair value of assets and liabilities		84			18			490
Goodwill arising on acquisition		8			10			249
Step acquisitions		(23	)		(7	)		—
Consideration payable		69			21			739
Satisfied by:
Cash consideration paid		(27	)		(6	)		(555	)
Contingent consideration payable		(42	)		(15	)		(184	)
		(69	)		(21	)		(739	)
Cash consideration paid for subsidiaries		(27	)		(6	)		(6	)
Cash consideration paid for Casamigos		(49	)		(9	)		(549	)
Cash consideration paid in respect of other prior year acquisitions		(9	)		(9	)		(22	)
Cash consideration paid for investments in associates		(6	)		(15	)		(12	)
Capital injection in associates		(41	)		(17	)		(11	)
Cash acquired		2			—			6
Net cash outflow on acquisition of businesses		(130	)		(56	)		(594	)
Purchase of shares of non-controlling interests		(62	)		(784	)		—
Total net cash outflow		(192	)		(840	)		(594	)

Acquisitions in the year

During the year ended 30 June 2020, Diageo completed a number of acquisitions, the largest of these were Seedlip Ltd and Anna Seed 83 Ltd, the brand owners of Seedlip and Aecorn distilled non-alcoholic spirits and aperitifs, both of which completed on 6 August 2019. The contingent consideration payable represents the present value of payments up to £60 million linked to certain performance targets and are expected to be paid over the next six years.

36

Financial statements (continued)

Prior year acquisitions

On 28 September 2018, Diageo acquired Copper Dog Whisky Limited. In addition, Diageo has made a number of smaller acquisitions of brands, distribution rights and equity interests in various drinks businesses and made contingent consideration payments in respect of prior year acquisitions.

On 15 August 2017, Diageo completed the purchase of 100% of the share capital of Casamigos Tequila, LLC (Casamigos), a super premium tequila based in the United States, for $1,000 million (£777 million) of which $300 million (£233 million) was contingent on Casamigos achieving certain performance targets.

On 14 March 2018, Diageo completed the acquisition of Belsazar GmbH, a premium aperitif from Germany’s Black Forest.

On 2 May 2018, Diageo acquired 100% of the intellectual property of Pierde Almas, an ultra premium mezcal.

Purchase of shares of non-controlling interests

On 29 July 2019, East African Breweries Limited completed the purchase of 4% of the share capital of Serengeti Breweries Limited for $3 million (£2 million). This increased Diageo’s effective economic interest from 39.2% to 40.2%.

In August 2019 and February 2020, in two separate purchases, Diageo acquired shares in United Spirits Limited (USL) for INR 5,495 million (£60 million) which increased Diageo’s percentage of shares owned in USL from 54.78% to 55.94% (excluding 2.38% owned by the USL Benefit Trust).

On 17 August 2018 and 9 April 2019, Diageo completed the purchase of 20.29% and 3.14% of the share capital of Sichuan Shuijingfang Company Limited (SJF) for an aggregate consideration of RMB 6,774 million (£775 million) and transaction costs of £9 million. This took Diageo’s shareholding in SJF from 39.71% to 63.14%. SJF was already controlled and therefore consolidated prior to these transactions.

37

Financial statements (continued)

(b) Sale of businesses

Cash consideration received and net assets disposed of in respect of sale of businesses in the two years ended 30 June 2020:

	UNB			Other			Total			2019
	£ million			£ million			£ million			£ million
Sale consideration
Cash received in year		10			1			11			438
Transaction and other directly attributable costs paid		—			—			—			(12	)
Net cash received		10			1			11			426
Transaction costs payable		(1	)		—			(1	)		(4	)
		9			1			10			422
Net assets disposed of
Brands		—			—			—			(230	)
Goodwill		—			—			—			(12	)
Property, plant and equipment		—			(1	)		(1	)		(6	)
Investment in associates		—			(1	)		(1	)		(3	)
Assets and liabilities held for sale		(30	)		—			(30	)		—
Inventories		—			—			—			(18	)
		(30	)		(2	)		(32	)		(269	)
Impairment charge recognised up until the date of sale		(7	)		—			(7	)		—
Exchange recycled from other comprehensive income		(4	)		—			(4	)		—
(Loss)/gain on disposal before taxation		(32	)		(1	)		(33	)		153
Taxation		—			—			—			(33	)
(Loss)/gain on disposal after taxation		(32	)		(1	)		(33	)		120

On 1 April 2020, Diageo completed the sale of United National Breweries (UNB), Diageo’s wholly owned sorghum beer business in South Africa. In the year ended 30 June 2020, up until the date of sale, UNB contributed net sales of £31 million (2019 - £43 million; 2018 - £49 million), operating profit of £nil (2019 - £1 million; 2018 - £6 million) and profit after taxation of £nil (2019 - £1 million; 2018 - £4 million).

In the year ended 30 June 2019, Diageo completed the sale of a portfolio of 19 brands to Sazerac for an aggregate consideration of $550 million (£435 million). Diageo continued to provide manufacturing services for all disposed brands until December 2019 with some extended up to June 2020 and for five brands will continue up to December 2028.

In the year ended 30 June 2018, there were no significant disposals completed by the group.

38

Financial statements (continued)

9. Intangible assets

Accounting policies

Acquired intangible assets are held on the consolidated balance sheet at cost less accumulated amortisation and impairment losses. Acquired brands and other intangible assets are initially recognised at fair value 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. Where these assets are regarded as having indefinite useful economic lives, they are not amortised.

Goodwill represents the excess of the aggregate of the consideration transferred, the value of any non-controlling interests and the fair value of any previously held equity interest in the subsidiary acquired over the fair value of the identifiable net assets acquired. Goodwill arising on acquisitions prior to 1 July 1998 was eliminated against reserves, and this goodwill has not been reinstated. Goodwill arising subsequent to 1 July 1998 has been capitalised.

Amortisation and impairment of intangible assets is based on their useful economic lives and are amortised on a straight-line basis over those lives and reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Goodwill and intangible assets that are regarded as having indefinite useful economic lives are not amortised and are reviewed for impairment at least annually or when there is an indication that the assets may be impaired. Impairment reviews compare the net carrying value with the recoverable amount (where recoverable amount is the higher of fair value less costs of disposal and value in use). Amortisation and any impairment write downs are charged to other operating expenses in the income statement.

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

Critical accounting estimates and judgements

Assessment of the recoverable amount of an intangible asset and the useful economic life of an asset are based on management’s estimates.

Impairment reviews are carried out to ensure that intangible assets, including brands, are not carried at above their recoverable amounts. Value in use and fair value less costs of disposal were both considered for these reviews and any impairment charge was based on these. The tests are dependent on management’s estimates in respect of the forecasting of future cash flows, the discount rates applicable to the future cash flows and what expected growth rates are reasonable. Judgement is required in determining the cash-generating units. Such estimates and judgements are subject to change as a result of changing economic conditions and actual cash flows may differ from forecasts.

Additional estimates have been applied by management regarding the potential financial impact of the Covid-19 pandemic across markets. In this regard a combination of the following factors was considered in every impairment model:

• the future development of the virus, including the duration, scale and geographic extent of the closures;

• the expected scale and duration of the economic recovery;

• the size of the on-trade channel in the market;

• the life cycle phase of the brand and the maturity of the market.

39

Financial statements (continued)

	Brands £ million			Goodwill £ million			Other intangibles £ million			Computer software £ million			Total £ million
Cost
At 30 June 2018		8,946			2,788			1,482			604			13,820
Exchange differences		182			28			56			8			274
Additions		25			10			2			46			83
Disposals(i)		(230	)		(12	)		—			(5	)		(247	)
Transfers to assets held for sale(ii)		(28	)		(19	)		—			—			(47	)
At 30 June 2019		8,895			2,795			1,540			653			13,883
Exchange differences		(74	)		(139	)		44			—			(169	)
Additions		102			8			3			52			165
Disposals		—			—			—			(7	)		(7	)
At 30 June 2020		8,923			2,664			1,587			698			13,872
Amortisation and impairment
At 30 June 2018		616			110			75			447			1,248
Exchange differences		5			3			—			8			16
Amortisation for the year		—			—			3			60			63
Disposals		—			—			—			(1	)		(1	)
At 30 June 2019		621			113			78			514			1,326
Exchange differences		(17	)		(16	)		(1	)		2			(32	)
Amortisation for the year		—			—			1			62			63
Impairment		564			655			—			—			1,219
Disposals		—			—			—			(4	)		(4	)
At 30 June 2020		1,168			752			78			574			2,572
Carrying amount
At 30 June 2020		7,755			1,912			1,509			124			11,300
At 30 June 2019		8,274			2,682			1,462			139			12,557
At 30 June 2018		8,330			2,678			1,407			157			12,572

(i) In the year ended 30 June 2019 Diageo completed the sale of a portfolio of 19 brands to Sazerac. See note 8(b) for further information.

(ii) Transfers to assets held for sale in the year ended 30 June 2019 was in respect of United National Breweries (UNB).

40

Financial statements (continued)

(a) Brands

At 30 June 2020, the principal acquired brands, all of which are regarded as having indefinite useful economic lives, are as follows:

	Principal markets		2020 £ million		2019 £ million
Crown Royal whisky		United States		1,190		1,153
McDowell’s No.1 whisky, rum and brandy		India		1,050		1,112
Captain Morgan rum		Global		977		946
Smirnoff vodka		Global		670		648
Johnnie Walker whisky		Global		625		625
Casamigos tequila		United States		491		476
Shui Jing Fang Chinese white spirit		Greater China		260		259
Yenì Raki		Turkey		202		231
Signature whisky		India		197		209
Seagram’s 7 Crown whiskey		United States		181		176
Don Julio tequila		United States		179		209
Bell’s whisky		Europe		179		179
Black Dog whisky		India		167		177
Antiquity whisky		India		163		173
Zacapa rum		Global		156		151
Windsor Premier whisky		Korea		154		589
Gordon’s gin		Europe		119		119
Old Parr whisky		Global		110		106
Other brands				685		736
			7,755		8,274

The brands are protected by trademarks, which are renewable indefinitely, in all of the major markets where they are sold. 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 and are therefore not amortised.

(b) Goodwill

For the purposes of impairment testing, goodwill has been attributed to the following cash-generating units:

	2020 £ million		2019 £ million
North America		416		403
Europe and Turkey
Europe (excluding Turkey)		181		172
Turkey		205		234
Latin America and Caribbean – Mexico		123		143
Asia Pacific
Greater China		132		131
India		770		1,511
Other cash-generating units		85		88
	1,912		2,682

41

Financial statements (continued)

Goodwill has arisen on the acquisition of businesses and includes synergies arising from cost savings, the opportunity to utilise Diageo’s distribution network to leverage marketing of the acquired products and the extension of the group’s portfolio of brands in new markets around the world.

(c) Other intangibles

Other intangibles principally comprise distribution rights. Diageo owns the global distribution rights for Ketel One vodka products in perpetuity, and the Directors believe that it is appropriate to treat these rights as having an indefinite life for accounting purposes. The carrying value at 30 June 2020 was £1,464 million (2019 – £1,418 million).

(d) Impairment testing

Impairment tests are performed annually, or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. Recoverable amounts are calculated based on the value in use approach also considering fair value less cost to sale. The value in use calculations are based on discounted forecast cash flows using the assumption that cash flows continue in perpetuity at the terminal growth rate of each country or region. The individual brands, other intangibles with indefinite useful lives and their associated tangible fixed assets are aggregated as separate cash-generating units. Separate tests are carried out for each cash-generating unit and for each of the markets. Goodwill is attributed to each of the markets.

The key assumptions used for the value in use calculations are as follows:

Cash flows

Cash flows are forecast for each cash-generating unit for the financial year, which is approved by management and reflect the following assumptions:

• Cash flows are projected based on the actual operating results and a three-year plan approved by the management. Cash flows are extrapolated up to five-years using expected growth rates in line with management’s best estimates. Growth rates reflect expectations of sales growth, operating costs and margin, based on past experience and external sources of information. Where applicable, multiple cash flow scenarios were populated to predict the potential outcome, considering the increased risk of uncertainty around the duration and severity of the Covid-19 pandemic in the different markets. A simple average of these projections served as the estimation of the recoverable amount of the cash-generating units including the goodwill of USL, Indian brands, Nigeria and Windsor Premier brand. Management has no information which would indicate that any of the scenarios are more likely than the others;

• The five-year forecast period is extended by up to an additional ten years at acquisition date for some intangible assets and goodwill when management believes that this period is justified by the maturity of the market and expects to achieve growth in excess of the terminal growth rate driven by Diageo’s sales, marketing and distribution expertise. Cash flows beyond the five-year period are projected using steady or progressively declining growth rates. These rates do not exceed the annual growth rate of the real gross domestic product (GDP) aggregated with the long-term annual inflation rate of the country or region;

• Cash flows for the subsequent years after the forecast period are extrapolated based on a terminal growth rate which does not exceed the long-term annual inflation rate of the country or region.

The calculation of value in use as at 30 June 2020 is based on a five-year detailed plan for every cash-generating unit, except for India where the period is extended by an additional four years.

Discount rates

The discount rates used are the weighted average cost of capital which reflects the returns on government bonds and an equity risk premium adjusted for the drinks industry specific to the cash-generating units. Further risk premiums are applied according to management’s assessment of the risks in respect of the cash flows for a particular asset or cash-generating unit. The group applies post-tax discount rates to post-tax cash flows as the valuation calculated using this method closely approximates to applying pre-tax discount rates to pre-tax cash flows.

42

Financial statements (continued)

For goodwill, these assumptions are based on the cash-generating unit or group of units to which the goodwill is attributed. For brands, they are based on a weighted average taking into account the country or countries where sales are made.

The pre-tax discount rates, terminal and long-term growth rates used for impairment testing are as follows:

	2020							2019
	Pre-tax discount rate %		Terminal growth rate %			Long-term growth rate %		Pre-tax discount rate %		Terminal growth rate %		Long-term growth rate %
North America – United States		8		2			4		9		2		4
Europe and Turkey
Europe (excluding Turkey)		7		2			4		7		2		4
Turkey		22		11			15		25		13		16
Africa
Ethiopia		21		8			17		25		8		17
South Africa		18		—			7		18		—		7
Latin America and Caribbean
Brazil		15		3			6		16		4		6
Mexico		16		3			5		17		3		6
Asia Pacific
Korea		10		(4	)		—		8		2		—
Greater China		9		3			8		10		3		8
India		12		4			12		14		5		12

Value in use calculation and fair value less costs of disposal methodologies were both considered to assess the recoverable amount of the India cash-generating unit. Having considered the volatility in local share prices, the premiums that businesses controlled by large multinationals trade at and other factors, we assessed a range of fair value less costs of disposal with particular focus on the value a third party may pay for a controlling stake in the current environment. The value in use calculation was above our view of fair value less costs of disposal and was therefore used to determine the recoverable amount of this cash-generating unit. Based on this, in the year ended 30 June 2020, an impairment charge of £655 million in respect of the India cash-generating unit containing the India goodwill was recognised in exceptional operating items. In the year ended 30 June 2020, impairment charges of £78 million in respect of the Old Tavern brand and £38 million in respect of the Bagpiper brand in India were also recognised in exceptional operating items, based on their value in use. Forecast cash flow assumptions were reduced principally due to the general economic downturn further aggravated by the Covid-19 pandemic, including pandemic related recent regulatory changes both negatively impacting demand and margins. The brand impairment reduced the deferred tax liability by £25 million. The recoverable amount is £3,444 million in respect of the India cash-generating unit, £20 million in respect of the Old Tavern brand and £94 million in respect of the Bagpiper brand cash-generating units.

In the year ended 30 June 2020, an impairment charge of £434 million in respect of the Windsor Premier brand has been recognised in exceptional operating items, based on its value in use. The impairment reduced the deferred tax liability attributable to the brand by £105 million resulting in a net exceptional loss of £329 million. The forecast cash flow assumptions were reduced principally due to the recent regulatory changes limiting trade spend for wholesalers and venues and the Covid-19 pandemic negatively impacting the challenging whisky category in Korea. The recoverable amount is £164 million in respect of the Windsor Premier brand cash-generating unit.

(e) Sensitivity to change in key assumptions

Impairment testing for the year ended 30 June 2020 has identified the following cash-generating units as being sensitive to reasonably possible changes in assumptions.

43

Financial statements (continued)

The table below shows the headroom at 30 June 2020 and the impairment charge that would be required if the assumptions in the calculation of their value in use were changed:

	Carrying value of CGU £ million		Headroom £ million		1ppt increase in discount rate £ million			2ppt decrease in annual growth rate in forecast period 2021-2029 £ million			0.5 - 1ppt reduction in the rate of price increase £ million			Covid-19 scenario £ million
India(i)		3,444		—		(242	)		(235	)		(297	)		(396	)
Bagpiper brand(i)		94		—		(11	)		(16	)		(19	)		(17	)
Antiquity brand(i)		166		8		(15	)		(18	)		(13	)		(25	)
McDowell’s No.1 brand(i)		1,179		29		(121	)		(173	)		(216	)		(234	)
Windsor Premier brand(ii)		164		—		—			—			—			(30	)
Bell’s brand(iii)		225		12		(11	)		—			—			—

(i) Reasonably possible changes in key assumptions that would result in an additional impairment of the India cash-generating unit, Bagpiper, Antiquity and McDowell’s No.1 brands would be a 1ppt increase in discount rate or a 2ppt decrease in the annual growth rate in forecast period of 2021-2029 or a 0.5-1ppt reduction in the rate of price increase. Furthermore, due to the Covid-19 pandemic, a permanent delay of the F20 lost base recovery period is also considered to be a reasonably possible scenario due to the severity of measures taken in India and the introduction of unprecedented increase of taxes on alcohol. In the Covid-19 scenario above it was assumed that F19 base will be reached by F25.

(ii) Due to the high-level uncertainty of the Covid-19 pandemic, additional possible changes in volume growth rates are forecasted assuming permanent damage of local whisky category with no recovery to F19 levels based on latest outlook of IWSR reports, and the fact that the majority of sales are on-trade.

(iii) The Bell’s brand is disclosed as sensitive due to strong competition and challenging market conditions. The only change in the key assumptions considered reasonably possible that would result in an impairment of the brand would be a 1ppt increase in discount rate.

(f) USL combination of popular brands

Following the acquisition of United Spirits Limited (USL) in 2014, all material brands together with the associated property, plant and equipment (the brands) were fair valued and capitalised. Each year since the acquisition, the brands were tested separately for impairment.

The long-term strategic priorities have continued to evolve for the Indian market with a greater emphasis on premium brands, operating margin expansion and generating marketing spend efficiencies. This has resulted in the management and marketing teams managing, reporting both internally and externally, and allocating resources to the popular category rather than to individual brands.

In the year ended 30 June 2020, the impairment tests have been carried out for the brands within the popular category as a single cash-generating unit and also at the individual brand level to ensure that the change in the definition of cash-generating units does not result in the understatement of an impairment charge. The impairment charge of £116 million on Old Tavern Whisky and Bagpiper was based on the individual brand level impairment models. For the year ending 30 June 2021 a single impairment test will be carried out at the popular category in accordance with how this category is now managed.

The principal USL brands in the popular category are Director’s Special, Bagpiper, Old Tavern Whisky and White Mischief.

10. Property, plant and equipment

Accounting policies

Land and buildings are stated at cost less accumulated depreciation. Freehold land is not depreciated. Leaseholds are generally 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: buildings – 10 to 50 years; within plant and equipment casks and containers – 15 to 50 years; other plant and equipment – 5 to 25 years; fixtures and fittings – 5 to 10 years; and returnable bottles and crates – 5 to 10 years.

Reviews are carried out if there is an indication that assets may be impaired, to ensure that property, plant and equipment are not carried at above their recoverable amounts.

44

Financial statements (continued)

Government grants

Government grants are not recognised until there is reasonable assurance that the group will comply with the conditions pursuant to which they have been granted and that the grants will be received. Government grants in respect of property, plant and equipment are deducted from the asset that they relate to, reducing the depreciation expense charged to the income statement.

	Land and buildings £ million			Plant and equipment £ million			Fixtures and fittings £ million			Returnable bottles and crates £ million			Under construction £ million			Total £ million
Cost
At 30 June 2018		1,585			4,102			126			534			432			6,779
Exchange differences		16			54			1			4			10			85
Sale of businesses		(2	)		(7	)		(1	)		—			—			(10	)
Additions		42			180			9			31			383			645
Disposals		(16	)		(32	)		(13	)		(21	)		(2	)		(84	)
Transfers		87			218			3			18			(329	)		(3	)
At 30 June 2019		1,712			4,515			125			566			494			7,412
Recognition of right-of-use asset on adoption of IFRS 16		173			63			—			—			—			236
Adjusted balance at 1 July 2019		1,885			4,578			125			566			494			7,648
Exchange differences		(10	)		(22	)		—			(1	)		(9	)		(42	)
Additions		202			156			13			34			439			844
Disposals		(46	)		(86	)		(20	)		(37	)		(1	)		(190	)
Transfers		110			242			9			13			(374	)		—
At 30 June 2020		2,141			4,868			127			575			549			8,260
Depreciation
At 30 June 2018		467			1,761			91			371			—			2,690
Exchange differences		4			23			—			3			—			30
Depreciation charge for the year		49			216			13			33			—			311
Sale of businesses		—			(4	)		—			—			—			(4	)
Disposals		(9	)		(25	)		(12	)		(17	)		—			(63	)
Transfers		—			(6	)		(1	)		—			—			(7	)
At 30 June 2019		511			1,965			91			390			—			2,957
Exchange differences		—			(5	)		(1	)		(2	)		—			(8	)
Depreciation charge for the year		106			260			15			36			—			417
Exceptional impairment		20			114			—			6			—			140
Disposals		(40	)		(78	)		(19	)		(35	)		—			(172	)
At 30 June 2020		597			2,256			86			395			—			3,334
Carrying amount
At 30 June 2020		1,544			2,612			41			180			549			4,926
At 30 June 2019		1,201			2,550			34			176			494			4,455
At 30 June 2018		1,118			2,341			35			163			432			4,089

(a) The net book value of land and buildings comprises freeholds of £1,218 million (2019 – £1,162 million), long leaseholds of £6 million (2019 – £21 million) and short leaseholds of £320 million (2019 – £18 million). Depreciation was not charged on £161 million (2019 – £164 million) of land.

(b) Property, plant and equipment is net of a government grant of £150 million (2019 – £143 million) received in prior years in respect of the construction of a rum distillery in the US Virgin Islands.

45

Financial statements (continued)

(c) In the year ended 30 June 2020, an impairment charge of £84 million in respect of the Nigeria tangible fixed asset has been recognised in exceptional operating items. The impairment reduced the deferred tax liability by £25 million resulting in a net exceptional loss of £59 million. The profit generating ability of the assets were reduced principally due to the deteriorated economic outlook as a result of the combination of the oil price crisis in Nigeria and the Covid-19 pandemic. The recoverable amount is £140 million in respect of the Nigeria cash-generating unit based on the fair value of the assets applying the cost valuation technique and it is considered a Level 3 instrument within the fair value hierarchy as the assumptions used in the valuation are not observable in the market. The valuation is only sensitive to the cost of replacing the assets and if this was 10% less, the fair value of the assets would decrease by approximately £14 million.

(d) In the year ended 30 June 2020, an impairment charge of £55 million in respect of the Ethiopia tangible fixed asset has been recognised in exceptional operating items. The impairment reduced the deferred tax liability by £10 million resulting in a net exceptional loss of £45 million. The forecast cash flow assumptions were reduced principally due to the impact of recent excise duty increase and Covid-19 pandemic. The recoverable amount is £12 million in respect of the Ethiopia cash-generating unit based on the fair value of the assets.

11. Leases

Accounting policies

Where the group is the lessee, all leases are recognised on the balance sheet as right-of-use assets and depreciated on a straight-line basis with the charge recognised in cost of sales. The liability, recognised as part of net borrowings, is measured at a discounted value and any interest is charged to finance charges.

The group recognises services associated with a lease as other operating expenses. Payments associated with leases where the value of the asset when it is new is lower than $5,000 (leases of low value assets) and leases with a lease term of twelve months or less (short term leases) are recognised as other operating expenses. A judgement in calculating the lease liability at initial recognition includes determining the lease term where extension or termination options exist. In such instances any economic incentive to retain or end a lease are considered and extension periods are only included when it is considered reasonably certain that an option to extend a lease will be exercised.

For the years ended 30 June 2019 and 2018, where the group had substantially all the risks and rewards of ownership of an asset subject to a lease, the lease was treated as a finance lease. Assets held under finance leases were recognised as assets of the group at their fair value at the inception of the lease. The corresponding liability to the lessor was included in other financial liabilities on the consolidated balance sheet. Lease payments were apportioned between interest expense and a reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Other leases were treated as operating leases, with payments and receipts taken to the income statement on a straight-line basis over the life of the lease.

(a) Adoption of IFRS 16

Under the new standard, outstanding lease liabilities have been recognised at 1 July 2019, for leases previously classified as operating leases, at the present value of the future lease payments over their reasonably certain lease term. Right-of-use assets have been recognised equal to the net present value of the lease liabilities, adjusted for the amount of any prepaid or accrued lease payment, lease incentives and provisions for onerous leases. There was no impact on retained earnings as at 1 July 2019. The interest rate used to discount the future payments in the calculation of the lease liability is the incremental borrowing rate at 1 July 2019 taking into account the currency and duration of the lease. The weighted average incremental borrowing rate applied across all operating leases capitalised on 1 July 2019 was 3.2%.

For leases previously classified as finance leases the group recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right-of-use asset and the lease liability at the date of adoption of IFRS 16, 1 July 2019. The re-measurement principles of IFRS 16 are only applied after that date.

46

Financial statements (continued)

The group has decided to reduce the complexity of implementation by taking advantage of a number of practical expedients on transition on 1 July 2019 namely:

(i) to not capitalise leases which expire within a year of 1 July 2019;

(ii) to apply a single discount rate to portfolios of leases with similar characteristics; and

(iii) to adjust the right-of-use asset by the amount of any provision for onerous leases recognised immediately before the date of initial application.

The group has not capitalised leases where the value of the asset when it is new is lower than $5,000 (low value assets).

The impact of the adoption of IFRS 16 on affected lines of the consolidated balance sheet at 1 July 2019 is as follows:

	30 June 2019 £ million			IFRS 16 impact £ million			1 July 2019 £ million
Non-current assets
Property, plant and equipment		4,455			236			4,691
Other financial assets		404			1			405
Current assets
Trade and other receivables		2,694			(2	)		2,692
Current liabilities
Other financial liabilities		(307	)		(64	)		(371	)
Trade and other payables		(4,202	)		13			(4,189	)
Non-current liabilities
Other financial liabilities		(124	)		(187	)		(311	)
Provisions		(317	)		3			(314	)

As a result of the adoption of IFRS 16, on 1 July 2019 the total assets increased by £235 million from £31,296 million to £31,531 million and total liabilities increased by £235 million from £21,140 million to £21,375 million. The leases (previously classified as operating leases) which have been recognised at adoption are principally in respect of warehouses, office buildings, plant and machinery, cars and distribution vehicles. There is no impact on deferred tax balances.

The adoption of IFRS 16 resulted in an immaterial benefit to operating profit and an immaterial increase in finance charges. Profit before tax, taxation and earnings per share have not been significantly impacted. The adoption of IFRS 16 has had no impact on the group’s net cash flows although a presentation change has been reflected whereby the principal element of the lease payments (for leases formerly classified as operating leases under IAS 17) of £74 million for the year ended 30 June 2020, are disclosed as part of cash flow from financing activities and the interest element is included in cash flow from operating activities. Under IAS 17 both the principal and interest cash flows from operating leases would have been disclosed as part of cash flows from operating activities.

47

Financial statements (continued)

A reconciliation of differences between the operating lease commitments disclosed under IAS 17 and disclosed in note 19(b) of Diageo’s 2019 Annual Report and the lease liabilities under IFRS 16, at 1 July 2019, is as follows:

	£ million
Operating lease commitments at 30 June 2019		(321	)
Leases expiring within a year of 1 July 2019		19
Low value assets		11
Impact of discounting		40
Total additional lease liabilities recognised on adoption of IFRS 16		(251	)
Finance lease liabilities at 30 June 2019		(128	)
Total lease liabilities at 1 July 2019		(379	)
Total lease liabilities at 1 July 2019 - current		(107	)
Total lease liabilities at 1 July 2019 - non-current		(272	)

b) Movement in right-of-use assets

	Land and buildings £ million			Plant and equipment £ million			Under construction £ million		Total £ million
At 30 June 2019(i)		2			228			—		230
Adoption of IFRS16		173			63			—		236
Adjusted balance at 1 July 2019		175			291			—		466
Exchange differences		(3	)		2			—		(1	)
Additions		150			24			32		206
Disposals		(2	)		—			—		(2	)
Depreciation(ii)		(51	)		(41	)		—		(92	)
At 30 June 2020		269			276			32		577

(i) In the year ended 30 June 2019 and 30 June 2018, only leases that met the criteria of finance leases under IAS 17 - Leases were capitalised and included in property, plant and equipment.

(ii) In the year ended 30 June 2019 depreciation on assets held under finance leases was £12 million.

c) Lease liabilities

	2020 £ million			2019 £ million
Current lease liabilities		(106	)		(43	)
Non-current lease liabilities		(364	)		(85	)
		(470	)		(128	)

(i) In the year ended 30 June 2019, the group only recognised lease liabilities in relation to leases that were classified as finance leases under IAS 17 - Leases. The lease liabilities were presented as part of the group’s net borrowings in the year ended 30 June 2019.

The future cash outflows, which are not included in lease liabilities on the balance sheet, in respect of extension and termination options which are not reasonably expected to be exercised are estimated at £284 million.

d) Amounts recognised in the consolidated income statement

In the year ended 30 June 2020 other operating expenses (within other external charges) included £39 million in respect of leases of low value assets and short term leases and £11 million in respect of variable lease payments. In the year ended 30 June 2019 other external charges included operating lease expenses in respect of plant and machinery of £19 million (2018 - £21 million) and other assets (mainly properties) of £101 million (2018 - £87 million). Refer to note 5 for further information relating to the interest expenses on lease liabilities.

The total cash outflow for leases in the year ended 30 June 2020 was £180 million.

48

Financial statements (continued)

12. Other investments

Accounting policies

Other investments are such equity investments that are not classified as investments in associates or joint arrangements nor investments in subsidiaries. They are included in non-current assets. Subsequent to initial measurement, other investments are stated at fair value. Gains and losses arising from the changes in fair value are recognised in the income statement or in other comprehensive income on a case by case basis. Accumulated gains and losses included in other comprehensive income are not recycled to the income statement. Dividends from other investments are recognised in the consolidated income statement.

Loans receivable are non-derivative financial assets that are not classified as equity investments. They are subsequently measured either at amortised cost using the effective interest method less allowance for impairment or at fair value with gains and losses arising from changes in fair value recognised in the income statement or in other comprehensive income that are recycled to the income statement on the de-recognition of the asset. Allowances for expected credit losses are made based on the risk of non-payment taking into account ageing, previous experience, economic conditions and forward-looking data. Such allowances are measured as either 12-months expected credit losses or lifetime expected credit losses depending on changes in the credit quality of the counterparty.

	Loans £ million			Others £ million			Total £ million
Cost less allowances or fair value
At 30 June 2018		35			11			46
Additions		2			—			2
Repayments and disposals		(1	)		—			(1	)
Fair value adjustment		—			2			2
Transfers		(19	)		19			—
At 30 June 2019		17			32			49
Exchange differences		1			1			2
Additions		3			—			3
Repayments and disposals		(1	)		(2	)		(3	)
Fair value adjustment		—			2			2
Provision charged during the year		(14	)		—			(14	)
Capitalised interest		1			—			1
Transfer		—			1			1
At 30 June 2020		7			34			41

At 30 June 2020, loans comprise £4 million (2019 – £17 million; 2018 – £35 million) of loans to customers and other third parties, after allowances of £127 million (2019 – £111 million; 2018 – £108 million), and £3 million (2019 – £nil; 2018 – £nil) of loans to associates.

49

Financial statements (continued)

13. Post employment benefits

Accounting policies

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 post employment plans, other than defined contribution plans, the amount charged to operating profit is the cost of accruing pension benefits promised to employees over the year, plus any changes arising on benefits granted to members by the group during the year. Net finance charges comprise the net deficit/asset on the plans at the beginning of the year, adjusted for cash flows in the year, multiplied by the discount rate for plan liabilities. The differences between the fair value of the plans’ assets and the present value of the plans’ liabilities are disclosed as an asset or liability on the consolidated balance sheet. Any differences due to changes in assumptions or experience are recognised in other comprehensive income. The amount of any pension fund asset recognised on the balance sheet is limited to any future refunds from the plan or the present value of reductions in future contributions to the plan.

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

Critical accounting estimates and judgements

Application of IAS 19 requires the exercise of estimate and judgement in relation to various assumptions.

Diageo determines the assumptions on a country by country basis in conjunction with its actuaries. Estimates are required in respect of uncertain future events including the life expectancy of members of the funds, salary and pension increases, future inflation rates, discount rates and employee and pensioner demographics. The application of different assumptions could have a significant effect on the amounts reflected in the income statement, other comprehensive income and the balance sheet. There may be interdependencies between the assumptions.

Where there is an accounting surplus on a defined benefit plan management judgement is necessary to determine whether the group can obtain a refund of the surplus by reducing future contributions to the plan.

(a) Post employment benefit plans

The group operates a number of pension plans throughout the world, devised in accordance with local conditions and practices. Our most significant plans are defined benefit plans and are funded by payments to separately administered trusts or insurance companies. The group also operates a number of plans that are generally unfunded, primarily in the United States, which provide to employees post employment medical benefits.

The principal plans are in the United Kingdom, Ireland and the United States where benefits are based on employees’ length of service and salary at retirement. All valuations were performed by independent actuaries using the projected unit credit method to determine pension costs. The most recent funding valuations of the significant defined benefit plans were carried out as follows:

Principal plans	Date of valuation
United Kingdom(i)		1 April 2018
Ireland(ii)		31 December 2018
United States		1 January 2020

(i) The Diageo Pension Scheme (DPS) closed to new members in November 2005. Employees who have joined Diageo in the United Kingdom since the defined benefit scheme closed had been eligible to become members of the Diageo Lifestyle Plan (a cash balance defined benefit pension plan) until 1 January 2018. Since then new employees have been eligible to become members of a Diageo administered defined contribution plan.

(ii) The Irish scheme closed to new members in May 2013. Employees who have joined Diageo in Ireland since the defined benefit scheme closed have been eligible to become members of Diageo administered defined contribution plans.

The assets of the UK and Irish pension plans are held in separate trusts administered by trustees who are required to act in the best interests of the plans’ beneficiaries. For DPS, the trustee is Diageo Pension Trust Limited. As required by legislation, one-third of the directors of the Trust are nominated by the members of the DPS, member nominated directors are appointed from both the pensioner member community and the active member community. For the Irish Scheme Diageo Ireland makes four nominations and appoints three further candidates nominated by representative groupings.

50

Financial statements (continued)

The amounts charged to the consolidated income statement for the group’s defined benefit post employment plans and the consolidated statement of comprehensive income for the three years ended 30 June 2020 are as follows:

	2020 £ million			2019 £ million			2018 £ million
Current service cost and administrative expenses		(109	)		(110	)		(123	)
Past service gains - ordinary activities		50			56			33
Past service losses - exceptional		—			(21	)		—
Gains on curtailments and settlements		12			4			6
Charge to operating profit		(47	)		(71	)		(84	)
Net finance gain/(charge) in respect of post employment plans		9			7			(11	)
Charge before taxation(i)		(38	)		(64	)		(95	)
Actual returns less amounts included in finance income		774			438			312
Experience gains/(losses)		34			113			(30	)
Changes in financial assumptions		(754	)		(514	)		108
Changes in demographic assumptions		(14	)		(6	)		69
Other comprehensive income		40			31			459
Changes in the surplus restriction		(2	)		2			(2	)
Total other comprehensive income		38			33			457

(1) The year ended 30 June 2020 includes past service gains of £47 million in respect of the Irish Scheme following separate communications to the deferred members in respect of changing their expectations of a full pension prior to reaching the age of 65 and to pensioners in respect of future pension increases. (2019 - £54 million in respect of changes made to future pension increases for members of the UK Scheme and changes to the principal Irish Scheme.) The exceptional past service loss, in the year ended 30 June 2019, of £21 million is in respect of the equalisation of Guaranteed Minimum Pension (GMP) benefits for men and women.

(i) The charge/income before taxation in respect of the following countries is:

	2020 £ million			2019 £ million			2018 £ million
United Kingdom		(23	)		(3	)		(49	)
Ireland		34			(13	)		1
United States		(30	)		(30	)		(29	)
Other		(19	)		(18	)		(18	)
		(38	)		(64	)		(95	)

In addition to the charge in respect of defined benefit post employment plans, contributions to the group’s defined contribution plans were £24 million (2019 – £19 million; 2018 – £18 million).

51

Financial statements (continued)

The movement in the net (deficit)/surplus for the two years ended 30 June 2020 is set out below:

	Plan assets £ million			Plan liabilities £ million			Net (deficit)/surplus £ million
At 30 June 2018		9,310			(9,244	)		66
Exchange differences		45			(55	)		(10	)
Charge before taxation		234			(298	)		(64	)
Other comprehensive income/(loss)(i)		438			(407	)		31
Contributions by the group		192			—			192
Employee contributions		5			(5	)		—
Benefits paid		(511	)		511			—
At 30 June 2019		9,713			(9,498	)		215
Exchange differences		65			(73	)		(8	)
Charge before taxation		198			(236	)		(38	)
Other comprehensive income/(loss)(i)		774			(734	)		40
Contributions by the group		156			—			156
Employee contributions		5			(5	)		—
Benefits paid		(489	)		489			—
At 30 June 2020		10,422			(10,057	)		365

(i) Excludes surplus restriction.

The plan assets and liabilities by type of post employment benefit and country is as follows:

	2020					2019
	Plan assets £ million		Plan liabilities £ million			Plan assets £ million		Plan liabilities £ million
Pensions
United Kingdom		7,696		(6,831	)		7,115		(6,257	)
Ireland		1,810		(2,031	)		1,747		(2,098	)
United States		660		(578	)		593		(545	)
Other		183		(240	)		186		(234	)
Post employment medical		2		(288	)		1		(275	)
Other post employment		71		(89	)		71		(89	)
		10,422		(10,057	)		9,713		(9,498	)

The balance sheet analysis of the post employment plans is as follows:

	2020					2019
	Non- current assets(i) £ million		Non- current liabilities £ million			Non- current assets(i) £ million		Non- current liabilities £ million
Funded plans		1,111		(434	)		1,060		(547	)
Unfunded plans		—		(315	)		—		(299	)
		1,111		(749	)		1,060		(846	)

(i) Includes surplus restriction of £3 million (2019 – £1 million).

The disclosures have been prepared in accordance with IFRIC 14. In particular, where the calculation for a plan results in a surplus, the recognised asset is limited to the present value of any available future refunds from the plan or reductions in future contributions to the plan, and any additional liabilities are recognised as required. The DPS at 30 June 2020 had a net surplus of £934 million (2019 - £906 million; 2018 - £819 million). This surplus has been recognised, with no provision made against it, as it is expected to be recoverable through a combination of a reduction in future cash contributions or ultimately via a cash refund when the last member’s obligations have been met.

52

Financial statements (continued)

(b) Principal risks and assumptions

The material post employment plans are not exposed to any unusual, entity specific or scheme specific risks but there are general risks:

Inflation – The majority of the plans’ obligations are linked to inflation. Higher inflation will lead to increased liabilities which is partially offset by the plans holding inflation linked gilts, swaps and caps against the level of inflationary increases.

Interest rate – The plan liabilities are determined using discount rates derived from yields on AA-rated corporate bonds. A decrease in corporate bond yields will increase plan liabilities though this will be partially offset by an increase in the value of the bonds held by the post employment plans.

Mortality – The majority of the obligations are to provide benefits for the life of the members and their partners, so any increase in life expectancy will result in an increase in the plans’ liabilities.

Asset returns – Assets held by the pension plans are invested in a diversified portfolio of equities, bonds and other assets. Volatility in asset values will lead to movements in the net deficit/surplus reported in the consolidated balance sheet for post employment plans which in addition will also impact the post employment expense in the consolidated income statement.

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 ending 30 June are based on the assumptions disclosed as at the previous 30 June.

	United Kingdom						Ireland						United States(i)
	2020 %		2019 %		2018 %		2020 %		2019 %		2018 %		2020 %		2019 %		2018 %
Rate of general increase in salaries(ii)		3.2		3.6		4.3		2.6		2.3		3.2		—		—		—
Rate of increase to pensions in payment		3.0		3.2		3.3		1.4		1.5		2.0		—		—		—
Rate of increase to deferred pensions		2.1		2.2		2.1		1.2		1.3		1.8		—		—		—
Discount rate for plan liabilities		1.5		2.3		2.8		1.2		1.2		1.7		2.6		3.4		4.1
Inflation - CPI		2.1		2.2		2.1		1.2		1.3		1.8		1.4		1.7		2.1
Inflation - RPI		2.8		3.2		3.1		—		—		—		—		—		—

(i) The salary increase assumption in the United States is not a significant assumption as only a minimal amount of members’ pension entitlement is dependent on a member’s projected final salary.

(ii) The salary increase assumptions include an allowance for age related promotional salary increases.

For the principal 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(i)						Ireland(ii)						United States
	2020 Age		2019 Age		2018 Age		2020 Age		2019 Age		2018 Age		2020 Age		2019 Age		2018 Age
Retiring currently at age 65
Male		86.4		86.2		86.1		86.6		86.5		86.4		85.6		85.7		86.0
Female		88.7		88.5		88.4		89.3		89.2		89.2		87.3		87.7		88.0
Currently aged 45, retiring at age 65
Male		88.5		88.3		88.2		89.6		89.5		89.4		87.2		87.3		87.6
Female		90.8		90.6		90.5		92.3		92.2		92.1		88.9		89.3		89.6

(i) Based on the CMI’s S2 mortality tables with scaling factors based on the experience of the plan and where people live, with suitable future improvements.

(ii) Based on the ‘00’ series of mortality tables with scaling factors based on the experience of the plan and with suitable future improvements.

53

Financial statements (continued)

For the significant assumptions, the following sensitivity analyses estimate the potential impacts on the consolidated income statement for the year ended 30 June 2021 and on the plan liabilities at 30 June 2020:

	United Kingdom									Ireland									United States and other
Benefit/(cost)	Operating profit £ million			Profit after taxation £ million			Plan liabilities(i) £ million			Operating profit £ million			Profit after taxation £ million			Plan liabilities(i) £ million			Operating profit £ million			Profit after taxation £ million			Plan liabilities(i) £ million
Effect of 0.5% increase in discount rate		5			17			568			2			3			174			1			2			38
Effect of 0.5% decrease in discount rate		(6	)		(14	)		(644	)		(2	)		(2	)		(202	)		(2	)		(2	)		(42	)
Effect of 0.5% increase in inflation		(5	)		(9	)		(405	)		(1	)		(3	)		(152	)		(1	)		(1	)		(14	)
Effect of 0.5% decrease in inflation		5			10			448			1			3			126			1			1			13
Effect of one year increase in life expectancy		(1	)		(4	)		(304	)		—			(1	)		(86	)		—			(1	)		(34	)

(i) The estimated effect on the liabilities excludes the impact of any interest rate and inflation swaps held by the pension plans.

(1) The sensitivity analyses above have been determined based on reasonably possible changes of the respective assumptions and may not be representative of the actual change. Each sensitivity is calculated on a change in the key assumption while holding all other assumptions constant. The sensitivity to inflation includes the impact on all inflation linked assumptions (e.g. pension increases and salary increases where appropriate).

(c) Investment and hedging strategy

The investment strategy for the group’s funded post employment plans is determined locally by the trustees of the plan and/or Diageo, as appropriate, and takes account of the relevant statutory requirements. The objective of the investment strategy is to achieve a target rate of return in excess of the movement on the liabilities, whilst taking an acceptable level of investment risk relative to the liabilities. This objective is implemented by using the funds of the plans to invest in a variety of asset classes that are expected over the long-term to deliver a target rate of return. The majority of the investment strategies have significant amounts allocated 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, within acceptable boundaries of risk. Significant amounts are invested in bonds in order to provide a natural hedge against movements in the liabilities of the plans. At 30 June 2020, approximately 82% and 90% (2019 – 56% and 78%) of the UK Scheme’s liabilities measured on the Trustee’s funding basis were hedged against future movements in gilt based interest rates and RPI inflation, respectively, through the combined effect of bonds and swaps. At 30 June 2020, approximately 48% and 70% (2019 – 44% and 71%) of the Irish Scheme’s liabilities measured on the Trustee’s funding basis were hedged against future movements in euro government bond based interest rates and euro inflation, respectively, through the combined effect of bonds and swaps.

The discount rates used are based on the yields of high quality fixed income investments. For the UK plans, which represent approximately 68% of total plan liabilities, the discount rate is determined by reference to the yield curves of AA-rated corporate bonds for which the timing and amount of cash outflows are similar to those of the plans. A similar process is used to determine the discount rates used for the non-UK plans.

54

Financial statements (continued)

An analysis of the fair value of the plan assets is as follows:

	2020										2019
	United Kingdom £ million			Ireland £ million		United States and other £ million		Total £ million			United Kingdom £ million			Ireland £ million		United States and other £ million		Total £ million
Equities
Quoted		1			315		255		571			19			294		248		561
Unquoted and private equity		501			1		21		523			504			—		21		525
Bonds
Fixed-interest government		114			124		50		288			123			129		46		298
Inflation-linked government		—			247		—		247			—			262		—		262
Investment grade corporate		507			306		467		1,280			404			337		421		1,162
Non-investment grade		137			77		17		231			163			74		15		252
Loan securities		1,697			328		—		2,025			1,362			331		—		1,693
Repurchase agreements		4,809			—		—		4,809			4,629			—		—		4,629
Liability driven investment (LDI)		222			64		—		286			185			40		—		225
Property - unquoted(i)		620			85		1		706			744			84		1		829
Hedge funds		92			134		4		230			75			135		—		210
Interest rate and inflation swaps		(1,048	)		66		—		(982	)		(1,048	)		30		—		(1,018	)
Cash and other		44			63		101		208			(45	)		31		99		85
Total bid value of assets		7,696			1,810		916		10,422			7,115			1,747		851		9,713

(1) The asset classes include some cash holdings that are temporary. This cash is likely to be invested imminently and so has been included in the asset class where it is anticipated to be invested in the long-term.

(i) At 30 June 2020, the fair value of property assets of £331 million were subject to “material valuation uncertainty”. The external valuers have confirmed, the inclusion of the “material valuation uncertainty” declaration does not mean that valuations cannot be relied upon but instead in the current extraordinary circumstances less certainty can be attached to valuations than would otherwise be the case. The group considers the value to be materially accurate on the basis that any short term impact of Covid-19 would not be reflective of the value of these long-term investments.

Total cash contributions by the group to all post employment plans in the year ending 30 June 2021 are estimated to be approximately £140 million.

(d) Deficit funding arrangements

UK plans

In the year ended 30 June 2011 the group established a Pension Funding Partnership (PFP) in respect of the UK Scheme. Whisky inventory was transferred into the partnership but the group retains control over the partnership which at 30 June 2020 held inventory with a book value of £586 million (2019 – £661 million). The partnership is fully consolidated in the group financial statements. The UK Scheme has a limited interest in the partnership and, as a partner, is entitled to a distribution from the profits of the partnership. Following the finalisation of the trustee valuation at 1 April 2018 the PFP was amended and the contribution to the DPS in the year ended 30 June 2020 was £11 million (2019 – £25 million). The last payment is expected to be in 2030.

In 2030 the group will be required, dependent upon the funding position of the UK Scheme at that time, to pay an amount not greater than the actuarial deficit at that time, up to a maximum of £430 million in cash, to purchase the UK Scheme’s interest in the partnership. If the UK Scheme is in surplus at an actuarial triennial valuation excluding the value of the PFP, then the group can exit the PFP with the agreement of the trustees.

55

Financial statements (continued)

Irish plans

The group has agreed a deficit funding arrangement with the trustees of the Irish Scheme under which it contributes to the Irish Scheme €23 million (£21 million) per annum until the year ending 30 June 2028. The agreement also provides for additional cash contributions into escrow of up to €135 million (£124 million) if the deficit is not reduced at each triennial valuation to agreed limits up to 2027. As part of this funding plan, Diageo has also granted to the Irish Scheme a contingent asset comprising mortgages over certain land and buildings and fixed and floating charges over certain receivables of the group up to a value of €200 million (£183 million). As a result of the actuarial triennial valuation as of 31 December 2015, the group made additional cash contributions of €9 million (£8 million) (2019 - €9 million; 2018 - €9 million). The 31 December 2018 triennial actuarial valuation did not result in any additional funding requirement.

(e) Timing of benefit payments

The following table provides information on the timing of the benefit payments and the average duration of the defined benefit obligations and the distribution of the timing of benefit payments:

	United Kingdom				Ireland				United States
	2020 £ million		2019 £ million		2020 £ million		2019 £ million		2020 £ million		2019 £ million
Maturity analysis of benefits expected to be paid
Within one year		346		395		76		75		56		63
Between 1 to 5 years		1,202		1,197		364		367		202		202
Between 6 to 15 years		2,556		2,663		691		723		357		359
Between 16 to 25 years		2,083		2,078		627		657		196		207
Beyond 25 years		2,648		2,909		918		1,008		173		185
Total		8,835		9,242		2,676		2,830		984		1,016
	years		years		years		years		years		years
Average duration of the defined benefit obligation		18		17		18		18		11		10

The projected benefit payments are based on the assumptions underlying the assessment of the obligations, including inflation. They are disclosed undiscounted and therefore appear large relative to the discounted value of the plan liabilities recognised in the consolidated balance sheet. They are in respect of benefits that have accrued at the balance sheet date and make no allowance for any benefits accrued subsequently.

(f) Related party disclosures

Information on transactions between the group and its pension plans is given in note 20.

56

Financial statements (continued)

14. Working capital

Accounting policies

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 at the weighted average cost incurred in acquiring inventories. Maturing inventories and raw materials which are retained for more than one year are classified as current assets, as they are expected to be realised in the normal operating cycle.

Trade and other receivables are initially recognised at fair value less transaction costs and subsequently carried at amortised cost less any allowance for discounts and doubtful debts. Trade receivables arise from contracts with customers, and are recognised when performance obligations are satisfied, and the consideration due is unconditional as only the passage of time is required before the payment is received. Allowance losses are calculated by reviewing lifetime expected credit losses using historic and forward-looking data on credit risk.

Trade and other payables are initially recognised at fair value including transaction costs and subsequently carried at amortised costs. Contingent consideration recognised in business combinations are subsequently measured at fair value through income statement. The group evaluates supplier arrangements against a number of indicators to assess if the liability has the characteristics of a trade payable or should be classified as borrowings. These indicators include whether payment terms are similar to customary payment terms.

Provisions are liabilities of uncertain timing or amount. A provision is recognised if, as a result of a past event, the group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are calculated on a discounted basis. The carrying amounts of provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.

(a) Inventories

	2020 £ million		2019 £ million
Raw materials and consumables		363		338
Work in progress		48		46
Maturing inventories		4,562		4,334
Finished goods and goods for resale		799		754
	5,772		5,472

Maturing inventories include whisk(e)y, rum, tequila and Chinese white spirits. The following amounts of inventories are expected to be utilised after more than one year:

	2020 £ million		2019 £ million
Raw materials and consumables		18		14
Maturing inventories		3,740		3,434
	3,758		3,448

57

Financial statements (continued)

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

	2020 £ million			2019 £ million			2018 £ million
Balance at beginning of the year		63			71			88
Exchange differences		—			—			(2	)
Income statement charge/(release)(i)		47			(3	)		—
Utilised		(12	)		(5	)		(15	)
		98			63			71

(i) Income statement charge in the year ended 30 June 2020 comprise £23 million exceptional charge due to Covid-19.

(b) Trade and other receivables

	2020				2019
	Current assets £ million		Non-current assets £ million		Current assets £ million		Non-current assets £ million
Trade receivables		1,498		—		2,173		—
Interest receivable		29		—		25		—
VAT recoverable and other prepaid taxes		192		13		132		14
Other receivables		210		31		141		31
Prepayments		157		2		202		8
Accrued income		25		—		21		—
		2,111		46		2,694		53

At 30 June 2020, approximately 16%, 28% and 14% of the group’s trade receivables of £1,498 million are due from counterparties based in the United Kingdom, the United States and India, respectively. Accrued income primarily represents amounts receivable from customers in respect of performance obligations satisfied but not yet invoiced.

The aged analysis of trade receivables, net of expected credit loss allowance, is as follows:

	2020 £ million		2019 £ million
Not overdue		1,379		2,083
Overdue 1 – 30 days		5		27
Overdue 31 – 60 days		23		21
Overdue 61 – 90 days		39		13
Overdue 91 – 180 days		39		15
Overdue more than 180 days		13		14
		1,498		2,173

Trade and other receivables are disclosed net of expected credit loss allowance for doubtful debts, an analysis of which is as follows:

	2020 £ million			2019 £ million			2018 £ million
Balance at beginning of the year		113			97			129
Exchange differences		(3	)		3			(4	)
Income statement charge		55			23			18
Written off		(5	)		(10	)		(46	)
		160			113			97

58

Financial statements (continued)

Due to the global financial uncertainty arising from the Covid-19 pandemic, management has considered the elevated credit risk on trade and other receivables. In addition, certain balances (where there was an objective evidence of credit impairment) have been provided for on an individual basis. This has resulted in a charge of £55 million for impairment provisions recognised in the income statement, out of which £29 million expected credit loss allowance is directly in relation to the current difficult trading environment.

(c) Trade and other payables

	2020				2019
	Current liabilities £ million		Non-current liabilities £ million		Current liabilities £ million		Non-current liabilities £ million
Trade payables		1,333		—		1,694		—
Interest payable		152		—		127		—
Tax and social security excluding income tax		698		—		640		—
Other payables		420		175		565		222
Accruals		971		—		1,097		—
Deferred income		79		—		56		—
Dividend payable to non-controlling interests		30		—		23		—
		3,683		175		4,202		222

Interest payable at 30 June 2020 includes interest on non-derivative financial instruments of £148 million (2019 – £124 million). Deferred income represents amounts paid by customers in respect of performance obligations not yet satisfied. Non-current liabilities include £110 million (2019 - £153 million) in respect of the net present value of contingent consideration in respect of the acquisition of Casamigos.

The amount of contract liabilities recognised as revenue in the current year is £56 million (2019 – £37 million).

Together with the group’s partner banks supply chain financing (SCF) facilities are provided to our suppliers in certain countries. These arrangements enable suppliers to receive funding earlier than the invoice due date at their discretion and at their own cost. The group settles trade payables in accordance with agreed payment terms with the supplier. At 30 June 2020 the amount that has been subject to SCF and accounted for as trade payables was £309 million (2019 – £371 million).

(d) Provisions

	Thalidomide £ million			Other £ million			Total £ million
At 30 June 2019		209			207			416
Exchange differences		—			(3	)		(3	)
Provisions charged during the year		—			120			120
Provisions utilised during the year		(17	)		(20	)		(37	)
Transfers to other payables		—			(27	)		(27	)
Unwinding of discounts		7			—			7
At 30 June 2020		199			277			476
Current liabilities		17			166			183
Non-current liabilities		182			111			293
		199			277			476

59

Financial statements (continued)

(a) Provisions have been established in respect of the discounted value of the group’s commitment to the UK and Australian Thalidomide Trusts. These provisions will be utilised over the period of the commitments up to 2037.

(b) The largest item in other provisions at 30 June 2020 is £81 million in respect of “Raising the Bar” programme. In June 2020 Diageo launched this two years global programme to support pubs and bars to welcome customers back and recover following the Covid-19 pandemic.

60

Financial statements (continued)

Risk management and capital structure

Introduction

This section sets out the policies and procedures applied to manage the group’s capital structure and the financial risks the group is exposed to. Diageo considers the following components of its balance sheet to be capital: borrowings and equity. Diageo manages its capital structure to achieve capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to debt markets at attractive cost levels.

15. Financial instruments and risk management

Accounting policies

Financial assets and liabilities are initially recorded at fair value including, where permitted by IFRS 9, any directly attributable transaction costs. For those financial assets that are not subsequently held at fair value, the group assesses whether there is evidence of impairment at each balance sheet date.

The group classifies its financial assets and liabilities into the following categories: financial assets and liabilities at amortised cost, financial assets and liabilities at fair value through profit and loss and financial assets at fair value through other comprehensive income.

The accounting policies for other investments and loans are described in note 12, for trade and other receivables and payables in note 14 and for cash and cash equivalents in note 16.

Financial assets and liabilities at fair value through profit or loss include derivative assets and liabilities. Where financial assets or liabilities are eligible to be carried at either amortised cost or fair value through other comprehensive income, the group does not apply the fair value option.

Derivative financial instruments are carried at fair value using a discounted cash flow model based on market data applied consistently for similar types of instruments. Gains and losses on derivatives that do not qualify for hedge accounting treatment are taken to the income statement as they arise.

Other financial liabilities are carried at amortised cost unless they are part of a fair value hedge relationship. The difference between the initial carrying amount of the financial liabilities and their redemption value is recognised in the income statement over the contractual terms using the effective interest rate method. The Zacapa related financial liabilities are recognised at fair value.

Hedge accounting

The group designates and documents certain derivatives as hedging instruments against changes in fair value of recognised assets and liabilities (fair value hedges), highly probable forecast transactions or the cash flow risk from a change in exchange or interest rates (cash flow hedges) and hedges of net investments in foreign operations (net investment hedges). The designated portion of the hedging instruments is included in other financial assets and liabilities on the consolidated balance sheet. The effectiveness of such hedges is assessed at inception and at least on a quarterly basis, using prospective testing. Methods used for testing effectiveness include dollar offset, critical terms, regression analysis and hypothetical models.

Fair value hedges are used to manage the currency and/or interest rate risks to which the fair value of certain assets and liabilities are exposed. Changes in the fair value of the derivatives are recognised in the income statement, along with any changes in the relevant fair value of the underlying hedged asset or liability.

If such a hedge relationship no longer meets hedge accounting criteria, 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 using the effective interest rate method.

61

Financial statements (continued)

Cash flow hedges are used to hedge the foreign currency risk of highly probable future foreign currency cash flows, the commodity price risk of highly probable future transactions, as well as the cash flow risk from changes in exchange or interest rates. The effective portion of the gain or loss on the hedges is recognised in other comprehensive income, while any ineffective part is recognised in the income statement. Amounts recorded in other comprehensive income are recycled to the income statement in the same period in which the underlying foreign currency, commodity exposure or interest exposure affects the income statement.

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

The group’s funding, liquidity and exposure to foreign currency and interest rate risks are managed by the group’s treasury department. The treasury department uses a range of financial instruments to manage these underlying risks.

Treasury operations are conducted within a framework of Board-approved policies and guidelines, which are recommended and monitored by the finance committee, chaired by the Chief Financial Officer. The policies and guidelines include benchmark exposure and/or hedge cover levels for key areas of treasury risk which are periodically reviewed by the Board following, for example, significant business, strategic or accounting changes. The framework provides for limited defined levels of flexibility in execution to allow for the optimal application of the Board-approved strategies. Transactions arising from the application of this flexibility are carried at fair value, gains or losses are taken to the income statement as they arise and are separately monitored on a daily basis using Value at Risk analysis. In the years ended 30 June 2020 and 30 June 2019 gains and losses on these transactions were not material. The group does not use derivatives for speculative purposes. All transactions in derivative financial instruments are initially undertaken to manage the risks arising from underlying business activities.

The group purchases insurance for commercial or, where required, for legal or contractual reasons. In addition, the group retains insurable risk where external insurance is not considered an economic means of mitigating these risks.

The finance committee receives a monthly report on the key activities of the treasury department, which would identify any exposures which differ from the defined benchmarks, should they arise.

(a) Currency risk

The group presents its consolidated financial statements in sterling and conducts business in many currencies. As a result, it is subject to foreign currency risk due to exchange rate movements, which will affect the group’s transactions and the translation of the results and underlying net assets of its operations. To manage the currency risk the group uses certain financial instruments. Where hedge accounting is applied, hedges are documented and tested for effectiveness on an ongoing basis. The impact of the Covid-19 pandemic on the group’s cash flow hedges has been considered to determine if the hedged forecast cash flows remain ‘highly probable’, in relation to forecasted sales transactions on the net US dollar exposure of the group and other hedged currency pairs. In making this assessment, the potential financial impact of the Covid-19 pandemic has been modelled in group’s cash flow projections and stress tested. For the year ended 30 June 2020, no material ineffectiveness was recognized based on the group’s assessment, however if there was a reduction in foreign currency forecast transactions, any potential ineffectiveness would be recognized in the consolidated income statement.

Hedge of net investment in foreign operations

The group hedges a certain portion of its exposure to fluctuations in the sterling value of its foreign operations by designating borrowings held in foreign currencies and using foreign currency spots, forwards, swaps and other financial derivatives. For the year ended 30 June 2020 the group’s guidance was to maintain total net investment Value at Risk to total Net Asset value below 20%, where Value at Risk is defined as the maximum amount of loss over a one-year period with a 95% probability confidence level.

62

Financial statements (continued)

At 30 June 2020 foreign currency borrowings designated in net investment hedge relationships amounted to £9,127 million (2019 - £4,001 million, including financial derivatives).

Hedge of foreign currency debt

The group uses cross currency interest rate swaps to hedge the foreign currency risk associated with certain foreign currency denominated borrowings.

Transaction exposure hedging

The group’s policy is to hedge up to 24 months forecast transactional foreign currency risk on the net US dollar exposure of the group targeting 75% coverage for the current financial year and up to 18 months for other currency pairs. The group’s exposure to foreign currency risk arising principally on forecasted sales transactions is managed using forward agreements and options.

(b) Interest rate risk

The group has an exposure to interest rate risk, arising principally on changes in US dollar, euro and sterling interest rates. To manage interest rate risk, the group manages its proportion of fixed to floating rate borrowings within limits approved by the Board, primarily through issuing fixed and floating rate borrowings and commercial paper, and by utilising interest rate swaps. These practices aim to minimise the group’s net finance charges with acceptable year-on-year volatility. To facilitate operational efficiency and effective hedge accounting, for the year ended 30 June 2020 the group’s policy was to maintain fixed rate borrowings within a band of 40% to 60% of forecasted net borrowings. In September 2019 the Board approved to temporarily amend the approved 40% - 60% fixed debt band to 40% - 70% for a period of 15 months until 31 December 2020. For these calculations, net borrowings exclude interest rate related fair value adjustments. The majority of the group’s existing interest rate derivatives are designated as hedges and are expected to be effective. Fair value of these derivatives is recognised in the income statement, along with any changes in the relevant fair value of the underlying hedged asset or liability. The group’s net borrowings interest rate profile as at 30 June 2020 and 2019 is as follows:

	2020						2019 (reclassification)
	£ million			%			£ million			%
Fixed rate		9,213			70			6,181			55
Floating rate(i)		3,746			28			5,071			45
Impact of financial derivatives and fair value adjustments		(183	)		(1	)		(103	)		(1	)
Lease liabilities(ii)		470			3			128			1
Net borrowings		13,246			100			11,277			100

(i) The floating rate portion of net borrowings includes cash and cash equivalents, collaterals, floating rate loans and bonds and bank overdrafts.

(ii) At 30 June 2019 the group reported lease liabilities of £128 million in respect of leases that met the criteria of ‘finance leases’ under IAS 17 - Leases, in the floating rate categorisation. As at 30 June 2020 Lease liabilities are disclosed separately.

The table below sets out the average monthly net borrowings and effective interest rate:

Average monthly net borrowings					Effective interest rate
2020 £ million	2019 £ million		2018 £ million		2020 %		2019 %		2018 %
12,708		10,393		9,063		2.6		2.4		2.6

(1) For this calculation, net interest charge excludes fair value adjustments to derivative financial instruments and borrowings and average monthly net borrowings includes the impact of interest rate swaps that are no longer in a hedge relationship but excludes the market value adjustment for cross currency interest rate swaps.

63

Financial statements (continued)

(c) Commodity price risk

Commodity price risk is managed in line with the principles approved by the Board either through long-term purchase contracts with suppliers or, where appropriate, derivative contracts. The group policy is to maintain the Value at Risk of commodity price risk arisen from commodity exposures below 75 bps of forecast gross margin in any given financial year. Where derivative contracts are used the commodity price risk exposure is hedged up to 24 months of forecast volume through exchange-traded and over-the-counter contracts (futures, forwards and swaps) and cash flow hedge accounting is applied.

(d) Market risk sensitivity analysis

The group uses a sensitivity analysis that estimates the impacts on the consolidated income statement and other comprehensive income of either an instantaneous increase or decrease of 0.5% in market interest rates or a 10% strengthening or weakening in sterling against all other currencies, from the rates applicable at 30 June 2020 and 30 June 2019, for each class of financial instruments with all other variables remaining constant. The sensitivity analysis excludes the impact of market risks on the net post employment benefit liabilities and assets, and corporate tax payable. This analysis is for illustrative purposes only, as in practice interest and foreign exchange rates rarely change in isolation.

The sensitivity analysis estimates the impact of changes in interest and foreign exchange rates. All hedges are expected to be highly effective for this analysis and it considers the impact of all financial instruments including financial derivatives, cash and cash equivalents, borrowings and other financial assets and liabilities. The results of the sensitivity analysis should not be considered as projections of likely future events, gains or losses as actual results in the future may differ materially due to developments in the global financial markets which may cause fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed in the table below.

	Impact on income statement gain/(loss)						Impact on consolidated comprehensive income gain/(loss)(i) (ii)
				2019						2019
	2020			(restated(iii))			2020			(restated(iii))
	£ million			£ million			£ million			£ million
0.5% decrease in interest rates		19			27			45			40
0.5% increase in interest rates		(19	)		(27	)		(43	)		(39	)
10% weakening of sterling		(26	)		(17	)		(1,384	)		(1,001	)
10% strengthening of sterling		22			14			1,132			805

(i) The impact on foreign currency borrowings and derivatives in net investment hedges is largely offset by the foreign exchange difference arising on the translation of net investments.

(ii) The impact on the consolidated statement of comprehensive income includes the impact on the income statement.

(iii) The year ended 30 June 2019 has been restated to reflect the increase or decrease of 0.5% in market interest rates from the rates applicable at 30 June 2019.

(e) Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the group. Credit risk arises on cash balances (including bank deposits and cash and cash equivalents), derivative financial instruments and credit exposures to customers, including outstanding loans, trade and other receivables, financial guarantees and committed transactions.

The carrying amount of financial assets of £5,989 million (2019 - £3,950 million) represents the group’s exposure to credit risk at the balance sheet date as disclosed in section (i), excluding the impact of any collateral held or other credit enhancements. A financial asset is in default when the counterparty fails to pay its contractual obligations. Financial assets are written off when there is no reasonable expectation of recovery.

Credit risk is managed separately for financial and business related credit exposures.

64

Financial statements (continued)

Financial credit risk

Diageo aims to minimise its financial credit risk through the application of risk management policies approved and monitored by the Board. Counterparties are predominantly limited to major banks and financial institutions, primarily with a long-term credit rating within the A band or better, and the policy restricts the exposure to any one counterparty by setting credit limits taking into account the credit quality of the counterparty. The group’s policy is designed to ensure that individual counterparty limits are adhered to and that there are no significant concentrations of credit risk. The Board also defines the types of financial instruments which may be transacted. The credit risk arising through the use of financial instruments for currency and interest rate risk management is estimated with reference to the fair value of contracts with a positive value, rather than the notional amount of the instruments themselves. Diageo annually reviews the credit limits applied and regularly monitors the counterparties’ credit quality reflecting market credit conditions.

When derivative transactions are undertaken with bank counterparties, the group may, where appropriate, enter into certain agreements with such bank counterparties whereby the parties agree to post cash collateral for the benefit of the other if the net valuations of the derivatives are above a predetermined threshold. At 30 June 2020, the collateral held under these agreements amounted to $221 million (£180 million) (2019 – $152 million (£120 million)).

Business related credit risk

Loan, trade and other receivables exposures are managed locally in the operating units where they arise and active risk management is applied, focusing on country risk, credit limits, ongoing credit evaluation and monitoring procedures. There is no significant concentration of credit risk with respect to loans, trade and other receivables as the group has a large number of customers which are internationally dispersed.

(f) Liquidity risk

Liquidity risk is the risk that Diageo may encounter difficulties in meeting its obligations associated with financial liabilities that are settled by delivering cash or other financial assets. The group uses short-term commercial paper to finance its day-to-day operations. The group’s policy with regard to the expected maturity profile of borrowings is to limit the amount of such borrowings maturing within 12 months to 50% of gross borrowings less money market demand deposits, and the level of commercial paper to 30% of gross borrowings less money market demand deposits. In addition, the group’s policy is to maintain backstop facilities with relationship banks to support commercial paper obligations.

The following tables provide an analysis of the anticipated contractual cash flows including interest payable for the group’s financial liabilities and derivative instruments on an undiscounted basis. Where interest payments are calculated at a floating rate, rates of each cash flow until maturity of the instruments are calculated based on the forward yield curve prevailing at the respective year ends. The gross cash flows of cross currency swaps are presented for the purposes of this table. All other derivative contracts are presented on a net basis. Financial assets and liabilities are presented gross in the consolidated balance sheet although, in practice, the group uses netting arrangements to reduce its liquidity requirements on these instruments.

65

Financial statements (continued)

Contractual cash flows

	Due within 1 year £ million			Due between 1 and 3 years £ million			Due between 3 and 5 years £ million			Due after 5 years £ million			Total £ million			Carrying amount at balance sheet date £ million
2020
Borrowings(i)		(1,994	)		(2,980	)		(3,080	)		(8,615	)		(16,669	)		(16,785	)
Interest on borrowings(i)(iii)		(466	)		(669	)		(541	)		(1,741	)		(3,417	)		(148	)
Lease capital repayments		(106	)		(135	)		(71	)		(158	)		(470	)		(470	)
Lease future interest payments		(9	)		(13	)		(9	)		(31	)		(62	)		—
Trade and other financial liabilities(ii)		(2,833	)		(127	)		(48	)		(35	)		(3,043	)		(3,006	)
Non-derivative financial liabilities		(5,408	)		(3,924	)		(3,749	)		(10,580	)		(23,661	)		(20,409	)
Cross currency swaps (gross)
Receivable		65			902			89			1,506			2,562			—
Payable		(41	)		(824	)		(56	)		(1,014	)		(1,935	)		—
Other derivative instruments (net)		21			89			45			19			174			—
Derivative instruments(iii)		45			167			78			511			801			610
2019
Borrowings(i)		(1,957	)		(2,942	)		(2,845	)		(4,748	)		(12,492	)		(12,555	)
Interest on borrowings(i)(iii)		(363	)		(489	)		(368	)		(1,362	)		(2,582	)		(124	)
Finance lease capital repayments(iv)		(43	)		(43	)		(33	)		(9	)		(128	)		(128	)
Finance lease future interest payments(iv)		(5	)		(7	)		(3	)		—			(15	)		—
Trade and other financial liabilities(ii)		(3,305	)		(233	)		(3	)		(11	)		(3,552	)		(3,524	)
Non-derivative financial liabilities		(5,673	)		(3,714	)		(3,252	)		(6,130	)		(18,769	)		(16,331	)
Cross currency swaps (gross)
Receivable		63			125			854			1,503			2,545			—
Payable		(41	)		(82	)		(811	)		(1,042	)		(1,976	)		—
Other derivative instruments (net)		70			27			30			18			145			—
Derivative instruments(iii)		92			70			73			479			714			400

(i) For the purpose of these tables above, borrowings are defined as gross borrowings excluding lease liabilities and fair value of derivative instruments as disclosed in note 16.

(ii) Primarily consists of trade and other payables that meet the definition of financial liabilities under IAS 32.

(iii) Carrying amount of interest on borrowings, interest on derivatives and interest on other payable is included within interest payable in note 14.

(iv) For the year ended 30 June 2019 lease liabilities only include liabilities that met the criteria of ‘finance leases’ under IAS 17—Leases.

The group had available undrawn committed bank facilities as follows:

	2020 £ million		2019 £ million
Expiring within one year(i)		2,439		—
Expiring between one and two years		610		—
Expiring after two years		2,236		2,756
		5,285		2,756

(i) Diageo has the rights to extend £813 million of the committed facilities expiring within one year to May 2022.

The facilities can be used for general corporate purposes and, together with cash and cash equivalents, support the group’s commercial paper programmes.

66

Financial statements (continued)

There are no financial covenants on the group’s material short- and long-term borrowings. Certain of these borrowings contain cross default provisions and negative pledges.

The committed bank facilities are subject to a single financial covenant, being minimum interest cover ratio of two times (defined as the ratio of operating profit before exceptional items, aggregated with share of after tax results of associates and joint ventures, to net interest). They are also subject to pari passu ranking and negative pledge covenants.

Any non-compliance with covenants underlying Diageo’s financing arrangements could, if not waived, constitute an event of default with respect to any such arrangements, and any non-compliance with covenants may, in particular circumstances, lead to an acceleration of maturity on certain borrowings and the inability to access committed facilities. Diageo was in full compliance with its financial, pari passu ranking and negative pledge covenants in respect of its material short and long-term borrowings throughout each of the years presented.

(g) Fair value measurements

Fair value measurements of financial instruments are presented through the use of a three-level fair value hierarchy that prioritises the valuation techniques used in fair value calculations.

The group maintains policies and procedures to value instruments using the most relevant data available. If multiple inputs that fall into different levels of the hierarchy are used in the valuation of an instrument, the instrument is categorised on the basis of the most subjective input.

Foreign currency forwards and swaps, cross currency swaps and interest rate swaps are valued using discounted cash flow techniques. These techniques incorporate inputs at levels 1 and 2, such as foreign exchange rates and interest rates. These market inputs are used in the discounted cash flow calculation incorporating the instrument’s term, notional amount and discount rate, and taking credit risk into account. As significant inputs to the valuation are observable in active markets, these instruments are categorised as level 2 in the hierarchy.

Other financial liabilities include a put option, which does not have an expiry date, held by Industrias Licoreras de Guatemala (ILG) to sell the remaining 50% equity stake in Rum Creations & Products Inc, the owner of the Zacapa rum brand, to Diageo. The liability is fair valued and as at 30 June 2020 an amount of £167 million (30 June 2019—£174 million) is recognised as a liability with changes in fair value of the put option included in retained earnings. As the valuation of this option uses assumptions not observable in the market, it is categorised as level 3 in the hierarchy. As at 30 June 2020 because it is unknown when or if ILG will exercise the option the liability is measured as if the exercise date is on the last day of the next financial year considering forecast future performance.

Included in other financial liabilities, the contingent consideration on acquisition of businesses represents the present value of payments up to £283 million linked to certain performance targets which are expected to be paid over the next 10 years.

The group’s financial assets and liabilities measured at fair value are categorised as follows:

	2020 £ million			2019 £ million
Derivative assets		758			531
Derivative liabilities		(145	)		(129	)
Valuation techniques based on observable market input (Level 2)		613			402
Financial assets - other		116			86
Financial liabilities - other		(416	)		(401	)
Valuation techniques based on unobservable market input (Level 3)		(300	)		(315	)

67

Financial statements (continued)

In the year ended 30 June 2020, the increase in financial assets - other of £30 million is principally due to additions. In the year ended 30 June 2019, the decrease in financial assets - other of £3 million was mainly due to additions offset by advances promised to associates recognised only when targets are achieved.

The movements in level 3 instruments, measured on a recurring basis, are as follows:

	Zacapa financial liability			Contingent consideration recognised on acquisition of businesses(i)			Zacapa financial liability			Contingent consideration recognised on acquisition of businesses
	2020			2020			2019			2019
	£ million			£ million			£ million			£ million
At the beginning of the year		(174	)		(227	)		(164	)		(188	)
Net losses included in the income statement		(6	)		(24	)		(8	)		(25	)
Net losses included in exchange in other comprehensive income		(5	)		(5	)		(8	)		(8	)
Net gains/(losses) included in retained earnings		9			—			(3	)		—
Additions		—			(42	)		—			(15	)
Settlement of liabilities		9			49			9			9
At the end of the year		(167	)		(249	)		(174	)		(227	)

(i) Included in the balance at 30 June 2020 is £173 million in respect of the acquisition of Casamigos (2019 - £197 million).

There were no transfers between levels during the two years ended 30 June 2020 and 30 June 2019.

(h) Results of hedge relationships

The group targets a one-to-one hedge ratio. Strengths of the economic relationship between the hedged item and the hedging instrument is analysed on an ongoing basis. Ineffectiveness can arise from subsequent change in the forecast transactions as a result of timing, cash flows or value except when the critical terms of the hedging instrument and hedged item are closely aligned. The change in the credit risk of the hedging instruments or the hedged items is not expected to be the primary factor in the economic relationship.

The notional amounts, contractual maturities and rates of the hedging instruments designated in hedging relationships as of 30 June 2020 by the main risk categories are as follows:

	Notional amounts £ million		Maturity		Range of hedged rates(i)
2020
Net investment hedges
Derivatives in net investment hedges of foreign operations		—		—		—
Cash flow hedges
Derivatives in cash flow hedge (foreign currency debt)		1,667		April 2023-April 2043		US dollar 1.22-1.88
Derivatives in cash flow hedge (foreign currency exchange risk)		1,428		September 2020-March 2022		US dollar 1.19-1.36, euro 1.06-1.18
Derivatives in cash flow hedge (commodity price risk)		133		July 2020 - February 2023		Corn: 3.45 - 4.04 USD/Bu Fuel Oil: 1.11 - 1.87 USD/gal
Fair value hedges
Derivatives in fair value hedge (interest rate risk)		6,092		July 2020-April 2030		(0.01)-4.83%
2019
Net investment hedges
Derivatives in net investment hedges of foreign operations		68		July 2019		Turkish lira 7.55
Cash flow hedges
Derivatives in cash flow hedge (foreign currency debt)		1,614		April 2023-April 2043		US dollar 1.22-1.88
Derivatives in cash flow hedge (foreign currency exchange risk)		1,599		September 2019-February 2021		US dollar 1.28-1.47, euro 1.08-1.15
Derivatives in cash flow hedge (commodity price risk)		97		July 2019-May 2021		Wheat 148.75-171 GBP/t, Aluminium 1971-2204 USD/MT
Fair value hedges
Derivatives in fair value hedge (interest rate risk)		4,063		May 2020-May 2028		(0.01)-3.09%

(i) In case of derivatives in cash flow hedge (commodity price risk and foreign exchange risk) the range of the most significant contract’s hedged rates are presented.

68

Financial statements (continued)

For hedges of the cash flow risk from a change in forward exchange rates using cross currency interest rate swaps, the retranslation of the related bond principal to closing exchange rates and recognition of interest on the related bonds will affect the income statement in each year until the related bonds mature in 2023, 2036 and 2043. Exchange retranslation and the interest on the hedged bonds in the income statement are expected to offset those on the cross currency swaps in each of the years.

In respect of cash flow hedging instruments, a gain of £173 million (2019 - £79 million gain; 2018 - £57 million loss) has been recognised in other comprehensive income due to changes in fair value. A loss of £42 million has been transferred out of other comprehensive income to other operating expenses and a gain of £75 million to other finance charges, respectively (2019 - a loss of £45 million and a gain of £82 million; 2018 - a gain of £7 million and a loss of £6 million) to offset the foreign exchange impact on the underlying transactions. A loss of £8 million (2019 - £nil, 2018 - £nil) has been transferred out of other comprehensive income to operating profit in relation to commodity hedges. The carrying amount of hedged items recognised in the statement of financial position in relation to hedges of cash flow risk arising from foreign currency debts equals the notional value of the hedging instruments at 30 June 2020 and are included within borrowings. The notional amount for cash flow hedges of foreign currency debt at 30 June 2020 was £1,667 million (2019 - £1,614 million).

For cash flow hedges of forecast transactions at 30 June 2020, based on year end interest and exchange rates, there is expected to be a loss to the income statement of £62 million in the year ending 30 June 2021 and a gain of £4 million in the year ending 30 June 2022.

For hedges, that are no longer applicable at 30 June 2020, a loss of £20 million (2019 - a loss of £20 million) in respect of hedges of foreign currency borrowings is reported in reserves. There was no significant ineffectiveness on net investment and cash flow hedges during the year ended 30 June 2020.

The carrying amount of hedged items recognised in the statement of financial position in relation to fair value hedges £6,092 million (2019 - £4,063 million) equals the notional value of the hedging instruments at 30 June 2020 and are included within borrowings.

For fair value hedges, that are no longer applicable, the accumulated fair value changes shown on the statement of financial position at 30 June 2020 was £13 million (2019 - £21 million).

69

Financial statements (continued)

The following table sets out information regarding the effectiveness of hedging relationships designated by the Group, as well as the impacts on profit or loss and other comprehensive income:

	At the beginning of the year £ million			Income statement £ million			Consolidated comprehensive income £ million			Other £ million			At the end of the year £ million
2020
Net investment hedges
Derivatives in net investment hedges of foreign operations		(1	)		—			(1	)		2			—
Cash flow hedges
Derivatives in cash flow hedge (foreign currency debt)		271			75			146			(23	)		469
Derivatives in cash flow hedge (foreign currency exchange risk)		(57	)		(47	)		(1	)		47			(58	)
Derivatives in cash flow hedge (commodity price risk)		(9	)		(8	)		(3	)		11			(9	)
Fair value hedges
Derivatives in fair value hedge (interest rate risk)		104			85			—			—			189
Fair value hedge hedged item		(103	)		(86	)		—			—			(189	)
Instruments in fair value hedge relationship		1			(1	)		—			—			—
2019
Net investment hedges
Derivatives in net investment hedges of foreign operations		(3	)		—			(25	)		27			(1	)
Cash flow hedges
Derivatives in cash flow hedge (foreign currency debt)		112			82			98			(21	)		271
Derivatives in cash flow hedge (foreign currency exchange risk)		(16	)		(24	)		(41	)		24			(57	)
Derivatives in cash flow hedge (commodity price risk)		—			—			(9	)		—			(9	)
Fair value hedges
Derivatives in fair value hedge (interest rate risk)		(15	)		119			—			—			104
Fair value hedge hedged item		17			(120	)		—			—			(103	)
Instruments in fair value hedge relationship		2			(1	)		—			—			1

70

Financial statements (continued)

(i) Reconciliation of financial instruments

The table below sets out the group’s accounting classification of each class of financial assets and liabilities:

	Fair value through income statement £ million			Fair value through other comprehensive income £ million		Assets and liabilities at amortised cost £ million			Not categorised as a financial instrument £ million			Total £ million			Current £ million			Non-current £ million
2020
Other investments and loans(i)		96			20		5			2			123			—			123
Trade and other receivables		—			—		1,784			373			2,157			2,111			46
Cash and cash equivalents		—			—		3,323			—			3,323			3,323			—
Derivatives in fair value hedge (interest rate risk)		189			—		—			—			189			—			189
Derivatives in cash flow hedge (foreign currency debt)		469			—		—			—			469			—			469
Derivatives in cash flow hedge (foreign currency exchange risk)		8			—		—			—			8			1			7
Derivatives in cash flow hedge (commodity price risk)		1			—		—			—			1			1			—
Other instruments		91			—		—			—			91			73			18
Leases		—			—		3			—			3			—			3
Total other financial assets		758			—		3			—			761			75			686
Total financial assets		854			20		5,115			375			6,364			5,509			855
Borrowings(ii)		—			—		(16,785	)		—			(16,785	)		(1,995	)		(14,790	)
Trade and other payables		(249	)		—		(2,742	)		(867	)		(3,858	)		(3,683	)		(175	)
Derivatives in cash flow hedge (foreign currency exchange risk)		(66	)		—		—			—			(66	)		(52	)		(14	)
Derivatives in cash flow hedge (commodity price risk)		(10	)		—		—			—			(10	)		(9	)		(1	)
Other instruments		(236	)		—		—			—			(236	)		(222	)		(14	)
Leases		—			—		(470	)		—			(470	)		(106	)		(364	)
Total other financial liabilities		(312	)		—		(470	)		—			(782	)		(389	)		(393	)
Total financial liabilities		(561	)		—		(19,997	)		(867	)		(21,425	)		(6,067	)		(15,358	)
Total net financial assets/(liabilities)		293			20		(14,882	)		(492	)		(15,061	)		(558	)		(14,503	)
2019
Other investments and loans(i)		67			19		16			2			104			—			104
Trade and other receivables		—			—		2,385			362			2,747			2,694			53
Cash and cash equivalents		—			—		932			—			932			932			—
Derivatives in fair value hedge (interest rate risk)		104			—		—			—			104			2			102
Derivatives in cash flow hedge (foreign currency debt)		283			—		—			—			283			—			283
Derivatives in cash flow hedge (foreign currency exchange risk)		1			—		—			—			1			1			—
Other instruments at fair value		143			—		—			—			143			124			19
Total other financial assets		531			—		—			—			531			127			404
Total financial assets		598			19		3,333			364			4,314			3,753			561
Borrowings(ii)		—			—		(12,555	)		—			(12,555	)		(1,959	)		(10,596	)
Trade and other payables		(227	)		—		(3,251	)		(946	)		(4,424	)		(4,202	)		(222	)
Derivatives in cash flow hedge (foreign currency debt)		(12	)		—		—			—			(12	)		—			(12	)
Derivatives in cash flow hedge (foreign currency exchange risk)		(58	)		—		—			—			(58	)		(41	)		(17	)
Derivatives in cash flow hedge (commodity price risk)		(9	)		—		—			—			(9	)		(9	)		—
Derivatives in net investment hedge		(1	)		—		—			—			(1	)		(1	)		—
Other instruments		(223	)		—		(26	)		—			(249	)		(239	)		(10	)
Finance leases(iii)		—			—		(128	)		—			(128	)		(43	)		(85	)
Total other financial liabilities		(303	)		—		(154	)		—			(457	)		(333	)		(124	)
Total financial liabilities		(530	)		—		(15,960	)		(946	)		(17,436	)		(6,494	)		(10,942	)
Total net financial liabilities		68			19		(12,627	)		(582	)		(13,122	)		(2,741	)		(10,381	)

(i) Other investments and loans are including those in respect of associates.

(ii) Borrowings are defined as gross borrowings excluding lease liabilities and the fair value of derivative instruments.

(iii) In the year ended 30 June 2019 lease liabilities only include liabilities that met the criteria of ‘finance leases’ under IAS 17 - Leases.

At 30 June 2020 and 30 June 2019, the carrying values of cash and cash equivalents, other financial assets and liabilities approximate to fair values. At 30 June 2020 the fair value of borrowings, based on unadjusted quoted market data, was £18,175 million (2019 – £13,240 million).

71

Financial statements (continued)

(j) Capital management

The group’s management is committed to enhancing shareholder value in the long-term, both by investing in the business and brands so as to deliver continued improvement in the return from those investments and by managing the capital structure. Diageo manages its capital structure to achieve capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to debt markets at attractive cost levels. This is achieved by targeting an adjusted net borrowings (net borrowings aggregated with post employment benefit liabilities) to adjusted EBITDA leverage of 2.5 – 3.0 times, this range for Diageo being currently broadly consistent with an A band credit rating. Diageo would consider operating outside of this range in order to effect strategic initiatives within its stated goals, which could have an impact on its rating. If Diageo’s leverage was to be negatively impacted by the financing of an acquisition, it would seek over time to return to the range of 2.5 – 3.0 times. The group regularly assesses its debt and equity capital levels against its stated policy for capital structure. As at 30 June 2020 the adjusted net borrowings (£13,995 million) to adjusted EBITDA ratio was 3.3 times. For this calculation net borrowings are adjusted by post employment benefit liabilities before tax (£749 million) whilst adjusted EBITDA (£4,270 million) comprises operating profit excluding exceptional operating items and depreciation, amortisation and impairment and includes share of after tax results of associates and joint ventures.

16. Net borrowings

Accounting policies

Borrowings are initially recognised at fair value net of transaction costs and are subsequently reported at amortised cost. Certain bonds are designated in fair value hedge relationship. In these cases, the amortised cost is adjusted for the fair value of the risk being hedged, with changes in value recognised in the income statement. The fair value adjustment is calculated using a discounted cash flow technique based on unadjusted market data.

Bank overdrafts form an integral part of the group’s cash management and are included as a component of net cash and cash equivalents in the consolidated statement of cash flows.

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, including money market deposits, commercial paper and investments.

Net borrowings are defined as gross borrowings (short-term borrowings and long-term borrowings plus lease liabilities plus interest rate hedging instruments, cross currency interest rate swaps and funding foreign currency forwards and swaps used to manage borrowings) less cash and cash equivalents.

As a result of the adoption of IFRS 16 on 1 July 2019, net borrowings include leases previously classified as operating leases under IAS 17. Comparative information has not been restated.

72

Financial statements (continued)

	2020 £ million			2019 £ million
Bank overdrafts		170			211
Commercial paper		—			649
Bank and other loans		367			190
Credit support obligations		180			120
US$ 500 million floating bonds due 2020		—			394
US$ 500 million 3% bonds due 2020		—			393
€ 775 million 0% bonds due 2020		711			—
US$ 696 million 4.828% bonds due 2020		566			—
Fair value adjustment to borrowings		1			2
Borrowings due within one year		1,995			1,959
€ 775 million 0% bonds due 2020		—			691
US$ 696 million 4.828% bonds due 2020		—			538
€ 900 million 0.25% bonds due 2021		825			802
US$ 1,000 million 2.875% bonds due 2022(i)		812			785
US$ 300 million 8% bonds due 2022(i)		243			235
US$ 1,350 million 2.625% bonds due 2023		1,096			1,060
€ 600 million 0.125% bonds due 2023		548			533
US$ 500 million 3.5% bonds due 2023		405			393
US$ 600 million 2.125% bonds due 2024		487			—
€ 500 million 1.75% bonds due 2024		456			444
€ 500 million 0.5% bonds due 2024		456			443
US$ 750 million 1.375% bonds due 2025		606			—
€ 600 million 1% bonds due 2025		546			531
€ 850 million 2.375% bonds due 2026		776			755
£ 500 million 1.75% bonds due 2026		496			496
€ 750 million 1.875% bonds due 2027		683			—
€ 500 million 1.5% bonds due 2027		457			445
US$ 500 million 3.875% bonds due 2028		404			391
US$ 1,000 million 2.375% bonds due 2029		804			—
£ 300 million 2.875% bonds due 2029		298			—
US$ 1,000 million 2% bonds due 2030		807			—
€ 1,000 million 2.5% bonds due 2032		911			—
US$ 750 million 2.125% bonds due 2032		603			—
US$ 400 million 7.45% bonds due 2035(i)		325			315
US$ 600 million 5.875% bonds due 2036		483			468
US$ 500 million 4.25% bonds due 2042(i)		402			389
US$ 500 million 3.875% bonds due 2043		400			387
Bank and other loans		260			373
Fair value adjustment to borrowings		201			122
Borrowings due after one year		14,790			10,596
Total borrowings before derivative financial instruments		16,785			12,555
Fair value of cross currency interest rate swaps		(469	)		(271	)
Fair value of foreign exchange swaps and forwards		(28	)		(99	)
Fair value of interest rate hedging instruments		(189	)		(104	)
Lease liabilities(ii)		470			128
Gross borrowings		16,569			12,209
Less: Cash and cash equivalents		(3,323	)		(932	)
Net borrowings		13,246			11,277

73

Financial statements (continued)

(i) SEC-registered debt issued on an unsecured basis by Diageo Investment Corporation, a 100% owned finance subsidiary of Diageo plc.

(ii) In the year ended 30 June 2019 lease liabilities only includes leases that were classified as finance leases under IAS 17—Leases.

(1) The interest rates shown are those contracted on the underlying borrowings before taking into account any interest rate hedges (see note 15).

(2) Bonds are stated net of unamortised finance costs of £86 million (2019 – £63 million; 2018 – £60 million).

(3) Bonds are reported above at amortised cost with a fair value adjustment shown separately.

(4) All bonds, medium-term notes and commercial paper issued on an unsecured basis by the group’s 100% owned subsidiaries are fully and unconditionally guaranteed on an unsecured basis by Diageo plc.

Gross borrowings before derivative financial instruments are expected to mature as follows:

	2020 £ million		2019 £ million
Within one year		1,995		1,959
Between one and three years		3,013		2,940
Between three and five years		3,134		2,879
Beyond five years		8,643		4,777
		16,785		12,555

During the year the following bonds were issued and repaid:

	2020 £ million			2019 £ million			2018 £ million
Issued
€ denominated		1,594			2,270			1,136
£ denominated		298			496			—
US$ denominated		3,296			—			1,476
Repaid
€ denominated		—			(1,168	)		—
US$ denominated		(820	)		—			(1,571	)
		4,368			1,598			1,041

(a) Reconciliation of movement in net borrowings

	2020 £ million			2019 £ million
At beginning of the year		11,277			9,091
Net increase in cash and cash equivalents before exchange		(2,552	)		(54	)
Net increase in bonds and other borrowings(i)		4,089			2,331
Change in net borrowings from cash flows		1,537			2,277
Exchange differences on net borrowings		95			22
Other non-cash items(ii)		86			(113	)
Adoption of IFRS 16		251			—
Net borrowings at end of the year		13,246			11,277

(i) In the year ended 30 June 2020, net increase in bonds and other borrowings excludes £6 million cash outflow in respect of derivatives designated in forward point hedges (2019—£12 million).

(ii) In the years ended 30 June 2020 other non-cash items are principally in respect of leases of £206 million entered into in the period partially offset by the fair value changes of cross currency interest rate swaps. In the year ended 30 June 2019 other non-cash items are principally in respect of changes in the fair value of borrowings.

74

Financial statements (continued)

(b) Analysis of net borrowings by currency

	2020					2019
	Cash and cash equivalents £ million		Gross borrowings(i) £ million			Cash and cash equivalents £ million		Gross borrowings(i) £ million
US dollar		2,649		(6,300	)		88		525
Euro		57		(3,119	)		70		(2,910	)
Sterling		19		(6,233	)		40		(9,308	)
Indian rupee		13		(253	)		23		(247	)
Kenyan shilling		28		(351	)		79		(223	)
Hungarian forint		3		(239	)		4		157
Mexican peso		16		(104	)		16		(78	)
South African rand		1		(23	)		23		(35	)
Chinese yuan		207		(1	)		249		9
Other(ii)		330		54			340		(99	)
Total		3,323		(16,569	)		932		(12,209	)

(i) Includes foreign currency forwards and swaps and leases.

(ii) Includes £100 million (Turkish lira) cash and cash equivalents in cash-pooling arrangements (2019 - £122 million (Turkish lira)).

17. Equity

Accounting policies

Own shares represent shares and share options of Diageo plc that are held in treasury or by employee share trusts for the purpose of fulfilling obligations in respect of various employee share plans or were acquired as part of a share buyback programme. Own shares are treated as a deduction from equity until the shares are cancelled, reissued or disposed of and when vest are transferred from own shares to retained earnings at their weighted average cost.

Share-based payments include share awards and options granted to directors and employees. The fair value of equity settled share options and share grants is initially measured at grant date based on the binomial or Monte Carlo models and is charged to the income statement over the vesting period. For equity settled shares the credit is included in retained earnings. Cancellations of share options are treated as an acceleration of the vesting period and any outstanding charge is recognised in operating profit immediately. Any surplus or deficit arising on the sale of the Diageo plc shares held by the group is included as a movement in equity.

Dividends are included in the financial statements in the year in which they are approved.

(a) Allotted and fully paid share capital – ordinary shares of 28¹⁰¹/₁₀₈ pence each

	Number of shares million		Nominal value £ million
At 30 June 2020		2,562		742
At 30 June 2019		2,601		753
At 30 June 2018		2,695		780

75

Financial statements (continued)

(b) Hedging and exchange reserve

	Hedging reserve £ million			Exchange reserve £ million			Total £ million
At 30 June 2017		(21	)		(432	)		(453	)
Other comprehensive loss		(44	)		(530	)		(574	)
Adoption of IFRS 9 by associate		(3	)		—			(3	)
At 30 June 2018		(68	)		(962	)		(1,030	)
Other comprehensive income		31			181			212
At 30 June 2019		(37	)		(781	)		(818	)
Other comprehensive income/(loss)		125			(241	)		(116	)
Transfers from other retained earnings		5			—			5
At 30 June 2020		93			(1,022	)		(929	)

£30 million surplus (2019 – £1 million surplus, 2018 – £9 million deficit) out of the hedging reserve represents the cost of hedging arising as a result of imperfections of foreign exchange markets in the form of foreign currency basis spreads.

(c) Own shares

Movements in own shares

	Number of shares million			Purchase consideration £ million
At 30 June 2017		241			2,176
Share trust arrangements		(1	)		(9	)
Shares purchased - employee share plans		2			66
Shares used to satisfy options		(4	)		(89	)
Shares purchased - share buyback programme		59			1,507
Shares cancelled		(59	)		(1,507	)
At 30 June 2018		238			2,144
Share trust arrangements		(1	)		(14	)
Shares used to satisfy options		(5	)		(104	)
Shares purchased - share buyback programme		95			2,775
Shares cancelled		(95	)		(2,775	)
At 30 June 2019		232			2,026
Share trust arrangements		(1	)		(7	)
Shares used to satisfy options		(4	)		(83	)
Shares purchased - share buyback programme		39			1,282
Shares cancelled		(39	)		(1,282	)
At 30 June 2020		227			1,936

Share trust arrangements

At 30 June 2020 the employee share trusts owned 2 million of ordinary shares in Diageo plc (the company) at a cost of £51 million and market value of £57 million (2019 – 3 million shares at a cost of £58 million, market value £92 million; 2018 – 4 million shares at a cost of £72 million, market value £106 million). Dividends receivable by the employee share trusts on the shares are waived and the trustee abstains from voting.

Purchase of own shares

Authorisation was given by shareholders on 19 September 2019 to purchase a maximum of 237,177,623 shares at a minimum price of 28¹⁰¹/₁₀₈ pence and a maximum price of higher of (a) 105% of the average of the middle market quotations for an ordinary share for the five preceding business days and (b) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange at the time the purchase is carried out. The programme expires at the conclusion of the next Annual General Meeting or on 18 December 2020 if earlier.

76

Financial statements (continued)

During the year ended 30 June 2019 the company purchased call options over 4 million shares at a cost of £14 million to hedge employee share awards and share option grants. These are three-year call options, denominated in sterling. During the year ended 30 June 2018, as part of the employee share schemes, the company purchased 2.5 million ordinary shares, nominal value of £1 million, representing approximately 0.1% of the issued ordinary share capital (excluding treasury shares).

On 25 July 2019, the Board approved a return of capital programme with up to £4.5 billion to be returned to shareholders over the three-year period to 30 June 2022. Under the first phase of the programme, which ended on 31 January 2020, the group returned £1.25 billion via share buybacks.

During the year ended 30 June 2020 the group purchased approximately 39 million ordinary shares (2019 – 94.7 million, 2018 – 58.9 million), representing approximately 1.5% of the issued ordinary share capital (2019 – 3.5%, 2018 – 2.1%) at an average price of £32.43 per share, and an aggregate cost of £1,282 million (including £7 million of transaction costs) (2019 – £29.24 per share, and an aggregate cost of £2,775 million, including £6 million of transaction costs, 2018 – £25.43 per share, and an aggregate cost of £1,507 million, including £9 million of transaction costs) under the share buyback programme. This amount includes the aggregate consideration of £26 million (including £17 million settlement payments for the purchases made in the year ended 30 June 2019 and 30 June 2020) in relation to the prior year programme, which was completed on 10 July 2019 resulting in the repurchase of £0.3 million shares in the year ended 30 June 2020. The shares purchased under the share buyback programmes were cancelled.

At 30 June 2020 the leverage ratio, calculated as adjusted net borrowings to adjusted EBITDA, was 3.3x and the group anticipates leverage to be above the target range of 2.5-3.0x through the year ending 30 June 2021. The company has paused the return of capital programme until leverage is back within the target range.

The monthly breakdown of all shares purchased and the average price paid per share (excluding expenses) for the year ended 30 June 2020 were as follows:

Period	Number of shares purchased under share buyback programme		Total number of shares purchased		Average price paid pence		Authorised purchases unutilised at month end
July 2019		270,502		270,502		3373		162,912,211
August 2019		5,945,767		5,945,767		3422		156,966,444
1-19 September 2019		5,662,939		5,662,939		3514		151,303,505
20-30 September 2019		2,549,669		2,549,669		3249		234,627,954
October 2019		9,959,084		9,959,084		3220		224,668,870
November 2019		3,837,551		3,837,551		3099		220,831,319
December 2019		6,597,406		6,597,406		3100		214,233,913
January 2020		4,176,677		4,176,677		3165		210,057,236
Total		38,999,595		38,999,595		3243		210,057,236

In April 2020, the Directors became aware that certain share buybacks and certain transactions related to the company’s employee share schemes with or for the benefit of the company’s employee benefit and share ownership trusts undertaken between 10 May 2019 and 9 August 2019, amounting to approximately £320 million (‘the affected transactions’), were undertaken contrary to the applicable provisions of the Companies Act 2006 as they were undertaken following utilisation in full of the company’s distributable reserves as set out in its balance sheet as at 30 June 2018. At the Annual General Meeting to be held on 28 September 2020, a resolution will be proposed which will appropriate an equivalent amount of distributable profits of the company to the payments made in respect of the affected transactions and will implement arrangements to put all potentially affected parties, so far as possible, in the position in which

77

Financial statements (continued)

they were intended to be had the affected transactions been undertaken in accordance with the applicable provisions of the Companies Act 2006. This resolution and the arrangements that it implements will, if approved by shareholders, constitute a related party transaction under IAS 24 and under the Listing Rules, as the Directors would benefit from the waiver of any claims that the company has or may have against them as a result of the affected transactions. These arrangements are not expected to have any effect on the company’s financial position as the company has not recorded or disclosed its right potentially to make claims against any person in respect of the affected transactions as an asset or contingent asset of the company.

(d) Dividends

	2020 £ million		2019 £ million		2018 £ million
Amounts recognised as distributions to equity shareholders in the year
Final dividend for the year ended 30 June 2019 42.47 pence per share (2018 – 40.4 pence; 2017 – 38.5 pence)		1,006		993		968
Interim dividend for the year ended 30 June 2020 27.41 pence per share (2019 – 26.1 pence; 2018 – 24.9 pence)		640		630		613
		1,646		1,623		1,581

The proposed final dividend of £992 million (42.47 pence per share) for the year ended 30 June 2020 was approved by the Board of Directors on 3 August 2020. As this was after the balance sheet date and the dividend is subject to approval by shareholders at the Annual General Meeting, this dividend has not been included as a liability in these consolidated financial statements. There are no corporate tax consequences arising from this treatment.

Dividends are waived on all treasury shares owned by the company and all shares owned by the employee share trusts.

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Financial statements (continued)

(e) Non-controlling interests

Diageo consolidates USL, a company incorporated in India, with a 42.73% non-controlling interest and has a 50% controlling interest in Ketel One Worldwide B.V. (Ketel One), a company incorporated in the Netherlands. All other consolidated subsidiaries are fully owned or the non-controlling interests are not material.

Summarised financial information for USL and other subsidiaries, after fair value adjustments on acquisition, and the amounts attributable to non-controlling interests are as follows:

	2020									2019			2018
	USL £ million			Others £ million			Total £ million			Total £ million			Total £ million
Income statement
Sales		2,790			1,898			4,688			5,346			4,926
Net sales		846			1,468			2,314			2,656			2,431
(Loss)/profit for the year		(53	)		138			85			383			244
Other comprehensive (loss)/income(i)		(112	)		16			(96	)		137			(163	)
Total comprehensive (loss)/income		(165	)		154			(11	)		520			81
Attributable to non-controlling interests		(71	)		79			8			234			53
Balance sheet
Non-current assets(ii)		2,041			3,129			5,170			5,313			4,973
Current assets		541			739			1,280			1,469			1,384
Non-current liabilities		(349	)		(1,110	)		(1,459	)		(1,526	)		(1,425	)
Current liabilities		(466	)		(722	)		(1,188	)		(1,204	)		(1,183	)
Net assets		1,767			2,036			3,803			4,052			3,749
Attributable to non-controlling interests		756			912			1,668			1,795			1,765
Cash flow
Net cash inflow from operating activities		29			204			233			542			334
Net cash outflow from investing activities		(16	)		(136	)		(152	)		(157	)		(136	)
Net cash outflow from financing activities		(34	)		(175	)		(209	)		(266	)		(164	)
Net (decrease)/increase in cash and cash equivalents		(21	)		(107	)		(128	)		119			34
Exchange differences		(1	)		(2	)		(3	)		3			(2	)
Dividends payable to non-controlling interests		—			(117	)		(117	)		(114	)		(101	)

(i) Other comprehensive income is principally in respect of exchange on translating the subsidiaries to sterling.

(ii) Non-current assets include the global distribution rights to distribute Ketel One vodka products throughout the world. The carrying value of the distribution rights at 30 June 2020 was £1,464 million (2019 – £1,418 million; 2018 – £1,363 million).

(1) On 29 July 2019 East African Breweries Limited completed a purchase of 4% of the share capital of Serengeti Breweries Limited. This increased Diageo’s effective economic interest from 39.2% to 40.2%.

(2) On 20 August 2019 and 28 February 2020 Diageo completed the purchase of 0.46% and 0.7% of the share capital of United Spirits Limited (USL) respectively. This increased Diageo’s controlling shareholding position from 54.78% to 55.94%, excluding 2.38% owned by the USL Share Trust.

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Financial statements (continued)

(f) Employee share compensation

The group uses a number of share award and option plans to grant to its directors and employees.

The annual fair value charge in respect of the equity settled plans for the three years ended 30 June 2020 is as follows:

	2020 £ million			2019 £ million		2018 £ million
Executive share award plans		(3	)		41		33
Executive share option plans		2			4		3
Savings plans		3			4		3
		2			49		39

Executive share awards are primarily made under the Diageo 2014 Long Term Incentive Plan (DLTIP) from September 2014 onwards. Prior to the introduction of the DLTIP, employees in associated companies were granted awards under the Diageo plc 2011 Associated Companies Share Incentive Plan (DACSIP). There was a single grant in September 2016 under the Diageo Performance Incentive plan. Under all of these plans, conditional awards can be delivered in the form of restricted shares or share options at the market value at the time of grant.

Share awards normally vest and are released on the third anniversary of the grant date. Participants do not make a payment to receive the award at grant. Executive Directors are required to hold any vested shares awarded from 2014 for a further two-year period. Share options may normally be exercised between three and ten years after the grant date. Executives in North America and Latin America and Caribbean are granted awards over the company’s ADSs (one ADS is equivalent to four ordinary shares).

Performance shares under the DLTIP are subject to the achievement of three equally weighted performance tests: 1) compound annual growth in profit before exceptional items over three years; 2) compound annual growth in organic net sales over three years; 3) cumulative free cash flow over a three-year period, measured at constant exchange rates. Shares awarded under the Diageo Performance Incentive plan (DPI) in September 2016 are subject to the achievement of two equally weighted performance tests over the three-year performance period. These were: 1) compound annual growth in organic net sales over three years; and 2) productivity savings over three years, with an assessment of line manager performance as an underpin. Performance share options under the DLTIP are subject to the achievement of two equally weighted performance tests: 1) a comparison of Diageo’s three-year TSR with a peer group; 2) compound annual growth in profit before exceptional items over three years. Performance measures and targets are set annually by the Remuneration Committee. The vesting range is 20% or 25% (for Executive Directors and for other participants respectively) for achieving minimum performance targets, up to 100% for achieving the maximum target level. Retesting of the performance condition is not permitted.

For performance shares under the DLTIP dividends are accrued on awards and are given to participants to the extent that the awards actually vest at the end of the performance period. Dividends are normally paid out in the form of shares.

For the three years ended 30 June 2020, the calculation of the fair value of each share award used the Monte Carlo pricing model and the following assumptions:

	2020			2019			2018
Risk free interest rate		0.4	%		0.8	%		0.3	%
Expected life of the awards		37 months			37 months			37 months
Dividend yield		1.9	%		2.4	%		2.6	%
Weighted average share price		3501 p			2736 p			2573 p
Weighted average fair value of awards granted in the year		899 p			1941 p			1761 p
Number of awards granted in the year		1.7 million			2.5 million			2.3 million
Fair value of all awards granted in the year	£	16 million		£	48 million		£	41 million

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Financial statements (continued)

Transactions on schemes

Transactions on the executive share award plans for the three years ended 30 June 2020 were as follows:

	2020 Number of awards million			2019 Number of awards million			2018 Number of awards million
Balance outstanding at 1 July		7.0			7.8			7.9
Granted		1.8			2.5			2.3
Awarded		(2.5	)		(2.1	)		(0.7	)
Forfeited		(0.7	)		(1.2	)		(1.7	)
Balance outstanding at 30 June		5.6			7.0			7.8

The exercise price of share options outstanding at 30 June 2020 was in the range of 1080 pence-3483 pence (2019—952 pence-2773 pence; 2018 - 765 pence-2602 pence).

At 30 June 2020, 3.8 million share options were exercisable at a weighted average exercise price of 1998 pence.

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Financial statements (continued)

Other financial information

Introduction

This section includes additional financial information that are either required by the relevant accounting standards or management considers these to be material information for shareholders.

18. Contingent liabilities and legal proceedings

Accounting policies

Provision is made for the anticipated settlement costs of legal or other disputes against the group where it is considered to be probable that a liability exists and a reliable estimate can be made of the likely outcome. Where it is possible that a settlement may be reached or it is not possible to make a reliable estimate of the estimated financial effect appropriate disclosure is made but no provision created.

Critical accounting judgements and estimates

Judgement is necessary in assessing the likelihood that a claim will succeed, or a liability will arise, and an estimate to quantify the possible range of any settlement. Due to the inherent uncertainty in this evaluation process, actual losses may be different from the liability originally estimated. The group may be involved in legal proceedings in respect of which it is not possible to make a reliable estimate of any expected settlement, if any. In such cases appropriate disclosure is provided but no provision is made and no contingent liability is quantified.

(a) Guarantees and related matters

As of 30 June 2020, the group has no material unprovided guarantees or indemnities in respect of liabilities of third parties.

(b) Acquisition of USL shares from UBHL, winding-up petitions against UBHL and other proceedings in relation to the USL transaction

On 4 July 2013, Diageo completed its acquisition, under a share purchase agreement with United Breweries (Holdings) Limited (UBHL) and various other sellers (the SPA), of 21,767,749 shares (14.98%) in United Spirits Limited (USL) for a total consideration of INR 31.3 billion (£349 million), including 10,141,437 shares (6.98%) from UBHL. The SPA was signed on 9 November 2012 and was part of the transaction announced by Diageo in relation to USL on that day (the Original USL Transaction). Following a series of further transactions, as of 30 June 2020, Diageo has a 55.94% investment in USL (excluding 2.38% owned by the USL Benefit Trust).

Prior to the acquisition from UBHL on 4 July 2013, the High Court of Karnataka (High Court) had granted leave to UBHL under sections 536 and 537 of the Indian Companies Act 1956 (the Leave Order) to enable the sale by UBHL to Diageo to take place (the UBHL Share Sale) notwithstanding the continued existence of five winding-up petitions that were pending against UBHL on 9 November 2012, being the date of the SPA. Additional winding-up petitions have been brought against UBHL since 9 November 2012, and the Leave Order did not extend to them. At the time of the completion of the UBHL Share Sale, the Leave Order remained subject to review on appeal. However, as stated by Diageo at the time of closing on 4 July 2013, it was considered unlikely that any appeal process in respect of the Leave Order would definitively conclude on a timely basis and, accordingly, Diageo waived the conditionality under the SPA relating to the absence of insolvency proceedings in relation to UBHL and acquired the 10,141,437 USL shares from UBHL at that time.

Following closing of the UBHL Share Sale, appeals were filed by various petitioners in respect of the Leave Order. On 20 December 2013, the division bench of the High Court set aside the Leave Order (the December 2013 Order). Following the December 2013 Order, Diageo filed special leave petitions (SLPs) in the Supreme Court of India against the December 2013 Order.

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Financial statements (continued)

On 10 February 2014, the Supreme Court of India issued an order giving notice in respect of the SLPs and ordering that the status quo be maintained with regard to the UBHL Share Sale pending a hearing on the matter in the Supreme Court. Following a number of adjournments, the next date for a substantive hearing of the SLPs (in respect of which leave has since been granted and which have been converted to civil appeals) is yet to be fixed.

In separate proceedings, the High Court passed a winding-up order against UBHL on 7 February 2017. On 4 March 2017, UBHL appealed against this order before a division bench of the High Court. On 6 March 2020, the division bench of the High Court, confirmed the winding up order dated 7 February 2017, and dismissed the appeal filed by UBHL. On 30 June 2020, UBHL filed a special leave petition in the Supreme Court of India against the order of the division bench of the High Court. This petition is currently pending.

Diageo continues to believe that the acquisition price of INR 1,440 per share paid to UBHL for the USL shares is fair and reasonable as regards UBHL, UBHL’s shareholders and UBHL’s secured and unsecured creditors. However, adverse results for Diageo in the proceedings referred to above could, absent leave or relief in other proceedings, ultimately result in Diageo losing title to the 6.98% stake acquired from UBHL (now represented by 50,707,185 USL shares following a share split). Diageo believes, including by reason of its rights under USL’s articles of association to nominate USL’s CEO and CFO and the right to appoint, through USL, a majority of the directors on the boards of USL’s subsidiaries as well as its ability as promoter to nominate for appointment up to two-thirds of USL’s directors for so long as the chairperson of USL is an independent director, that it would remain in control of USL and be able to consolidate USL as a subsidiary regardless of the outcome of this litigation.    

There can be no certainty as to the outcome of the existing or any further related legal proceedings or the timeframe within which they would be concluded.

Diageo also has the benefit of certain contractual undertakings and commitments from the relevant sellers in relation to potential challenges to its unencumbered title to the USL shares acquired on 4 July 2013, including relating to the winding-up petitions described above and/or certain losses and costs that may be incurred in the event of third party actions relating to the acquisition of the USL shares.

(c) Continuing matters relating to the resignation of Dr Vijay Mallya from USL and USL internal inquiries

On 25 February 2016, Diageo and USL each announced that they had entered into arrangements with Dr Mallya under which he had agreed to resign from his position as a director and as chairman of USL and from his positions in USL’s subsidiaries. As specified by Diageo in its announcement at that time, these arrangements ended its prior agreement with Dr Mallya regarding his position at USL, therefore bringing to an end the uncertainty relating to the governance of USL, and put in place a five-year global non-compete (excluding the United Kingdom), non-interference, non-solicitation and standstill arrangement with Dr Mallya. As part of those arrangements, USL, Diageo and Dr Mallya agreed a mutual release in relation to matters arising out of an inquiry into certain matters referred to in USL’s financial statements and the qualified auditor’s report for the year ended 31 March 2014 (the Initial Inquiry) which had revealed, among other things, certain diversions of USL funds. Dr Mallya also agreed not to pursue any claims against Diageo, USL and their affiliates (including under the prior agreement with Diageo). In evaluating entering into such arrangements, Diageo considered the impact of the arrangements on USL and all of USL’s shareholders, and came to the view that the arrangements were in the best interests of USL and its shareholders.

Diageo’s agreement with Dr Mallya (the February 2016 Agreement) provided for a payment of $75 million (£61 million) to Dr Mallya over a five year period in consideration for the five-year global non-compete, non-interference, non-solicitation and standstill commitments referred to above, his resignation from USL and the termination of his USL-related appointment and governance rights, the relinquishing of rights and benefits attached to his position at USL, and his agreement not to pursue claims against Diageo and USL. The February 2016 Agreement also provided for the release of Dr Mallya’s personal obligations to indemnify (i) Diageo Holdings Netherlands B.V. (DHN) in respect of its earlier liability ($141 million (£115 million)) under a backstop guarantee of certain borrowings of Watson Limited (Watson) (a company affiliated with Dr Mallya), and (ii) Diageo Finance plc in respect of its earlier liability (£30 million) under a guarantee of certain borrowings of United Breweries Overseas Limited, a subsidiary of UBHL. $40 million (£32 million) of the $75 million (£61 million) amount was paid on signing of the February 2016 Agreement with the balance being payable in equal instalments of $7 million (£6 million) a year over five years, subject to and conditional on Dr Mallya’s compliance with certain terms of the agreement.

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Financial statements (continued)

While the first four instalments of $7 million (£6 million) each would have become due on 25 February 2017, 25 February 2018, 25 February 2019 and 25 February 2020, respectively, owing to various reasons (including breaches committed by Dr Mallya and certain persons connected with him of several provisions of the February 2016 Agreement and agreements of the same date between Dr Mallya and USL), Diageo believes that it was not liable to pay such amounts and did not do so. Diageo further believes that it is very unlikely to become liable to pay any future instalments, to Dr Mallya. By notice to Dr Mallya and certain persons connected with him on 24 February 2017, 3 November 2017, 23 February 2018, 22 August 2018, 22 February 2019 and 24 February 2020, Diageo and other group companies have demanded from Dr Mallya the repayment of $40 million (£32 million) which was paid by Diageo on 25 February 2016, and also sought compensation from him for various losses incurred by the relevant members of the Diageo group on account of the breaches committed by him and certain persons connected with him. On 16 November 2017, Diageo and other relevant members of the Diageo group commenced claims in the High Court of Justice in England and Wales (the English High Court) against Dr Mallya in relation to certain of the matters specified in those notices. At the same time DHN also commenced claims in the English High Court against Dr Mallya, his son Sidhartha Mallya, Watson (a company affiliated with Dr Mallya), Continental Administration Services Limited (CASL) (a company affiliated with Dr Mallya and understood to hold assets on trust for him and certain persons affiliated with him) for in excess of $142 million (£115 million) (plus interest) in relation to Watson’s liability to DHN in respect of its borrowings referred to above and the breach of associated security documents. These additional claims are described in paragraph (d) below.

Dr Mallya, Sidhartha Mallya and the relevant affiliated companies filed a defence to such claims and the additional claims on 12 March 2018, and Dr Mallya also filed a counterclaim for payment of the two $7 million (£6 million) instalment payments withheld by Diageo as described above. Diageo and the other relevant members of its group filed a reply to that defence and a defence to the counter-claim on 5 September 2018.

Diageo continues to prosecute its claims and to defend the counterclaim. As part of this, on 18 December 2018, Diageo and the other relevant members of its group filed an application for strike out and/or summary judgement in respect of certain aspects of the defence filed by Dr Mallya and the other defendants, including their defence in relation to Watson and CASL’s liability to repay DHN. That application was made by DHN on the basis that the defence filed by Dr Mallya and his co-defendants in relation to those matters had no real prospect of success.

DHN’s summary judgement and strike out application was heard by the English High Court on 24 May 2019. The court decided in favour of DHN that (i) Watson is liable to pay, and has no defence against paying, $135 million (£110 million) plus interest of $11 million (£9 million) to DHN, and (ii) CASL is liable, as co-surety, to pay, and has no defence against paying, 50% of any such amount unpaid by Watson, i.e. up to $67.5 million (£55 million) plus interest of $5.5 million (£5 million) to DHN. Watson and CASL were ordered to pay such sums, as well as certain amounts in respect of DHN and Diageo’s costs, to DHN by 21 June 2019. Such amounts were not paid on that date by either Watson or CASL. Accordingly, Diageo and DHN have sought asset disclosure and are considering further enforcement steps against those companies, both in the United Kingdom and in other jurisdictions where they are present or hold assets.

The remaining elements of the claims originally commenced on 16 November 2017 by Diageo and the relevant members of its group are now proceeding to trial and following a case management conference on 6 December 2019, that trial is scheduled to take place from 11 October 2021 through 21 October 2021.

As previously announced by USL, the Initial Inquiry identified certain additional parties and matters indicating the possible existence of other improper transactions. These transactions could not be fully analysed during the Initial Inquiry and, accordingly, USL, as previously announced, mandated that its Managing Director and Chief Executive Officer conduct a further inquiry into the transactions involving the additional parties and the additional matters to determine whether they also suffered from improprieties (the Additional Inquiry). USL announced the results of the Additional Inquiry in a notice to the Indian Stock Exchange dated 9 July 2016. The mutual release in relation to the Initial Inquiry agreed by Diageo and USL with Dr Mallya announced on 25 February 2016 does not extend to matters arising out of the Additional Inquiry.

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Financial statements (continued)

As stated in USL’s previous announcement, the Additional Inquiry revealed further instances of actual or potential fund diversions from USL and its Indian and overseas subsidiaries to, in most cases, Indian and overseas entities in which Dr Mallya appears to have a material direct or indirect interest, as well as other potentially improper transactions involving USL and its Indian and overseas subsidiaries.

In connection with the matters identified by the Additional Inquiry, USL has, pursuant to a detailed review of each case of such fund diversion and after obtaining expert legal advice, where appropriate, filed civil suits for recovery of funds from certain parties, including Dr Mallya, before the relevant courts in India.

The amounts identified in the Additional Inquiry have been previously provided for or expensed in the financial statements of USL or its subsidiaries for prior periods. Further, at this stage, it is not possible for the management of USL to estimate the financial impact on USL, if any, arising out of potential non-compliance with applicable laws in relation to such fund diversions.

(d) Other continuing matters relating to Dr Mallya and affiliates

DHN issued a conditional backstop guarantee on 2 August 2013 to Standard Chartered Bank (Standard Chartered) pursuant to a guarantee commitment agreement (the Guarantee Agreement). The guarantee was in respect of the liabilities of Watson, a company affiliated with Dr Mallya, under a $135 million (£110 million) facility from Standard Chartered (the Facility Agreement). The Guarantee Agreement was entered into as part of the arrangements put in place and announced at the closing of the USL transaction on 4 July 2013.

DHN’s provision of the Guarantee Agreement enabled the refinancing of certain existing borrowings of Watson from a third party bank and facilitated the release by that bank of rights over certain USL shares that were to be acquired by Diageo as part of the USL transaction. The facility matured and entered into default in May 2015. In aggregate DHN paid Standard Chartered $141 million (£115 million) under this guarantee, i.e. including payments of default interest and various fees and expenses.

Watson remains liable for all amounts paid by DHN under the guarantee. Under the guarantee documentation with Standard Chartered, DHN is entitled to the benefit of the underlying security package for the loan, including: (a) certain shares in United Breweries Limited (UBL) held solely by Dr Mallya and certain other shares in UBL held by Dr Mallya jointly with his son Sidhartha Mallya, and (b) the shareholding in Watson.

Aspects of the security package are the subject of various proceedings in India in which third parties are alleging and asserting prior rights to certain assets comprised in the security package or otherwise seeking to restrain enforcement against certain assets by Standard Chartered and/or DHN. These proceedings are ongoing and DHN will continue to vigorously pursue these matters as part of its efforts for enforcement of the underlying security and recovery of outstanding amounts. Diageo believes that the existence of any prior rights or dispute in relation to the security would be in breach of representations and warranties given by Dr Mallya and others to Standard Chartered at the time the security was granted and further believes that certain actions taken by Dr Mallya in relation to the proceedings described above also breached his obligations to Standard Chartered. In addition to these third party proceedings, Dr Mallya is also subject to proceedings in India under the Prevention of Money Laundering Act and the Fugitive Economic Offenders Act in which the relevant Indian authority, the Directorate of Enforcement, is seeking confiscation of the UBL shares which were provided as security for Watson’s liabilities. DHN is participating in these proceedings in order to protect its security interest in respect of the UBL shares.

Under the terms of the guarantee and as a matter of law, there are arrangements to pass on to DHN the benefit of the security package upon payment by DHN under the guarantee of all amounts owed to Standard Chartered. Payment under the guarantee has now occurred as described above. To the extent possible in the context of the proceedings described above, DHN continues to work towards enforcement of the security package, including, when appropriate, in conjunction with Standard Chartered. DHN’s ability to assume or enforce security over some elements of the security package is also subject to regulatory consent. It is not at this stage possible to determine whether such consent would be forthcoming.

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Financial statements (continued)

In addition to the Indian proceedings just described, certain of the assets comprised in the security package may also be affected by a worldwide freezing order of the English High Court granted on 24 November 2017 and continued on 8 December 2017 and 8 May 2018 in respect of the assets of Dr Mallya.

The agreement with Dr Mallya referenced in paragraph (c) above does not impact the security package. Watson remains liable for all amounts paid pursuant to the guarantee and DHN has the benefit of a counter-indemnity from Watson in respect of payments in connection with the guarantee, as well as a claim against CASL as a co-surety with DHN of Watson’s obligations. The various security providers, including Dr Mallya and Watson, acknowledged in the February 2016 Agreement referred to in paragraph (c) above that DHN is entitled to the benefit of the security package underlying the Standard Chartered facility and have also undertaken to take all necessary actions in that regard. Further, Diageo believes that the existence of any prior rights or disputes in relation to the security package would be in breach of certain confirmations given to Diageo and DHN pursuant to that agreement by Dr Mallya, Watson and certain connected persons.

On 16 November 2017, DHN commenced various claims in the English High Court for, in aggregate, in excess of $142 million (£115 million) (plus interest) in relation to these matters, including the following: (i) a claim against Watson for $141 million (£115 million) (plus interest) under Watson’s counter-indemnity to DHN in respect of payments made by DHN to Standard Chartered under the guarantee referred to above; (ii) a claim against Dr Mallya and Sidhartha Mallya under various agreements creating or relating to the security package referred to above for (a) the costs incurred to date in the various Indian proceedings referred to above (plus interest), and (b) damages of $141 million (£115 million), being DHN’s loss as a result of those Indian proceedings which currently prevent enforcement of the security over shares in UBL (plus interest); and (iii) a claim against CASL, as a co-surety with DHN of Watson’s obligations under the Facility Agreement, for 50% of the difference between the amount claimed under (i) above and the amount (if any) that DHN is in fact able to recover from Watson, Dr Mallya and/or Sidhartha Mallya.

As noted in paragraph (c), Dr Mallya, Sidhartha Mallya and the relevant affiliated companies filed a defence to these claims on 12 March 2018. Diageo and the other relevant members of its group filed a reply to that defence on 5 September 2018.

DHN and Diageo continue to prosecute these claims. As part of that, on 18 December 2018, Diageo and the other relevant members of its group filed an application for strike out and/or summary judgment in respect of certain aspects of the defence filed by Dr Mallya, Sidhartha Mallya and the relevant affiliated companies, including in respect of Watson and CASL’s liability to repay DHN. The successful outcome of that application and the current status of other aspects of the claims are described in paragraph (c) above.

(e) Other matters in relation to USL

Following USL’s earlier updates concerning the Initial Inquiry as well as in relation to the arrangements with Dr Mallya that were the subject of the 25 February 2016 announcement, USL and Diageo have received various notices from Indian regulatory authorities, including the Ministry of Corporate Affairs, Enforcement Directorate and Securities and Exchange Board of India (SEBI).

Diageo and USL are co-operating fully with the authorities in relation to these matters. Diageo and USL have also received notices from SEBI requesting information in relation to, and explanation of the reasons for, the arrangements with Dr Mallya that were the subject of the 25 February 2016 announcement as well as, in the case of USL, in relation to the Initial Inquiry and the Additional Inquiry, and, in the case of Diageo, whether such arrangements with Dr Mallya or the Watson backstop guarantee arrangements referred to in paragraphs (c) and (d) above were part of agreements previously made with Dr Mallya at the time of the Original USL Transaction announced on 9 November 2012 and the open offer made as part of the Original USL Transaction. Diageo and USL have complied with such information requests and Diageo has confirmed that, consistent with prior disclosures, the Watson backstop guarantee arrangements and the matters described in the 25 February 2016 announcement were not the subject of any earlier agreement with Dr Mallya. In respect of the Watson backstop guarantee arrangements, SEBI issued a further notice to Diageo on 16 June 2016 that if there is any net liability incurred by Diageo (after any recovery under relevant security or

86

Financial statements (continued)

other arrangements, which matters remain pending) on account of the Watson backstop guarantee, such liability, if any, would be considered to be part of the price paid for the acquisition of USL shares under the SPA which formed part of the Original USL Transaction and that, in that case, additional equivalent payments would be required to be made to those shareholders (representing 0.04% of the shares in USL) who tendered in the open offer made as part of the Original USL Transaction. Diageo is clear that the Watson backstop guarantee arrangements were not part of the price paid or agreed to be paid for any USL shares under the Original USL Transaction and therefore believes the decision in the SEBI notice to be misconceived and wrong in law and appealed against it before the Securities Appellate Tribunal, Mumbai (SAT). On 1 November 2017, SAT issued an order in respect of Diageo’s appeal in which, amongst other things, it observed that the relevant officer at SEBI had neither considered Diageo’s earlier reply nor provided Diageo with an opportunity to be heard, and accordingly directed SEBI to pass a fresh order after giving Diageo an opportunity to be heard. Following SAT’s order, Diageo made its further submissions in the matter, including at a personal hearing before a Deputy General Manager of SEBI. On 26 June 2019, SEBI issued an order reiterating the directions contained in its previous notice dated 16 June 2016. As with the previous notice, Diageo believes SEBI’s latest order to be misconceived and wrong in law and has filed an appeal before SAT against the order. This appeal is currently pending. Diageo is unable to assess if the notices or enquiries referred to above will result in enforcement action or, if this were to transpire, to quantify meaningfully the possible range of loss, if any, to which any such action might give rise to if determined against Diageo or USL.

In relation to the matters described in the 25 February 2016 announcement, Diageo had also responded to a show cause notice dated 12 May 2017 from SEBI arising out of the previous correspondence in this regard and made its further submissions in the matter, including at a personal hearing before a Whole Time Member of SEBI. On 6 September 2018, SEBI issued an order holding that Diageo had acquired sole control of USL following its earlier open offers, and that no fresh open offer was triggered by Diageo.

(f) USL’s dispute with IDBI Bank Limited

Prior to the acquisition by Diageo of a controlling interest in USL, USL had prepaid a term loan of INR 6,280 million (£68 million) taken through IDBI Bank Limited (IDBI), an Indian bank, which was secured on certain fixed assets and brands of USL, as well as by a pledge of certain shares in USL held by the USL Benefit Trust (of which USL is the sole beneficiary). The maturity date of the loan was 31 March 2015. IDBI disputed the prepayment, following which USL filed a writ petition in November 2013 before the High Court of Karnataka (the High Court) challenging the bank’s actions.

Following the original maturity date of the loan, USL received notices from IDBI seeking to recall the loan, demanding a further sum of INR 459 million (£5 million) on account of the outstanding principal, accrued interest and other amounts, and also threatening to enforce the security in the event that USL did not make these further payments. Pursuant to an application filed by USL before the High Court in the writ proceedings, the High Court directed that, subject to USL depositing such further amount with the bank (which amount was duly deposited by USL), the bank should hold the amount in a suspense account and not deal with any of the secured assets including the shares until disposal of the original writ petition filed by USL before the High Court.

On 27 June 2019, a single judge bench of the High Court issued an order dismissing the writ petition filed by USL, amongst other things, on the basis that the matter involved an issue of breach of contract by USL and was therefore not maintainable in exercise of the court’s writ jurisdiction. USL has since filed an appeal against this order before a division bench of the High Court, which on 30 July 2019 has issued an interim order directing the bank to not deal with any of the secured assets until the next date of hearing. On 13 January 2020, the division bench of the High Court admitted the writ appeal and extended the interim stay. This appeal is currently pending. Based on the assessment of USL’s management supported by external legal opinions, USL continues to believe that it has a strong case on the merits and therefore continues to believe that the aforesaid amount of INR 459 million (£5 million) remains recoverable from IDBI.

87

Financial statements (continued)

(g) 2019 Moët Hennessy dividend

No dividend was received during the financial year ended 30 June 2020 in respect of Diageo’s 34% investment in Moët Hennessy SAS and Moët Hennessy International SAS (together MH). This investment is governed by a Partners’ Agreement with certain members of the LVMH Moët Hennessy - Louis Vuitton group (LVMH) which holds 66% of MH, which includes the dividend policy and minimum annual dividend requirements for MH. Diageo believes that non-payment by MH of the dividend in respect of the financial year ended 31 December 2019 constitutes a breach by LVMH of the Partners’ Agreement and that the minimum aggregate dividend that should have been received by Diageo in respect of that period was €181 million (£166 million). Diageo has commenced arbitration proceedings under the Partners’ Agreement in respect of this dispute.

(h) Tax

The international tax environment has seen increased scrutiny and rapid change over recent years bringing with it greater uncertainty for multinationals. Against this backdrop, Diageo has been monitoring developments and continues to engage transparently with the tax authorities in the countries where Diageo operates to ensure that the group manages its arrangements on a sustainable basis.

In April 2019, the European Commission issued its decision in a state aid investigation into the Group Financing Exemption in the UK controlled foreign company rules. The European Commission found that part of the Group Financing Exemption constitutes state aid. The Group Financing Exemption was introduced in legislation by the UK government in 2013. In common with other UK-based international companies whose arrangements are in line with current UK CFC legislation Diageo may be affected by the ultimate outcome of this investigation. The UK government and other UK-based international companies, including Diageo, have appealed to the General Court of the European Union against the decision. The UK government is required to commence collection proceedings and therefore it is expected that Diageo will have to make a payment in the year ending 30 June 2021 in respect of this case. At present it is not possible to determine the amount that the UK government will seek to collect. If the decision of the European Commission is upheld, Diageo calculates its maximum potential liability to be approximately £275 million. Based on its current assessment, Diageo believes that no provision is required in respect of this issue.

The group operates in a large number of markets with complex tax and legislative regimes that are open to subjective interpretation. As assessing an accurate value of contingent liabilities in these markets requires a high level of judgement, contingent liabilities are disclosed on the basis of the current known possible exposure from tax assessment values.

Diageo has reviewed its disclosures in relation to Brazil and India, where Diageo has a large number of ongoing tax cases. While these cases are not individually significant, the current assessment of the aggregate possible exposures is up to approximately £285 million for Brazil and up to approximately £150 million for India. The group believes that the likelihood that the tax authorities will ultimately prevail is lower than probable but higher than remote. Due to the fiscal environment in Brazil and in India the possibility of further tax assessments related to the same matters cannot be ruled out. Based on its current assessment, Diageo believes that no provision is required in respect of these issues.

Payments were made under protest in India in respect of the periods 1 April 2006 to 31 March 2017 in relation to tax assessments where the risk is considered to be remote or possible. These payments have to be made in order to challenge the assessments and as such have been recognised as a receivable on the consolidated balance sheet. The total amount of protest payments recognised as a receivable as at 30 June 2020 is £117 million (corporate tax payments of £107 million and indirect tax payments of £10 million).

A lawsuit was filed on 15 April 2019 by the National Association of Manufacturers (NAM) against the United States Department of the Treasury (U.S. Treasury) and the United States Customs and Border Protection (CBP) on behalf of its affected industry members, including Diageo, to invalidate regulations published in February 2019 and to ensure that substitution drawback is permitted in accordance with 19 U.S.C.§ 1313(j)(2) as amended by the Trade Facilitation and Trade Enforcement Act of 2015, which was enacted on 24 February 2016 (TFTEA). Substitution drawback permits the refund, including of excise taxes, paid on imported merchandise when sufficiently similar substitute merchandise is exported. The United States Congress passed the TFTEA to, among other things, clarify and broaden the standard for what constitutes substitute merchandise. This change should entitle Diageo to obtain substitution drawback in respect of certain eligible product categories. Despite this change in the law, U.S. Treasury and CBP issued final regulations in 2019 declaring that substitution drawback is not available for imports when substituted with an export on which no tax was paid. The Court of International Trade issued a judgement in favour of NAM on

88

Financial statements (continued)

18 February 2020, denying the request by the U.S. Treasury and CBP for a stay of payment on 15 May 2020, and on 26 May 2020, ordered the immediate processing of claims. Current eligible claims of Diageo Americas Supply, Inc. are estimated at £95 million ($117 million), with a financial impact of £87 million ($110 million) for the year ended 30 June 2020 of which Diageo has received £26 million ($33 million). However, on 23 July 2020 the U.S. Treasury and CBP filed an appeal with the U.S. Federal Court of Appeal, and, although Diageo believes that the NAM is more likely than not to ultimately prevail, if they were to fail, the CBP could be permitted to recover these payments.

(i) Other

The group has extensive international operations and is a defendant in a number of legal, customs and tax proceedings incidental to these operations, the outcome of which cannot at present be foreseen. In particular, the group is currently a defendant in various customs proceedings that challenge the declared customs value of products imported by certain Diageo companies. Diageo continues to defend its position vigorously in these proceedings.

Save as disclosed above, neither Diageo, nor any member of the Diageo group, is or has been engaged in, nor (so far as Diageo is aware) is there pending or threatened by or against it, any legal or arbitration proceedings which may have a significant effect on the financial position of the Diageo group.

89

Financial statements (continued)

19. Commitments

(a) Capital commitments

Commitments for expenditure on intangibles and property, plant and equipment not provided for in these consolidated financial statements are estimated at £312 million (2019 – £255 million; 2018 – £161 million).

(b) Other commitments

The minimum lease rentals payable in the year ending 30 June 2020 for short term and low value leases are estimated at £19 million. The total future cash outflows for leases that had not yet commenced, and not recognised as lease liabilities at 30 June 2020, are estimated at £133 million.

20. Related party transactions

Transactions between the group and its related parties are made on terms equivalent to those that prevail in arm’s length transactions.

(a) Subsidiaries

Transactions between the company and its subsidiaries are eliminated on consolidation and therefore are not disclosed. Details of the principal group companies are given in note 21.

(b) Associates and joint ventures

Sales and purchases to and from associates and joint ventures are principally in respect of premium drinks products but also include the provision of management services.

Transactions and balances with associates and joint ventures are set out in the table below:

	2020 £ million		2019 £ million		2018 £ million
Income statement items
Sales		9		9		10
Purchases		29		28		29
Balance sheet items
Group payables		2		12		3
Group receivables		1		2		2
Loans payable		6		6		6
Loans receivable		82		55		59
Cash flow items
Loans and equity contributions, net		47		32		37

Other disclosures in respect of associates and joint ventures are included in note 6.

90

Financial statements (continued)

(c) Key management personnel

The key management of the group comprises the Executive and Non-Executive Directors, the members of the Executive Committee and the Company Secretary.

They are listed under ‘Board of Directors and Company Secretary’ and ‘Executive Committee’.

	2020 £ million			2019 £ million		2018 £ million
Salaries and short-term employee benefits		10			10		10
Annual incentive plan		—			10		10
Non-Executive Directors’ fees		1			1		1
Share-based payments(i)		(11	)		20		15
Post employment benefits		2			3		2
Termination benefits(ii)		2			—		—
		4			44		38

(i) Time-apportioned fair value of unvested options and share awards.

(ii) £1 million of the termination benefits disclosed for 2020 have been paid in the year ended 30 June 2020; a further £1 million will be paid in the year ending 30 June 2021.

Non-Executive Directors do not receive share-based payments or post employment benefits. Details of the individual Directors’ remuneration are given in ’Single total figure of remuneration for Executive Directors’ and ’Non-Executive Directors’ remuneration’ in the Directors’ remuneration report.

(d) Pension plans

The Diageo pension plans are recharged with the cost of administration services provided by the group to the pension plans and with professional fees paid by the group on behalf of the pension plans. The total amount recharged for the year was £nil (2019 – £3 million; 2018 – £14 million).

(e) Directors’ remuneration

	2020 £ million		2019 £ million		2018 £ million
Salaries and short-term employee benefits		2		2		2
Annual incentive plan		—		2		3
Non-Executive Directors’ fees		1		1		1
Share option exercises(i)		—		2		—
Shares vesting(i)		11		13		1
Post employment benefits		1		1		1
		15		21		8

(i) Gains on options realised in the year and the benefit from share awards, calculated by using the share price applicable on the date of exercise of the share options and release of the awards.

Details of the individual Directors’ remuneration are given in ’Single total figure of remuneration for Executive Directors’ and ’Non-Executive Directors’ remuneration’ in the Directors’ remuneration report.

91

Financial statements (continued)

21. Principal group companies

The companies listed below include those which principally affect the profits and assets of the group. The operating companies listed below may carry on the business described in the countries listed in conjunction with their subsidiaries and other group companies.

	Country of incorporation		Country of operation		Percentage of equity owned(i)			Business description
Subsidiaries
Diageo Ireland		Republic of Ireland		Worldwide		100	%	Production, marketing and distribution of premium drinks
Diageo Great Britain Limited		England		Great Britain		100	%	Marketing and distribution of premium drinks
Diageo Scotland Limited		Scotland		Worldwide		100	%	Production, marketing and distribution of premium drinks
Diageo Brands B.V.		Netherlands		Worldwide		100	%	Marketing and distribution of premium drinks
Diageo North America, Inc.		United States		Worldwide		100	%	Production, importing, marketing and distribution of premium drinks
United Spirits Limited(ii)		India		India		55.94	%	Production, importing, marketing and distribution of premium drinks
Diageo Capital plc(iii)		Scotland		United Kingdom		100	%	Financing company for the group
Diageo Finance plc(iii)		England		United Kingdom		100	%	Financing company for the group
Diageo Investment Corporation		United States		United States		100	%	Financing company for the US group
Mey İçki Sanayi ve Ticaret A.Ş.		Turkey		Turkey		100	%	Production, marketing and distribution of premium drinks
Associates
Moët Hennessy, SAS(iv)		France		France		34	%	Production, marketing and distribution of premium drinks

(i) All percentages, unless otherwise stated, are in respect of holdings of ordinary share capital and are equivalent to the percentages of voting rights held by the group.

(ii) Percentage ownership excludes 2.38% owned by the USL Benefit Trust.

(iii) Directly owned by Diageo plc.

(iv) French limited liability company.

92

Diageo’s business, financial condition, cash flows and results of operations have been and may continue to be adversely affected by the Covid-19 pandemic

A novel strain of coronavirus (Covid-19) was first identified in Wuhan, China in late 2019, and subsequently declared a pandemic by the World Health Organization. This pandemic, which has now spread to nearly all regions around the world, as well as measures taken in response to contain or mitigate the pandemic, have caused and are continuing to cause business slowdowns or shutdowns in affected areas, as well as significant disruption in the financial markets globally.

At this time, Diageo remains unable to accurately assess the longer-term impact of the pandemic on its business and operations, including the degree to which, or the time period over which, its business will continue to be affected by the Covid-19 pandemic and related response measures. To date, the impacts on Diageo’s business from the Covid-19 pandemic and related response measures have included, but are not limited to, the following:

• social distancing measures, including the closure of on-trade channels such as bars and restaurants and restrictions on banqueting, conferences and similar events, being introduced in most of Diageo’s markets, leading to a negative impact on sales;

• travel restrictions being imposed by many countries and concern over the pandemic resulting in significant declines in passenger numbers, particularly in airports, with a corresponding negative impact on Diageo’s global Travel Retail business;

• regulatory restrictions, combined with the implementation of heightened safety protocols across all of Diageo’s office and production sites (including increased sanitation measures, safety equipment and restrictions on access), resulting in office closures and reductions in levels of activity at certain of Diageo’s production facilities, including the temporary closure of United Spirits’ supply operations due to a nationwide lockdown in India and the temporary closure of two production sites in Nigeria; and

• wider disruptions in supply chains and routes to market, or those of Diageo’s suppliers and/or distributors or customers, which could result in further increases in Diageo’s costs of production and distribution or an increase in transnational trade or other trading practices impacting profitability.

The impacts of the Covid-19 pandemic and related response measures worldwide, including the impacts described above, have had and may continue to have an adverse effect on global economic conditions, as well as on Diageo’s business, results of operations, cash flows and financial condition, with recovery expected to be dependent on the success of public health measures, the impact of economic policies, the pace at which lockdown measures are eased, and how quickly consumers choose to return to bars and restaurants and resume international travel. However, even those regions that are beginning to experience business recovery or the scaling back of response measures, such as Greater China and Europe, may experience further impacts from Covid-19 or suffer a resurgence of Covid-19 cases, and economic activity in those regions may not recover quickly or at all, which may materially adversely impact global economic conditions. This could in turn lead to a further decline in discretionary spending by consumers.

Diageo conducts impairment reviews as and when required in accordance with applicable accounting standards, to ensure that, among other things, intangible assets, including brands, are not carried at above their recoverable amounts. The impacts of the Covid-19 pandemic and related response measures, in particular with respect to expectations of future cash flows, contributed to approximately £1.3 billion in impairments recognised by the Diageo group during its fiscal year ended 30 June 2020, primarily impacting assets located in India, Korea, Nigeria and Ethiopia where already challenging economic conditions and/or other factors were exacerbated by the Covid-19 pandemic, and may result in further material write-downs or impairments being recognised during future periods.

In addition, the impact of the Covid-19 pandemic on global economic conditions has impacted and may continue to impact the proper functioning of financial and capital markets, as well as foreign currency exchange rates, commodity and energy prices and interest rates. Responses to the Covid-19 pandemic may also result in both short-term and long-term changes to fiscal and tax policies in impacted jurisdictions, including increases in tax rates. Although Diageo completed bond issuances under both its European and US shelf programmes in spring 2020, has temporarily increased its committed bank facilities from £2.8 billion to £5.3 billion, and may take other actions to enhance its liquidity, there is no guarantee that Diageo’s existing arrangements or any future arrangements will provide sufficient liquidity over the course of the Covid-19 pandemic, and the impacts of the Covid-19 pandemic and related response measures may adversely impact Diageo’s liquidity or financial position. In addition, a continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on Diageo’s ability to access, or costs of, capital or borrowings, its liquidity, its financial position, its adjusted net debt to EBITDA ratio, its ability to comply with any applicable financial covenants or its credit ratings.

Any of the foregoing developments may have a material adverse effect on Diageo’s business, financial condition, cash flows and results of operations. In addition, the impact of the Covid-19 pandemic, or any other future epidemics or pandemics, may also have the effect of heightening many of the risks described elsewhere within Diageo’s Annual Report on Form 20-F, filed with the Securities and Exchange Commission on August 5, 2019.

Exhibit No.		Description
23.1	—	Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
99.1	—	Memorandum and Articles of Association of Diageo plc as amended by shareholder resolution on September 19, 2019.
99.2	—	Capitalization and indebtedness of Diageo plc as of June 30, 2020.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorised.

Diageo plc

(Registrant)

/s/ James Edmunds

Name: James Edmunds

Title: Deputy Company Secretary

August 7, 2020

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form F-3 of Diageo plc (No. 333-224340) and Form S-8 of Diageo plc (No. 333-223071, 333-153481, 333-154338, 333-162490, 333-169934, 333-182315, 333-206290) of our report dated 7 August 2020 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 6-K.

/s/ PricewaterhouseCoopers LLP

London, United Kingdom

7 August 2020

EX-99.1

Exhibit 99.1

DIAGEO

THE COMPANIES ACT 2006

Company limited by shares

Diageo plc

(REGISTERED 21st October 1886)

Company No 23307

Memorandum and Articles of

Association

(Incorporating amendments up to and including those made at the Annual

General Meeting held on 19 September 2019)

Contents		Page
1.	Exclusion of Model Articles		19
2.	Definitions		19
3.	Limited Liability		21
4.	Change of Name		21
5.	Rights Attached to Shares		21
6.	Redeemable Shares		21
7.	Variation of Rights		21
8.	Pari Passu Issues		22
9.	Shares		22
10.	Payment of Commission		22
11.	Trusts Not Recognised		22
12.	Suspension of Rights Where Non-Disclosure of Interest		22
13.	Uncertificated Shares		25
14.	Right to Share Certificates		26
15.	Replacement of Share Certificates		26
16.	Execution of Share Certificates		27
17.	Share Certificates Sent at Holder’s Risk		27
18.	Company’s Lien on Shares Not Fully Paid		27
19.	Enforcing Lien by Sale		27
20.	Application of Proceeds of Sale		27
21.	Calls		28
22.	Timing of Calls		28
23.	Liability of Joint Holders		28
24.	Interest Due on Non-Payment		28

25.	Sums Due on Allotment Treated as Calls	28
26.	Power to Differentiate	28
27.	Payment of Calls in Advance	28
28.	Notice if Call or Instalment Not Paid	29
29.	Form of Notice	29
30.	Forfeiture for Non-Compliance with Notice	29
31.	Notice after Forfeiture	29
32.	Sale of Forfeited Shares	29
33.	Arrears to be Paid Notwithstanding Forfeiture	30
34.	Effect of Forfeiture	30
35.	Statutory Declaration as to Forfeiture	30
36.	Transfer	30
37.	Execution of Transfer	30
38.	Rights to Decline Registration of Partly Paid Shares	31
39.	Other Rights to Decline Registration	31
40.	No Fee for Registration	31
41.	Renunciation of Allotment	31
42.	Untraced Shareholders	31
43.	Transmission on Death	32
44.	Entry of Transmission in Register	33
45.	Election of Person Entitled by Transmission	33
46.	Rights of Person Entitled by Transmission	33
47.	Sub-division	33
48.	Fractions	34
49.	Omission or Non-Receipt of Notice	34

13

50.	Postponement of General Meetings	34
51.	Quorum	34
52.	Procedure if Quorum Not Present	35
53.	Security Arrangements	35
54.	Chairman of General Meeting	36
55.	Orderly Conduct	36
56.	Entitlement to Attend and Speak	36
57.	Adjournments	37
58.	Notice of Adjournment	37
59.	Amendments to Resolutions	37
60.	Amendments Ruled Out of Order	37
61.	Votes of Members	37
62.	Method of Voting	38
63.	Procedure if Poll Demanded	38
64.	When Poll to be Taken	38
65.	Continuance of Other Business after Poll Demand	38
66.	Votes of Joint Holders	39
67.	Voting on Behalf of Incapable Member	39
68.	No Right to Vote where Sums Overdue on Shares	39
69.	Objections or Errors in Voting	39
70.	Appointment of Proxies	40
71.	Receipt of Proxies	40
72.	Maximum Validity of Proxy	41
73.	Form of Proxy	41
74.	Cancellation of Proxy’s Authority	41

14

75.	Board’s Power to Issue Proxies	41
76.	Number of Directors	42
77.	Directors’ Shareholding Qualification	42
78.	Power of Company to Elect Directors	42
79.	Power of Board to Appoint Directors	42
80.	Annual Retirement of Directors	42
81.	Power of Removal by Special Resolution	42
82.	Persons Eligible as Directors	42
83.	Position of Retiring Directors	43
84.	Vacation of Office by Directors	43
85.	Alternate Directors	43
86.	Chief Executive, Managing and Executive Directors	44
87.	Directors’ Fees	45
88.	Additional Remuneration	45
89.	Expenses and Legal Costs	45
90.	Power to Pay Pensions and Gratuities	45
91.	Conflicts of Interest Requiring Board Authorisation	46
92.	Other Conflicts of Interest	47
93.	Benefits	48
94.	Quorum and Voting Requirements	48
95.	General	50
96.	General Powers of Company Vested in Board	50
97.	Borrowing Powers	50
98.	Agents	53
99.	Delegation to Individual Directors	54

15

100.	Branch Registers	54
101.	Provision for Employees	54
102.	Board Meetings	54
103.	Notice of Board Meetings	54
104.	Quorum	55
105.	Directors below Minimum through Vacancies	55
106.	Appointment of Chairman, Vice-Chairman and Deputy Chairman	55
107.	Competence of Meetings	55
108.	Voting	55
109.	Delegation to Committees	55
110.	Participation in Meetings	56
111.	Resolution in Writing	56
112.	Validity of Acts of Board or Committee	56
113.	Authentication of Documents	56
114.	Use of Seals	57
115.	Declaration of Dividends by Company	57
116.	Payment of Interim and Fixed Dividends by Board	57
117.	Calculation and Currency of Dividends	57
118.	Payment of Dividends in Foreign Currencies	58
119.	Amounts Due on Shares may be Deducted from Dividends	58
120.	No Interest on Dividends	58
121.	Payment Procedure	58
122.	Uncashed Dividends	60
123.	Forfeiture of Unclaimed Dividends	60
124.	Dividends Not in Cash	60

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125.	Dividend Reinvestment Plans	60
126.	Power to Capitalise Reserves and Funds	61
127.	Settlement of Difficulties in Distribution	61
128.	Power to Choose Any Record Date	61
129.	Inspection of Records	62
130.	Summary Financial Statements	62
131.	Service of Notices	62
132.	Record Date for Service	62
133.	Members Resident Abroad or on branch registers	63
134.	Service of Notice on Person Entitled by Transmission	63
135.	When Notice Deemed Served	63
136.	Notice When Post Not Available	64
137.	Members Present Deemed to Have Received Notice	64
138.	Power to Stop Sending Notices or Other Documents.	64
139.	Presumptions Where Documents Destroyed	65
140.	Indemnity of Directors	65

17

ARTICLES OF ASSOCIATION

of

DIAGEO PLC

(adopted by special resolution on 19 September 2019)

Slaughter and May

One Bunhill Row

London EC1Y8YY

558379720

18

ARTlCLES OF ASSOCIATION

of

DIAGEO PLC

(adopted by special resolution on 19 September 2019)

Interpretation

1. Exclusion of Model Articles

No articles set out in any statute, or in any statutory instrument or other subordinate legislation made under any statute, concerning companies shall apply as the articles of the company

2. Definitions

In these articles unless the context otherwise requires

“address” includes a number or address used for the purposes of sending or receiving documents or information by electronic means,

“approved depositary” means any custodian or other person (or a nominee for such custodian or other person) who holds or is interested in shares of the company (or rights or interests in shares of the company) and issues securities, documents of title or documents otherwise evidencing the entitlement of the holder thereof to or to receive such shares, rights or interests, provided and to the extent that such arrangements have been contractually agreed with the company or otherwise approved by the board, in each case for the purpose of these articles, and including (without limitation):

(i) the trustees (acting in their capacity as such) of any employees’ share scheme established by the company or any other scheme or arrangement principally for the benefit of employees of the company and/or any of its subsidiary undertakings, which has been approved by the company in general meeting;

(ii) the managers (acting in their capacity as such) of any investment or savings plan which the board has approved; and

(iii) members holding shares of the company within CREST on behalf of the beneficial owners of such shares;

“these articles’’ means these articles of association as altered from time to time and the expression “this article” shall be construed accordingly;

“the auditors’’ means the auditors from time to time of the company or, in the case of joint auditors any one of them;

‘‘the board” means the board of directors from time to time of the company or the directors present at a meeting of the directors at which a quorum is present;

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“certificated share” means a share which is not an uncertificated share and references in those articles to a share being held in certificated form shall be construed accordingly;

“clear days” in relation to the period of a notice means that period excluding the day when the notice is served or deemed to be served and the day for which it is given or on which it is to take effect;

‘‘the Companies Acts” means every statute (including any orders, regulations or other subordinate legislation made under it) from time to time in force concerning companies in so far as it applies to the company;

“the holder” in relation to any shares means the member whose name is entered in the register as the holder of those shares;

“the office” means the registered office from time to time of the company;

“paid up” means paid up or credited as paid up;

“participating class” means a class of shares title to which is permitted by an operator to be transferred by means of a relevant system;

“person entitled by transmission’’ means a person whose entitlement to a share in consequence of the death or bankruptcy of a member or of any other event giving rise to its transmission by operation of law has been noted in the register;

“the register” means the register of members of the company;

“seal” means any common or official seal that the company may be permitted to have under the Companies Acts;

“the secretary” means the secretary, or (if there are joint secretaries) any one of the joint secretaries, of the company and includes an assistant or deputy secretary and any person appointed by the board to perform any of the duties of the secretary;

“the uncertificated securities rules” means any provision of the Companies Acts relating to the holding, evidencing of title to, or transfer of uncertificated shares and any legislation, rules or other arrangements made under or by virtue of such provision;

“uncertificated share” means a share of a class which is at the relevant time a participating class title to which is recorded on the register as being held in uncertificated form and references in these articles to a share being held in uncertificated form shall be construed accordingly;

“United Kingdom” means Great Britain and Northern Ireland;

references to a document being “executed” include references to its being executed under hand or under seal or by any other method except by means of it being authenticated by electronic means;

references to a document being “signed” or to “signature” include references to its being executed under hand or under seal or by any other method and, in the case of a communication in electronic form, such references are to its being authenticated in accordance with the Companies Acts;

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references to “writing” include references to any method of representing or reproducing words in a legible and non-transitory form whether sent or supplied in electronic form or otherwise;

words or expressions to which a particular meaning is given by the Companies Acts in force when these articles or any part of these articles are adopted bear (if not inconsistent with the subject matter or context) the same meaning in these articles or that part (as the case may be) save that,

(i) the word “company” shall include any body corporate; and

(ii) the expressions “electronic form” and “electronic means” shall have the meanings given by the Company Acts as amended from time to time; and

references to a “meeting” shall not be taken as requiring more than one person to be present if any quorum requirement can be satisfied by one person.

Headings are included only for convenience and shall not affect meaning

3. Limited Liability

The liability of members of the company is limited to the amount, if any, unpaid on the shares in the company held by them.

4. Change of Name

The company may change its name by resolution of the board

Share Capital

5. Rights Attached to Shares

Subject to any rights attached to existing shares, any share may be issued with or have attached to it such rights and restrictions as the company may by ordinary resolution decide or, if no such resolution has been passed or so far as the resolution does not make specific provision, as the board may decide.

6. Redeemable Shares

Subject to any rights attached to existing shares, any share may be issued which is to be redeemed, or is liable to be redeemed at the option of the company or the holder. The board may determine the terms, conditions and manner of redemption of any redeemable share so issued.

7. Variation of Rights

Subject to the provisions of the Companies Acts, all or any of the rights attached to any existing class of shares may from time to time (whether or not the company is being wound up) be varied either with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class (excluding any shares of that class held as treasury shares) or with the sanction of a special resolution passed at a separate general meeting of the holders of those shares. All the provisions of these articles as to general meetings of the company shall, with any necessary modifications, apply to any such separate general meeting, but so that the necessary quorum shall be two persons entitled to vote and holding or representing by proxy not less than one-third in nominal value of the issued

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shares of the class (excluding any shares of that class held as treasury shares), (but so that at any adjourned meeting one holder entitled to vote and present in person or by proxy (whatever the number of shares held by him) shall be a quorum), and that any holder of shares of the class present in person or by proxy and entitled to vote may demand a poll. The foregoing provisions of this article shall apply to the variation of the special rights attached to some only of the shares of any class as if each group of shares of the class differently treated formed a separate class and their special rights were to be varied.

8. Pari Passu Issues

The rights conferred upon the holders of any shares shall not, unless otherwise expressly provided in the rights attaching to those shares, be deemed to be varied by the creation or issue of further shares ranking pari passu with them.

9. Shares

Subject to the provisions of these articles and to any resolution passed by the company and without prejudice to any rights attached to existing shares, the board may offer, allot, grant options over or otherwise deal with or dispose of shares in the company to such persons, at such times and for such consideration and upon such terms as the board may decide.

10. Payment of Commission

The company may in connection with the issue of any shares or the sale for cash of treasury shares exercise all powers of paying commission and brokerage conferred or permitted by the Companies Acts. Any such commission or brokerage may be satisfied by the payment of cash, or by the allotment of fully or partly-paid shares or other securities or partly in one way and partly in the other.

11. Trusts Not Recognised

Except as ordered by a court of competent jurisdiction or as required by law, no person shall be recognised by the company as holding any share upon any trust and the company shall not be bound by or required in any way to recognise (even when having notice of it) any interest in any share or (except only as by these articles or by law otherwise provided) any other right in respect of any share other than an absolute right to the whole of the share in the holder.

12. Suspension of Rights Where Non-Disclosure of Interest

(A) Where the holder of any shares in the company, or any other person appearing to be interested in those shares, fails to comply within the relevant period with any statutory notice in respect of those shares or, in purported compliance with such a notice, has made a statement which is false or inadequate in a material particular, the company may give the holder of those shares a further notice (a “restriction notice”) to the effect that from the service of the restriction notice those shares will be subject to some or all of the relevant restrictions, and from service of the restriction notice those shares shall, notwithstanding any other provision of these articles, be subject to those relevant restrictions accordingly. For the purpose of enforcing the relevant restriction referred to in sub paragraph (iii) of the definition of “relevant restrictions” set out in article 12(J), the board may give notice to the relevant member requiring the member to change the relevant shares held in uncertificated form to certificated

22

form by the time stated in the notice and to keep them in certificated form for as long as the board requires. The notice may also state that the member may not change any of the relevant shares held in certificated form to uncertificated form. If the member does not comply with the notice, the board may authorise any person to instruct the Operator to change the relevant shares held in uncertificated form to certificated form.

(B) If after the service of a restriction notice in respect of any shares the board is satisfied that all information required by any statutory notice relating to those shares or any of them from their holder or any other person appearing to be interested in the shares the subject of the restriction notice has been supplied, the company shall, within seven days, cancel the restriction notice. The company may at any time at its discretion cancel any restriction notice or exclude any shares from it. The company shall cancel a restriction notice within seven days after receipt of a notice in writing that the relevant shares have been transferred pursuant to an arm’s length sale.

(C) Where any restriction notice is cancelled or ceases to have effect in relation to any shares, any moneys relating to those shares which were withheld by reason of that notice shall be paid without interest to the person who would but for the notice have been entitled to them or as he may direct.

(D) Any new shares in the company issued in right of any shares subject to a restriction notice shall also be subject to the restriction notice, and the board may make any right to an allotment of the new shares subject to restrictions corresponding to those which will apply to those shares by reason of the restriction notice when such shares are issued.

(E) Any holder of shares on whom a restriction notice has been served may at any time request the company to give in writing the reason why the restriction notice has been served, or why it remains uncancelled, and within 14 days of receipt of such a notice the company shall give that information accordingly.

(F) If a statutory notice is given by the company to a person appearing to be interested in any share, a copy shall at the same time be given to the holder, but the failure or omission to do so or the non-receipt of the copy by the holder shall not invalidate such notice.

(G) Where shares subject to a restriction notice, in which a person appears to be interested, are held by an approved depository, the provisions of this article 12 shall be treated as applying only to those shares held by the approved depository in which such person appears to be interested and not to any other shares held by the approved depository.

(H) Where the member on which a statutory notice is served is an approved depository acting in its capacity as such, the disclosure obligations of the approved depository as a member of the company for the purposes of that statutory notice shall be limited to disclosing to the company such information relating to any person appearing to be interested in the shares held by the approved depository as has been recorded by the approved depository pursuant to arrangements entered into with the company or approved by the board and pursuant to which the approved depository was appointed.

(I) This article is in addition to, and shall not in any way prejudice or affect, the statutory rights of the company arising from any failure by any person to give any information required by a statutory notice within the time specified in it. For the purpose of this article a statutory notice need not specify the relevant period, and may require any information to be given before the expiry of the relevant period.

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(J) In this article:

a sale is an “arm’s length sale” if the board is satisfied that it is a bona fide sale of the whole of the beneficial ownership of the shares to a party unconnected with the holder or with any person appearing to be interested in such shares and shall include a sale made by way of or in pursuance of acceptance of a takeover offer and a sale made through a recognised investment exchange or any other stock exchange outside the United Kingdom. For this purpose an associate (within the definition of that expression in any statute relating to insolvency in force at the date of adoption of this article) shall be included amongst the persons who are connected with the holder or any person appearing to be interested in such shares;

“person appearing to be interested” in any shares shall mean any person named in a response to a statutory notice or otherwise notified to the company by a member as being so interested or shown in any register or record kept by the company under the Companies Acts as so interested or, taking into account a response or failure to respond in the light of the response to any other statutory notice and any other relevant information in the possession of the company, any person whom the company knows or has reasonable cause to believe is or may be so interested;

“person with a 0.25 per cent. interest” means a person who holds, or is shown in any register or record kept by the company under the Companies Acts as having an interest in, shares in the company which comprise in total at least 0.25 per cent. in number or nominal value of the shares of the company (calculated exclusive of any shares held as treasury shares), or of any class of such shares (calculated exclusive of any shares of that class held as treasury shares), in issue at the date of service of the restriction notice;

“relevant period” means a period of 14 days following service of a statutory notice;

“relevant restrictions” mean in the case of a restriction notice served on a person with a 0.25 per cent. interest that:-

(i) the shares shall not confer on the holder any right to attend or vote either personally or by proxy at any general meeting of the company or at any separate general meeting of the holders of any class of shares in the company or to exercise any other right conferred by membership in relation to general meetings;

(ii) the board may withhold payment of all or any part of any dividends or other moneys payable in respect of the shares and the holder shall not be entitled to receive shares in lieu of dividend;

(iii) the board may decline to register a transfer of any of the shares which are certificated shares, unless such a transfer is pursuant to an arm’s length sale,

and in any other case mean only the restriction specified in sub paragraph (i) of this definition; and

“statutory notice” means a notice served by the company under the Companies Acts requiring particulars of interests in shares or of the identity of persons interested in shares.

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13. Uncertificated Shares

(A) Pursuant and subject to the uncertificated securities rules, the board may permit title to shares of any class to be evidenced otherwise than by a certificate and title to shares of such a class to be transferred by means of a relevant system and may make arrangements for a class of shares (if all shares of that class are in all respects identical) to become a participating class. Title to shares of a particular class may only be evidenced otherwise than by a certificate where that class of shares is at the relevant time a participating class. The board may also, subject to compliance with the uncertificated securities rules, determine at any time that title to any class of shares may from a date specified by the board no longer be evidenced otherwise than by a certificate or that title to such a class shall cease to be transferred by means of any particular relevant system.

(B) In relation to a class of shares which is a participating class and for so long as it remains a participating class, no provision of these articles shall apply or have effect to the extent that it is inconsistent in any respect with:

(i) the holding of shares of that class in uncertificated form;

(ii) the transfer of title to shares of that class by means of a relevant system; and

(iii) any provision of the uncertificated securities rules,

and, without prejudice to the generality of this article, no provision of these articles shall apply or have effect to the extent that it is in any respect inconsistent with the maintenance, keeping or entering up by the Operator, so long as that is permitted or required by the uncertificated securities rules, of an Operator register of securities in respect of that class of shares in uncertificated form.

(C) Shares of a class which is at the relevant time a participating class may be changed from uncertificated to certificated form, and from certificated to uncertificated form, in accordance with and subject as provided in the uncertificated securities rules.

(D) If, under these articles or the Companies Acts, the company is entitled to sell, transfer or otherwise dispose of, forfeit, re-allot, accept the surrender of or otherwise enforce a lien over an uncertificated share, then, subject to these articles and the Companies Acts, such entitlement shall include the right of the board to:

(i) require the holder of that uncertificated share by notice in writing to change that share from uncertificated to certificated form within such period as may be specified in the notice and keep it as a certificated share for as long as the board requires;

(ii) appoint any person to take such other steps, by instruction given by means of a relevant system or otherwise, in the name of the holder of such shares as may be required to effect the transfer of such share and such steps shall be as effective as if they had been taken by the registered holder of that share; and

(iii) take such other action that the board considers appropriate to achieve the sale, transfer, disposal, forfeiture, re-allotment or surrender of that share or otherwise to enforce a lien in respect of that share.

25

(E) Unless the board otherwise determines, shares which a member holds in uncertificated form shall be treated as separate holdings from any shares which that member holds in certificated form. However, shares held in uncertificated form shall not be treated as forming a class which is separate from certificated shares with the same rights.

(F) Unless the board otherwise determines or the uncertificated securities rules otherwise require, any shares issued or created out of or in respect of any uncertificated shares shall be uncertificated shares and any shares issued or created out of or in respect of any certificated shares shall be certificated shares.

(G) The company shall be entitled to assume that the entries on any record of securities maintained by it in accordance with the uncertificated securities rules and regularly reconciled with the relevant Operator register of securities are a complete and accurate reproduction of the particulars entered in the operator register of securities and shall accordingly not be liable in respect of any act or thing done or omitted to be done by or on behalf of the company in reliance on such assumption; in particular, any provision of these articles which requires or envisages that action will be taken in reliance on information contained in the register shall be construed to permit that action to be taken in reliance on information contained in any relevant record of securities (as so maintained and reconciled).

14. Right to Share Certificates

Every person (except a person to whom the company is not by law required to issue a certificate) whose name is entered in the register as a holder of any certificated shares shall be entitled, without payment, to receive within the time limits prescribed by the Companies Acts (or, if earlier, within any prescribed time limit or within a time specified when the shares were issued) one certificate for all those shares of any one class. In the case of a certificated share held jointly by several persons, the company shall not be bound to issue more than one certificate and delivery of a certificate to one of several joint holders shall be sufficient delivery to all. A member who transfers some but not all of the shares comprised in a certificate shall be entitled to a certificate for the balance without charge (to the extent the balance is to be held in certificated form). If a member requires additional certificates he shall pay for each additional certificate (other than a certificate issued pursuant to article 15) such reasonable sum (if any) as the board may determine.

15. Replacement of Share Certificates

If a share certificate is defaced, worn out, lost or destroyed, it may be replaced on such terms (if any) as to evidence and indemnity as the board may decide and, where it is defaced or worn out, after delivery of the old certificate to the company. Any two or more certificates representing shares of any one class held by any member shall at his request be cancelled and a single new certificate for such shares issued in lieu. Any certificate representing shares of any one class held by any member may at his request be cancelled and two or more certificates for such shares may be issued instead. The board may require the payment of any exceptional out-of-pocket expenses of the company incurred in connection with the issue of any certificates under this article (including, without limiting the generality of the foregoing, any expenses incurred in the investigation of such request and in the preparation and execution of any such indemnity). Any one of two or more joint holders may request replacement certificates under this article.

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16. Execution of Share Certificates

Every share certificate shall be executed under a seal or in such other manner as the board, having regard to the terms of issue and any listing requirements, may authorise and shall specify the number and class of the shares to which it relates and the amount or respective amounts paid up on the shares. The board may by resolution decide, either generally or in any particular case or cases, that any signatures on any share certificates need not be autographic but may be applied to the certificates by some mechanical or other means or may be printed on them or that the certificates need not be signed by any person.

17. Share Certificates Sent at Holder’s Risk

Every share certificate sent in accordance with these articles will be sent at the risk of the member or other person entitled to the certificate. The company will not be responsible for any share certificate lost or delayed in the course of delivery.

Lien

18. Company’s Lien on Shares Not Fully Paid

The company shall have a first and paramount lien on every share (not being a fully paid share) for all amounts payable to the company (whether presently or not) in respect of that share. The company’s lien on a share shall extend to every amount payable in respect of it. The board may at any time either generally or in any particular case waive any lien that has arisen or declare any share to be wholly or in part exempt from the provisions of this article.

19. Enforcing Lien by Sale

The company may sell, in such manner as the board may decide, any share on which the company has a lien if a sum in respect of which the lien exists is presently payable and is not paid within 14 clear days after a notice has been served on the holder of the share or the person who is entitled by transmission to the share, demanding payment and stating that if the notice is not complied with the share may be sold. For giving effect to the sale the board may authorise some person to execute an instrument of transfer of the share sold to or in accordance with the directions of the purchaser. The transferee shall not be bound to see to the application of the purchase money, nor shall his title to the share be affected by any irregularity or invalidity in relation to the sale.

20. Application of Proceeds of Sale

The net proceeds, after payment of the costs, of the sale by the company of any share on which it has a lien shall be applied in or towards payment or discharge of the debt or liability in respect of which the lien exists so far as it is presently payable, and any residue shall (subject to a like lien for debts or liabilities not presently payable as existed upon the share prior to the sale and upon surrender, if required by the company, for cancellation of the certificate for the share sold) be paid to the person who was entitled to the share at the time of the sale.

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Calls on Shares

21. Calls

Subject to the terms of issue, the board may from time to time make calls upon the members in respect of any moneys unpaid on their shares (whether on account of the nominal amount of the shares or by way of premium) and not payable on a date fixed by or in accordance with the terms of issue, and each member shall (subject to the company serving upon him at least 14 clear days’ notice specifying when and where payment is to be made) pay to the company as required by the notice the amount called on his shares. A call may be made payable by instalments. A call may be revoked or postponed, in whole or in part, as the board may decide. A person upon whom a call is made shall remain liable jointly and severally with the successors in title to his shares for all calls made upon him notwithstanding the subsequent transfer of the shares in respect of which the call was made.

22. Timing of Calls

A call shall be deemed to have been made at the time when the resolution of the board authorising the call was passed.

23. Liability of Joint Holders

The joint holders of a share shall be jointly and severally liable to pay all calls in respect of the share.

24. Interest Due on Non-Payment

If a call remains unpaid after it has become due and payable, the person from whom it is due and payable shall pay all costs, charges and expenses that the company may have incurred by reason of such non-payment together with interest on the amount unpaid from the day it is due and payable to the time of actual payment at the rate fixed by the terms of the allotment of the share or in the notice of the call or, if no rate is so fixed, at such rate, not exceeding 20 per cent. per annum (compounded on a six monthly basis), as the board may decide, but the board shall be at liberty in any case or cases to waive payment of any sum due under this article, wholly or in part.

25. Sums Due on Allotment Treated as Calls

Any amount which becomes payable in respect of a share on allotment or on any other date fixed by or in accordance with the terms of issue, whether in respect of the nominal amount of the share or by way of premium or as an instalment of a call, shall be deemed to be a call and, if it is not paid, all the provisions of these articles shall apply as if the sum had become due and payable by virtue of a call.

26. Power to Differentiate

The board may on or before the issue of shares differentiate between the allottees or holders as to the amount of calls to be paid and the times of payment.

27. Payment of Calls in Advance

The board may, if it thinks fit, receive from any member who is willing to advance them all or any part of the moneys uncalled and unpaid upon any shares held by him and on all or any of the moneys so advanced may (until they would, but for the advance, become presently payable) pay interest at such rate, not exceeding (unless the company by ordinary resolution shall otherwise direct) 20 per cent. per annum, as the board may decide. The board may at any time repay the amount so advanced on giving such member not less than three months’ notice in writing of its intention to do so, unless before the expiration of such notice the amount so advanced shall have been called up on the shares in respect of which it was advanced.

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Forfeiture of Shares

28. Notice if Call or Instalment Not Paid

If any call or instalment of a call remains unpaid on any share after the day appointed for payment, the board may at any time serve a notice on the holder requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued and any expenses incurred by the company by reason of such non-payment.

29. Form of Notice

The notice shall name a further day (not being less than 14 clear days from the date of the notice) on or before which, and the place where, the payment required by the notice is to be made and shall state that in the event of non-payment on or before the day and at the place appointed, the shares in respect of which the call has been made or instalment is payable will be liable to be forfeited.

30. Forfeiture for Non-Compliance with Notice

If the notice is not complied with, any share in respect of which it was given may, at any time before payment of all calls or instalments and interest and expenses due in respect of it has been made, be forfeited by (and with effect from the passing of) a resolution of the board to that effect and the forfeiture shall include all dividends declared and other moneys payable in respect of the forfeited shares and not paid before the forfeiture. Unless the board otherwise decides, no holder of such a share is entitled to be present or vote (whether in person or by proxy) at any meeting, on a show of hands or on a poll, or to demand a poll or exercise any other right as a member. The board may accept the surrender of any share liable to be forfeited and, in that event, references in these articles to forfeiture shall include surrender.

31. Notice after Forfeiture

When any share has been forfeited, notice of the forfeiture shall be served upon the person who was before forfeiture the holder of the share (or on any person entitled to the share by transmission) and an entry of the forfeiture or surrender, with the date thereof, shall forthwith be made in the register, but no forfeiture shall be invalidated by any omission or neglect to give such notice or make such entry.

32. Sale of Forfeited Shares

Until cancelled in accordance with the requirements of the Companies Acts, a forfeited share shall be deemed to be the property of the company and may be sold or otherwise disposed of either to the person who was, before forfeiture, the holder or to any other person upon such terms and in such manner as the board shall decide. The board may for the purposes of the disposal authorise some person to execute an instrument of transfer to the designated transferee. The company may receive the consideration (if any) given for the share on its disposal. At any time before a sale or disposition the forfeiture may be cancelled by the board on such terms as the board may decide.

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33. Arrears to be Paid Notwithstanding Forfeiture

A person whose shares have been forfeited shall cease to be a member in respect of them and shall surrender to the company for cancellation the certificate for the forfeited shares but shall remain liable to pay to the company all moneys which at the date of the forfeiture were payable by him to the company in respect of those shares with interest thereon at the rate of 20 per cent. per annum (or such lower rate as the board may decide) from the date of forfeiture until payment, and the company may enforce payment without being under any obligation to make any allowance for the value of the shares forfeited or for any consideration received on their disposal.

34. Effect of Forfeiture

The forfeiture of a share shall (subject to the Companies Acts and unless otherwise provided by these articles) involve the extinction from the time of forfeiture of all interest in, and all claims and demands against the company in respect of, the share and all other rights and liabilities incidental to the share as between the holder and the company.

35. Statutory Declaration as to Forfeiture

A statutory declaration that the declarant is a director of the company or the secretary and that a share has been forfeited (or sold to satisfy a lien of the company) on a specified date shall be conclusive evidence of the facts stated in it as against all persons claiming to be entitled to the share. The declaration shall (subject to the execution of an instrument of transfer if necessary) constitute a good title to the share and the person to whom the share is sold or otherwise disposed of shall not be bound to see to the application of the purchase money (if any) nor shall his title to the share be affected by any irregularity or invalidity in the proceedings relating to the forfeiture, sale or disposal.

Transfer of Shares

36. Transfer

(A) Subject to such of the restrictions of these articles as may be applicable:

(i) any member may transfer all or any of his uncertificated shares by means of a relevant system in such manner provided for, and subject as provided in, the uncertificated securities rules, and accordingly no provision of these articles shall apply in respect of an uncertificated share to the extent that it requires or contemplates the effecting of a transfer by an instrument in writing or the production of a certificate for the share to be transferred; and

(ii) any member may transfer all or any of his certificated shares by an instrument of transfer in any usual form or in any other form which the board may approve.

(B) The transferor of a share shall be deemed to remain the holder of the share concerned until the name of the transferee is entered in the register in respect of it.

37. Execution of Transfer

The instrument of transfer of a certificated share shall be executed by or on behalf of the transferor and (in the case of a partly paid share) the transferee. All instruments of transfer, when registered, may be retained by the company.

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38. Rights to Decline Registration of Partly Paid Shares

The board may decline to register any transfer of any share which is not a fully paid share.

39. Other Rights to Decline Registration

(A) Registration of a transfer of an uncertificated share may be refused in the circumstances set out in the uncertificated securities rules, and where, in the case of a transfer to joint holders, the number of joint holders to whom the uncertificated share is to be transferred exceeds four.

(B) The board may decline to register any transfer of a certificated share unless:

(i) the instrument of transfer is duly stamped or duly certified or otherwise shown to the satisfaction of the board to be exempt from stamp duty and is left at the office or such other place as the board may from time to time determine accompanied (save in the case of a transfer by a person to whom the company is not required by law to issue a certificate and to whom a certificate has not been issued) by the certificate for the share to which it relates and such other evidence as the board may reasonably require to show the right of the person executing the instrument of transfer to make the transfer and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do;

(ii) the instrument of transfer is in respect of only one class of share; and

(iii) in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four.

(C) For all purposes of these articles relating to the registration of transfers of shares, the renunciation of the allotment of any shares by the allottee in favour of some other person shall be deemed to be a transfer and the board shall have the same powers of refusing to give effect to such a renunciation as if it were a transfer.

40. No Fee for Registration

No fee shall be charged by the company for registering any transfer, document or instruction relating to or affecting the title to any share or for making any other entry in the register.

41. Renunciation of Allotment

The board may, at any time after the allotment of any share but before any person has been entered in the register as the holder, recognise a renunciation thereof by the allottee in favour of some other person and may accord to any allottee of a share a right to effect such renunciation upon and subject to such terms and conditions as the board may decide.

42. Untraced Shareholders

(A) The company may sell any certificated shares in the company on behalf of the holder of, or person entitled by transmission to, the shares at the best price reasonably obtainable at the time of sale if:

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(i) the shares have been in issue either in certificated or uncertificated form throughout the qualifying period and at least three cash dividends have become payable on the shares during the qualifying period;

(ii) no cash dividend payable on the shares has either been claimed by presentation to the paying bank of the relevant cheque or warrant or been satisfied by the transfer of funds to a bank account designated by the holder of, or person entitled by transmission to, the shares or by the transfer of funds by means of a relevant system at any time during the relevant period;

(iii) so far as any director of the company at the end of the relevant period is then aware, the company has not at any time during the relevant period received any communication from the holder of, or person entitled by transmission to, the shares; and

(iv) after the qualifying period, the company has sent a notice to the last known address the company has for the relevant shareholder, stating that it intends to sell the shares. Before sending such notice, the company must have used such efforts as it considers reasonable to trace the relevant shareholder.

For the purpose of this article:

“the qualifying period” means the period of 12 years immediately preceding the date of sending of the notice referred to in sub-paragraph (iv) above; and

“the relevant period” means the period beginning at the commencement of the qualifying period and ending on the date when all the requirements of sub-paragraphs (i) to (iv) above have been satisfied.

(B) The company shall also be entitled to sell at the best price reasonably obtainable at the time of sale any additional certificated shares in the company issued either in certificated or uncertificated form during the qualifying period in respect of any share to which paragraph (A) of this article applies (or in respect of any share so issued), if the criteria in paragraph (A)(ii) to (iv) are satisfied in relation to the additional shares.

(C) To give effect to any sale of shares pursuant to this article the board may authorise some person to transfer the shares in question and an instrument of transfer executed by that person shall be as effective as if it had been executed by the holder of, or person entitled by transmission to, the shares. The purchaser shall not be bound to see to the application of the purchase moneys nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale. The net proceeds of sale shall belong to the company and, upon their receipt, the company shall become indebted to the former holder of, or person entitled by transmission to, the shares for an amount equal to the net proceeds. No trust shall be created in respect of the debt and no interest shall be payable in respect of it and the company shall not be required to account for any moneys earned from the net proceeds which may be employed in the business of the company or as it thinks fit.

Transmission of Shares

43. Transmission on Death

If a member dies, the survivor or survivors, where he was a joint holder, and his personal representatives, where he was a sole holder or the only survivor of joint holders, shall be the only persons recognised by the company as having any title to his shares; but nothing contained in these articles shall release the estate of a deceased holder from any liability in respect of any share held by him solely or jointly with other persons.

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44. Entry of Transmission in Register

Where the entitlement of a person to a certificated share in consequence of the death or bankruptcy of a member or of any other event giving rise to its transmission by operation of law is proved to the satisfaction of the board, the board shall within two months after proof cause the entitlement of that person to be noted in the register.

45. Election of Person Entitled by Transmission

Any person entitled by transmission to a share may, subject as provided elsewhere in these articles, elect either to become the holder of the share or to have some person nominated by him registered as the holder. If he elects to be registered himself he shall give notice to the company to that effect. If he elects to have another person registered and the share is a certificated share, he shall execute an instrument of transfer of the share to that person. If he elects to have himself or another person registered and the share is an uncertificated share, he shall take any action the board may require (including, without limitation, the execution of any document and the giving of any instruction by means of relevant system) to enable himself or that person to be registered as the holder of the share. The board may at any time require the person to elect either to be registered himself or to transfer the share and if the requirements are not complied with within 60 days of being issued the board may withhold payment of all dividends and other moneys payable in respect of the share until the requirements have been complied with. All the provisions of these articles relating to the transfer of, and registration of transfers of, shares shall apply to the notice or transfer as if the death or bankruptcy of the member or other event giving rise to the transmission had not occurred and the notice or transfer was given or executed by the member.

46. Rights of Person Entitled by Transmission

Where a person becomes entitled by transmission to a share, the rights of the holder in relation to that share shall cease, but the person entitled by transmission to the share may give a good discharge for any dividends or other moneys payable in respect of it and shall have the same rights in relation to the share as he would have had if he were the holder of it save that, until he becomes the holder, he shall not be entitled in respect of the share (except with the authority of the board) to receive notice of, or to attend or vote at, any general meeting of the company or at any separate general meeting of the holders of any class of shares in the company or to exercise any other right conferred by membership in relation to general meetings.

Alteration of Share Capital

47. Sub-division

Any resolution authorising the company to sub-divide its shares or any of them may determine that, as between the shares resulting from the sub-division, any of them may have any preference or advantage or be subject to any restriction as compared with the others.

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48. Fractions

Whenever as a result of a consolidation, consolidation and sub-division or sub division of shares any members would become entitled to fractions of a share, the board may deal with the fractions as it thinks fit. In particular the board may sell the shares representing the fractions for the best price reasonably obtainable (or at any other price approved by the company by special resolution) to any person (including, subject to the provisions of the Companies Acts, the company) and distribute the net proceeds of sale (subject to the retention by the company of any amounts so small that the cost of distribution would be disproportionate to the amounts involved) in due proportion among those members and the board may authorise some person to transfer or deliver the shares to, or in accordance with the directions of, the purchaser. For the purposes of effecting the sale, the board may arrange for the shares representing the fractions to be entered in the register as certificated shares. The person to whom any shares are transferred or delivered shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity in, or invalidity of, the proceedings relating to the sale.

Notice of General Meetings

49. Omission or Non-Receipt of Notice

(A) The accidental omission to give any notice of a meeting or the accidental omission to send or supply any notice, document or other information relating to any meeting to, or the non-receipt (even if the company becomes aware of such non-receipt) of any such notice, document or other information by, any person entitled to receive the notice, document or other information shall not invalidate the proceedings at that meeting.

(B) A member present in person or by proxy at a meeting shall be deemed to have received proper notice of that meeting and, where applicable, of the purpose of that meeting.

50. Postponement of General Meetings

If the board, in its absolute discretion, considers that it is impractical or undesirable for any reason to hold a general meeting on the date or at the time or place specified in the notice calling the general meeting, it may postpone or move the general meeting to another date, time and/or place. The board shall take reasonable steps to ensure that notice of the date, time and place of the rearranged meeting is given to any member trying to attend the meeting at the original time and place. Notice of the date, time and place of the rearranged meeting shall, if practicable, also be placed in at least two national newspapers in the United Kingdom and one national newspaper in the Republic of Ireland. Notice of the business to be transacted at such rearranged meeting shall not be required. If a meeting is rearranged in this way, the appointment of a proxy will be valid if it is received as required by these articles not less than 48 hours before the time appointed for holding the rearranged meeting. The board may also postpone or move the rearranged meeting under this article.

Proceedings at General Meetings

51. Quorum

No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the choice or appointment of a chairman of the meeting which shall not be treated as part of the business of the meeting. Save as otherwise provided by these articles, two members present in person or by proxy and entitled to vote shall be a quorum for all purposes.

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52. Procedure if Quorum Not Present

If within five minutes (or such longer time not exceeding one hour as the chairman of the meeting may decide to wait) after the time appointed for the commencement of the meeting a quorum is not present, or if during the meeting a quorum ceases to be present, the meeting:

(i) if convened by or upon the requisition of members, shall be dissolved; and

(ii) in any other case, it shall stand adjourned to such other day (being not less than ten days later, excluding the day on which the meeting is adjourned and the day for which it is reconvened) and at such other time or place as the chairman of the meeting may decide. At any adjourned meeting one member present in person or by proxy and entitled to vote (whatever the number of shares held by him) shall be a quorum and any notice of an adjourned meeting shall state that one member present in person or by proxy and entitled to vote (whatever the number of shares held by him) shall be a quorum.

53. Security Arrangements

(A) The board may, for the purpose of controlling the level of attendance and ensuring the safety of those attending at any place specified for the holding of a general meeting, from time to time make (and vary) such arrangements as the board may in its absolute discretion decide. The entitlement of any member or proxy to attend a general meeting at such place shall be subject to any such arrangements.

(B) Without prejudice to the generality of (A) above, the board may:

(i) direct that the meeting shall be held at a place specified in the notice at which the chairman of the meeting shall preside (the “principal place”); and

(ii) make arrangements for simultaneous attendance and participation at other places by members otherwise entitled to attend the general meeting but excluded from the principal place under the provisions of this article (“excluded members”) (or who wish to attend at any such other places) provided that, to the extent required by law, persons attending at the principal place and at any such other places shall (by any means) be able to see, and hear and be seen and heard by, persons attending at the principal place and at such other places.

Such arrangements for simultaneous attendance may include arrangements for controlling the level of attendance in any manner at any of such other places, provided that they shall operate so that each excluded member is able to attend at one of such other places. For the purposes of all other provisions of these articles any such meeting shall be treated as being held and taking place at the principal place.

(C) The board may also direct that persons wishing to attend any general meeting should submit to such searches or other security arrangements or restrictions as the board shall consider appropriate in the circumstances and shall be entitled in its absolute discretion to (or to authorise some one or more persons to) refuse entry to, or to eject from, such general meeting any person who fails to submit to such searches or otherwise to comply with such security arrangements or restrictions.

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54. Chairman of General Meeting

(A) The chairman (if any) of the board or, in his absence, the deputy chairman (if any) shall preside as chairman at every general meeting. If more than one deputy chairman is present they shall agree amongst themselves who is to take the chair or, if they cannot agree, the deputy chairman who has been in office as a director longest shall take the chair.

(B) If:

(i) there is no chairman or deputy chairman; or

(ii) at any meeting neither the chairman nor any deputy chairman is present within 15 minutes after the time appointed for the commencement of the meeting; or

(iii) neither the chairman nor any deputy chairman is capable or willing to act as chairman,

then the senior non-executive director of the company shall act as chairman of the meeting or (if the senior non-executive director is absent, incapacitated or unwilling to act) the directors present shall choose one of their number to act, or if one director only is present he shall preside as chairman of the meeting if willing to act.

(C) If no director is present at a general meeting, or if each of the directors present declines to take the chair, the persons present and entitled to vote shall appoint one of their number to be chairman of the meeting.

(D) Nothing in these articles shall restrict or exclude any of the powers or rights of a chairman of a meeting which are given by law. A chairman selected pursuant to this article will remain chairman for the duration of the relevant meeting.

(E) If the board shall at any time have appointed joint chairmen, each joint chairman shall preside as chairman at alternate general meetings of the company, unless the joint chairmen shall otherwise agree between them.

(F) The chairman of a general meeting may nominate any director present at the meeting to propose any resolution or otherwise facilitate the conduct of any business concerning the chairman himself.

55. Orderly Conduct

The chairman of the meeting shall take such action or give directions for such action to be taken as he thinks fit to promote the orderly conduct of the business of the meeting as laid down in the notice of the meeting. The chairman’s decision on points of order, matters of procedure or matters arising incidentally from the business of the meeting shall be final as shall be his determination as to whether any point or matter is of such a nature.

56. Entitlement to Attend and Speak

Each director shall be entitled to attend and speak at any general meeting of the company. The chairman of the meeting may invite any person to attend and speak at any general meeting of the company where he considers that this will assist in the deliberations of the meeting.

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57. Adjournments

The chairman of the meeting may at any time without the consent of the meeting adjourn any meeting (whether or not it has commenced or a quorum is present) either sine die or to another time or place where it appears to him that (a) the members entitled to vote and wishing to attend cannot be conveniently accommodated in the place appointed for the meeting (b) the conduct of persons present prevents or is likely to prevent the orderly continuation of business or (c) an adjournment is otherwise necessary so that the business of the meeting may be properly conducted. In addition, the chairman of the meeting may at any time with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting) adjourn the meeting either sine die or to another time or place. When a meeting is adjourned sine die the time and place for the adjourned meeting shall be fixed by the board. No business shall be transacted at any adjourned meeting except business which might properly have been transacted at the meeting had the adjournment not taken place. Any meeting may be adjourned more than once.

58. Notice of Adjournment

If the continuation of an adjourned meeting is to take place three months or more after it was adjourned or if business is to be transacted at an adjourned meeting the general nature of which was not stated in the notice of the original meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Except as provided in this article, it shall not be necessary to give any notice of an adjourned meeting or of the business to be transacted at an adjourned meeting.

Amendments

59. Amendments to Resolutions

In the case of a resolution duly proposed as a special resolution no amendment thereto (other than an amendment to correct a patent error) may be considered or voted upon and in the case of a resolution duly proposed as an ordinary resolution no amendment thereto (other than an amendment to correct a patent error) may be considered or voted upon unless either at least 48 hours prior to the time appointed for holding the meeting or adjourned meeting at which such ordinary resolution is to be proposed notice in writing of the terms of the amendment and intention to move the same has been received by the company or the chairman of the meeting in his absolute discretion decides that it may be considered or voted upon. With the consent of the chairman of the meeting, an amendment may be withdrawn by its proposer before it is put to the vote.

60. Amendments Ruled Out of Order

If an amendment shall be proposed to any resolution under consideration but shall be ruled out of order by the chairman of the meeting the proceedings on the substantive resolution shall not be invalidated by any error in such ruling.

Voting

61. Votes of Members

Subject to any special terms as to voting upon which any shares may be issued or may at the relevant time be held and to any other provisions of these articles, members shall be entitled to vote at a general meeting whether on a show of hands or on a poll as provided in the Companies Acts. For this purpose, where a proxy is given discretion as to how to vote on a show of hands, this shall be treated as an instruction by the relevant member to vote in the way that the proxy elects to exercise that discretion.

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62. Method of Voting

At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands) a poll is demanded. A poll may be demanded by:

(i) the chairman of the meeting; or

(ii) at least three members present in person or by proxy and entitled to vote on the resolution; or

(iii) any member or members present in person or by proxy and representing in the aggregate not less than one-tenth of the total voting rights of all the members having the right to vote on the resolution; or

(iv) any member or members present in person or by proxy and holding shares conferring a right to vote on the resolution on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.

The chairman of the meeting can also demand a poll before a resolution is put to the vote on a show of hands.

Unless a poll is so demanded and the demand is not withdrawn, a declaration by the chairman of the meeting that a resolution on a show of hands has been carried or carried unanimously or by a particular majority or not carried by a particular majority or lost shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded for or against the resolution.

63. Procedure if Poll Demanded

If a poll is properly demanded it shall be taken in such manner as the chairman of the meeting shall direct. The chairman may appoint scrutineers (who need not be members) and fix a day, time and place for declaring the result of the poll. The result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded.

64. When Poll to be Taken

No poll may be demanded on the election of the chairman of a meeting. On a question of adjournment of any meeting, a poll may only be demanded by the chairman of the meeting and it shall be taken immediately. A poll duly demanded on any other question shall be taken in such manner and either forthwith or on such date (being not later than 28 days after the date of the demand) and at such time and place as the chairman of the meeting shall direct. It shall not be necessary (unless the chairman of the meeting otherwise directs) for notice to be given of a poll.

65. Continuance of Other Business after Poll Demand

The demand for a poll (other than a demand by the chairman on a question of adjournment) shall not prevent the continuance of a meeting for the transaction of any business other than the question on which the poll was demanded, and it may be withdrawn with the consent of the chairman of the meeting at any time before the close of the meeting or the taking of the poll, whichever is the earlier, and in that event shall not invalidate the result of a show of hands declared before the demand was made.

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66. Votes of Joint Holders

In the case of joint holders of a share the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders and, for this purpose, seniority shall be determined by the order in which the names stand in the register in respect of the joint holding.

67. Voting on Behalf of Incapable Member

A member in respect of whom an order has been made by any competent court or official on the ground that he is or may be suffering from mental disorder or is otherwise incapable of managing his affairs may vote at any general meeting of the company or at any separate general meeting of the holders of any class of shares in the company and may exercise any other right conferred by membership in relation to general meetings by or through any person authorised in such circumstances to do so on his behalf (and that person may vote by proxy), provided that evidence to the satisfaction of the board of the authority of the person claiming to exercise the right to vote or such other right has been received at the office (or at such other place as may be specified in accordance with these articles for the receipt of appointments of a proxy in writing) not later than the last time at which such an appointment should have been received in order to be valid for use at that meeting or on the holding of that poll.

68. No Right to Vote where Sums Overdue on Shares

No member shall, unless the board otherwise decides, be entitled in respect of any share held by him to attend or vote (either personally or by proxy) at any general meeting of the company or at any separate general meeting of the holders of any class of shares in the company or upon a poll or to exercise any other right conferred by membership in relation to general meetings or polls unless all calls or other sums presently payable by him in respect of that share have been paid.

69. Objections or Errors in Voting

If:

(i) any objection shall be raised to the qualification of any voter, or

(ii) any votes have been counted which ought not to have been counted or which might have been rejected, or

(iii) any votes are not counted which ought to have been counted,

the objection or error shall not vitiate the decision of the meeting or adjourned meeting or poll on any resolution unless it is raised or pointed out at the meeting or, as the case may be, the adjourned meeting or poll at which the vote objected to is given or tendered or at which the error occurs. Any objection or error shall be referred to the chairman of the meeting and shall only vitiate the decision of the meeting on any resolution if the chairman decides that the same may have affected the decision of the meeting. The decision of the chairman on such matters shall be conclusive.

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Proxies

70. Appointment of Proxies

The appointment of a proxy shall be in writing signed by the appointor or his duly authorised attorney or, if the appointor is a corporation, shall either be executed under its seal or signed by an officer, attorney or other person authorised to sign it.

71. Receipt of Proxies

(A) The appointment of a proxy must:

(i) in the case of an appointment made in hard copy form, be received at the office (or such other place as may be specified by the company for the receipt of appointments of proxy in hard copy form) not less than 48 hours (or such shorter time as the board may determine or as is specified in such notice or instrument of proxy) before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote together with (if required by the board) any authority under which it is made or a copy of the authority, certified notarially or in accordance with the Powers of Attorney Act 1971 or in some other manner approved by the board;

(ii) in the case of an appointment made by electronic means, be received at the address specified by the company for the receipt of appointment of proxy by electronic means not less than 48 hours (or such shorter time as the board may determine or as is specified in such notice or instrument of proxy) before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote. Any authority pursuant to which such an appointment is made or a copy of the authority, certified notarially or in accordance with the Powers of Attorney Act 1971 or in some other manner approved by the board, must, if required by the board, be received at such address or at the office (or such other place as may be specified by the company for the receipt of such documents) not less than 48 hours (or such shorter time as the board may determine or as is specified in such notice or instrument of proxy) before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote;

(iii) in the case of a poll taken more than 48 hours after it was demanded, be received as aforesaid not less than 24 hours (or such shorter time as the board may determine) before the time appointed for the taking of the poll; or

(iv) in the case of a poll taken following the conclusion of a meeting or adjourned meeting but 48 hours or less after it was demanded, be received as aforesaid before the end of the meeting at which it was demanded (or at such later time as the board may determine),

and an appointment of a proxy which is not, or in respect of which the authority or copy thereof is not, received in a manner so permitted shall be invalid, unless the board waives compliance with this provision. When two or more valid but differing appointments of a proxy are received in respect of the same share for use at the same meeting or poll, the one which is last received (regardless of its date or of the date of its signature) shall be treated as replacing and revoking the others as regards that share; if the company is unable to determine which was last received, none of them shall be

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treated as valid in respect of that share. The appointment of a proxy shall not preclude a member from attending and voting in person at the meeting or poll concerned. The proceedings at a general meeting shall not be invalidated where an appointment of a proxy in respect of that meeting is sent in electronic form as provided in these articles, but because of a technical problem it cannot be read by the recipient.

(B) The board may at its discretion determine that in calculating the periods mentioned in this article no account shall be taken of any part of a day that is not a working day.

72. Maximum Validity of Proxy

No appointment of a proxy shall be valid after 12 months have elapsed from the date of its receipt save that, unless the contrary is stated in it, an appointment of a proxy shall be valid for use at an adjourned meeting or a poll after a meeting or an adjourned meeting even after 12 months, if it was valid for the original meeting.

73. Form of Proxy

The appointment of a proxy shall be in any usual form or in such other form as the board may approve. The appointment of a proxy shall be deemed to confer authority to demand or join in demanding a poll and to vote on any amendment of a resolution put to, or any other business which may properly come before, the meeting for which it is given as the proxy thinks fit. The appointment of a proxy shall, unless the contrary is stated in it, be valid as well for any adjournment of the meeting as for the meeting to which it relates.

74. Cancellation of Proxy’s Authority

A vote given or poll demanded by a proxy or by the duly authorised representative of a corporation shall be valid notwithstanding the previous determination of the authority of the person voting or demanding a poll, unless notice in writing of the determination was received by the company at the office (or such other place or address as was specified by the company for the receipt of appointments of proxy in the notice convening the meeting or in any notice of any adjournment or, in either case, in any accompanying document) not later than the last time at which an appointment of a proxy should have been received in order to be valid for use at the meeting or on the holding of the poll at which the vote was given or the poll demanded.

75. Board’s Power to Issue Proxies

The board may at the expense of the company send instruments of proxy to members by post or otherwise (with or without provision for their return prepaid) for use at any general meeting or at any separate meeting of the holders of any class of shares, either in blank or nominating in the alternative any one or more of the board or any other person. If, for the purpose of any meeting, invitations to appoint as proxy a person, or one of a number of persons specified in the invitations, are issued at the company’s expense, they shall (without prejudice to any other provision of these articles or of the Companies Acts permitting the board to cease or suspend sending notices or other circulars to a member) be issued to all the members entitled to be sent a notice of the meeting and to vote at it. The accidental omission to send such an instrument or give such an invitation to, or the non-receipt by, any member entitled to attend and vote at a meeting shall not invalidate the proceedings at that meeting.

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Appointment, Retirement and Removal of Directors

76. Number of Directors

Unless otherwise determined by ordinary resolution of the company, the directors (disregarding alternate directors) shall be not less than three nor more than 25 in number.

77. Directors’ Shareholding Qualification

No shareholding qualification for directors shall be required.

78. Power of Company to Elect Directors

Subject to the provisions of these articles, the company may by ordinary resolution elect any person who is willing to act to be a director, either to fill a vacancy or as an addition to the existing board, but so that the total number of directors shall not at any time exceed any maximum number fixed by or in accordance with these articles.

79. Power of Board to Appoint Directors

Subject to the provisions of these articles, the board may appoint any person who is willing to act to be a director, either to fill a vacancy or as an addition to the existing board, but so that the total number of directors shall not at any time exceed any maximum number fixed by or in accordance with these articles. Any director so appointed shall retire at the next annual general meeting and shall then be eligible for election.

80. Annual Retirement of Directors

At every annual general meeting all the directors shall retire from office and may offer themselves for re-election by the members.

81. Power of Removal by Special Resolution

In addition to any power of removal conferred by the Companies Acts, the company may by special resolution remove any director before the expiration of his period of office and may (subject to these articles) by ordinary resolution appoint another person who is willing to act to be a director in his place.

82. Persons Eligible as Directors

No person other than a director retiring at the meeting shall be elected or re-elected a director at any general meeting unless:

(i) he is recommended by the board; or

(ii) not less than seven nor more than 40 clear days before the day appointed for the meeting, notice in writing by a member qualified to vote at the meeting (not being the person to be proposed) has been given to the secretary at the office of the intention to propose that person for election or re-election together with confirmation in writing by that person of his willingness to be elected or re-elected; the notice shall give the particulars of that person which would (if he were elected) be required to be included in the company’s register of directors.

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83. Position of Retiring Directors

A director who retires at an annual general meeting may, if willing to continue to act, be elected or re-elected. If he is elected or re-elected he is treated as continuing in office throughout. If he is not elected or re-elected, he shall retain office until the end of the meeting or (if earlier) when a resolution is passed to elect someone in his place or when a resolution to elect or re-elect the director is put to the meeting and lost.

84. Vacation of Office by Directors

Without prejudice to the provisions for retirement annually or otherwise contained in these articles, the office of a director shall be vacated if:

(i) he resigns his office by notice in writing delivered to or received at the office or tendered at a meeting of the board; or

(ii) by notice in writing delivered to or received at the office or tendered at a meeting of the board, he offers to resign and the board resolves to accept such offer; or

(iii) he is an executive director and his appointment to the relevant office or employment is terminated or expires and the board resolves that his office be vacated; or

(iv) by notice in writing delivered to or received at the office or tendered at a meeting of the board, his resignation is requested by all of the other directors and all of the other directors are not less than three in number; or

(v) he is or has been suffering from mental or physical ill health or becomes a patient for the purpose of any statute relating to mental health and the board resolves that his office is vacated; or

(vi) he is absent without the permission of the board from meetings of the board (whether or not an alternate director appointed by him attends) for six consecutive months and the board resolves that his office is vacated; or

(vii) he becomes bankrupt or compounds with his creditors generally; or

(viii) he is prohibited by law from being a director; or

(ix) he ceases to be a director by virtue of the Companies Acts or is removed from office pursuant to these articles.

If the office of a director is vacated for any reason, he shall cease to be a member of any committee or sub-committee of the board.

85. Alternate Directors

(A) Each director may appoint any person to be his alternate and may at his discretion remove an alternate director so appointed. If the alternate director is not already a director, the appointment, unless previously approved by the board, shall have effect only upon and subject to its being so approved. Any appointment or removal of an alternate director shall be effected by notice in writing signed by the

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appointor and delivered to or received at the office or tendered at a meeting of the board, or in any other manner approved by the board. An alternate director shall not be required to hold any shares in the capital of the company and shall not be counted in reckoning the maximum and minimum numbers of directors allowed or required by article 76. An alternate director shall be entitled (subject to his giving to the company an address within the United Kingdom at which notices may be served upon him) to receive notice of all meetings of the board or of committees of the board of which his appointor is a member. It shall not be necessary to give notice of such a meeting to an alternate director who is absent from the United Kingdom. He shall also be entitled to attend and vote as a director at any such meeting at which the director appointing him is not personally present and at such meeting to exercise and discharge all the functions, powers, rights and duties of his appointor as a director and for the purposes of the proceedings at such meeting the provisions of these articles shall apply as if he were a director.

(B) Every person acting as an alternate director shall (except as regards power to appoint an alternate and remuneration) be subject in all respects to the provisions of these articles relating to directors and shall during his appointment be an officer of the company. An alternate director shall alone be responsible to the company for his acts and defaults and shall not be deemed to be the agent of or for the director appointing him. An alternate director may be paid expenses and shall be entitled to be indemnified by the company to the same extent as if he were a director. An alternate director shall not be entitled to receive from the company any fee in his capacity as an alternate director but the company shall, if so requested in writing by the appointor, pay to the alternate director any part of the fees or remuneration otherwise due to the appointor.

(C) A director or any other person may act as an alternate director to represent more than one director. Every person acting as an alternate director shall have one vote for each director for whom he acts as alternate, in addition to his own vote if he is also a director but he shall count as only one for the purposes of determining whether a quorum is present. Signature by an alternate director of any resolution in writing of the board or a committee of the board shall, unless the notice of his appointment provides to the contrary, be as effective as signature by his appointor.

(D) An alternate director shall cease to be an alternate director:

(i) if his appointor ceases for any reason to be a director except that, if at any meeting any director retires but is re-elected at the same meeting, any appointment made by him pursuant to this article which was in force immediately before his retirement shall remain in force as though he had not retired; or

(ii) on the happening of any event which if he were a director would cause him to vacate his office as director; or

(iii) if he resigns his office by notice in writing to the company.

86. Chief Executive, Managing and Executive Directors

The board (or any committee authorised by the board) may:

(i) appoint one or more of its body to the office of chief executive, managing director or joint managing director, or to any other office (except that of auditor) or employment in the company, for such period (subject to the Companies Acts) and on such terms as it thinks fit, and may revoke such appointment (but so that the revocation is without prejudice to any rights or claims which the person whose appointment is revoked may have against the company or the company may have against such person by reason of (or connected with) the revocation);

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(ii) permit any person elected or appointed to be a director to continue in any other office or employment held by the person before he was so elected or appointed; and

(iii) appoint any director or former director of the company who, in its opinion, has rendered outstanding service to the company to be president of the company. The president shall not, by virtue of such office, be deemed a director or be entitled to any remuneration.

Fees, Remuneration, Expenses and Pensions

87. Directors’ Fees

The directors (other than alternate directors) shall be paid such remuneration (by way of fee) for their services as directors as may from time to time be determined by the board. Unless otherwise approved by ordinary resolution of the company in general meeting, the aggregate of the remuneration (by way of fee), but excluding special remuneration or other amounts paid under article 88, of all the directors shall not exceed £1,200,000 for any financial year of the company (and pro rata for any shorter or longer period). Such sum (unless otherwise directed by the resolution of the company by which it is approved) shall be divided among the directors in such proportions and in such manner as the board may determine or, in default of such determination, equally. Any fees payable pursuant to this article shall be distinct from any salary, remuneration or other amounts payable to a director pursuant to any other provisions of these articles and shall accrue from day to day.

88. Additional Remuneration

Any director who by request of the board serves on a committee of the board, performs special services, or goes or resides abroad for any purposes of the company, may be paid extra remuneration by way of salary, commission, percentage of profits or otherwise as the board decides.

89. Expenses and Legal Costs

Each director shall be entitled to be repaid all reasonable travelling, hotel and other expenses properly incurred by him in or about the performance of his duties as a director, including any expenses incurred in attending meetings of the board or any committee of the board or general meetings or separate meetings of the holders of any class of shares or of debentures of the company. The company may also fund a director’s expenditure for the purposes permitted under the Companies Acts and may do anything to enable a director to avoid incurring such expenditure as provided in the Companies Acts.

90. Power to Pay Pensions and Gratuities

(A) The board may grant or make provision for pensions, allowances, gratuities and life assurance, bonuses or other benefits to or for the benefit of:

(i) any director or former director or other officer or former officer who holds or has held any executive office or place of profit with the company or any other company in which the company is or was interested, or any company or firm or concern whose business or any part thereof (or control of whose business or any part thereof) has at any time been acquired by the company or any of its subsidiary undertakings;

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(ii) the wife or widow, husband or widower, or other dependant or relation of such director or former director or other officer or former officer;

(iii) any other employee or former employee of the company or of any such other company, firm or concern as mentioned in article 90(A)(i);

(iv) the wife or widow, husband or widower, or any other dependant or relation of any such other employee or former employee,

or any class or classes thereof.

(B) Any of the matters in article 90(A) may be done either alone or in conjunction with any other person or company, and in such manner as the board thinks fit.

(C) Subject to the provisions of the Companies Acts, any such director or other person mentioned in sub-paragraphs (i) to (iv) inclusive of article 90(A) is entitled to receive and retain for his own benefit any such pension, allowance, gratuity, assurance or other benefit (and receipt of the same shall not disqualify any person from being or becoming a director of the company) and any such director may vote as a director in the exercise of any of the powers conferred by this article 90 notwithstanding that he is interested therein.

Directors’ Interests

91. Conflicts of Interest Requiring Board Authorisation

(A) The board may, subject to the quorum and voting requirements set out in this article, authorise any matter which would otherwise involve a director breaching his duty under the Companies Acts to avoid conflicts of interest (“Conflict”).

(B) A director seeking authorisation in respect of a Conflict shall declare to the board the nature and extent of his interest in a Conflict as soon as is reasonably practicable. The director shall provide the board with such details of the relevant matter as are necessary for the board to decide how to address the Conflict together with such additional information as may be requested by the board.

(C) Any director (including the relevant director) may propose that the relevant director be authorised in relation to any matter the subject of a Conflict. Such proposal and any authority given by the board shall be effected in the same way that any other matter may be proposed to and resolved upon by the board under the provisions of these articles save that:

(i) the relevant director and any other director with a similar interest shall not count towards the quorum nor vote on any resolution giving such authority; and

(ii) the relevant director and any other director with a similar interest may, if the other members of the board so decide, be excluded from any board meeting while the Conflict is under consideration.

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(D) Where the board gives authority in relation to a Conflict:

(i) the board may (whether at the time of giving the authority or subsequently) (a) require that the relevant director is excluded from the receipt of information, the participation in discussion and/or the making of decisions (whether at meetings of the board or otherwise) related to the Conflict; and (b) impose upon the relevant director such other terms for the purpose of dealing with the Conflict as it may determine;

(ii) the relevant director will be obliged to conduct himself in accordance with any terms imposed by the board in relation to the Conflict;

(iii) the board may provide that where the relevant director obtains (otherwise than through his position as a director of the company) information that is confidential to a third party, the director will not be obliged to disclose that information to the company, or to use or apply the information in relation to the company’s affairs, where to do so would amount to a breach of that confidence;

(iv) the terms of the authority shall be recorded in writing (but the authority shall be effective whether or not the terms are so recorded); and

(v) the board may revoke or vary such authority at any time but this will not affect anything done by the relevant director prior to such revocation in accordance with the terms of such authority.

92. Other Conflicts of Interest

(A) If a director is in any way directly or indirectly interested in a proposed contract with the company or a contract that has been entered into by the company, he must declare the nature and extent of that interest to the directors in accordance with the Companies Acts.

(B) Provided he has declared his interest in accordance with paragraph (A), a director may:

(i) be party to, or otherwise interested in, any contract with the company or in which the company has a direct or indirect interest;

(ii) hold any other office or place of profit with the company (except that of auditor) in conjunction with his office of director for such period and upon such terms, including as to remuneration, as the board may decide;

(iii) act by himself or through a firm with which he is associated in a professional capacity for the company or any other company in which the company may be interested (otherwise than as auditor);

(iv) be or become a director or other officer of, or employed by or otherwise be interested in any holding company or subsidiary company of the company or any other company in which the company may be interested; and

(v) be or become a director of any other company in which the company does not have an interest and which cannot reasonably be regarded as giving rise to a conflict of interest at the time of his appointment as a director of that other company.

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93. Benefits

A director shall not, by reason of his office or of the fiduciary relationship thereby established, be liable to account to the company for any remuneration, profit or other benefit realised by reason of his having any type of interest authorised under article 91(A) or permitted under article 92(B) and no contract shall be liable to be avoided on the grounds of a director having any type of interest authorised under article 91(A) or permitted under article 92(B).

94. Quorum and Voting Requirements

(A) A director shall not vote on or be counted in the quorum in relation to any resolution of the board concerning his own appointment, or the settlement or variation of the terms or the termination of his own appointment, as the holder of any office or place of profit with the company or any other company in which the company is interested but, where proposals are under consideration concerning the appointment, or the settlement or variation of the terms or the termination of the appointment, of two or more directors to offices or places of profit with the company or any other company in which the company is interested, a separate resolution may be put in relation to each director and in that case each of the directors concerned shall be entitled to vote and be counted in the quorum in respect of each resolution unless it concerns his own appointment or the settlement or variation of the terms or the termination of his own appointment or the appointment of another director to an office or place of profit with a company in which the company is interested and the director seeking to vote or be counted in the quorum has a Relevant Interest in it.

(B) A director shall not vote on, or be counted in the quorum in relation to, any resolution of the board in respect of any contract in which he has an interest and, if he shall do so, his vote shall not be counted, but this prohibition shall not apply to any resolution where that interest cannot reasonably be regarded as likely to give rise to a conflict of interest or where that interest arises only from one or more of the following matters:-

(i) the giving to him of any guarantee, indemnity or security in respect of money lent or obligations undertaken by him or by any other person at the request of or for the benefit of the company or any of its subsidiary undertakings;

(ii) the giving to a third party of any guarantee, indemnity or security in respect of a debt or obligation of the company or any of its subsidiary undertakings for which he himself has assumed responsibility in whole or in part under a guarantee or indemnity or by the giving of security;

(iii) the giving to him of any other indemnity where all other directors are being offered indemnities on substantially the same terms;

(iv) the funding by the company of his expenditure on defending proceedings or the doing by the company of anything to enable him to avoid incurring such expenditure where all other directors are being offered substantially the same arrangements;

(v) where the company or any of its subsidiary undertakings is offering securities in which offer the director is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which the director is to participate;

(vi) any contract in which he is interested by virtue of his interest in shares or debentures or other securities of the company or by reason of any other interest in or through the company;

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(vii) any contract concerning any other company (not being a company in which the director has a Relevant Interest) in which he is interested directly or indirectly whether as an officer, shareholder, creditor or otherwise howsoever;

(viii) any contract concerning the adoption, modification or operation of a pension fund, superannuation or similar scheme or retirement, death or disability benefits scheme or employees’ share scheme which relates both to directors and employees of the company or of any of its subsidiary undertakings and does not provide in respect of any director as such any privilege or advantage not accorded to the employees to which the fund or scheme relates;

(ix) any contract for the benefit of employees of the company or of any of its subsidiary undertakings under which he benefits in a similar manner to the employees and which does not accord to any director as such any privilege or advantage not accorded to the employees to whom the contract relates; and

(x) any contract for the purchase or maintenance of insurance against any liability for, or for the benefit of, any director or directors or for, or for the benefit of, persons who include directors.

(C) A company shall be deemed to be one in which a director has a “Relevant Interest” if and so long as (but only if and so long as) he is to his knowledge (either directly or indirectly) the holder of or beneficially interested in one per cent. or more of any class of the equity share capital of that company (calculated exclusive of any shares of that class in that company held as treasury shares) or of the voting rights available to members of that company. In relation to an alternate director, an interest of his appointor shall be treated as an interest of the alternate director without prejudice to any interest which the alternate director has otherwise.

(D) Where a company in which a director has a Relevant Interest is interested in a contract, he also shall be deemed interested in that contract.

(E) If any question shall arise at any meeting of the board as to the interest of a director (other than the chairman of the meeting) in a contract and whether it is likely to give rise to a conflict of interest or as to the entitlement of any director (other than the chairman of the meeting) to vote or be counted in the quorum and the question is not resolved by his voluntarily agreeing to abstain from voting or not to be counted in the quorum, the question shall be referred to the chairman of the meeting and his ruling in relation to the director concerned shall be conclusive except in a case where the nature or extent of the director’s interest (so far as it is known to him) has not been fairly disclosed to the board. If any question shall arise in respect of the chairman of the meeting, the question shall be decided by a resolution of the board (for which purpose the chairman of the meeting shall be counted in the quorum but shall not vote on the matter) and the resolution shall be conclusive except in a case where the nature or extent of the interest of the chairman of the meeting (so far as it is known to him) has not been fairly disclosed to the board.

(F) Subject to these articles, the board may also cause any voting power conferred by the shares in any other company held or owned by the company or any power of appointment to be exercised in such manner in all respects as it thinks fit, including the exercise of the voting power or power of appointment in favour of the appointment of the directors or any of them as directors or officers of the other company, or in favour of the payment of remuneration to the directors or officers of the other company. Subject to these articles, a director may also vote on and be counted in the quorum in relation to any of such matters.

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95. General

(A) References in articles 91 to 94 and in this article to:

(i) a contract include references to any proposed contract and to any transaction or arrangement or proposed transaction or arrangement whether or not constituting a contract; and

(ii) a conflict of interest includes a conflict of interest and duty and a conflict of duties.

(B) The company may by ordinary resolution suspend or relax the provisions of articles 91 to 94 to any extent or ratify any contract not properly authorised by reason of a contravention of any of the provisions of articles 91 to 94.

Powers and Duties of the Board

96. General Powers of Company Vested in Board

Subject to these articles and to any directions given by the company in general meeting by special resolution, the business of the company shall be managed by the board which may exercise all the powers of the company whether relating to the management of the business of the company or not. No alteration of these articles and no special resolution shall invalidate any prior act of the board which would have been valid if that alteration had not been made or that resolution had not been passed. The powers given by this article shall not be limited by any special power given to the board by any other article

97. Borrowing Powers

(A) The board may exercise all the powers of the company to borrow money and to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the company, to issue debentures, debenture stock and other securities and to give security, whether outright or as collateral security, for any debt, liability or obligation of the company or of any third party.

(B) The board shall restrict the borrowings of the company and exercise all voting and other rights or powers of control exercisable by the company in relation to its subsidiaries so as to secure (but as regards its subsidiaries only in so far as by the exercise of the rights or powers of control the board can secure) that the aggregate principal amount from time to time outstanding of all net external borrowings by the company and its subsidiaries shall not at any time without the previous sanction of an ordinary resolution of the company exceed an amount equal to two times the adjusted capital and reserves.

For the purposes of this paragraph of this article:

(i) “the adjusted capital and reserves” means the aggregate from time to time of:

(a) the amount paid up or credited as paid up on the issued share capital of the company (including any shares held as treasury shares);

(b) the amount standing to the credit of the reserves of the group, including any share premium account, capital redemption reserve and credit balance on profit and loss account; and

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(c) an amount of £1,562,000,000 representing goodwill arising on acquisitions prior to 1 July 1998 of subsidiaries, related companies and businesses which remained within the group at 30 June 2004 and which has been written off against share capital and reserves,

(d) and (b) above as shown by the then latest audited balance sheet of the group but after:

(e) deducting from the aggregate amount any debit balance on profit and loss account subsisting at the date of that audited balance sheet except to the extent that a deduction has already been made on that account;

(f) excluding the effects on the reserves of the group in that audited balance sheet of the recognition of any post employment net assets or net liabilities reflected in accordance with any applicable accounting standards; and

(g) making such adjustments as may be appropriate to reflect any variation in the amount of the paid up share capital, share premium account, capital redemption reserve or other reserve since the date of that audited balance sheet.

If any issue or proposed issue of shares by the company for cash has been or becomes unconditionally underwritten, then those shares shall be deemed to have been issued and the amount (including any premium) of the subscription moneys payable in respect thereof shall (provided such subscription moneys are payable not later than three months after the date of allotment) be deemed to have been paid up on the date when those shares become unconditionally underwritten but only to the extent of the underwriters’ liability to the company in respect of the subscription moneys;

(ii) “net external borrowings” means external borrowings less:

(a) cash at bank and liquid resources; and

(b) any other assets which would be included in short term investments,

in each case as shown in a consolidated balance sheet of the group prepared on the date of the relevant calculation in accordance with the principles with which the then latest audited balance sheet of the group was prepared;

(iii) “external borrowings” does not include:

(a) borrowings owing by one member of the group to another member of the group;

(b) borrowings incurred by any member of the group for the purpose of repaying within six months of the borrowing the whole or any part of any borrowings of that or any other member of the group outstanding at the relevant time, pending their application for that purpose within that period;

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(c) borrowings incurred by any member of the group for the purpose of financing any contract in respect of which any part of the price receivable under the contract by that or any other member of the group is guaranteed or insured by the Export Credits Guarantee Department or by any other governmental department or agency fulfilling a similar function, up to an amount equal to that part of the price receivable under the contract which is so guaranteed or insured;

(d) borrowings of, or amounts secured on assets of, an undertaking which became a member of the group after the date as at which the latest audited balance sheet was prepared, to the extent their amount does not exceed their amount immediately after it became such a member; or

(e) the minority proportion of moneys borrowed by a partly-owned member of the group and not owing to another member of the group;

(iv) when the aggregate principal amount of borrowings required to be taken into account on any particular date is being ascertained, any particular borrowing then outstanding which is denominated or repayable in a currency other than sterling shall be notionally converted into sterling at the rate of exchange prevailing in London on the last business day before that date or, if it would result in a lower figure, at the rate of exchange prevailing in London on the last business day six months before that date and so that for these purposes the rate of exchange shall be taken as the spot rate in London recommended by a London clearing bank, selected by the board, as being the most appropriate rate for the purchase by the company of the currency in question for sterling on the day in question;

(v) if the amount of the adjusted capital and reserves is being calculated in connection with a transaction involving a company becoming or ceasing to be a member of the group, the amount is to be calculated as if the transaction had already occurred;

(vi) “audited balance sheet” means the audited balance sheet of the company prepared for the purposes of the Companies Acts for a financial year unless an audited consolidated balance sheet dealing with the state of affairs of the group required to be dealt with in group accounts has been prepared for those purposes for the same financial year, in which case it means that audited consolidated balance sheet, and in that case all references to reserves and profit and loss account shall be deemed to be references to consolidated reserves and consolidated profit and loss account respectively;

(vii) the company may from time to time change the accounting convention on which the audited balance sheet is based provided that any new convention adopted complies with the requirements of the Companies Acts; if the company should prepare its primary audited balance sheet on the basis of one convention, but a supplementary audited balance sheet on the basis of another, the primary audited balance sheet shall be taken as the audited balance sheet;

(viii) “the group” means the company, its subsidiaries and any other entity the accounts of which are required to be consolidated with the accounts of the company and its subsidiaries;

(ix) “the minority proportion” means a proportion equal to the proportion of the issued share capital of a partly-owned member of the group which is not attributable to a member of the group; and

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(x) a certificate or report by the auditors as to the amount of the adjusted capital and reserves or the amount of any borrowings or to the effect that the limit imposed by this article has not been or will not be exceeded at any particular time or times shall be conclusive evidence of that amount or of that fact.

98. Agents

(A) The board can appoint anyone as the company’s attorney by granting a power of attorney or by authorising them in some other way. Attorneys can either be appointed directly by the board or the board can give someone else the power to select attorneys. The board or the persons who are authorised by it to select attorneys can decide on the purposes, powers, authorities and discretions of attorneys. But they cannot give an attorney any power, authority or discretion which the board does not have under these articles.

(B) The board can decide how long a power of attorney will last for and attach any conditions to it. The power of attorney can include any provisions which the board decides on for the protection and convenience of anybody dealing with the attorney. The power of attorney can allow the attorney to grant any or all of his power, authority or discretion to any other person.

(C) The board can:

(i) delegate any of its authority, powers or discretions to any manager or agent of the company;

(ii) allow managers or agents to delegate to another person;

(iii) remove any people it has appointed in any of these ways; and

(iv) cancel or change anything that it has delegated, although this will not affect anybody who acts in good faith who has not had any notice of any cancellation or change.

Any appointment or delegation by the board which is referred to in this article can be on any conditions decided on by the board.

(D) The ability of the board to delegate under this article applies to all its powers and is not limited because certain articles refer to powers being exercised by the board or by a committee authorised by the board while other articles do not.

(E) Without prejudice to any powers of delegation granted to the directors elsewhere under these articles, the board may make such arrangements as it thinks fit for the management and transaction of the company’s affairs in the United Kingdom, the Republic of Ireland and elsewhere, and may for that purpose appoint local boards, managers and agents and delegate to them upon such terms and conditions as the board thinks fit any of the powers of the board (other than the power to borrow and make calls) with power to sub-delegate, and may authorise them to fill any vacancies in their number or to act notwithstanding any vacancies.

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99. Delegation to Individual Directors

The board may entrust to and confer upon any director any of its powers, authorities and discretions (with power to sub-delegate) upon such terms and conditions and with such restrictions as it thinks fit, and either collaterally with, or to the exclusion of, its own powers, authorities and discretions and may from time to time revoke or vary all or any of them but no person dealing in good faith and without notice of the revocation or variation shall be affected by it. The power to delegate contained in this article shall be effective in relation to the powers, authorities and discretions of the board generally and shall not be limited by the fact that in certain articles, but not in others, express reference is made to particular powers, authorities or discretions being exercised by the board or by a committee authorised by the board.

100. Branch Registers

The board may direct the company to keep, in any part of the world outside the United Kingdom in which the company transacts business, a branch register or registers of members resident in such territory, and the board may (subject to the provisions of the Companies Acts) make and vary such regulations as it thinks fit regarding the keeping of any such register or registers, provided that if there are in issue any uncertificated shares such regulations shall be consistent with the uncertificated securities rules.

101. Provision for Employees

The board may exercise any power conferred by the Companies Acts to make provision for the benefit of persons employed or formerly employed by the company or any of its subsidiaries in connection with the cessation or the transfer to any person of the whole or part of the undertaking of the company or that subsidiary.

Proceedings of the Board

102. Board Meetings

The board may meet for the despatch of business, adjourn and otherwise regulate its meetings as it thinks fit. A meeting of the board may be called on reasonable notice by (and shall be so called by the secretary at the requisition of) any of the following:

(A) the chairman or the joint chairmen (or either of them);

(B) the vice chairman or the joint vice chairmen (or either of them);

(C) the deputy chairman or the joint deputy chairmen (or either of them);

(D) the chief executive;

(E) the managing director (or any joint managing director); or

(F) any two directors.

103. Notice of Board Meetings

Notice of a board meeting shall be deemed to be properly given to a director if it is given to him personally or by word of mouth or sent in writing to him at his last known address or any other address given by him to the company for this purpose. A director may waive his entitlement to notice of any meeting either prospectively or retrospectively and any retrospective waiver shall not affect the validity of the meeting or of any business conducted at the meeting.

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104. Quorum

The quorum necessary for the transaction of the business of the board may be fixed by the board but shall not be less than three. Subject to the provisions of these articles, any director who ceases to be a director at a board meeting may continue to be present and to act as a director and be counted in the quorum until the termination of the board meeting if no other director objects and if otherwise a quorum of directors would not be present.

105. Directors below Minimum through Vacancies

The continuing directors or a sole continuing director may act notwithstanding any vacancy in their number but, if and so long as the number of directors is reduced below the minimum number fixed by or in accordance with these articles or is below the number fixed by or in accordance with these articles as the quorum or there is only one continuing director, the continuing directors or director may act for the purpose of filling vacancies or of summoning general meetings of the company but not for any other purpose. If there are no directors or director able or willing to act, then any two members (excluding any member holding shares as treasury shares) may summon a general meeting for the purpose of appointing directors.

106. Appointment of Chairman, Vice-Chairman and Deputy Chairman

The board may appoint a chairman or joint chairmen and, if it thinks fit, a vice-chairman or joint vice-chairmen and a joint deputy chairman or deputy chairmen of its meetings and determine the period for which they respectively are to hold office. If there are joint chairmen at any time, they shall, unless otherwise determined by the board, chair alternate meetings of the board. If no chairman, vice-chairman or deputy chairman is appointed, or none is present within five minutes after the time fixed for holding any meeting, the directors present may choose one of their number to act as chairman of the meeting. If more than one person is appointed as vice-chairman or deputy chairman, and a dispute arises as to which of them shall be chairman the directors present shall determine which person is to act as chairman.

107. Competence of Meetings

A meeting of the board at which a quorum is present shall be competent to exercise all the powers, authorities and discretions vested in or exercisable by the board.

108. Voting

Questions arising at any meeting shall be determined by a majority of votes. In the case of an equality of votes the chairman of the meeting shall have a second or casting vote.

109. Delegation to Committees

(A) The board may delegate any of its powers, authorities and discretions (with power to sub-delegate) for such time, on such terms and subject to such conditions as it thinks fit to any committee, consisting of such person or persons (whether a member or members of its body or not) as it thinks fit. Any committee so formed may exercise its powers to sub-delegate by sub delegating to any person or persons (whether or not a member of the board or of the committee).

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(B) Any committee so formed shall, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations which may be imposed on it by the board. The meetings and proceedings of any committee consisting of three or more members shall be governed by the provisions contained in these articles for regulating the meetings and proceedings of the board so far as the same are applicable and are not superseded by any regulations imposed by the board.

(C) The power to delegate contained in this article shall be effective in relation to the powers, authorities and discretions of the board generally and shall not be limited by the fact that in certain articles, but not in others, express reference is made to particular powers, authorities or discretions being exercised by the board or by a committee authorised by the board.

110. Participation in Meetings

All or any of the members of the board may participate in a meeting of the board by means of a conference telephone or any communication equipment which allows all persons participating in the meeting to speak to and hear each other. A person so participating shall be deemed to be present in person at the meeting and shall be entitled to vote and be counted in a quorum accordingly.

111. Resolution in Writing

A resolution in writing signed by a majority of the directors who are at the relevant time entitled to receive notice of a meeting of the board or a committee of the board and who would be entitled to vote on the resolution at a meeting of the board or a meeting of a committee of the board (if that number is sufficient to constitute a quorum) shall be as valid and effectual as a resolution passed at a meeting of the board (or, as the case may be, of that committee) properly called and constituted. The resolution may be contained in one document or in several documents in like form each signed by one or more of the directors concerned.

112. Validity of Acts of Board or Committee

All acts done by the board or by any committee or sub-committee of the board or by any person acting as a director or member of a committee or sub-committee shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of any member of the board or committee or sub-committee or person so acting or that they or any of them were disqualified from holding office or had vacated office or were not entitled to vote, be as valid as if each such member or person had been properly appointed and was qualified and had continued to be a director or member of the committee or subcommittee and had been entitled to vote.

113. Authentication of Documents

(A) Any director or the secretary or any person appointed by the board for the purpose, has the power to authenticate any documents affecting the constitution of the company and any resolutions passed by the company or the board or any committee of the board and any books, records, documents and accounts relating to the business of the company, and to certify copies or extracts as true copies or extracts. Where any books, records, documents or accounts are elsewhere than at the office, the officer or local manager of the company having custody of such books, records, documents or accounts is deemed to be a person appointed by the board for these purposes.

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(B) A document purporting to be a copy of a resolution, or an extract from the minutes of a meeting of the company or of the board or of any committee, which is certified as such in accordance with article 113(A) is conclusive evidence in favour of all persons dealing with the company on the faith of the document that the resolution has been duly passed or, as the case may be, that the extract is a true and accurate record of proceedings at a duly constituted meeting.

Seals

114. Use of Seals

The board shall provide for the custody of every seal of the company. A seal shall only be used by the authority of the board or of a committee of the board authorised by the board in that behalf. Subject as otherwise provided in these articles, and to any resolution of the board or committee of the board dispensing with the requirement for counter-signature on any occasion, any instrument to which the common seal is applied shall be signed by at least one director and the secretary, or by at least two directors or by one director in the presence of a witness who attests the signature or by such other person or persons as the board may approve. Any instrument to which an official seal is applied need not, unless the board otherwise decides or the law otherwise requires, be signed by any person.

Dividends and Other Payments

115. Declaration of Dividends by Company

The company may by ordinary resolution from time to time declare dividends in accordance with the respective rights of the members, but no dividend shall exceed the amount recommended by the board.

116. Payment of Interim and Fixed Dividends by Board

The board may pay such interim dividends as appear to the board to be justified by the financial position of the company and may also pay any dividend payable at a fixed rate at intervals settled by the board whenever the financial position of the company, in the opinion of the board, justifies its payment. If the board acts in good faith, it shall not incur any liability to the holders of any shares for any loss they may suffer in consequence of the payment of an interim or fixed dividend on any other class of shares ranking pari passu with or after those shares.

117. Calculation and Currency of Dividends

Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provide:

(i) all dividends shall be declared and paid according to the amounts paid up on the share in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for the purposes of this article as paid up on the share;

(ii) all dividends shall be apportioned and paid pro rata according to the amounts paid up on the share during any portion or portions of the period in respect of which the dividend is paid; and

(iii) dividends may be declared or paid in any currency.

The board shall decide, in accordance with article 118, the basis of conversion for any currency conversions that may be required and how any costs involved are to be met.

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118. Payment of Dividends in Foreign Currencies

(A) The board may in its discretion make provisions to enable depositaries and/or members to receive dividends declared or paid in one currency or currencies in another currency or currencies. For the purposes of the calculation of the amount receivable in respect of any dividend, the rate of exchange to be used to determine the foreign exchange currency equivalent of any sum payable as a dividend shall be such market rate selected by the board as they shall consider appropriate ruling at the close of business in London on the date which is the business day last preceding:

(i) in the case of a dividend to be declared by the company in (i) general meeting, the date on which the board publicly announced its intention to recommend that dividend, and

(ii) in the case of any other dividend, the date on which the board (ii) publicly announces its intention to pay that dividend.

(B) Where an approved depositary has elected or agreed to receive dividends in a foreign currency, the board may in its discretion approve the entering into of arrangements with the approved depositary to enable payment of the dividend in such foreign currency for value on the date on which the relevant dividend is paid, or on such other date as the board may determine.

119. Amounts Due on Shares may be Deducted from Dividends

The board may deduct from any dividend or other moneys payable to a member by the company on or in respect of any shares all sums of money (if any) presently payable by him to the company on account of calls or otherwise in respect of shares of the company. Sums so deducted can be used to pay amounts owing to the company in respect of the shares.

120. No Interest on Dividends

Subject to the rights attaching to, or the terms of issue of, any shares, no dividend or other moneys payable by the company on or in respect of any share shall bear interest against the company.

121. Payment Procedure

(A) Where a dividend or other sum which is a distribution is payable in respect of a share, it may, subject to article 121(B), be paid by one or more of the following means:

(i) transfer to a bank or building society account specified by the distribution recipient either in writing or as the directors may otherwise decide;

(ii) sending a cheque made payable to the distribution recipient by post to the distribution recipient at the distribution recipient’s registered address (if the distribution recipient is a holder of the share), or (in any other case) to an address specified by the distribution recipient either in writing or as the directors may otherwise decide;

(iii) sending a cheque made payable to such person by post to such person at such address as the distribution recipient has specified either in writing or as the directors may otherwise decide;

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(iv) by means of a relevant system in respect of shares in uncertificated form in such manner as may be consistent with the facilities and requirements of the relevant system or as the directors may otherwise decide; or

(v) by any electronic or other means as the directors may decide, to an account, or in accordance with the details, specified by the distribution recipient either in writing or as the directors may otherwise decide.

(B) In respect of the payment of any dividend or other sum which is a distribution, the directors may decide, and notify distribution recipients, that:

(i) one or more of the means described in paragraph (A) will be used for payment and a distribution recipient may elect to receive the payment by one of the means so notified in the manner prescribed by the directors;

(ii) one or more of such means will be used for the payment unless a distribution recipient elects otherwise in the manner prescribed by the directors; or

(iii) one or more of such means will be used for the payment and that distribution recipients will not be able to elect otherwise.

The directors may for this purpose decide that different methods of payment may apply to different distribution recipients or groups of distribution recipients.

(C) Payment of any dividend or other sum which is a distribution is made at the risk of the distribution recipient. The company is not responsible for a payment which is lost or delayed. Payment, in accordance with these articles, of any cheque by the bank upon which it is drawn, or the transfer of funds by any means, or (in respect of shares in uncertificated form) the making of payment by means of a relevant system, shall be a good discharge to the company.

(D) In the event that:

(i) a distribution recipient does not specify an address, or does not specify an account of a type prescribed by the directors, or other details necessary in order to make a payment of a dividend or other distribution by the means by which the directors have decided in accordance with this article that a payment is to be made, or by which the distribution recipient has elected to receive payment, and such address or details are necessary in order for the company to make the relevant payment in accordance with such decision or election; or

(ii) if payment cannot be made by the company using the details provided by the distribution recipient,

then the dividend or other distribution shall be treated as unclaimed for the purposes of these articles.

(E) In the articles, “the distribution recipient” means, in respect of a share in respect of which a dividend or other sum is payable:

(i) the holder of the share; or

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(ii) if the share has two or more joint holders, whichever of them is named first in the register of members; or

(iii) if the holder is no longer entitled to the share by reason of death or bankruptcy, or otherwise by operation of law, the transmittee.

122. Uncashed Dividends

The company may cease to send any cheque, warrant or similar financial instrument through the post or to employ any other means of payment, including payment by means of a relevant system, for any dividend payable on any shares in the company which is normally paid in that manner on those shares if in respect of at least two consecutive dividends payable on those shares the cheques, warrants or similar financial instruments have been returned undelivered or remain uncashed during or at the end of the period for which the same are valid or that means of payment has failed. In addition, the company may cease to send any cheque, warrant or similar financial instrument through the post or may cease to employ any other means of payment if, in respect of one dividend payable on those shares, the cheque, warrant or similar financial instrument has been returned undelivered or remains uncashed during or at the end of the period for which the same is valid or that means of payment has failed and reasonable enquiries have failed to establish any new postal address or account of the holder. Subject to the provisions of these articles, the company must recommence sending cheques, warrants or similar financial instruments or employing such other means in respect of dividends payable on those shares if the holder or person entitled by transmission requests such recommencement in writing.

123. Forfeiture of Unclaimed Dividends

All dividends or other sums payable on or in respect of any shares which remain unclaimed may be invested or otherwise made use of by the board for the benefit of the company until claimed. Any dividend or other sum unclaimed after a period of 12 years from the date when it was declared or became due for payment shall be forfeited and shall revert to the company unless the board decides otherwise and the payment by the board of any unclaimed dividend or other sum payable on or in respect of a share into a separate account shall not constitute the company a trustee in respect of it.

124. Dividends Not in Cash

Any general meeting declaring a dividend may, upon the recommendation of the board, by ordinary resolution direct that it shall be satisfied wholly or partly by the distribution of assets, and in particular of paid up shares or debentures of any other company, and where any difficulty arises in regard to the distribution the board may settle it as it thinks expedient, and in particular may authorise any person to sell and transfer any fractions or may ignore fractions altogether, and may fix the value for distribution purposes of any assets or any part thereof to be distributed and may determine that cash shall be paid to any members upon the footing of the value so fixed in order to secure equality of distribution and may vest any assets to be distributed in trustees as may seem expedient to the board.

125. Dividend Reinvestment Plans

The board may from time to time make available to members the opportunity to participate in a dividend reinvestment plan or similar scheme.

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Capitalisation of Reserves

126. Power to Capitalise Reserves and Funds

The company may, upon the recommendation of the board, at any time and from time to time pass an ordinary resolution to the effect that it is desirable to capitalise all or any part of any amount standing to the credit of any reserve or fund (including the profit and loss account) at the relevant time whether or not the same is available for distribution and accordingly that the amount to be capitalised be set free for distribution among the members or any class of members who would be entitled to it if it were distributed by way of dividend and in the same proportions, on the footing that it is applied either in or towards paying up the amounts unpaid at the relevant time on any shares in the company held by those members respectively or in paying up in full unissued shares, debentures or other obligations of the company to be allotted and distributed credited as fully paid up among those members, or partly in one way and partly in the other, but so that, for the purposes of this article:

(i) a share premium account and a capital redemption reserve, and any reserve or fund representing unrealised profits, may be applied only in paying up in full unissued shares of the company; and

(ii) where the amount capitalised is applied in paying up in full unissued shares, the company will also be entitled to participate in the relevant distribution in relation to any shares of the relevant class held by it as treasury shares and the proportionate entitlement of the relevant class of members to the distribution will be calculated accordingly.

The board may authorise any person to enter into an agreement with the company on behalf of the persons entitled to participate in the distribution and the agreement shall be binding on those persons.

127. Settlement of Difficulties in Distribution

Where any difficulty arises in regard to any distribution of any capitalised reserve or fund the board may settle the matter as it thinks expedient and in particular may authorise any person to sell and transfer any fractions or may resolve that the distribution should be as nearly as may be practicable in the correct proportion but not exactly so or may ignore fractions altogether, and may determine that cash payments shall be made to any members in order to adjust the rights of all parties, as may seem expedient to the board.

Record Dates

128. Power to Choose Any Record Date

Notwithstanding any other provision of these articles, the company or the board may fix any date as the record date for any dividend, distribution, allotment or issue and such record date may be on or at any time before or after any date on which the dividend, distribution, allotment or issue is declared, paid or made. The power to fix any such record date shall include the power to fix a time on the chosen date.

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Records and Summary Financial Statements

129. Inspection of Records

No member in his capacity as such shall have any right of inspecting any accounting record or book or document of the company except as conferred by law, ordered by a court of competent jurisdiction or authorised by the board or by ordinary resolution of the company.

130. Summary Financial Statements

The company may send summary financial statements to members of the company instead of copies of its full accounts and reports and for the purposes of this article sending includes using electronic means and by making it available on a website and notifying the member of its availability.

Service of Notices and Documents

131. Service of Notices

(A) Any notice, document (including a share certificate) or other information may be served on or sent or delivered to any member by the company either personally or by sending it through the post addressed to the member at his registered address or by leaving it at that address addressed to the member or by means of a relevant system or, where appropriate, by sending or supplying it in electronic form to an address notified by the member concerned to the company for that purpose or, where appropriate, by making it available on a website and notifying the member of its availability in accordance with this article or by any other means authorised in writing by the member concerned. In the case of joint holders of a share, service, sending or delivery of any notice, document or other information on or to one of the joint holders shall for all purposes be deemed a sufficient service on or sending or delivery to all the joint holders.

(B) In the case of joint holders of a share, anything to be agreed or specified by the holder of a share in relation to any notice, document or other information to be sent or supplied to the holder may be agreed or specified by any one of the joint holders and (in the case of agreement or specification by more than one of the joint holders) the agreement or specification of the senior holder shall be accepted to the exclusion of that of the other joint holders and, for this purpose, seniority shall be determined by the order in which the names appear in the register of members in respect of the joint holding.

(C) The company may at any time and in its sole discretion choose to serve, send or supply notices, documents or other information in hard copy form alone to some or all members.

132. Record Date for Service

Any notice, document or other information may be served, sent or delivered by the company by reference to the register as it stands at any time not more than 21 days before the date of service, sending or delivery. No change in the register after that time shall invalidate that service, sending or delivery. Where any notice or document is served on or sent or delivered to any person in respect of a share in accordance with these articles, no person deriving any title or interest in that share shall be entitled to any further service, sending or delivery of that notice or document.

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133. Members Resident Abroad or on branch registers

(A) Any member whose registered address is not within the United Kingdom or the Republic of Ireland and who gives to the company a postal address within the United Kingdom or the Republic of Ireland at which notices, documents or other information may be served upon, or delivered to, him shall be entitled to have notices, documents or other information served on or sent or delivered to him at that address or, where appropriate, by making them available on a website and notifying the holder at that address. Any member whose registered address is not within the United Kingdom or the Republic of Ireland and who gives to the company an address for the purposes of communications by electronic means may, subject to these articles, have notices, documents or other information sent to him at that address or, where appropriate, by making them available on a website and notifying the holder at that address. Otherwise, a member whose registered address is not within the United Kingdom or the Republic of Ireland shall not be entitled to receive any notice, document or other information from the company.

(B) For a member registered on a branch register, notices, documents or other information can be posted or despatched in the United Kingdom or in the country where the branch register is kept.

134. Service of Notice on Person Entitled by Transmission

A person who is entitled by transmission to a share, upon supplying the company with a postal address within the United Kingdom or the Republic of Ireland for the service of notices shall be entitled to have served upon or delivered to him at such address any notice, document or other information to which he would have been entitled if he were the holder of that share or, where applicable, may be notified at that address of the availability of the notice, document or other information on a website. Subject to these articles, a person who is entitled by transmission to a share, upon supplying the company with an address for the purposes of communications by electronic means for the service of notices may have sent to him at such address any notice, document or other information to which he would have been entitled if he were the holder of that share or, where applicable, may be notified at that address of the availability of the notice, document or other information on a website. In either case, such service, sending or delivery shall for all purposes be deemed a sufficient service, sending or delivery of such notice, document or other information on all persons interested (whether jointly with or as claimants through or under him) in the share. Otherwise, any notice, document or other information served on or sent or delivered to any member pursuant to these articles shall, notwithstanding that the member is then dead or bankrupt or that any other event giving rise to the transmission of the share by operation of law has occurred and whether or not the company has notice of the death, bankruptcy or other event, be deemed to have been properly served, sent or delivered in respect of any share registered in the name of that member as sole or joint holder.

135. When Notice Deemed Served

Any notice, document or other information, if sent by the company by post, shall be deemed to have been received on the day following that on which it was put in the post if first class post was used or 72 hours after it was posted if first class post was not used and, in proving service or delivery, it shall be sufficient to prove that the notice, document or other information was properly addressed, prepaid and put in the post. Any notice, document or other information not sent by post but left by the company at a registered address or at an address (other than an address for the purposes of communications by electronic means) notified to the company in accordance with these articles by a person who is entitled by transmission to a share shall be deemed to have been received on the day it was so left. Any notice, document or other information served or delivered by the company by means of a relevant system

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shall be deemed to have been received when the company or any sponsoring system-participant acting on its behalf sends the issuer-instruction relating to the notice, document or other information. Any notice or document sent by the company using electronic means shall be deemed to have been received on the day following that on which it was sent notwithstanding that the company subsequently sends a hard copy of such notice, document or information by post. Any notice, document or other information made available on a website shall be deemed to have been received on the day on which the notice, document or other information was first made available on the website or, if later, when a notice of availability is deemed to have been served, sent or supplied pursuant to this article. In proving that a notice, document or other information sent or supplied by electronic means was given, sent or supplied, it shall be sufficient to prove that it was properly addressed. Any notice or document served, sent or delivered by the company by any other means authorised in writing by the member concerned shall be deemed to have been received when the company has carried out the action it has been authorised to take for that purpose.

136. Notice When Post Not Available

If there is a suspension or curtailment of postal services within the United Kingdom or the Republic of Ireland or some part of the United Kingdom or the Republic of Ireland, the company need only give notice of a general meeting to those members with whom the company can communicate by electronic means and who have provided the company with an address for this purpose. The company shall also advertise the notice in at least one leading national daily newspaper published in the United Kingdom and in one leading national daily newspaper published in the Republic of Ireland and make it available on its website from the date of such advertisement until the conclusion of the meeting or any adjournment thereof. If at least seven clear days prior to the meeting the sending of notices by post in hard copy form has again become generally possible, the company shall send confirmatory copies of the notice by post to the persons who would otherwise receive the notice in hard copy form.

137. Members Present Deemed to Have Received Notice

Any member present, either in person or by proxy, at any general meeting of the company or of the holders of any class of shares in the company shall for all purposes be deemed to have received due notice of that meeting and of the purposes for which the meeting was called.

138. Power to Stop Sending Notices or Other Documents.

Subject to the Companies Acts, if on two consecutive occasions a notice or other document sent to a member has been returned undelivered, such member shall not thereafter be entitled to receive notices or documents from the company until he shall have communicated with the company and supplied to the company (or its agent) a new registered address, or a postal address within the United Kingdom or the Republic of Ireland for the service of notices and documents, or shall have informed the company, in such manner as may be specified by the company, of an address for the service of notices and documents in electronic form. For these purposes:

(i) a notice or document sent by post shall be treated as returned undelivered if the notice or document is sent back to the company (or its agents), and a notice or document sent in electronic form shall be treated as returned undelivered if the company (or its agents) receives notification that the notice or document was not delivered to the address to which it was sent; and

(ii) references to a document include references to any cheque, warrant or similar financial instrument, but nothing in this article shall entitle the company to cease (or refuse to recommence) sending any cheque, warrant or similar financial instrument for any dividend, unless it is otherwise entitled under these articles to do so.

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Destruction of Documents

139. Presumptions Where Documents Destroyed

If the company destroys or deletes:

(i) any share certificate which has been cancelled at any time after a period of one year has elapsed from the date of cancellation; or

(ii) any instruction concerning the payment of dividends or other moneys in respect of any share or any notification of change of name or address at any time after a period of two years has elapsed from the date the instruction or notification was recorded by the company; or

(iii) any instrument of transfer of shares or operator-instruction for the transfer of shares which has been registered by the company at any time after a period of six years has elapsed from the date of registration; or

(iv) any other document on the basis of which any entry is made in the register at any time after a period of six years has elapsed from the date the entry was first made in the register in respect of it,

and the company destroys or deletes the document or instruction in good faith and without express notice that its preservation was relevant to a claim, it shall be presumed irrebuttably in favour of the company that every share certificate so destroyed was a valid certificate and was properly cancelled, that every instrument of transfer or Operator-instruction so destroyed or deleted was a valid and effective instrument of transfer or instruction and was properly registered and that every other document so destroyed was a valid and effective document and that any particulars of it which are recorded in the books or records of the company were correctly recorded. If the documents relate to uncertificated shares, the company must comply with any requirements of the uncertificated securities rules which limit its ability to destroy these documents. Nothing contained in this article shall be construed as imposing upon the company any liability which, but for this article, would not exist or by reason only of the destruction of any document of the kind mentioned above before the relevant period mentioned in this article has elapsed or of the fact that any other condition precedent to its destruction mentioned above has not been fulfilled. References in this article to the destruction of any document include references to its disposal in any manner.

Indemnity

140. Indemnity of Directors

To the extent permitted by the Companies Acts, the company may indemnify any director of the company or of any associated company against any liability and may purchase and maintain for any director of the company or of any associated company insurance against any liability. No director of the company or of any associated company shall be accountable to the company or the members for any benefit provided pursuant to this article and the receipt of any such benefit shall not disqualify any person from being or becoming a director of the company.

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EX-99.2

Exhibit 99.2

The following table sets forth the actual capitalization and indebtedness, and cash and cash equivalents, of Diageo as of June 30, 2020, based on amounts determined in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Other than the items as described in notes (1) and (5) to the following table, there has been no material change in the capitalization and indebtedness of Diageo since June 30, 2020.

	As of June 30, 2020
	Actual
	£ million
Indebtedness
Short term borrowings and bank overdrafts (including current portion of long term borrowings)		1,995
Long term borrowings		14,790
Lease liabilities		470
Total indebtedness		17,255
Capitalization
Share capital		742
Share premium		1,351
Capital redemption reserve		3,201
Fair value, hedging and exchange reserve		(929	)
Own shares		(1,936	)
Other retained earnings		4,343
Equity attributable to the equity shareholders of the parent company		6,772
Non-controlling interests		1,668
Total equity		8,440
Total capitalization and indebtedness		25,695
Cash and cash equivalents		3,323

(1) As of July 31, 2020, 2,561,988,804 ordinary shares of 28 101/108 pence each were issued, all of which were fully paid, including shares issued, shares issued and held in employee share trusts and those held as treasury shares.

(2) Subject to approval by shareholders, Diageo has recommended a final dividend of 42.47 pence per share to be paid to holders of ordinary shares on October 8, 2020.

(3) See note 18 to Diageo’s consolidated financial statements for the fiscal year ended June 30, 2020 for information on performance guarantees or indemnities in respect of liabilities of third parties as of June 30, 2020. There have been no material changes to such performance guarantees or indemnities in respect of liabilities of third parties since June 30, 2020.

(4) As of June 30, 2020, £1 million of the group’s net borrowings were secured by assets of the group. There have been no material changes to such secured borrowings since June 30, 2020.

(5) On July 15, 2020, Diageo repaid $696 million of 4.828% bonds due 2020.