GlaxoSmithKline (GSK) is the largest pharmaceutical company in the United Kingdom and the second-largest pharmaceutical company in the world. In a recent Form 20-F filing, the firm estimates that it has captured approximately 7 percent of the world pharmaceutical market. GSK prepares financial statements in accordance with generally accepted accounting principles in the United Kingdom (U.K. GAAP). The statements appear in Exhibit 6.25 (balance sheet) and Exhibit 6.26 (income statement). Exhibit 6.27 presents a reconciliation of shareholders' equity and net income from U.K. accounting principles to U.S. accounting principles. A description of the reconciling items appears next.
Deferred taxation. U.K. GAAP requires the recognition of deferred taxes only when it is probable that deferred tax benefits or liabilities will crystallize. U.S. GAAP requires the recognition of deferred taxes for all temporary differences between financial and tax reporting.
Postretirement benefits other than pensions. U.K. GAAP allows recognition of postretirement benefits other than pensions on a cash basis. U.S. GAAP requires recognition of this benefit obligation on an accrual basis.
Goodwill. The combination of Glaxo Wellcome and SmithKline Beecham was accounted for as a pooling of interests in accordance with U.K. GAAP. Under U.S. GAAP, this business combination did not qualify for pooling-of-interests accounting (although it was an acceptable technique at the time) and Glaxo Wellcome was determined to be the acquirer in a business combination accounted for using the purchase method. (The pooling-of-interests and purchase methods are discussed in

Chapter 9). The difference between the cost of acquisition and the fair value of the assets and liabilities of SmithKline Beecham has been recorded as goodwill under U.S. GAAR GSK tested the goodwill for impairment and concluded that none of it was impaired at the end of Year 4. Specifically identifiable intangibles. As noted previously, the combination of Glaxo Wellcome and SmithKline Beecham for U.S. GAAP purposes was accounted for using the purchase method. As a result, U.S. GAAP required GSK to record specifically identifiable intangibles, primarily patents and trademarks, as assets on the balance sheet.
Dividends. U.K. GAAP provides for the recognition of a liability when the board of directors recommends a dividend to shareholders for their approval. U.S. GAAP does not recognize a dividend until declared by the board of directors, which occurs in the U.K. after shareholders' approval.
Required
a. Recast GSK's balance sheet to the format more commonly employed by firms employing U.S. GAAP to prepare their financial statements.
b. Indicate the adjustments to the balance sheet and income statement to convert GSK's financial statements from U.K. GAAP to U.S. GAAP. GSK includes the divi¬dend recommended to shareholders in other current liabilities.
c. Compute the rate of return on assets (ROA) and the rate of return on common shareholders' equity (ROCE) using the reported amounts (U.K. GAAP) and the adjusted amounts (U.S. GAAP).
d. Why are ROCE and ROA larger using the reported amounts (U.K. GAAP) than using the adjusted amounts (U.S. GAAP)?

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EXHIBIT 6.24 INTERCO Statement of Cash Flows (amounts in thousands) (Problem 6.17) Year 9 as Reported Year 8 as Restated in Year 9 Annual Report Year 8 as Originally Reported Operations Income (Loss) from Continuing Operations Depreciation .. Other Addbacks (Subtractions) Change in Operating Working (4,282) 40,037 (24,230) $113,434 40,570 8,750 145,003 62,772 13,957 (96,271 $ 66,483 (103,958) S 117,774 Capital Accounts 29,015 Cash Flow from Continuing Operations ..........40,540 Cash Flow from Discontinued Operations . 249,704 27,964 94,447 117,774 Investing $ 4,134 (50,966) (46,832) 1,145 45925) $ (44,780) $ 8,102 65,880) $ (57,778) Cash Flow from Investing Financing 1,967,500 (617,401) 19,994 (102,341) (1,456,162) ....(676) 189,086 1,677 205,533 (85,570) 4,606 (160,442) (64,219) $ 1,677 205,673 (95,841) 4,606 (160,442) (64,219) 54 Decrease in Long-Term Borrowing. Decrease in Capital Stock Dividends 252 Cash Flow from Financing $ (98,163) S (48,496) s (108,492) (48,496) EXHIBIT 6.25 GlaxoSmithKline Selected Balance Statement Data (amounts in millions) (Problem 6.18) Year Ended June 30: Year 4 Year 3 E 8,945 8,575 12,625 (8,722)(8,471 911 4.154 £12,729 (3,883) Provisions for Liabilities and Charges ....................(3,029) (3,042) E 5,804 Total Assets Less Current Liabilities........................ £13,856 Creditors: Amounts Due After One Year 4,625) 6,202 Capital and Reserves Equity Shareholders' Funds Minority Interests . 5,925 5,059 . . ....£ 277 S 5,804 EXHIBIT 6.26 GlaxoSmithKline Selected Income Statement Data (amounts in millions) (Problem 6.18) Year 4 Year 3 Turnover Pharmaceuticals £17,146 £18,181 3,213 3,260 £20,359 21,441 (4,309) (4,544) Consumer Health Care Total Turnover. Selling, General, and Administrative Expenditure (7,061) (7,597) 2,839) (2,791 Operating Profit. Other Operating Income (Expense) Disposal of Interests in Equity Affiliates . . . . … … … . . . . . Profits of Joint Ventures and Affiliates........ (Loss) Profit on Disposal of Products and Businesses £ (6,150) 6,509 (60) 138 95 (133) 93 Profit Before Taxation.. Taxation E 6,119 6,313 (1.701 (1,729) 418 4584 r Taxation.. Minority Interests... 116) (104) 4302 4,480