SecProbe.io

CORRESP
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filename1.htm

  28 June 2005

  Mr. Michael Moran

  Ms. Nili Shah

  Securities and Exchange Commission

Division
of Corporation Finance

450
Fifth Street, N.W.

Washington,
D.C.  20549

United
States of America

Re:                             Allied
Domecq PLC – Response to SEC Comments on Form 20-F for the Year Ended 31 August 2004
(the “2004 20-F”)

Ladies
and Gentlemen:

On behalf of Allied Domecq (the “Registrant”),
we hereby set forth the following information in response to the comments
contained in the Staff’s letter dated 3 June 2005 (the “Staff
Comments”).  Unless
expressly stated herein, all page references herein refer to pages of
the 2004 20-F.

At the outset, the Registrant notes that it describes
its Foreign Exchange Hedging Policy and interpretation of SSAP 20 in the response
to Staff Comment 2, and confines itself solely to materiality considerations in
its response to Staff Comment 1.

REGISTRANT’S RESPONSE TO THE
STAFF COMMENTS

General

1.  We note that you identified
the following errors in your response to our letter dated March 29, 2005:

•                  Understatement
of UK GAAP shareholders equity of £42 million, or 8.2% of reported UK GAAP
shareholders’ equity, as of August 31, 2004, as discussed in your response
to prior comment 27.

•                  Understatement
of US GAAP shareholders’ equity of £50 million, as discussed in your response
to prior comment 38 and 44.

•                  Overstatement
of US GAAP net income of £17 million, or 6.8% of US GAAP net income, as
discussed in your response to prior comment 38.

We consider these amounts to be
material to your financial statements.
Accordingly, please amend your Form 20-F to correct these
errors.  In doing so, please
appropriately address the following:

•                  An
explanatory paragraph in the reissued audit opinion,

•                  Full
compliance with APB 20, paragraphs 36 and 37,

•                  Full
update of all affected portions of the Form 20-F, including operating and
financial review and prospects and selected financial data,

•                  Updated
Item 15 disclosures should include the following:

•                  a
discussion of the restatement and the facts and circumstances surrounding it,

•                  how
the restatement impacted the CEO and CFO’s original conclusions regarding the
effectiveness of their disclosure controls and procedures,

•                  changes
to internal controls over financial reporting, and

•                  anticipated
changes to disclosure controls and procedures and/or internal controls over
financial reporting to prevent future misstatements of a similar nature.

•                  Updated
certifications.

The Registrant respectfully submits that it does not
believe that the errors discussed above are material.  In the Registrant’s first response letter, it
stated that it had considered the materiality of the items concerned and had
concluded that they were not material.

By way of background, the errors relate to an
understatement of UK GAAP shareholders’ equity identified in response to prior
comment 27, an understatement of US GAAP shareholders’ equity identified in
response to prior comments 38 and 44 and an overstatement of US GAAP net income
identified in response to prior comment 38.
The latter two are connected by virtue of the fact that they concern US
GAAP pension-related items.  In the
Registrant’s view, they can be considered together for materiality purposes.

The Registrant would emphasize that it has considered
the materiality of all of the errors in accordance with Staff Accounting
Bulletin 99 “Materiality” (“SAB 99”)
for the purpose of its 2004 20-F filing, and has separately analyzed the
materiality of the UK GAAP error in accordance with FRS No. 3 for the
purpose of its UK financial statements.

UK GAAP Understatement of
Shareholder’s Equity

In its response to prior comment 27, the Registrant
set out both quantitative and qualitative reasons why it believes its
understatement of UK GAAP shareholders’ equity is not material to its financial
statements.  Those reasons were stated in
light of SAB 99 and, in particular, the various qualitative aspects of SAB 99.

The Registrant recognizes that the error in reported
UK GAAP shareholders’ equity was 8.2%, and that, from a quantitative
perspective alone, this difference might indicate that the error could be
material.  However, the Registrant
respectfully contends that this figure should be accorded less weight than
certain important quantitative and qualitative considerations.

In particular, the Registrant contends that the
balance sheet figure for shareholders’ funds has, for materiality purposes, to
be quantitatively adjusted for the impact of goodwill that has been written off
to reserves. This is demonstrated by UK GAAP requiring that when a business is
disposed of, any goodwill written off to reserves must be recycled back into
the profit or loss on disposal calculation. In addition, the Registrant is a
brand-led company, and prior to its adoption of FRS No. 10, such brand
assets were not recognized separately from goodwill, which was written off to
reserves. Failure to recognize that the substantial amounts of goodwill written
off have reduced UK GAAP shareholders equity, would be to ignore many of the
Registrant’s most valuable revenue-generating assets. Such an adjustment, in
the Registrant’s view, is appropriate in considering the materiality of items
in its balance sheet, but is even more so when the item being considered is
itself an adjustment to goodwill.

2

In addition to its response to prior comment 27, the
Registrant adds the following clarification of its materiality considerations:

•                  The Registrant notes that the Staff will not apply a specific numerical
threshold to materiality (SAB 99 paragraph 35).

•                  The Registrant notes that the Staff will give weight to the Company’s
(and its auditors’) materiality considerations, as they are best placed to
consider all the facts (SAB 99 paragraph 30).

•                  The Registrant notes
that it is the total mix of information available and its relevance to the
judgment of reasonable investors that is important (SAB 99 paragraphs 26 and 27).

The Registrant’s analysis
of materiality has recently been tested, as the Registrant disclosed the
understatement of UK GAAP shareholders equity on 25 May 2005 in its
shareholders circular distributed in connection with its pending Scheme of
Arrangement with Pernod Ricard SA (the “Scheme
Circular”).(1) The Registrant has
not received any questions or comments on this aspect of the Scheme Circular
from its existing shareholders.
Furthermore, the prospective owners of the Registrant have expressed no
interest or concern, despite its explicit disclosure to them.  Importantly, the share price of the Registrant
has not been impacted by the disclosure of the issue.

The Registrant believes that these qualitative
factors, together with the quantitative result of 1.2% of UK GAAP Shareholders’
Equity including goodwill written off, weigh heavily against the 8.2% impact on
Shareholders’ Equity to which the Staff has pointed.

In addition to the SAB 99 evaluation, the Registrant
has considered the provisions of FRS No. 3 on the materiality of this
adjustment.  The Registrant has
concluded, for the reasons set out above and in its response to prior comment
27, that the requirements of FRS No. 3 are not met and that a restatement
under UK GAAP is therefore not appropriate.

US GAAP Understatement of
Shareholder’s Equity and Overstatement of Net Income

In its response to prior comment 38, the Registrant
set out both quantitative and qualitative reasons why it believes its
understatement of its US GAAP shareholders’ equity and overstatement of net
income are not material to its financial statements.  Those reasons were stated in light of SAB 99
and, in particular, the various qualitative aspects of SAB 99.

(1)                                  In particular, the Scheme Circular states (on page 51):

“In the accounts for the year ended 31
August 2004 and prior periods, the Group recorded goodwill at the historical
rates of exchange fixed at the date of acquisition.  The Group intends in its financial statements
for the year ending 31 August 2005, to record the cumulative foreign currency
retranslation difference on goodwill through its reserves and in future periods
goodwill will continue to be retranslated at closing balance sheet rates.  The effect in any period will be to increase
or decrease both capitalized goodwill and profit and loss account reserves by equal
amounts.  The amount will depend upon
year end currency rates.  If the amounts
had been recorded at 31 August 2004, goodwill and profit and loss account
reserves would each have been increased by £42 million.  Normalised earnings and cash will be
unaffected.”

3

Specifically, the Registrant does not believe
that the errors under US GAAP are material when the following qualitative
factors are taken into account, which, taken as a whole, indicate that there is
no material error:

•                  the misstatements do
not mask a change in earnings or other trends,

•                  the misstatements do
not hide a failure to meet analysts’ consensus expectations for the company,

•                  the misstatements do
not change a loss into income or vice versa,

•                  the misstatements do
not concern a segment or other portion of the Registrant’s business that has
been identified as playing a significant role in the Registrant’s operations or
profitability,

•                  the misstatements do
not affect the Registrant’s compliance with regulatory requirements,

•                  the misstatements do
not affect the Registrant’s compliance with loan covenants or other contractual
requirements,

•                  the misstatements do
not have the effect of increasing management’s compensation (for example, by
satisfying requirements for the award of bonuses or other forms of incentive
compensation), and

•                  the misstatements do
not involve or conceal an unlawful transaction.

The Registrant confirms that the figure of 6.8% of
reported US GAAP net income includes the impact of its total unadjusted audit differences.  However, the Registrant clarifies to the
Staff that the overstatement of US GAAP net income of £17 million discussed in
response to prior comment 38 represented only 3.7% of US GAAP net income in
2004.

The Registrant respectfully contends that when the
3.7% overstatement of US GAAP net income in 2004 is viewed in conjunction with the
important qualitative factors set out above, the overstatement to US GAAP net
income is not material.

In addition to the £17 million overstatement
of net income discussed above, the Registrant has evaluated the quantitative
and qualitative impact of the £30 million understatement of shareholders’
equity. The Registrant clarifies to the Staff that the £50 million
understatement it discussed in its response to prior comment 44 actually
represented an error of £30 million in shareholders’ equity, the difference
being the related taxation impact.  The
Registrant believes that the understatement by £30 million (1.8%) of both its
US GAAP shareholders’ equity and total US GAAP intangible assets is not
quantitatively material and no qualitative factors were identified that would
change this view.

Consolidated Statement of Total
Recognized Gains and Losses, page F-4

2.  We note, based on your response to prior
comment 15 of our letter dated March 29, 2005 that you recognized foreign
exchange transaction gains of £193 million on foreign currency denominated debt
offset by foreign exchange transaction losses of £85 million on foreign
currency denominated net assets. These amounts suggest that your foreign
currency denominated debt has overhedged your foreign currency denominated net
assets. Please tell us why you did not recognize foreign exchange transaction
gains in your income statement to the extent your borrowings exceeded your net
assets, in light of the second paragraph of your response to prior comment 27,
which states that you recognize any excess exchange differences on borrowings
in income under UK GAAP.

4

In this response, the Registrant will be addressing
Staff Comment 2 and, in part, Staff Comment 4.

The Registrant clarifies to the Staff that its foreign
currency denominated debt has never overhedged its foreign currency denominated
net investments.

The Registrant has a policy of hedging against the
economic impact of foreign exchange movements.
The Registrant summarized this policy in its Annual Report &
Accounts and 2004 20-F, stating “Our policy is to match our currency of debt in
proportion to foreign exchange earnings...”
The choice of foreign exchange earnings as the basis for comparison in
this policy reflects the fact that the Registrant has acquired many brands that
generate substantial foreign currency revenue and profits in respect of which
the related goodwill has been written off to reserves.  This economic hedge has operated successfully
and, as a result, the Registrant has consistently applied the principle of
Paragraph 30 of SSAP No.20, which provides “Since in this case the group will
be covered in economic terms against any movement in exchange rates, it would
be inappropriate to record an accounting profit or loss when exchange rates
change.”

The Registrant recognizes that paragraph 57 of SSAP No. 20
sets out four factors that limit the extent to which foreign exchange gains or
losses can be offset as reserve movements.
Specifically, Paragraph 57(c) of SSAP No. 20 states that “the
foreign currency borrowings, whose exchange gains or losses are used in the
offset process, should not exceed, in the aggregate, the total amount of cash
that the net investments are expected to be able to generate, whether from
profits or otherwise.”  The Registrant
confirms that all the provisions of paragraph 57 have been met and concludes
that the gains or losses each year on foreign currency borrowings have not
exceeded the gains or losses on net investments (including goodwill).

The following tables demonstrate that the Registrant’s
foreign currency borrowings have not exceeded its foreign currency net
investments in any accounting period and that the exchange gains and losses
arising on such borrowings have, therefore, been offset as reserve movements.

  2004

  All figures in £ million

  GBP

  EUR

  USD

  Other

  TOTAL

  Net Debt

  (18

  )

  (562

  )

  (1,205

  )

  (156

  )

  (1,941

  )

  Net Investments (excl. all goodwill)

  (262

  )

  737

  464

  312

  1,251

  Net Investments (incl. goodwill written off)

  349

  1,357

  1,325

  312

  3,343

  Net Investments (incl. goodwill written off and capitalized)

  904

  1,714

  1,353

  647

  4,618

  Net Investment less Net Debt

  886

  1,152

  148

  491

  2,677

5

  2003

  All figures in £ million

  GBP

  EUR

  USD

  Other

  TOTAL

  Net Debt

  (65

  )

  (701

  )

  (1,471

  )

  (175

  )

  (2,412

  )

  Net Investments (excl. all goodwill)

  (329

  )

  810

  608

  287

  1,376

  Net Investments (incl. goodwill written off)

  282

  1,443

  1,595

  287

  3,607

  Net Investments (incl. goodwill written off and capitalized)

  837

  1,830

  1,627

  652

  4,946

  Net Investment less Net Debt

  772

  1,129

  156

  477

  2,534

  2002

  All figures in £ million

  GBP

  EUR

  USD

  Other

  TOTAL

  Net Debt

  (350

  )

  (719

  )

  (1,262

  )

  (247

  )

  (2,578

  )

  Net Investments (excl. all goodwill)

  389

  604

  763

  400

  2,156

  Net Investments (incl. goodwill written off)

  1,000

  1,185

  1,769

  400

  4,354

  Net Investments (incl. goodwill written off and capitalized)

  1,555

  1,560

  1,805

  736

  5,656

  Net