Notes to the accounts

27 Reconciliation of movements in equity

	Share capital £m	Share premium account £m	Other reserves £m	Hedge reserve £m	Retained earnings £m	Equity shareholders’ funds £m	Minority interest £m	Total equity £m
At 5 August 2006	141.8	224.1	236.5	26.5	734.0	1,362.9		1,362.9
Exercises of share options	2.8	74.9				77.7		77.7
Purchase of own shares					(7.0)	(7.0)		(7.0)
Return of capital to shareholders and redemption of B shares		(10.0)	5.7		(2,104.6)	(2,108.9)		(2,108.9)
Total recognised income and expenses for the period				(7.9)	1,752.8	1,744.9		1,744.9
Dividends paid to equity shareholders					(182.4)	(182.4)		(182.4)
Dilution of interest in associated company					(1.2)	(1.2)		(1.2)
Share-based payment					17.3	17.3		17.3
At 31 July 2007	144.6	289.0	242.2	18.6	208.9	903.3		903.3
Exercises of share options	0.9	14.6			5.5	21.0		21.0
Purchase of own shares					(20.7)	(20.7)		(20.7)
Redemption of B shares			0.1		(0.1)
Acquisition (note 29)							2.0	2.0
Total recognised income and expenses for the period				(47.8)	180.6	132.8	0.3	133.1
Dividends paid to equity shareholders					(131.4)	(131.4)		(131.4)
Dilution of interest in associated company					(0.9)	(0.9)		(0.9)
Share-based payment					11.8	11.8		11.8
At 31 July 2008	145.5	303.6	242.3	(29.2)	253.7	915.9	2.3	918.2

Other reserves comprise a capital redemption reserve of £5.8m (2007: £5.7m), a revaluation reserve of £1.7m (2007: £1.7m) and a merger reserve of £234.8m (2007: £234.8m). The movements in other reserves relate to the recognition of transfers to the capital redemption reserve required following the redemption of the B shares.

The retained earnings include the purchase of Smiths Group plc shares by the Smiths Industries Employee Benefit Trust. The consideration paid was £20.7m (2007: £7.0m). At 31 July 2008 the trust held 1,095,965 (2007: 634,274) ordinary shares with a nominal value of £0.4m (2007: £0.2m) and a market value of £11.5m (2007: £6.6m).

Capital management

Capital comprises shareholders’ equity adjusted for goodwill recognised directly in reserves. For the period ended 31 July 2008 the average Group capital was £1,728.1m (2007: £1,732.3m).

The capital structure is based on the directors’ judgement of the balance required to maintain flexibility while achieving an efficient cost of capital. The Group has a target gearing, calculated on a market value basis, of approximately 20%. At the balance sheet date the Group had gearing of 18% (2007: 15%). This generated a weighted average cost of capital of 8% (2007: 9%).

As part of this process the Group maintains its target of a solid investment grade credit rating by monitoring the factors utilised by ratings agencies and evaluating the impact of potential distributions and future funding requirements. At the 31 July 2008 the Group had a credit rating of BBB+/Baa2 (2007: BBB+/Baa2) with Standard & Poor’s and Moody’s respectively.

Hedge reserve

The hedge reserve on the balance sheet comprises:	2008 £m	2007 £m
Cash-flow hedge reserve	1.1	1.4
Net investment hedge reserve	(30.3)	17.2
	(29.2)	18.6

See transactional currency exposure risk management disclosures in note 21 for additional details of cash-flow hedges and translational currency exposure risk management disclosure also in note 21 for additional details of net investment hedges.

Smiths Group divisions:
Smiths Detection, Smiths Medical, John Crane, Smiths Interconnect, Flex-Tek