Notes to the Company Financial Statements For the 53 weeks ended 3 September 2011

1 Accounting Policies

Basis of Preparation

These Financial Statements have been prepared on the going concern basis and in accordance with UK GAAP using the historical cost convention as modified by financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss. These Financial Statements have been prepared in accordance with applicable accounting standards within the United Kingdom and the Companies Act 2006.

The Company has taken advantage of the exemption from preparing a cash flow statement in accordance with FRS 1 (revised 1996) “Cash Flow Statement”.

The Company is also exempt under the terms of FRS 8 “Related Party Disclosures” from disclosing related party transactions with entities that are wholly owned subsidiaries.

The principal accounting policies, which have been applied consistently during the year, are set out below.

Investments

Investments are held at cost less any provision for impairment.

Impairment Testing

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.

The recoverable amount is the higher of an asset’s net realisable value and value-in-use.

Borrowings

All borrowings are stated at the fair value of the consideration received after deduction of issue costs. Issue costs, together with finance costs, are charged to the profit and loss account over the term of the borrowings. Finance costs represent a constant proportion of the balance of capital repayments outstanding.

Taxation

Current tax is provided at amounts expected to be paid (or recovered) using the tax rates that are in force during the period.

Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the taxable profits and the results as stated in the Financial Statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the Financial Statements.

Deferred tax is measured on a non-discounted basis. A deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be taxable profits from which the future reversal of the underlying timing differences can be deducted.

Dividend Distribution

A final dividend distribution to the Company’s shareholders is recognised as a liability in the Company’s Financial Statements in the period in which the dividends are approved by the Company’s shareholders. Interim dividends are recognised when paid.

Share-Based Payments

Where the Company has granted options over the Company’s shares to employees of its subsidiaries, a capital contribution has been deemed made by the Company. This is then recharged to the subsidiary and is based on the fair value of the options issued spread over the options vesting period. At each balance sheet date, the Company revises its estimate of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, with a corresponding adjustment to equity.

Derivatives

The derivative instruments used by the Company to manage its interest rate risk are interest rate swaps.

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as an effective hedging instrument and the nature of the item being hedged. The Company designates certain derivatives as hedges of highly probable forecast transactions (cash flow hedges).

The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items as well as its risk management objectives and strategy for undertaking various hedge transactions. The Company also documents its assessment, both at the inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

• i) Cash Flow Hedges

  The effective portion of the changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the relevant line of the profit and loss account which will be affected by the underlying hedged item.

  Amounts accumulated in equity are reclassified and adjusted against the initial measurement of the underlying hedged item when the underlying hedged item is recognised on the Balance Sheet or in the profit and loss account.

  When a hedged instrument expires, is sold or when a hedge no longer meets the criteria for hedge accounting, hedge accounting is discontinued. Any cumulative gain or loss existing in equity at that time is held in equity until the forecast transaction occurs. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to the relevant line of the profit and loss account which would have been affected by the forecasted transaction.

• ii) Derivatives That Do Not Qualify for Hedge Accounting

  Certain derivatives do not qualify for hedge accounting. Changes in fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the profit and loss account.

2 Profit and Loss Account

The directors have taken advantage of the exemption available under Section 408 of the Companies Act 2006 and have not presented a profit and loss account for the Company. A profit of £120.2 million is attributable to shareholders for the 53 weeks ended 3 September 2011 (2010: loss of £883.0 million).

The contracts of employment for all the executive directors are held by Debenhams plc. The total cost of employing the directors is disclosed in the Remuneration Report.

Auditors’ remuneration of £0.1 million (2010: £0.1 million) is borne by another Group undertaking.

3 Dividends

An interim dividend of 1.0 pence per share was paid during the year (2010: nil). The directors are proposing a final dividend in respect of the 53 weeks ended 3 September 2011 of 2.0 pence per share (2010: nil), which will absorb an estimated £25.7 million (2010: nil) of shareholders’ funds. It will be paid on 13 January 2012 to shareholders who are on the register of members at close of business on 9 December 2011. No liability is recorded in the Financial Statements in respect of the final dividend as it was not approved at the balance sheet date.

4 Investments

The directors consider that the carrying value of the investments is supported by their underlying net assets.

Investment in Subsidiary Undertakings

In accordance with FRS 11 “Impairment of fixed assets and goodwill” the carrying values of the Company’s subsidiary undertakings have been compared to their recoverable amounts represented by the value-in-use to the Company. The review has resulted in an impairment of nil (2010: £970.8 million). The discount rate used in the calculation to arrive at the valuation was 8.9 per cent (2010: 8.0 per cent) on a pre-tax basis.

The principal subsidiary undertakings of the Company at 3 September 2011 are shown in note 34 of theDebenhams Group Financial Statements.

5 Derivative Financial Instruments

Information relating to the derivatives held by the Company are shown in note 22 of the Debenhams Group Financial Statements.

6 Debtors

Amounts owed by group undertakings are unsecured, repayable on demand and carry an average rate of interest of 2.8 per cent (2010: 2.7 per cent).

7 Creditors: Amounts Falling Due Within One Year

Amounts owed to group undertakings are unsecured, have no fixed date of redemption and either carry an average interest rate of 2.8 per cent (2010: 2.7 per cent) or are interest free.

8 Creditors: Amounts Falling Due After More Than One Year

9 Borrowings

Maturity of Debt

Information relating to the borrowings of the Company is shown in note 21 of the Debenhams Group Financial Statements.

In November 2010 the Group cancelled its existing term loan and Revolving Credit Facility (“RCF”) and drew down on its new £650.0 million credit facility comprising a term loan of £250.0 million and an RCF of £400.0 million. This new facility was due to expire in 2013.

In July 2011 the terms of the credit facility were renegotiated to extend the expiry date to October 2015, with an option to further extend to October 2016. At 3 September 2011 the Group’s facilities outstanding comprised the term loan of £250.0 million (2010: £555.6 million) and an RCF of £165.0 million (2010: nil).

During the current and prior year the Group has complied with its covenants relating to its credit facilities.

Issue costs, which mainly relate to facility costs, are being amortised over the term of the facilities to October 2015 at the effective interest rate based on the committed amount of the term loan. Additional refinancing costs of £3.3 million were incurred during the year ended 3 September 2011 in respect of the renegotiation of the new credit facilities, which will be amortised over the term of the facility. The amortisation charge relating to the issue costs of the credit facilities cancelled and current for the year ended 3 September 2011 was £5.8 million (2010: £5.7 million).

10 Deferred Taxation

Deferred tax is calculated in full on all temporary differences under the liability method using a tax rate of 25.0 per cent (2010: 27.0 per cent).

The Finance Act 2011, which was enacted on 19 July 2011, included legislation reducing the main rate of corporation tax from 27 per cent to 26 per cent from 1 April 2011 and also reducing the main rate of corporation tax from 26 per cent to 25 per cent from 1 April 2012. Further reductions to the main rate are proposed to reduce the rate by 1 per cent per annum to 23 per cent by 1 April 2014. These further changes had not been substantially enacted at the balance sheet date and are therefore not included in these Financial Statements. The effect of these changes would be to reduce the deferred tax asset by £0.1 million.

Deferred tax provided on the fair value gains represents the deferred tax on the derivatives that qualify for cash flow hedges.

11 Called-up Share Capital

The number of ordinary shares in the Company held by the Debenhams Retail Employee Trust 2004 (“DRET”) in connection with the Group’s employee ownership plan described is as follows:

The market value of the shares at 3 September 2011 was £0.4 million for the DRET (2010: £0.8million). The cost of the shares held at the year end was £0.6 million (2010: £1.2 million).

Share option schemes

The Company has various share schemes which are designed to reward senior executives and management of the Group. At 3 September 2011 the Group had four schemes in operation: the Performance Share Plan (“PSP”), the Executive Share Option Plan (“ESOP”), the Share Incentive Plan (“SIP”) and the Deferred Bonus Matching Plan (“DBMP”). The following table reconciles the movement in share options and the weighted average exercise price, (“WAEP”) for the ESOP scheme. The PSP, SIP and DBMP share options all have a nil exercise price.

For further information on these schemes please see note 29 of the Debenhams Group Financial Statements.

12 Reserves

Hedging Reserve

The hedging reserve represents the change in fair value of the interest rate swaps which have been designated as cash flow hedges.

Profit and Loss Account

A dividend of £12.9 million (2010: nil) was paid by the Company during the year ended 3 September 2011.

13 Reconciliation of Movements in Shareholders’ Funds

14 Contingent Liabilities

The Company guaranteed certain of its subsidiary property finance lease obligations which totalled nil at 3 September 2011 (2010: £42.7 million).

The Company is also liable for the pension schemes’ contributions and deficits, where relevant, for both the Debenhams Executive Pension Plan and the Debenhams Retirement Scheme. The asset in the schemes at 3 September 2011 was £3.9 million (2010: deficit of £80.7 million).

There are a number of contingent liabilities that arise in the normal course of business which if realised are not expected to result in a material liability to the Company. The Company recognises provisions for liabilities when it is more likely than not a settlement will be required and the value of such a payment can be reliably estimated.