1st Jun 2005 07:00
ITV PLC01 June 2005 ITV plc Preliminary International Financial Reporting Standards Financial Statements for 2004 Introduction ITV plc will be reporting its financial results in accordance with InternationalFinancial Reporting Standards as adopted by the European Union ("IFRS") from 1January 2005. The Group's first IFRS results will be the interim results forthe six months to 30 June 2005 with the first Annual Report under IFRS being forthe year ended 31 December 2005. The Group's date of transition to IFRS is 1January 2004. The purpose of this statement is to present the effect of IFRS onITV plc at the date of transition and for the 2004 full year and half yearcomparative periods. Summary IFRS does not affect the underlying business performance of ITV, has no impacton cash generated from operations, and does not have a significant impact onITV's results before amortisation for the year ended 31 December 2004. EBITAremains virtually unchanged at £254m and although PBT reduces to £168m this isprincipally due to an increased amortisation charge. Looking forward, IFRS is expected to have minimal further impact on EBITA. Theincreased amortisation charge, and other IFRS changes, will have a reducedeffect on PBT in 2005. In 2006, amortisation will reduce significantly and willalso be below the estimated 2006 UK GAAP amortisation charge). Impact on 2004 profit: £m Pensions - operating cost 5Share based payments (5)Other (1)Impact on EBITA (1)Goodwill amortisation 72Amortisation of other intangibles (105)Net financing costs (pensions) (6)Joint ventures and associates 1Impact on profit before tax (39)Taxation 36Impact on profit after tax (3) Contents 1 Introduction 2 Basis of preparation 3 IFRS 1 exemptions 4 Key impact analysis 4.1 Presentation of financial statements 4.2 Business combinations 4.3 Post employment benefits 4.4 Share based payments 4.5 Deferred taxation 4.6 Recognition of acquired programme rights 4.7 Recognition of dividends 4.8 Financial instruments 4.9 Earnings per share 4.10 Guide to impact on 2005 5 Consolidated Income Statement 6 Consolidated Balance Sheet 7 Consolidated Cash Flow Statement 8 Consolidated Statement of Recognised Income and Expense 9 Consolidated Statement of Changes in Equity Appendix 1 - Significant accounting policies Appendix 2 - Reconciliation of income statements from UK GAAP to IFRS Appendix 3 - Reconciliation of balance sheets from UK GAAP to IFRS Appendix 4 - Report of KPMG Audit Plc Appendix 5 - Forward looking statements 1. Introduction This document explains how ITV's previously reported UK GAAP financialperformance and position are reported under IFRS. It includes, on an IFRSbasis: • the Group's consolidated income statement for the year ended 31 December 2004 and the six months ended 30 June 2004 along with a consolidated cash flow statement, a consolidated statement of recognised income and expense and a consolidated statement of changes in equity for these periods; and • the Group's consolidated balance sheet at 31 December 2004, 30 June 2004 and 1 January 2004; Set out below are the key factors affecting the conversion to IFRS including theIFRS 1 exemptions taken, a key impact analysis and restated primary statementsfor 2004. The appendices set out ITV's IFRS accounting policies andreconciliations of the 2004 statements under IFRS from UK GAAP. KPMG have audited the IFRS statements for the year ended 31 December 2004.Their audit report is attached in Appendix 4. The interim financial informationpresented is unaudited. 2. Basis of preparation The restated financial information presented in this document has been preparedin accordance with International Financial Reporting Standards (IFRS) andInternational Accounting Standards (IAS) adopted by the International AccountingStandards Board (IASB), and interpretations issued by the InternationalFinancial Reporting Interpretations Committee of the IASB. ITV is required to prepare its consolidated accounts in accordance with thosestandards and interpretations as adopted by the European Union (called "IFRS" inthis document). This restatement has been prepared on the assumption that allIFRS and interpretations, that ITV proposes adopting, effective for 2005reporting will be endorsed by the European Commission. At the date ofpublication of this document not all of these standards have been endorsed infull. In particular, the EU yet to endorse the amendment to IAS 19 (EmployeeBenefits). ITV has assumed that the amendment to IAS 19 is endorsed and intendsto adopt it for its 2005 financial reporting. Were these standards not to be endorsed in time for 2005 financial reportingthen the accounting policies or presentation of certain financial informationcontained in this document may need to be changed. It is therefore possiblethat further changes will be required to this information before it is presentedin the 2005 interim results and in the 2005 annual report. Details of ITV plc's significant IFRS accounting policies are given in Appendix1. 3. IFRS 1 exemptions IFRS 1 (First-time Adoption of International Financial Reporting Standards) setsout the procedures that ITV must follow when IFRS is adopted for the first timeas the basis for preparing Group consolidated financial statements. It sets outa number of exemptions that are available on first-time adoption to assistcompanies in the transition to reporting under IFRS. ITV has taken thefollowing decisions on these exemptions: a) Business combinations: ITV has taken the exemption from restating business combinations occurring before the date of transition, 1 January 2004. b) Employee benefits: ITV has elected to recognise all cumulative actuarial gains and losses in respect of employee benefit schemes at the date of transition to IFRS. This is consistent with the Group's accounting policy adopted under the amendment to IAS 19 issued on 16 December 2004 whereby actuarial gains and losses are recognised through the statement of recognised income and expense in full in the period in which they arise. c) Share-based payments: ITV has applied IFRS 2 only to share options and awards granted after 7 November 2002 that had not vested at 1 January 2005. d) Financial instruments: ITV has taken the exemption from applying IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS 39 (Financial Instruments: Recognition and Measurement) to the comparative information to be presented in the Group's first IFRS financial statements and will adopt IAS 32 and IAS 39 with effect from 1 January 2005. As such, the 2004 information relating to financial instruments continues to be presented under the current UK GAAP basis. This is discussed under key impacts below. e) Fair value or revaluation as deemed cost: ITV has not taken the option to restate items of property, plant and equipment to their fair value at 1 January 2004. ITV has elected for all items to take their cost or revalued amount as shown previously under UK GAAP as their deemed cost under IFRS. f) Cumulative translation differences: ITV has taken the option to set the cumulative level of translation differences relating to foreign operations held within reserves to nil at 1 January 2004. 4. Key Impact Analysis The analysis below sets out the most significant adjustments made to arrive atthe IFRS 2004 income statements and balance sheets. The impact of these canalso be seen in the reconciliations in Appendices 2 and 3. Other lesssignificant adjustments are included within these reconciliations. 4.1 Presentation of financial statements The primary statements included in this document have been presented inaccordance with IAS 1 (Presentation of Financial Statements). However, thispresentation may require modification in the event that further guidance isissued. The key presentational differences are as follows: Income statement: • The Group's share of the profit of joint ventures and associates is now presented including its share of interest and tax. The interest and tax lines in the income statement now exclude these amounts. • Net financing costs are analysed between financing income and financing costs on the face of the income statement. Balance sheet: • Assets and liabilities are analysed between current and non-current (see accounting policies in Appendix 1 for definitions). • Provisions are analysed between current and non-current liabilities. • Deferred tax is shown separately on the face of the balance sheet and disclosed as non-current. • The defined benefit pensions deficit is shown separately on the face of the balance sheet. • Current tax liabilities are shown separately on the face of the balance sheet. 4.2 Business combinations As detailed in section 3, ITV has taken the exemption from applying IFRS 3(Business Combinations) to combinations occurring before 1 January 2004. Thegoodwill arising from combinations occurring before that date therefore remainsat the amount shown under UK GAAP at 1 January 2004 and so there is no impact onthe 2004 opening balance sheet. Business combinations occurring after 1 January 2004 have been accounted for inaccordance with IFRS 3. This impacts on the acquisition accounting for CarltonCommunications Plc and the purchase of additional stakes in GMTV and GSkyB, allof which occurred during 2004. The principal impact is that intangible assets(which meet the definition for recognition under IAS 38 (Intangible Assets) andwhose fair value can be measured) are recognised separately from goodwill.These assets are then amortised over their useful lives. Additionally the fairvalues identified under UK GAAP must be revisited under IFRS. The main impactof this is that the pensions deficits are brought onto the balance sheet usingan IAS 19 (Employee Benefits) valuation rather than the SSAP 24 (Accounting forPension Costs) valuation used under UK GAAP. Both the intangible assets andpensions adjustments lead to associated deferred tax balances being recognised(see section 4.5). The net of these reduces the goodwill recognised. IFRS 3 prohibits the amortisation of goodwill instead requiring that it issubjected to annual impairment testing. This causes a reduction in the Group'samortisation charge for the year ended 31 December 2004 of £72m. Additionallygoodwill balances held within investments in joint ventures and associates arealso no longer amortised leading to a credit of £5m to the share of profit ofassociates and joint ventures. The balance sheet shows corresponding increasesto goodwill and investments in associates and joint ventures. The net impact on the income statement is to increase the amortisation charge in2004 by £33m. This reflects the initially high level of amortisation on theintangible assets included under the acquisition accounting for Carlton. On the balance sheet at 31 December 2004, goodwill is lower than previouslyreported under UK GAAP by £255m while other intangible assets increase by £435mgiving a net increase in intangible assets on the face of the balance sheet of£180m. Due to the short useful lives of some of the intangible assets recognised (e.g.customer contracts generally have a life of 1 to 2 years), the amortisationcharge from these in 2005 will be £13 million lower than 2004, and amortisationin 2006 will reduce further to be more than £50m less than the 2004 IFRS charge. 4.3 Post employment benefits The principal impact of IAS 19 (Employee Benefits) on ITV is in relation toaccounting for defined benefit pension schemes. IAS 19 requires defined benefit pension schemes accounting to be based on fairvalues at the balance sheet date. Separate charges for operating and netfinancing costs based on actuarial assumptions in place at the start of the yearare required through the income statement while recognition through the balancesheet is dependent upon the policy adopted for the recognition of actuarialgains and losses. As discussed in section 3, ITV has elected to recognise allcumulative actuarial gains and losses in respect of employee benefit schemes atthe date of transition to IFRS. Additionally ITV has chosen to adopt early theamendment to IAS 19 (issued on 16 December 2004) and recognise actuarial gainsand losses arising from the full year actuarial valuation in full through thestatement of recognised income and expense in the period in which they arise.The treatment and impact is broadly in line with that previously disclosed inaccordance with FRS 17 under UK GAAP. The operating charge through the income statement reduces by £5m while the netfinancing cost, for which there was no equivalent under UK GAAP (SSAP 24), is£6m. The reduction reflects a different measurement basis and the recognitionof a short term curtailment gain on ITV's pension schemes which had asignificant drop in active members as a result of the merger between Granada andCarlton. The balance sheet shows a total IAS 19 pensions deficit of £672m at 31 December2004 of which, under UK GAAP, the unfunded element of £27m was previouslyrecognised within creditors and an amount of £95m was included within provisionsunder acquisition accounting for Carlton. A movement through the statement ofrecognised income and expense for the year of £123m reflects the actuarial gainsand losses. The deficit is shown before a deferred tax asset of £202mrecognised within non-current assets in the balance sheet. This gives a netdeficit of £470m. On an ongoing funding basis the latest valuations show a total deficit of £586mat 31 December 2004 against the IAS 19 deficit of £672m. This is a morerelevant figure as it is these valuations that determine the future fundingrequirements for ITV. Expenditure relating to defined contribution pension schemes continues to becharged through the income statement as incurred. The IFRS defined benefit pensions charge for 2005 will remain approximately thesame as 2004 at operating level while a higher interest charge is expected dueto the increased deficit recognised at 31 December 2004. 4.4 Share based payments Under IFRS 2 (Share Based Payment) the charge through the income statement isbased upon the fair value of share options and awards granted. The fair valueof the equity instrument is measured at grant date and spread over the vestingperiod through the income statement with a corresponding increase in equity.The fair value of the share options and awards is measured using either aMonte-Carlo or Black-Scholes model as appropriate taking into account the termsand conditions of the individual scheme. The amount recognised as an expense isadjusted to reflect changes to the expected vesting except where forfeiture isdue only to changes in the expected achievement of market based criteria. IFRS 2 requires a charge for all such grants including awards, options and SAYEschemes unlike 2004 UK GAAP which based the charge on the intrinsic market valueof the underlying shares at the date of grant and so, for ITV, a charge arose onawards only. ITV has applied IFRS 2 only to share options and awards granted after 7 November2002 that had not vested at 1 January 2005 as permitted under IFRS 1. As ITVhas not previously presented the fair value of share options and awards granted,the IFRS 1 option to apply IFRS 2 to all share options and awards granted,including those granted before 7 November 2002, cannot be taken by the Group. The charge under IFRS is £5m higher in 2004 than under UK GAAP. There is noimpact on the net assets of the Group as the charge to the income statement ismatched by an equal credit through reserves. As ITV is unable to apply IFRS 2 to share options and awards granted pre 7November 2002, the charge through the income statement in 2005 will increase asmore schemes are captured within the valuation period. This is expected toincrease the IFRS charge by up to £5m in 2005. 4.5 Deferred taxation IAS 12 (Income Taxes) requires deferred tax to be provided on all temporarydifferences rather than timing differences under UK GAAP. The total impact on the 2004 income statement is a reduction in the tax chargeof £33m. On the balance sheet the net deferred tax asset increases by £24m.The tax recognised directly through equity in 2004 is £37m. The key impacts ondeferred tax are in the following areas: • A deferred tax liability has been recognised in relation to intangible assets brought on to the balance sheet at fair value in accordance with IFRS 3 (Business Combinations). This liability is released through the income statement in line with the amortisation of these intangible assets. At the 31 December 2004 a deferred tax liability of £151m remains on the balance sheet following a credit of £33m through the income statement in the period. • The defined benefit pension schemes deficit recognised in the balance sheet results in an increase to the deferred tax asset of £174m at 31 December 2004. The movements in this asset are through the income statement with a £2m increase to the charge in 2004, in respect of the operating charge and net interest, and £37m through the statement of recognised income and expense, in respect of the actuarial gains and losses. • Deferred tax is provided on share based payments as the tax basis differs from the requirements of IFRS. At 31 December 2004 an additional deferred tax asset of £5m is recognised with a credit of £2m being recognised through the income statement in 2004. Movements through equity for the year are nil. 4.6 Recognition of acquired programme rights Under UK GAAP, ITV had a policy of recognising, within the cost of programmingrights in stock, contractual commitments in relation to acquired programmingrights which were not yet available for transmission (e.g. film rights). UnderIFRS, acquired programming rights are recognised at the level of payments madeuntil the asset is available for transmission, whereupon the full cost of therights is recognised within programme rights in current assets. This hasresulted in a reduction to programme rights held on the balance sheet, with acorresponding reduction in trade payables, of £110m. 4.7 Recognition of dividends Under IAS 10 (Events After the Balance Sheet Date) dividends are recognised inthe period in which they are declared. Additionally ITV no longer showsdividends on the face of the income statement but instead shows them as amovement in equity. The impact on the balance sheet is to reduce liabilities by£53m at 31 December 2004. 4.8 Financial instruments ITV has taken the IFRS 1 exemption from applying IAS 32 (Financial Instruments:Disclosure and Presentation) and IAS 39 (Financial Instruments: Recognition andMeasurement) to its 2004 results. As such the 2004 information in this documentfor financial instruments continues to be presented under the current UK GAAPbasis. When these standards are adopted from 1 January 2005 the balance sheetat that date will be restated to show their impact. Under IFRS all derivative financial instruments are recognised as assets orliabilities in the balance sheet at fair value. Gains and losses are recognisedin the income statement unless they meet the definition of a cash flow hedgeunder IAS 39 in which case the element of the gains and losses which fulfil thehedge effectiveness criteria are taken directly to equity. Marketable shares and securities classified as available for sale are recognisedat fair value with fair value movements going directly to equity. Debt instruments are carried at amortised cost unless they are designated as thehedged item in a hedge relationship in which case they are held at fair valuewith movements being taken to the income statement to match against the movementin the hedging item. The impact on the 1 January 2005 balance sheet is limited with the net assetseffect being a decrease of £4m from IAS 39 itself and an increase to deferredtax assets of £3m resulting from the application of IAS 12 to these adjustments. 4.9 Earnings per share Basic earnings per share for 2004 are 3.5p (UK GAAP 3.5p). Adjusted earningsper share for 2004 under IFRS are 6.4p (UK GAAP 6.6p). Adjusted earnings pershare are based on earnings before amortisation of intangible assets,reorganisation, integration and impairment costs, gains on sale of investmentsand the tax associated with these items. 4.10 Guide to impact on 2005 The impact from individual standards is discussed above and the net effect onPBT in 2005 is expected to be similar to that in 2004. This excludes anypotential volatility caused by the introduction of IAS 39. 5. Consolidated Income Statement under IFRS 12 months ended 31 6 months ended December 2004 30 June 2004 Total Total £m £m Group and share of joint ventures' turnover 2,132 991Less share of joint ventures' turnover (79) (35) Revenue 2,053 956 Operating costs before depreciation, amortisation of intangible (1,694) (815)assets and reorganisation, integration and impairment costsOperating costs - reorganisation, integration and impairment (70) (23)costsEBITDA 289 118Depreciation of property, plant and equipment (35) (19)EBITA 254 99Amortisation of intangible assets (111) (60) Total operating costs (1,910) (917) Group operating profit 143 39 Financing income 22 9Financing costs (41) (17) Net financing costs (19) (8)Share of profit of associates and joint ventures 13 5Investment income 7 4Gain on sale of property 7 5Gain on sale of investments 17 - Profit before tax 168 45Taxation (25) (8) Profit for the period 143 37Profit attributable to minority interest (6) (5) Profit attributable to equity shareholders of the company 137 32 Basic earnings per share 3.5p 0.8pDiluted earnings per share 3.4p 0.8p All results are from continuing operations. 6. Consolidated Balance Sheet under IFRS 31 December 30 June 1 January 2004 2004 2004 £m £m £m Non-current assetsProperty, plant and equipment 258 259 193Intangible assets 3,797 3,756 1,259Distribution rights 12 18 6Investments in joint ventures and associates 83 113 33Other investments 140 151 157 Deferred tax asset in respect of pension scheme deficits 202 168 127Other deferred tax balances (136) (129) (3) Net deferred tax asset 66 39 124 4,356 4,336 1,772 Current assetsCurrent asset investments - 174 -Assets held for resale - 59 -Programme rights and other stock 368 271 229 Trade and other receivables < 1 year 349 336 206Trade and other receivables > 1 year 8 30 3 Trade and other receivables 357 366 209Cash and cash equivalents 582 400 185 1,307 1,270 623 Current liabilitiesBorrowings (10) (412) (4) Trade and other payables < 1year (713) (617) (309)Trade and other payables > 1 year - (20) - Trade and other payables (713) (637) (309)Current tax liabilities (225) (222) (141)Provisions (32) (20) (8) (980) (1,291) (462) Net current assets/(liabilities) 327 (21) 161 Non-current liabilitiesBorrowings (852) (557) (54)Defined benefit pension deficit (672) (559) (422)Other payables (7) (7) (30)Provisions (43) (62) (39) (1,574) (1,185) (545) Net assets 3,109 3,130 1,388 Attributable to equity shareholdersShare capital 422 422 277Share premium account 91 90 -Capital reserve 112 112 112Merger reserve 1,669 1,669 -Other reserves 885 879 1,079Income and expense reserve (86) (64) (81) Total attributable to equity shareholders 3,093 3,108 1,387Minority interest 16 22 1 Total equity 3,109 3,130 1,388 7. Consolidated Cash Flow Statement under IFRS 12 months ended 6 months ended 31 December 2004 30 June 2004 £m £m £m £m Cash flows from operating activitiesContinuing activities 329 213Discontinued activities* (8) (6) Cash generated from operations 321 207Interest received 19 7Interest paid on bank and other loans (43) (25)Interest paid on finance leases (4) (2)Dividends received 7 4Dividends received from investments in joint ventures 4 2and associatesTaxation paid (12) (8) (29) (22) Net cash from operating activities 292 185 Cash flows from investing activitiesAcquisition of subsidiary undertakings, net of cash 434 461and cash equivalents acquiredProceeds from sale of assets held for resale 59 -Proceeds from sale of property, plant and equipment 35 19Acquisition of minority interest (154) (140)Acquisition of property, plant and equipment (36) (7)Acquisition of investments (2) (2)Proceeds from sale of investments 208 2 Net cash from investing activities 544 333 Cash flows from financing activitiesProceeds from issue of ordinary share capital 8 7Bank and other loans repaid (192) (85)Capital element of finance lease payments (4) (2)Preference dividends paid to shareholders (5) (5)Redemption of redeemable shares on merger (200) (200)Equity dividends paid (48) (28) Net cash used in financing activities (441) (313) Net increase in cash and cash equivalents 395 205 Cash and cash equivalents at 1 January 2004 185 185 Effects of exchange rate changes on cash and cash 2 10equivalents Cash and cash equivalents at 31 December 2004 582 400 *Cash flows in respect of discontinued activities relates to expenditure againstprovisions held in respect of activities which have been previouslydiscontinued. 8. Consolidated Statement of Recognised Income and Expense 12 months ended 6 months ended 30 31 December 2004 June 2004 £m £m Exchange differences on translation of foreign operations (2) (1)Actuarial gains and losses on defined benefit pension schemes (123) -Taxation on items taken directly to equity 37 - Net income recognised directly in equity (88) (1)Profit for the period 143 37 Total recognised income and expense for the period 55 36 Attributable to:Equity shareholders of the company 49 31Minority interests 6 5 Total recognised income and expense for the period 55 36 9. Consolidated Statement of Changes in Equity Attributable to equity shareholders Share Share Capital Merger Other Income Total Minority Total capital premium reserve reserve reserve and interest expense reserve £m £m £m £m £m £m £m £m £m At 1 January 2004 277 - 112 - 1,079 (81) 1,387 1 1,388Business combinations 143 85 - 1,669 6 - 1,903 174 2,077Redemption of Granada - - - - (200) - (200) - (200)redeemable sharesPurchase of minority - - - - - - - (159) (159)interestShares issued in the 2 6 - - - - 8 - 8periodTotal recognised income - - - - - 49 49 6 55and expenseMovements due to share - - - - - 11 11 - 11based compensationDividends paid to - - - - - - - (6) (6)non-equity shareholdersEquity dividends - - - - - (65) (65) - (65) At 31 December 2004 422 91 112 1,669 885 (86) 3,093 16 3,109 At 31 December 2004 the income and expense reserve includes the translationreserve of £(2)m (1 January 2004: nil). Attributable to equity shareholders Share Share Capital Merger Other Income Total Minority Total capital premium reserve reserve reserve and interest expense reserve £m £m £m £m £m £m £m £m £m At 1 January 2004 277 - 112 - 1,079 (81) 1,387 1 1,388Business combinations 143 85 - 1,669 - - 1,897 167 2,064Redemption of Granada - - - - (200) - (200) - (200)redeemable sharesPurchase of minority - - - - - - - (146) (146)interestShares issued in the 2 5 - - - - 7 - 7periodTotal recognised income - - - - - 31 31 5 36and expenseMovements due to share - - - - - 6 6 - 6based compensationDividends paid to - - - - - - - (5) (5)non-equity shareholdersEquity dividends - - - - - (20) (20) - (20) At 30 June 2004 422 90 112 1,669 879 (64) 3,108 22 3,130 At 30 June 2004 the income and expense reserve includes the translation reserveof £(1)m (1 January 2004: nil). Appendix 1: Significant accounting policies a) Basis of preparation The restated financial information presented in this document has been preparedin accordance with International Financial Reporting Standards (IFRS) andInternational Accounting Standards (IAS) adopted by the International AccountingStandards Board (IASB), and interpretations issued by the InternationalFinancial Reporting Interpretations Committee of the IASB. ITV is required to prepare its consolidated accounts in accordance with thosestandards and interpretations as adopted by the European Union (called "IFRS" inthis document). This restatement has been prepared on the assumption that allIFRS and interpretations, that ITV proposes adopting, effective for 2005reporting will be endorsed by the European Commission. At the date ofpublication of this document not all of these standards have been endorsed infull. In particular the EU has yet to endorse the amendment to IAS 19 (EmployeeBenefits). ITV has assumed that the amendment to IAS 19 is endorsed and intendsto adopt it for its 2005 financial reporting. Were these standards not to be endorsed in time for 2005 financial reportingthen the accounting policies or presentation of certain financial informationcontained in this document may need to be changed. It is therefore possiblethat further changes will be required to this information before it is presentedin the 2005 interim results and in the 2005 annual report. b) Basis of accounting The consolidated primary statements presented have been prepared under thehistorical cost convention. The accounting policies set out below have been applied consistently inpresenting this financial information and in preparing an opening IFRS balancesheet at 1 January 2004 for the purpose of the transition to IFRS. c) Revenue recognition Revenue is stated exclusive of VAT and consists of sales of goods and servicesto third parties. Revenue from services is recognised when the outcome can beestimated reliably and by reference to the stage of completion of thetransaction. Revenue from the sale of goods is recognised when the Group hastransferred the significant risks and rewards of ownership and control of thegoods sold and the amount of revenue can be measured reliably. Key classes ofrevenue are recognised on the following basis: Advertising and sponsorship on transmission Programme production on delivery Programme rights when contracted and available for exploitation Revenue on barter transactions is recognised only when the goods or servicesbeing exchanged are of a dissimilar nature. d) Subsidiaries, associates and joint ventures Subsidiaries are entities that are directly or indirectly controlled by theGroup. Control exists where the Group has the power to govern the financial andoperating policies of the entity so as to obtain benefits from its activities.The proportion of net income and net assets attributable to minorityshareholders is presented separately as a minority interest in the consolidatedincome statement and consolidated balance sheet. A joint venture is an entity in which the Group holds an interest under acontractual arrangement where the Group and one or more other parties undertakean economic activity that is subject to joint control. The Group accounts forits interests in joint ventures using the equity method. An associate is an entity, other than a subsidiary or joint venture, over whichthe Group has significant influence. Significant influence is the power toparticipate in the financial and operating decisions of an entity but is notcontrol or joint control over those policies. These investments are accountedfor using the equity method. e) Current/non-current distinction Current assets include assets held primarily for trading purposes, cash and cashequivalents and assets expected to be realised in, or intended for sale orconsumption in, the course of the Group's operating cycle. All other assets areclassified as non-current assets. Current liabilities include liabilities held primarily for trading purposes,liabilities expected to be settled in the course of the Group's operating cycleand those liabilities due within one year from the reporting date. All otherliabilities are classified as non-current liabilities. f) Property, plant and equipment Owned assets Property, plant and equipment are stated at cost less accumulated depreciationand impairment losses. Certain items of property, plant and equipment that hadbeen revalued to fair value prior to 1 January 2004, the date of transition toIFRS, are measured on the basis of deemed cost, being the revalued amount at thedate of that revaluation. Leases Finance leases are those which transfer substantially all the risks and rewardsof ownership to the lessee. Assets held under such leases are capitalised withinproperty, plant and equipment and depreciation is provided where appropriate.Outstanding finance lease obligations, which comprise principal plus accruedinterest, are included within borrowings. The finance element of the agreementsis charged to the income statement over the term of the lease on a systematicbasis. All other leases are operating leases the rentals on which are charged to theincome statement on a straight line basis over the lease term. Depreciation Depreciation is provided to write off the cost of property, plant and equipmentless estimated residual value on a straight line basis over their estimatedfuture lives. The major categories of property, plant and equipment aredepreciated as follows: Vehicles, equipment and fittings 3 to 10 years Plant and machinery 10 to 15 years Properties: television studios 50 years leaseholds shorter of residual lease term or 50 years Freehold land not depreciated Freehold buildings up to 50 years g) Intangible assets Business combinations and goodwill All business combinations that have occurred since 1 January 2004 are accountedfor by applying the purchase method. Goodwill represents the difference betweenthe cost of the acquisition and the fair value of the net identifiable assetsacquired. Subsequent adjustments to the fair values of assets acquired madewithin twelve months of the acquisition date are accounted for from the date ofacquisition. Consequently 2004 interim financial information presented has beenrestated to reflect changes to the fair value adjustments made in the full yearaccounts. For business combinations prior to this date, but after 30 September 1998,goodwill is included at its deemed cost, which represents the amount recordedunder relevant GAAP at the time. The classification and accounting treatment ofbusiness combinations occurring prior to 1 January 2004, the date of transitionto IFRS, has not been reconsidered as permitted under IFRS 1. Goodwill is stated at cost less any accumulated impairment losses and isallocated to cash generating units. Goodwill is not amortised but testedannually for impairment. Goodwill arising on acquisitions prior to 30 September 1998 was recognised as adeduction from equity. Other intangible assets Other intangible assets acquired by the Group are stated at cost lessaccumulated amortisation except those acquired as part of a business combinationwhich are shown at fair value at the date of acquisition (in accordance withIFRS 3 (Business Combinations)) less accumulated amortisation. Amortisation Amortisation is charged to the income statement over the estimated useful livesof intangible assets unless such lives are indefinite. Goodwill is notamortised but is tested for impairment at each balance sheet date. The usefullives and amortisation methods for each major class of intangible asset are asfollows: Film libraries 20 years Sum of digits Channel 3 licences 11 years Straight line Brands 11 years Straight line Customer contracts up to 2 years Straight line Customer relationships 7 to 10 years Straight line h) Distribution rights Programme rights acquired primarily for the purposes of distribution areclassified within the balance sheet as non-current assets. They are recognisedinitially at cost and charged through the income statement over either a 3 or 5year period depending on genre. i) Other investments Other investments comprise equity securities which do not meet the definition ofsubsidiaries, joint ventures and associates, and are held at initial cost lessany impairment subsequently recognised. j) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation andare tested annually for impairment. Assets that are subject to amortisation ordepreciation are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Animpairment loss is recognised in the income statement for the amount by whichthe asset's carrying amount exceeds its recoverable amount. For the purposes ofassessing impairment, assets are grouped at the lowest levels for which thereare separately identifiable cash flows (cash-generating units). The recoverable amount is the higher of an asset's fair value less costs to selland value in use. In assessing value in use, the estimated future cash flows arediscounted to their present value using a pre-tax discount rate that reflectscurrent market assessments of the time value of money and the risks specific tothe asset. In respect of assets other than goodwill, an impairment loss is reversed ifthere has been a change in the estimates used to determine the recoverableamount. An impairment loss is reversed only to the extent that the asset'scarrying amount does not exceed the carrying amount that would have beendetermined, net of depreciation or amortisation, if no impairment loss had beenrecognised. Impairment losses in respect of goodwill are not reversed. k) Foreign currencies Foreign currency transactions Transactions in foreign currencies are translated into sterling at the rate ofexchange ruling at the date of the transaction. Foreign currency monetaryassets and liabilities at the balance sheet date are translated into sterling atthe rate of exchange ruling at that date. Foreign exchange differences arisingon translation are recognised in the income statement. Non-monetary assets andliabilities measured at historical cost are translated into sterling at the rateof exchange on the date of the transaction. Financial statements of foreign operations The assets and liabilities of foreign operations are translated into sterling atthe rate of exchange ruling at the balance sheet date. The revenues andexpenses of foreign operations are translated into sterling at the average rateof exchange ruling during the financial period. Exchange differences arising ontranslation are recognised directly in a separate component of equity. Net investment in foreign operations Exchange differences arising on the translation of the net investment in foreignoperations, and of related hedges, are taken directly to the translation reservewithin equity. In respect of all foreign operations only those translation differences arisingsince 1 January 2004, the date of transition to IFRS, are presented as aseparate component of equity. l) Programme rights Where programming, sports rights and film rights are acquired for the primarypurpose of broadcasting these are recognised within current assets. An asset isrecognised when the Group controls, in substance, the respective assets and therisks and rewards associated with them. For acquired programme rights an assetis recognised as payments are made and in full when the acquired programming isavailable for transmission. Programming produced internally either for thepurpose of broadcasting or to be sold in the normal course of the Group'soperating cycle is recognised within current assets at production cost. Programme costs and rights are written off to operating costs in full on firsttransmission except certain film rights which are written off over a number oftransmissions. Films and programme costs not yet written off at the balancesheet date are included on the balance sheet at the lower of cost and netrealisable value. m) Cash and cash equivalents Cash and cash equivalents comprises cash balances and call deposits withmaturity of less than or equal to three months. n) Provisions A provision is recognised in the balance sheet when the Group has a presentlegal or constructive obligation arising from past events and it is probablethat an outflow of economic benefits will be required to settle the obligation.Provisions are determined by discounting the expected future cash flows by arate which reflects current market assessments of the time value of money andthe risks specific to the liability. o) Borrowings Borrowings consist of loans, loans notes and finance leases. p) IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations) IFRS 5 has been issued but it is not yet effective and applies prospectively forperiods beginning on or after 1 January 2005. ITV has therefore not adoptedthis standard for the purposes of this document and discontinued operations andassets held for sale continue to be accounted for under current UK GAAPprinciples. q) Taxation The tax charge for the period comprises both current and deferred tax. Taxationis recognised in the income statement except to the extent that it relates toitems recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year andany adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method on anytemporary differences between the carrying amounts for financial reportingpurposes and those for taxation purposes. The amount of deferred tax providedis based on the expected manner of realisation or settlement of the carryingamount of assets and liabilities. A deferred tax asset is recognised only to the extent that it is probablesufficient taxable profit will be available to utilise the temporary difference. r) Employee benefits Defined contribution schemes Obligations under the Group's defined contribution schemes are recognised as anexpense in the income statement as incurred. Defined benefit plans The Group's obligation in respect of defined benefit pension plans is calculatedseparately for each plan by estimating the amount of future benefit thatemployees have earned in return for their service in the current and priorperiods; that benefit is discounted to determine its present value and the fairvalue of plan assets is deducted. The discount rate is the yield at the balancesheet date on high quality corporate bonds. The calculation is performed by aqualified actuary using the projected unit credit method. In accordance with IFRS 1 ITV has chosen to recognise the full pensions deficiton the balance sheet at 1 January 2004. The Group has taken the option ofadopting early the amendment to IAS 19 (Employee Benefits) issued on 16 December2004. As a result, actuarial gains and losses are recognised in full in theperiod in which they arise through the statement of recognised income andexpense. Share based compensation The group operates a number of share based compensation schemes including anSAYE scheme which is open to all employees. The fair value of the equityinstrument is measured at grant date and spread over the vesting period throughthe income statement with a corresponding increase in equity. The fair value ofthe share options and awards is measured using either a Monte-Carlo orBlack-Scholes model as appropriate taking into account the terms and conditionsof the individual scheme. The amount recognised as an expense is adjusted toreflect the actual vesting except where forfeiture is due only to market basedcriteria not being achieved. s) Derivatives and other financial instruments The Group uses a limited number of derivative financial instruments to hedge itsexposure to fluctuations in interest and foreign exchange rates. The Group doesnot hold or issue derivative instruments for speculative purposes. Interest rate swap and option agreements are used to manage the interest basisof borrowings. Interest receipts and payments under these agreements areaccrued so as to match the net income or cost with the related finance expense.No amounts are recognised in respect of future periods. The difference between the fair value and book value of bonds and derivativeinstruments arising on the acquisition accounting for Carlton is amortisedthrough net interest over the remaining life of the instruments. t) Dividends Dividends are recognised through equity in the period in which they aredeclared. u) Investment income Investment income comprises dividends received from the Group's investments.Dividend income is recognised in the income statement on the date the Group'sright to receive payments is established. v) Net financing costs Net financing costs comprise interest payable on borrowings, interest receivableon funds invested, foreign exchange gains and losses and the net financing costsin respect of defined benefit pension schemes. Additionally the differencebetween the fair value and book value of bonds and derivative instrumentsarising on the acquisition accounting for Carlton is amortised through netinterest over the remaining life of the instruments. Appendix 2: Consolidated Income Statement for the 12 months ended 31 December 2004 UK GAAP IAS 1 IAS 19 IFRS 2 IFRS 3 Other IFRS IFRS Presentation Employee Share Business effect benefits based combinations payment £m £m £m £m £m £m £m £m Group and share of joint ventures' 2,132 - - - - - 2,132 -revenueLess share of joint ventures' revenue (79) - - - - - (79) - Revenue 2,053 - - - - - 2,053 - Operating costs before depreciation, amortisation of intangible assets andreorganisation, integration andimpairment costs (1,694) - 5 (5) - - (1,694) -Operating costs - reorganisation, integration and impairment costs (69) - - - (1) - (70) (1)EBITDA 290 - 5 (5) (1) - 289 (1)Depreciation of property, plant and equipment (35) - - - - - (35) -EBITA 255 - 5 (5) (1) - 254 (1)Amortisation of intangible assets (78) - - - (33) - (111) (33) Total operating costs (1,876) - 5 (5) (34) - (1,910) (34) Group operating profit 177 - 5 (5) (34) - 143 (34) Financing income 22 - - - - - 22 -Financing costs (35) 1 (6) - - (1) (41) (6) Net financing costs (13) 1 (6) - - (1) (19) (6)Share of profit of associates and joint ventures 12 (4) - - 5 - 13 1Investment income 7 - - - - - 7 -Gain on sale of property 7 - - - - - 7 -Gain on sale of investments 17 - - - - - 17 - Profit before tax 207 (3) (1) (5) (29) (1) 168 (39)Related Shares:
ITV