13th Jun 2005 07:00
Yell Group plc13 June 2005 Yell Group plc Unaudited IFRS Conversion Statements at the transition date of 1 April 2004, theyear ended 31 March 2005, and interim periods ended 30 June 2004, 30 September2004 and 31 December 2004 Yell Group PLC Please note: • Acronyms and accounting standards are defined in the glossary (Appendix 5). The relevant terms are in bold when first used; and • References to "we", "us", "our", "Yell", the "Group" and the "Yell Group" are to Yell Group plc, a company incorporated with limited liability under the law of the United Kingdom, and its consolidated subsidiaries. Restatement of financial information for FY 2005 and the transition toInternational Accounting Standards and International Financial ReportingStandards at 1 April 2004. Introduction We have previously prepared our primary financial statements under UK GAAP.From 1 April 2005 onwards we are required to prepare our consolidated financialstatements in accordance with International Accounting Standards andInternational Financial Reporting Standards as endorsed by the European Union.Our first IFRS(1) results will be the results for the three months ended 30 June2005. Our first Annual Report under IFRS will be for the year ended 31 March2006. The date for transition to IFRS is 1 April 2004, this being the start ofthe earliest period of comparative information. To explain how this change affects our reported performance and financialposition, we have restated information previously published under UK GAAP intowhat we would have published under IFRS with explanations as follows: • Appendix 1 - Accounting policies as revised under IFRS • Appendix 2 - Reconciliation of Equity at the transition date of 1 April 2004 • Appendix 3 - Profit, cash flow and equity for the three months ended 30 June 2004, the six months ended 30 September 2004 and the nine months ended 31 December 2004 restated under IFRS, together with separate reconciliations to the profit and equity previously published under UK GAAP • Appendix 4 - Profit, cash flow and equity for the year ended 31 March 2005 restated under IFRS, together with separate reconciliations to the profit and equity published under UK GAAP • Appendix 5 - Glossary of acronyms highlighted in bold in this document________________________________________________________________________________ (1) References to IFRS throughout this document, unless specified otherwise, refer to the application of International Accounting Standards, International Financial Reporting Standards and interpretations published by the International Financial Reporting Interpretation Committee. These financial statements have been prepared on the basis of preparationoutlined below. Basis of preparation In preparing this IFRS information, we have used our best knowledge of theexpected standards and interpretations, fact and circumstances, and accountingpolicies that will be applied when we prepare our first full IFRS financialstatements at 31 March 2006. Although the IFRS information is based on our best knowledge of expectedstandards and interpretations, and current facts and circumstances, these maychange. The expected standards and interpretations are subject to ongoingreview by the EU and the IASB may issue amended or additional standards orinterpretations. Therefore, until we prepare our first full IFRS financialstatements, the possibility cannot be excluded that the accompanying IFRSfinancial information may have to be adjusted. We have set out the accounting policies applied in preparing this financialinformation in Appendix 1 and have assumed that, with the exception of IAS 39and IFRIC 3 all existing standards in issue from the IASB and IFRIC will befully endorsed by the EU. We have adopted the EU endorsed IASB standards and interpretations from 1 April2005 with restatements of comparative information from 1 April 2004, excludingcomparative information in respect of IAS 32 and IAS 39 as permitted by IFRS 1.We do not believe that the differences between IFRS and EU endorsed IFRS will bematerial in the context of our financial statements. Our understanding of the status of standards and EU endorsement is as follows: • The EU has endorsed all International Financial Reporting Standards and all International Accounting Standards as revised by the IASB before 31 May 2005, with the exception of the revisions to IAS 19 and IAS 39. • The EU endorsed its own version of IAS 39, which is an altered version of the standard as it was before the IASB issued amendments in December 2004. We have adopted the EU endorsed standard from 1 April 2005. • IFRIC has published five interpretations and the EU has endorsed only the first. The group that provides advice to the EU has indicated that it is unlikely to support a recommendation for endorsement of IFRIC 3. The financial information included in this report is unaudited. Subject to EUendorsement of outstanding standards and no further changes from the IASB andIFRIC this information is expected to form the basis for comparative informationwhen reporting financial results during the 2006 financial year, and forsubsequent reporting periods. Effect on information in our OFR and basic financial statements The most significant items contributing to the changes in our financialinformation are: • Share-based payments - we record a fair value charge against profit in respect of employee share options granted after 7 November 2002 and not vested before 1 January 2005. • Goodwill amortisation - we do not record a charge against profit, unless goodwill is impaired or the benefit of a pre-acquisition net operating loss is recognised for tax purposes. • Taxation NOLs -when we recognise the tax benefit from net operating losses on acquisitions by reducing our tax charge, we also charge an equal amount against profit and loss to write down the value of goodwill. • Taxation goodwill - we account for tax-allowable goodwill by reducing our current tax payable for the relevant amount of allowable amortisation, but also offset this benefit by recording a deferred tax liability. • Acquired assets - we allocate the purchase price to acquired assets including certain intangible assets that will be amortised. Acquired directories in development are recorded in current intangibles at their fair value instead of replacement cost, thus reducing the profit from an acquired directory when it is first published after acquisition. • Employee benefits - we recognise the net deficit or surplus on the defined benefit pension scheme on the balance sheet, current service costs and financing costs as a charge against profit, and other annual charges in the balance sheet position net of employer contributions in equity. Our turnover and operating cash flow, as defined for management purposes, arenot affected by these changes. We have indicated in the following grid eachelement of profit that is affected. Share-based Goodwill Acquired Employee Taxation - Taxation - payments amortisation assets benefits NOLs goodwill EBITDA X X XDepreciation and X X XamortisationFinancing costs XTaxation X X X XProfit after tax X X X X X X We compare the key financial measures we use to manage the business in thefollowing table: Half Year 2005 Full Year 2005 UK GAAP IFRS UK GAAP IFRS Turnover (£m) 604.6 604.6 1,285.3 1,285.3Adjusted EBITDA (£m) (a) 206.0 201.2 402.8 393.0Operating cash flow (£m) (b) 170.6 170.6 347.2 347.2Cash conversion (%)(c) 82.8 84.8 86.2 88.3 Profit after tax (£m) 52.7 87.5 94.2 162.5Adjusted profit after tax (£m) (a) 60.7 95.5 117.0 185.3Diluted earnings per 7.4 12.3 13.3 22.9share (pence)Adjusted diluted earnings per 15.5 13.9 30.4 27.0share (pence) (d)Free cash flow (£m) (e) 108.4 108.4 229.9 229.9 (a) Adjusted items are stated before the effects of items that were called exceptional under UK GAAP. These items in the 2005 financial year were related to lawsuits associated with a YellowBook advertising campaign. (b) Net cash inflow from operations before payments of items called exceptional under UK GAAP, less capital expenditure. (c) Operating cash flow as a percentage of adjusted EBITDA. (d) Diluted earnings per share before amortisation of acquired intangible assets and items previously called exceptional under UK GAAP. (e) Net cash inflow from operating activities less capital expenditure and, in the case of UK GAAP, payments for interest, refinancing and income taxes. We have reconciled EBITDA and adjusted EBITDA to operating profit as follows: Half Year 2005 Full Year 2005 UK GAAP IFRS UK GAAP IFRS £m £m £m £m Operating profit 132.1 174.0 244.7 327.7Depreciation and amortisation 61.1 14.4 121.6 28.8EBITDA 193.2 188.4 366.3 356.5Costs of lawsuits from YellowBook 12.8 12.8 36.5 36.5advertising campaignAdjusted EBITDA 206.0 201.2 402.8 393.0 Effect on our consolidated cash flow statements Under UK GAAP, we previously presented the Consolidated Statements of Cash Flowsin accordance with FRS 1. Under FRS 1, cash comprised cash in hand and at bankand overnight deposits. Under IFRS, cash and cash equivalents include cash andshort-term investments with original maturities of three months or less. Thesedefinitions are not materially different in the context of our financialstatements. Under FRS 1, we presented separately the cash generated from operations, returnson investments and servicing of finance, taxation, capital expenditure andfinancial investments, acquisitions and disposals, dividends paid to theCompany's shareholders, and financing. Under IFRS we have classified separatelythe cash flows generated from operations and cash flows from operating,investing and financing activities. Cash flows in respect of interest and finance fees paid and taxation under FRS 1have been included within operating activities under IFRS. Operating cash flow as defined by management to monitor the business is notaffected by IFRS. The following table reconciles cash flow from operationsunder IFRS to operating cash flow: Half Year 2005 Full Year 2005 UK GAAP IFRS UK GAAP IFRS £m £m £m £m Cash generated from operations 170.3 170.3 357.6 357.6Cash payments for exceptional costs 9.0 9.0 13.6 13.6included in operating profitPurchase of tangible fixed assets, net of (8.7) (8.7) (24.0) (24.0)sales proceedsOperating cash flow 170.6 170.6 347.2 347.2 Transitional arrangements The rules for first-time adoption of IFRS are set out in IFRS 1. In general acompany is required to determine its IFRS accounting policies and apply theseretrospectively to determine its opening balance sheet under IFRS. The standardallows a number of exemptions and exceptions to this general principle to assistcompanies as they make the transition to reporting under IFRS. We have includedbelow descriptions of only those exemptions that we are using. Changes in accounting policies A summary of our accounting policies under IFRS is provided in Appendix 1.Changes to our financial information are quantified by standard in Appendix 2for the opening balance sheet at 1 April 2004, Appendix 3 for the first three ,six and nine months of the financial year ended 31 March 2005, and Appendix 4for the financial year ended 31 March 2005. We describe below the significant changes in our policies listed by IFRS,together with associated transitional arrangements. IFRS 2 Share-based Payments In accordance with IFRS 2, we recognised a charge to income representing thefair values of outstanding equity settled employee share based payment awardsgranted since 7 November 2002 (the effective date of IFRS 2) and not yet vestedat 1 January 2005 to our employees under various schemes. All options grantedon or since our IPO are accounted for under IFRS 2. We calculated the fairvalues using the Black-Scholes options valuation model and we charged thosevalues to income over the relevant option vesting periods, adjusted to reflectactual and expected levels of vesting. We accounted for all options grantedbefore our IPO at their intrinsic value on the date of grant. There were nooptions granted in the period from 7 November 2002 until our IPO that remainunvested at 1 January 2005. The £3.1 million reduction in EBITDA for financial year 2005 is offset by adeferred tax credit of £1.1 million. For the six months ended 30 September 2004there is an additional charge of £1.4 million and associated deferred tax creditof £0.5 million. IAS 19 Employee Benefits One of the options under IAS 19, which we have taken, allows separaterecognition of the operating and financing costs of defined benefit pensionschemes in the profit and loss statement. The standard also permits a number ofoptions for the recognition of actuarial gains and losses. Our policy is torecognise any variations in full immediately in equity, as would have beenrequired under FRS 17. The option to account for actuarial gains and losses inthis way is part of the revision to IAS 19 that the EU has not yet endorsed.The amendment to IAS 19 is effective from 1 January 2006 with earlier adoptionallowed. We are applying the revised standard voluntarily from the transitiondate of 1 April 2004. We note that IAS 19 requires a slightly lower valuationof scheme assets than the valuation under FRS 17. The additional charges under IFRS are in comparison to amounts recorded inaccordance with SSAP 24 under UK GAAP. The additional charges for financialyear 2005 of £6.7 million reducing EBITDA and £2.3 million increasing financecosts are offset by a deferred tax benefit of £2.7 million. For the six monthsended 30 September 2004 there is an additional charge against EBITDA of £3.4million and additional finance charge of £1.2 million offset by an associateddeferred tax benefit of £1.4 million. We recognised a pension liability of £66.8 million in our IFRS opening balancesheet at 1 April 2004, £71.3 million at 30 September 2004 and £99.7 million at31 March 2005. Our overall adjustments for IAS 19 reduced net assets by £47.1million in our opening balance sheet at 1 April 2004, £50.2 million at 30September 2004 and £76.1 million at 31 March 2005. IFRS 3 Business Combinations IFRS 3 prohibits merger accounting and the amortisation of goodwill. Thestandard requires goodwill to be carried at cost with impairment reviews bothannually and when there are indications that the carrying value may not berecoverable. IFRS 3 requires certain intangible assets to be recognised at thedate of acquisition and to be amortised on a systematic basis over theireconomic lives (discussed under IAS 38 below). It also requires that the fairvalue instead of replacement cost is attributed to the directories indevelopment purchased in an acquisition. For purposes of this discussion we have excluded the effects of accounting forthe subsequent recognition of tax benefits from acquired net operating lossesand the accounting for tax allowable goodwill amortisation. These effects areset out in the paragraphs describing IAS 12 below. Under the transitional arrangements of IFRS 1, a company has the option ofapplying IFRS 3 prospectively from the transition date. We have chosen thisoption rather than restating all previous business combinations. The effects ofIFRS 3 and the associated transitional arrangements on our financial informationare as follows: • all prior business combination accounting is frozen at the transition date, 1 April 2004; and • the value of goodwill is frozen at that date and associated goodwill amortisation previously reported under UK GAAP for the 2005 financial year is removed for IFRS restatement. We have eliminated the goodwill amortisation charge of £98.6 million for thefinancial year 2005 (excluding the adjustment described under IAS 12 below) andof £49.6 million for the six months ended 30 September 2004. Our adjustments to goodwill and taxation for IFRS 3, before taking into accountthe adjustments under IAS 12 described below, had nil effect in our openingbalance sheet at 1 April 2004. These adjustments increased our net assets by£49.6 million at 30 September 2004 and £98.6 million at 31 March 2005. IAS 38 Intangible Assets Under IAS 38 the policy on intangible assets is to capitalise all such assetswhere they meet the criteria specified within IAS 38. Under the transitionalarrangements of IFRS 1, where these assets would only have been recorded as partof an acquisition under IFRS 3 we have the option of recording these assetsprospectively from the transition date. We have chosen this option rather thanrestating all previous business combinations. Under UK GAAP, we reported internally developed software and software licensesas a tangible fixed asset. For IFRS we have reclassified £9.7 million fromtangible fixed assets to intangible fixed assets in our opening balance sheet at1 April 2004, £8.4 million at 30 September 2004, and £7.7 million at 31 March2005. These reclassifications do not affect the profit and loss account in anyperiod. IAS 12 Income Taxes IAS 12 requires separate disclosure of deferred tax assets and liabilities onthe Group's balance sheet. We reclassified deferred tax credits of £37.8million in our opening balance sheet at 1 April 2004 and at 30 September 2004,and £30.7 million at 31 March 2005 that had offset deferred tax assets under UKGAAP. We have increased the tax charge under IFRS by £11.7 million for the financialyear 2005 and by £5.8 million for the six months ended 30 September 2004. Theassociated tax effects arise from treating the amount of tax allowable goodwillamortisation as an immediate benefit to current tax payable offset by a deferredliability that only crystallises if the goodwill is impaired or the business issold under IFRS, whereas under UK GAAP we recognised the benefit as a reductionin the tax charge. The standard further requires that we adjust goodwill and post a charge againstprofits when we recognise previously unrecognised deferred tax assets arisingfrom acquired net operating losses. We have reported an amortisation charge of£5.8 million for the financial year 2005 and of £2.9 million for the six monthsended 30 September 2004. The charges to goodwill amortisation reduce our netassets by £29.5 million at 1 April 2004, £32.9 million at 30 September 2004 and£34.4 million at 31 March 2005. Our effective tax rate under IFRS in the financial year ended 31 March 2005 is30.7%. We have used this rate for intraperiod tax allocations when restatingour profits under IFRS for the interim periods in the 2005 financial year. Byapplying this effective tax rate in the six months ended 30 September 2004 wehave decreased the tax charge by £0.2 million and increased net assets at 30September 2004 by £0.2 million. We believe this will result in the mostmeaningful comparisons of our financial results when reporting interim figuresin the 2006 financial year. This allocation has no effect on the full year taxcharges for the financial year ended 31 March 2005. IAS 32 and IAS 39 Financial Instruments IAS 32 and IAS 39 address the accounting for, and financial reporting of,financial instruments. IAS 32 covers disclosure and presentation whilst IAS 39covers recognition and measurement. The general principle of IAS 39 is thatfinancial instruments should be recognised in accordance with theirclassification. Accounting for the movements in fair value is dependant on thedesignation of the relevant financial instrument. Financial instruments used tofix our floating interest rates and US dollar denominated bonds used as anatural hedge against our US dollar denominated investments have to bedocumented as hedges and tested for effectiveness on a quarterly basis before wecan account for them as hedges. We have applied IAS 32 and IAS 39 from 1 April 2005, having applied theexemption permitted by IFRS 1 allowing us to present comparative informationunder the previous UK GAAP. Therefore, these standards do not affect theperiods covered by this report. Furthermore, we believe that we had all therequired documentation in place by 31 March 2005 allowing us to achieve the samehedge accounting in future periods that we previously achieved under UK GAAP. Conclusion The IFRS information in this release has been prepared under the basis ofpreparation set out above. The most significant effects of the transition toIFRS upon the restated financial information arise from the discontinuation ofgoodwill amortisation. Net assets are also affected, but there is no effectupon the underlying cash balances within the business. The financial information presented above contains details of the transitionaladjustments required to restate the Group's financial information under IFRS.Future presentation of restated financial information may be in a differentformat. The transitional adjustments presented have been calculated on the basis of thespecific facts of the transaction and should not be used as indicators of futureadjustments between UK GAAP and IFRS that will be required, due to the risk anduncertainty surrounding events in the future. The preliminary financial information set out on pages 16 to 34 do notconstitute the company's statutory accounts for the year ended 31 March 2005.The information labelled as audited was extracted from accounts that we preparedunder UK GAAP in accordance with the Companies Act 1985 and on which Yell'sauditor reported. The auditor's reports were unqualified and did not containstatements under section 237(2) or (3) of the Companies Act 1985. We havedelivered the accounts for the year ended 31 March 2004 to the Registrar ofCompanies, and we will deliver those for the year ended 31 March 2005 in duecourse. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS________________________________________________________________________________ In order to utilise the 'Safe Harbor' provisions of the United States PrivateSecurities Litigation Reform Act of 1995, we are providing the followingcautionary statement. These preliminary financial statements containforward-looking statements with respect to the financial condition, results ofoperations and businesses of Yell. By their nature, forward-looking statementsand forecasts involve risk and uncertainty because they relate to events anddepend on circumstances that will occur in the future. There are a number offactors that could cause actual results and developments to differ materiallyfrom that expressed or implied by these forward-looking statements. You shouldread the section entitled "Risk Factors" in our annual report on Form 20-F filedwith the US Securities and Exchange Commission (the "SEC") on 13 June 2005 for adiscussion of some of these factors. We undertake no obligation publicly toupdate or revise any forward-looking statements, except as may be required bylaw. Yell Accounting Policies under IFRS Appendix 1 Appendix 1 provides a summary of Yell's accounting policies under IFRS from 1April 2005. We have indicated with an asterisk (*) those policies we changed onthe transition to IFRS. Accounting Policies Basis of accounting As set out on page 2 in the Basis of Preparation, the restated financialinformation for the financial year ended 31 March 2005, the six months ended 30September 2004, and the opening balance sheet at 1 April 2004, have beenprepared in accordance with International Accounting Standards (IAS) andInternational Financial Reporting Standards (IFRS) issued by the InternationalAccounting Standards Board as endorsed, or expected to be endorsed, by theEuropean Union. IFRS transitional arrangements and early adoption When preparing the Group's IFRS balance sheet at 1 April 2004, the date oftransition, the following optional exemptions from full retrospectiveapplication of IFRS accounting policies have been adopted: • Business combinations - the provisions of IFRS 3 have been applied prospectively from 1 April 2004; and • Employee benefits - the accumulated actuarial gains and losses in respect of employee defined benefit plans have been recognised in full through reserves. The Group has chosen to restate comparative information with respect to IFRS 2.The Group has also opted to adopt the revised IAS 19 early, allowing actuarialgains or losses to be charged to reserves in the period in which they arise. In addition, when preparing the Company's balance sheet at 1 April 2004, thefollowing optional exemption has been adopted: • Revaluation as deemed costs - the carrying value of investments in subsidiary undertakings in the financial statements of the Company at the transition date are based on a valuation performed in preparation for our initial public offering. Accounting policies We consider the following to be the most important accounting policies in thecontext of the Group's operations. (a) Turnover Group turnover, after deduction of sales allowances, value added tax and othersales taxes, comprises the value of products provided by Group undertakings.Turnover from classified directories, Business Pages and other directories,mainly comprising advertising revenue, is recognised in the profit and lossaccount upon completion of delivery to the users of the directories. Otherturnover, principally from Yellow Pages 118 24 7 and Yell.com, is recognisedfrom the point at which service is first provided over the life of the contract. (b) Cost of sales Cost of sales are the costs incurred in developing directories and other Groupproducts, including costs of the sales force , artwork and other directoryproduction and development costs, as well as appropriate overheads dedicated tothe development of the directories. Charges for doubtful debts are also includedwithin cost of sales. These are calculated by estimating future cash flows fromsales-related debtors on the basis of historical loss experience (c) Advertising The Group expenses the costs of advertising its products and services as thecosts are incurred. (d) Interest Interest payable is recognised on an effective interest rate basis. (e) Foreign currencies On consolidation, the assets and liabilities of foreign undertakings aretranslated into sterling at year-end exchange rates. The results of foreignundertakings are translated into sterling at average rates of exchange for theperiod to the extent that these rates approximate the actual rates. Exchange differences arising from the retranslation at period-end exchange ratesof the net investment in foreign undertakings, and on borrowings designated ashedges of such investments, are taken to reserves through the statement ofrecognised income and expense. All other exchange gains or losses are dealt with through the profit and lossaccount. (f) Goodwill and other intangible fixed assets * On the acquisition of a business, fair values are attributed to the net assetsacquired. These net assets may include software development costs, brand names,and customer relationships, all of which are recorded as intangible assets andheld at cost less accumulated amortisation. Software is amortised on a straightline basis over its useful economic life, which does not generally exceed fouryears. Brand names are amortised on a straight line basis over their usefuleconomic lives, which do not exceed 40 years. Customer relationships areamortised on a basis that takes into account the estimated customer retentionrate at the date of acquisition. The useful economic lives of customerrelationships do not generally exceed eight years. The amortisation period andmethod are reviewed and adjusted, if appropriate, at each balance sheet date. Goodwill arising from the purchase of subsidiary undertakings represents theexcess of the fair value of the purchase consideration over the fair value ofthe net assets. Goodwill arising on acquisitions is capitalised and is subjectto impairment review, both annually from the date of transition onwards and whenthere are indications that the carrying value may not be recoverable. Goodwillis carried at cost less accumulated impairment losses. Prior to 1 April 2004, goodwill was amortised over its estimated useful life (20 years); such amortisation ceased on 31 March 2004. (g) Tangible fixed assets * Tangible fixed assets are stated at historical cost less depreciation. Costcomprises the purchase price and any other costs of bringing an asset into use.Depreciation is provided on tangible fixed assets on a straight line basis fromthe time they are available for use, so as to write off their costs over theirestimated useful economic lives taking into account any expected residualvalues. Reviews are made annually of the estimated remaining lives and residual valuesof individual productive assets and adjusted prospectively, if appropriate,taking account of commercial and technological obsolescence as well as normalwear and tear. Under this policy it becomes impractical to calculate averageassets lives exactly. However, total lives range from approximately 10 to 40years for buildings and two to six years for plant and equipment. (h) Asset impairment* Intangible assets, other than goodwill, and tangible fixed assets are tested forimpairment when an event that might affect asset values has occurred. Animpairment loss is recognised to the extent that the carrying amount cannot berecovered either by selling the asset or by the discounted future earnings fromoperating the assets. Goodwill is subject to an annual impairment review, withthe first review at the end of the financial year in which the acquisition tookplace, and at any other time when the directors believe that impairment may haveoccurred. (i) Investments * The carrying value of the investments in subsidiary undertakings in thefinancial statements of the Company is based upon a valuation at 31 March 2003in preparation for our initial public offering. Under the transition rules ofIFRS 1, this carrying value is deemed to be cost and is subject to the policy onasset impairment. Any impairment would be charged to the profit and loss account to the extentthat it is not covered by amounts previously credited to shareholders' equitythrough revaluation surplus. (j) Leased assets Rentals in respect of operating leases, under which substantially all thebenefits and risks of ownership remain with the lessor, are charged to theprofit and loss account on a straight-line basis over the life of the lease. Assets held under finance leases where substantially all the benefits and risksof ownership are transferred to the Group are capitalised in the balance sheetas tangible fixed assets at the present value of the minimum lease paymentspayable during the lease term and depreciated over the shorter of their usefuleconomic lives or the lease term. The capital element of future obligationsunder leases is included as a liability in the consolidated balance sheets,classified as appropriate as a creditor due within or after one year. Leasepayments are split between capital and interest elements using the annuitymethod and the interest is then charged to the profit and loss account. (k) Directories in development * The cost of directories in development is recognised as a current asset wherethe directory is intended to be completed and where the costs directlyattributable to the development of the directory can be measured reliably.Where directories are launched on a non-paid basis the costs are expensed asincurred. The development costs mainly comprise the direct costs of the salesforce dedicated to procuring adverts and creating the content for directories,artwork and other directory production and development costs, includingappropriate directly attributable overheads. The asset is amortised to cost ofsales on completion of delivery of the relevant directory when the relatedturnover is recognised. (l) Employee benefits * The Group expenses employee benefits as employees render the services that giverise to the benefits in accordance with IAS 19 "Employee Benefits". The Group currently operates a defined benefit pension scheme for its UKemployees employed before 1 October 2001 and operates defined contributionpension schemes for its UK employees employed subsequent to 1 October 2001 andits US employees. All pension schemes, except for a small unfunded unapprovedplan, are independent of the Group's finances. Actuarial valuations of thedefined benefit scheme are carried out as determined by the trustees atintervals of not more than three years, the rates of contribution payable andthe pension cost being determined on the advice of the actuaries, having regardto the results of these valuations. In any intervening years, the actuariesreview the continuing appropriateness of the contribution rates. The balance sheet includes the surplus/deficit in the defined benefit schemetaking assets at their year-end market values and liabilities at theiractuarially calculated values discounted at the year-end AA corporate bondinterest rates. The cost of benefits accruing during the year in respect ofcurrent and past service is charged against operating profit. The expectedreturn on the schemes' assets and the increase in the present value of theschemes' liabilities arising from the passage of time are included in otherfinance income. Actuarial gains and losses are recognised immediately in thestatement of recognised income and expense. Payments to the Group's defined contribution schemes are charged against profitas incurred. (m) Employee share schemes * The fair value of employee share based payments is calculated using theBlack-Scholes model. In accordance with IFRS 2 "Share-based Payments" theresulting cost is charged against profit and loss over the vesting period of theawards. The value of the charge is adjusted to reflect expected and actuallevels of options vesting. When the ESOP trust acquires and holds shares of theCompany, the Group presents them as a deduction in arriving at equityshareholders' funds. (n) Taxation * The charge (credit) for taxation is based on the profit (loss) for the periodand takes into account deferred taxation where transactions or events give riseto temporary differences between the treatment of certain items for taxation andfor accounting purposes. Provision is made in full for deferred taxliabilities. Deferred tax assets are recognised to the extent that it isprobable that future taxable profit will be available against which the benefitcan be realised. Deferred tax is measured at the tax rates that are expected to apply in theperiods in which the temporary differences are expected to reverse, based on taxrates and laws that have been enacted or substantially enacted by the balancesheet date. Deferred tax assets and liabilities are not discounted. No provision is made for unremitted earnings of foreign subsidiaries ortemporary differences relating to investments in subsidiaries since realisationof such differences can be controlled and is not probable in the foreseeablefuture. (o) Financial instruments * Financial instruments are recorded initially at fair value. Subsequentmeasurement depends on the designation of the instrument, as follows: • Fixed deposits, comprising principally funds held with banks and other financial institutions are classified as receivables, and short-term borrowings and overdrafts are classified as loans. They are held at amortised cost. • Derivatives, comprising interest rate swaps and foreign exchange contracts, are classified as held for trading to the extent that they are not effective cash flow hedges and are measured at fair value with changes in value taken to the profit and loss account. • All borrowings are initially stated at the fair value of consideration received after deduction of issue costs. Issue costs are charged to the profit and loss account together with the coupon, as finance costs, using the effective interest rate method over the term of the borrowings, or over a shorter period where earlier repayment is possible. Borrowings are held at amortised cost. Before 1 April 2005, the Group considered its derivative financial instrumentsto be hedges when certain criteria were met. For interest rate derivatives, theinstrument must have been related to assets or liabilities or a probablecommitment and must have also changed the interest rate or the nature of theinterest rate by converting a variable rate to a fixed rate or vice versa.Interest differentials under interest rate swap agreements were recognised byadjustment of interest payable. Changes in the fair value of derivatives after 1 April 2005 are taken toreserves to the extent that such movements are deemed to be an effective cashflow hedge of our interest charges. Amounts deferred in reserves are recognisedin the profit and loss in the same period during which the interest charge onthe underlying debt affects profit and loss. On disposal of the relatedunderlying instrument, the accumulated changes in fair value recorded inreserves are included in the gain or loss recorded in the income statement. All other changes in the fair value of available for sale financial instrumentsare taken to the profit and loss account. (p) Dividends * Dividends are recorded in the period in which they are authorised. (q) Contingent liabilities * Through the normal course of business, Yell is involved in legal disputes, thesettlement of which may involve cost to the Group. These costs are accruedwhere settlement is agreed and associated costs can be reliably estimated Yell Group plc Opening Balance Sheet at 1 April 2004RECONCILIATION OF EQUITY Appendix 2Opening balance sheet reconciliation IAS 10 Previously IFRS 2 Events reported Share after IAS 12 IAS 19 IAS 38 RestatedAt 1 April 2004 under based balance Income Employee Intangible under UK GAAP payments sheet date taxes benefits assets IFRS £m £m £m £m £m £m £m (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)Non current assetsIntangible assets 1,725.3 (29.5) 9.7 1,705.5Tangible assets 45.9 (9.7) 36.2Investment 1.8 1.8Deferred tax assets - 6.3 72.5 19.9 98.7Total non current assets 1,773.0 6.3 - 43.0 19.9 - 1,842.2 Current assetsInventories 4.7 4.7Directories in development 147.2 147.2Debtors 460.6 (34.7) (0.2) 425.7Cash at bank and in hand 18.7 18.7Total current assets 631.2 - - (34.7) (0.2) - 596.3Creditors: amounts falling due within one yearLoans and other borrowings (85.8) (85.8)Corporation tax (16.2) (16.2)Other creditors (256.8) 41.9 (214.9)Total creditors: amounts falling due within oneyear (358.8) - 41.9 - - - (316.9) Net current assets 272.4 - 41.9 (34.7) (0.2) - 279.4Total assets less current liabilities 2,045.4 6.3 41.9 8.3 19.7 - 2,121.6Creditors: amounts falling due aftermore than one yearLoans and other borrowings (1,155.9) (1,155.9)Deferred tax creditors - (37.8) (37.8)Retirement benefit obligations - (66.8) (66.8)Net assets 889.5 6.3 41.9 (29.5) (47.1) - 861.1 Capital and reservesCalled up share capital 7.0 7.0Share premium account 1,184.7 1,184.7Foreign currency reserve (102.7) (102.7)Profit and loss account (199.5) 6.3 41.9 (29.5) (47.1) (227.9)deficitEquity shareholders' funds 889.5 6.3 41.9 (29.5) (47.1) - 861.1 Yell Group plc consolidated profit and loss for each of the first three Appendix 3quarters of the 2005 financial yearCONSOLIDATED PROFIT AND LOSS ACCOUNTUnder IFRS 3 months ended 6 months ended 9 months ended 30 June 30 September 31 December 2004 2004 2004 £m £m £m (Unaudited) (Unaudited) (Unaudited) Turnover 280.9 604.6 897.9Cost of Sales (127.8) (271.6) (410.6)Gross profit 153.1 333.0 487.3Distribution costs (8.3) (17.7) (26.1)Administrative costs Ordinary (64.6) (128.5) (203.9) Costs of exceptional lawsuits - (12.8) (12.8) (64.6) (141.3) (216.7)Operating Profit 80.2 174.0 244.5Net interest payable (24.3) (47.7) (71.0) Profit on ordinary activites before taxation 55.9 126.3 173.5 Taxation Ordinary (17.0) (43.6) (58.1) Costs of exceptional lawsuits - 4.8 4.8 (17.0) (38.8) (53.3) Profit for the financial period 38.9 87.5 120.2 Yell Group plc consolidated Cash Flows for each of the first three quarters ofthe 2005 financial yearCONSOLIDATED CASH FLOW STATEMENTS Appendix 3 3 months 6 months 9 months ended ended endedUnder IFRS 30 June 2004 30 September 31 December 2004 2004 £m £m £m (Unaudited) (Unaudited) (Unaudited)Net cash inflow from operating activities Cash generated from operations 74.1 170.3 263.2 Interest paid (15.4) (38.9) (50.2) Interest received 0.3 0.5 0.8 Income tax paid (5.3) (14.8) (24.3) Net cash inflow from operating activities 53.7 117.1 189.5 Cash flows from investing activities Purchases of tangible fixed assets (3.7) (8.7) (15.6) Net cash used in investing activities (3.7) (8.7) (15.6) Cash flows from financing activities Proceeds from issuance of ordinary shares - 1.2 1.4 Purchase of own shares - - (6.6) Repayments of borrowings (22.5) (45.0) (45.0) Dividends paid to Company's shareholders - (41.8) (71.3) Net cash used in financing activities (22.5) (85.6) (121.5) Net increase in cash and bank overdrafts 27.5 22.8 52.4 Cash and bank overdrafts at beginning of the year 18.7 18.7 18.7 Exchange gains (losses) on cash and bank overdrafts 1.8 0.5 (2.2)Cash and bank overdrafts at end of the period 48.0 42.0 68.9 Cash generated from operationsProfit for the period 38.9 87.5 120.2Adjustments for: Tax 17.0 38.8 53.3 Depreciation of tangible fixed assets 4.0 7.7 11.5 Depreciation of software costs 1.7 3.8 5.6 Goodwill adjustment arising from previously unrecognised tax benefits 1.5 2.9 4.4 Interest income (0.3) (0.5) (0.8) Interest expense 24.6 48.2 71.8 Employee bonus costs settled in shares - - 2.5Changes in working capital: Inventories and directories in development (15.4) (27.1) (40.2) Trade and other receivables 25.1 (2.9) 18.2 Trade and other payables (24.3) 9.3 12.6 Other 1.3 2.6 4.1Cash generated from operations 74.1 170.3 263.2 Yell Group plc consolidated Balance Sheets at 30 June, 30 September and 31December 2004CONSOLIDATED BALANCE SHEETS Appendix 3 At 30 June At 30 September At 31 DecemberUnder IFRS 2004 2004 2004 £m £m £m (Unaudited) (Unaudited) (Unaudited)Fixed assetsIntangible assets 1,712.3 1,711.6 1,671.1Tangible assets 34.1 33.4 35.2Investment 2.2 2.7 2.2Deferred tax assets 97.4 92.0 89.2Total fixed assets 1,846.0 1,839.7 1,797.7 Current assetsInventories 7.7 8.3 7.8Directories in development 159.9 171.9 179.2Debtors 404.2 424.7 397.7Cash at bank and in hand 48.0 42.0 68.9Total current assets 619.8 646.9 653.6Creditors: amounts falling due within one yearLoans and other borrowings (63.3) (85.6) (86.4)Corporation tax (20.8) (24.8) (22.4)Other creditors (195.0) (215.0) (223.4)Total creditors: amounts falling due within one year (279.1) (325.4) (332.2) Net current assets 340.7 321.5 321.4Total assets less current liabilities 2,186.7 2,161.2 2,119.1Creditors: amounts falling due aftermore than one yearLoans and other borrowings (1,166.0) (1,125.5) (1,104.0)Deferred tax creditor (41.9) (46.9) (49.9)Retirement benefit obligations (69.0) (71.3) (73.6)Net assets 909.8 917.5 891.6 Capital and reservesCalled up share capital 7.0 7.0 7.0Share premium account 1,184.7 1,185.9 1,188.6Foreign currency reserve (95.7) (94.9) (123.9)Profit and loss account deficit (186.2) (180.5) (180.1)Equity shareholders' funds 909.8 917.5 891.6 Yell Group plc consolidated statements of recognised income and expense for eachof the first three quarters of the 2005 financial yearSTATEMENTS OF RECOGNISED INCOME AND EXPENSE Appendix 3 3 months 6 months 9 months ended ended ended 30 30 September 31 December June 2004 2004 2004 £m £m £m (Unaudited) (Unaudited) (Unaudited) Profit for the period 38.9 87.5 120.2Exchange differences on translation of foreign operations 7.0 7.8 (21.2)Change in stock option tax benefit arising from change in share price 1.5 (0.9) 1.3Net gains (losses) not recognised in income statement 8.5 6.9 (19.9)Total recognised income for the period 47.4 94.4 100.3 Yell Group plc consolidated profit and loss for the three months ended 30 June2004CONSOLIDATED PROFIT AND LOSS ACCOUNT Appendix 3 Three months ended 30 June 2004 IFRS 3 & IAS 38 Business Previously IFRS 2 combinations reported Share IAS 12 IAS 19 and Restated under based Income Employee intangible under UK GAAP payments taxes benefits assets IFRS £m £m £m £m £m £m (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Turnover 280.9 280.9Cost of Sales (127.8) (127.8)Gross profit 153.1 - - - - 153.1 Distribution costs (8.3) (8.3)Administrative costs (85.5) (0.7) (1.5) (1.7) 24.8 (64.6) Operating Profit 59.3 (0.7) (1.5) (1.7) 24.8 80.2Net interest payable (23.7) (0.6) (24.3) Profit on ordinary activites before taxation 35.6 (0.7) (1.5) (2.3) 24.8 55.9 Taxation (14.9) (0.8) 0.9 0.7 (2.9) (17.0) Profit for the financial period 20.7 (1.5) (0.6) (1.6) 21.9 38.9 Yell Group plc consolidated profit and loss for the six months ended 30 September 2004 CONSOLIDATED PROFIT AND LOSS ACCOUNT Appendix 3 Six months ended 30 September 2004 Previously IFRS 2 IAS 10 IFRS 3 & IAS 38 reported Share Events IAS 12 IAS 19 Business Restated under based after Income Employee combinations and under UK GAAP payments balance sheet taxes benefits intangible assets IFRSRelated Shares:
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