Notification of Transfer to a Premium Listing

THIS ANNOUNCEMENT DOES NOT CONSTITUTE A PROSPECTUS OR PROSPECTUS EQUIVALENT DOCUMENT AND NEITHER THIS ANNOUNCEMENT NOR ANYTHING HEREIN FORMS THE BASIS FOR ANY OFFER TO PURCHASE OR SUBSCRIBE FOR ANY SHARES OR OTHER SECURITIES IN THE COMPANY NOR SHALL IT FORM THE BASIS FOR ANY CONTRACT OR COMMITMENT WHATSOEVER.

AA plc

("AA" or the "Company")

NOTIFICATION OF TRANSFER TO A PREMIUM LISTING

The AA announces that it is proposing to transfer the listing category of all of its ordinary shares from a standard listing to a premium listing in accordance with Listing Rule 5.4A of the Listing Rules (the "Transfer"). It is anticipated that the Transfer will take effect at 8.00 a.m. on 28 January 2015, conditional upon the approval of the UK Listing Authority ("UKLA").

This announcement is being made in accordance with Listing Rule 5.4A.5.

1. Background to and reasons for the Transfer

The AA is the largest roadside assistance provider in the UK, with over 40% of the market and responding to an average of approximately 10,000 breakdowns each day. Since formation in 1905 the Company has grown steadily, developing a strong business-to-business division to add to the existing personal membership offering. Today, having successfully leveraged the AA brand, the Company is a leading provider of insurance broking services and driving services, creating a strong and diversified customer base with approximately 16 million consumers and over 50% of UK households subscribing to at least one AA product as at 31 January 2014.

On 26 June 2014, the Company's ordinary share capital was admitted to the standard listing segment of the Official List of the UKLA and to trading on the Main Market of the London Stock Exchange (the "Listing"). As part of this transaction, Acromas Bid Co Limited ("Acromas" or the "Selling Shareholder") sold its entire stake in the Company to a diverse register of leading institutional investors. Gross proceeds of approximately £1.375 billion were raised as part of the transaction and the Company set aside approximately £185 million of the proceeds to reduce the leverage of the Group, reducing interest expense and allowing management to focus on future growth.

The Listing provided the AA with a means of allowing the Company's loyal customer base to invest in shares and provided the on-going liquidity and access to capital that comes with a publicly traded security. The board of directors (the "Board") believes that, given the profile of the AA, a premium listing is the most appropriate listing category for the Company, providing exposure to a wider investor base and enhancing the liquidity of the Company's shares. It is anticipated that, subject to the Transfer becoming effective and other conditions being met, the Company will be considered for inclusion into the FTSE UK Index Series, which includes FTSE 100, FTSE 250 and FTSE All Share indices. This would further enhance the Company's profile and allow access to a wider potential investor base. Accordingly, the Board has concluded that it is in the best interests of the Company and its shareholders as a whole to effect the Transfer.

The Company has, therefore, requested that the UKLA approve the Transfer with effect from 8.00 a.m. on 28 January 2015. As at 23 December 2014, the Company had 554,000,001 shares in issue.

2. Effect of the Transfer

Following the Transfer certain additional provisions of the Listing Rules will formally apply to the Company. These provisions, set out in Chapters 6 to 13 (inclusive) of the Listing Rules, relate to the following matters:

· the application of certain requirements that are specific to companies with a premium listing (Chapter 6);

· the application of the Premium Listing Principles set out in Listing Rule 7.2.1AR (Chapter 7);

· the requirement to appoint a sponsor (Chapter 8);

· the requirement to comply with various continuing obligations, including compliance with the Model Code on dealings in securities and compliance with all relevant provisions of the UK Corporate Governance Code (or provide an explanation for any non-compliance, if applicable, in its annual financial report) (Chapter 9);

· the requirement to announce, or obtain shareholder approval for, certain transactions (depending on their size and nature) and for certain transactions with "related parties" of the Company (Chapters 10 and 11);

· certain restrictions in relation to the Company dealing in its own securities and treasury shares (Chapter 12); and

· various specific contents requirements that will apply to circulars issued by the Company to its shareholders (Chapter 13).

3. Working Capital

In the opinion of the Company, the Company and its subsidiary undertakings (the "Group") have sufficient working capital available for the Group's requirements for at least the next 12 months from the date of this announcement.

4. Corporate Governance

The Board is committed to, and recognises the importance and value of good corporate governance. The Group will comply with the recommendations set out in the UK Corporate Governance Code immediately prior to the Transfer, save for Bob Mackenzie's role as Executive Chairman.

Since the Management Buy-In ("MBI") and IPO, the AA has also made material progress in establishing the appropriate practices and procedures for a public company with a premium listing. The Company has also appointed two additional non-executive directors, Simon Breakwell and Andrew Blowers, and now has a majority of independent non-executive directors on the Board. Furthermore, the Company appointed John Leach as Senior Independent Director (SID) on 13 November 2014. Finally, Martin Clarke was appointed as Group Chief Financial Officer as announced on 13 November 2014 and replaces Andy Boland who has now left the Company after the handover period.

With its ambitions for the AA and extensive experience of transforming business performance, the MBI team considers that it is best placed to develop and deliver the long-term plan for growth. For these reasons, the Board has concluded, with support from major shareholders, that it would be in the best interests of the business to retain Bob Mackenzie in the role of Executive Chairman, before his eventual move to Non-executive Chairman, which is expected to take place after the financial year ending 31 January 2017.

The Board believes that the AA currently has the appropriate corporate governance structure in place to deliver on the growth and restructuring objectives set out at the time of the IPO, whilst retaining sufficient safeguards to mitigate any governance-related concerns that may arise from the Executive Chairman role.

5. UK Takeover Code

As the Company has its registered office in the UK and its ordinary shares are admitted to trading on the Main Market of the London Stock Exchange it is, therefore, subject to the UK Takeover Code, with which the Company complies.

6. Appointment of Sponsor

The Group has appointed Cenkos Securities plc ("Cenkos") to act as its Sponsor in relation to the Transfer. Cenkos is currently joint corporate broker and adviser to the AA.

7. FTSE eligibility and qualification

FTSE's Europe, Middle East and Africa (EMEA) Committee meets on a quarterly basis to review the constituents of the FTSE UK index series, incorporating the FTSE 100, FTSE 250 and FTSE SmallCap. It is anticipated that, subject to the Transfer becoming effective and other conditions being met, the Company will be considered for inclusion into the FTSE UK Index Series.

8. Financial information on the AA

The financial information set out below is incorporated by reference into this announcement and can be found on the Company's website via the following link: http://www.theaaplc.com/~/media/Files/A/Aa-Plc/key-corporate-documents/aa-plc-prospectus.pdf.

Interim audited consolidated non-statutory accounts and the associated audit report for the AA for the 6 months period ended 31 July 2014 are set out below.

9. Consent

Cenkos has given and not withdrawn its written consent to the inclusion of the reference to its name in the form and context in which it is included in this announcement.

Ernst & Young LLP has given and not withdrawn its written consent to the inclusion of the reference to its name in the form and context in which it is included in this announcement.

Enquiries:

INDEPENDENT AUDITOR'S REPORT TO THE DIRECTORS OF AA plc

We have audited the non-statutory financial statements of AA plc for the six month period ended 31 July 2014 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related notes 1 to 32. The financial reporting framework that has been applied in their preparation is International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is required by Listing Rule 6.1.3R(1)(d) and is given for the purpose of complying with that item and for no other purpose. This report is made solely to the company's directors, as a body in accordance with our engagement letter dated 11 November 2014. Our audit work has been undertaken so that we might state to the company's directors those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's directors as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

The directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. The directors have elected to prepare the financial statements in accordance with IFRSs as adopted by the European Union. The directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and the profit or loss of the group for that period. In preparing these financial statements, the directors are required to:

· present fairly the financial position, financial performance and cash flows of the Group;

· select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· make judgements that are reasonable;

· provide additional disclosures when compliance with the specific requirements in IFRSs as adopted by the European Union is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance; and

· state whether the Group financial statements have been prepared in accordance with IFRSs as adopted by the European Union.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group's transactions and disclose with reasonable accuracy at any time the financial position of the group. They are also responsible for safeguarding the assets of the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Our responsibility is to audit and express an opinion on the financial statements in accordance with International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the non-statutory consolidated accounts to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements

In our opinion the financial statements:

· give a true and fair view of the state of the group's affairs as at 31 July 2014 and of the profit for the six months period then ended; and

· have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

Other matter

We have not audited the financial information for the six months period ended 31 July 2013 and accordingly do not express an opinion thereon.

11 November 2014

Ernst & Young LLP

London

Consolidated income statement

Earnings per share:

Consolidated statement of comprehensive income

Consolidated statement of financial position 

Signed for and on behalf of the Board by

A K Boland

Chief Financial Officer

11 November 2014

The notes on pages 6 to 48 form part of these consolidated financial statements.

Consolidated statement of changes in equity

Consolidated statement of cash flows

Notes to the financial statements

1 Basis of preparation

1.1 General information

The consolidated financial statements for the six month periods ending 31 July 2014 and the 31 July 2013 comprise the financial statements of AA plc ('the Company') and its subsidiaries (together referred to as 'the Group'). AA plc is a public limited company incorporated and domiciled in the United Kingdom. The registered office is located at Fanum House, Basing View, Basingstoke, Hampshire, RG21 4EA.

These financial statements are presented in pounds sterling which is the currency of the primary economic environment in which the Group operates.

These financial statements are not the Company's statutory accounts. The comparative information for the six month period ended 31 July 2013 is unaudited.

1.2 Accounting policies

The Group has prepared these statements under International Financial Reporting Standards (IFRS) as adopted by the European Union and the IFRS Interpretations Committee.

These consolidated financial statements have been prepared under the historic cost convention as modified by the measurement of derivatives and liabilities for contingent consideration in business combinations at fair value.

The principal accounting policies are set out below.

a) Going concern

The Group has long-term contracts with a number of suppliers across different industries and is strongly cash generative. The Group's borrowings are long-term in nature and in addition to the cash balances at the reporting date the Group has agreed undrawn credit facilities. The Directors have reviewed projected cash flows for a period of one year from the date of signing these financial statements and have concluded that the Group has sufficient funds to continue trading for this period and the foreseeable future. Therefore, the financial statements have been prepared using the going concern basis.

b) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

The results of subsidiaries acquired or disposed of during the period are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

c) Segmental analysis

The Group reports its operations for segmental purposes under the headings Roadside Assistance, Insurance Services, Driving Services, Ireland, Insurance Underwriting and Head Office costs. These are the segments that are reported for management purposes. Segments are based on business operations because this is where Group risk and return is focussed, with the exception of Ireland which represents the Group's only material operations outside of the UK.

The nature of the Group's operations means that for management's decision making and internal performance management the key performance metric is earnings before interest, tax, depreciation and amortisation (EBITDA) by trading segment which excludes certain unallocated items (referred to as Trading EBITDA). Items not allocated to a segment relate to transactions that do not form part of the on-going segment performance and include transactions which are one-off in nature. Trading EBITDA is further analysed as part of the segmental analysis in note 2.

d) Interests in joint ventures and associates

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participating in the financial and operating policy decisions of the investee.

The Group recognises its interest in joint ventures and associates using the equity method of accounting. Under the equity method, the interest in joint ventures and associates is carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets less distributions received and less any impairment in the value of individual investments. The income statement reflects the share of the result of the joint ventures and associates after tax.

e) Foreign currencies

Transactions in currencies other than the functional currency of each consolidated undertaking are recorded at rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the respective functional currency at rates of exchange ruling at the balance sheet date. Gains and losses arising on the translation of assets and liabilities are taken to the income statement.

The results of overseas operations are translated into sterling at average rates of exchange for the period. Exchange differences arising on the retranslation of the opening net assets of overseas operations are transferred to the Group's cumulative translation reserve in equity.

f) Business combinations and goodwill

All business combinations are accounted for by applying the acquisition method.

Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred.

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identified assets and liabilities of a subsidiary at the date of acquisition. Goodwill is recognised as an asset at cost less accumulated impairments and reviewed for impairment annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed.

Any contingent consideration payable is recognised at fair value at the acquisition date, and subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. Any consideration paid to a former owner as part of the acquisition that is contingent on future service is excluded from goodwill and separately included within administrative & marketing expenses.

g) Software and development costs

Software development expenditures on an individual project are recognised as an intangible asset when the Group can demonstrate:

· The technical feasibility of completing the intangible asset so that it will be available for use or sale

· Its intention to complete and its ability to use or sell the asset

· How the asset will generate future economic benefits

· The availability of resources to complete the asset

· The ability to measure reliably the expenditure during development

Following initial recognition of the development expenditure as an asset, the cost model is applied. The asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over its useful life of 3 to 5 years.

h) Property, plant and equipment

Land and buildings held for use in the production of goods and services or for administrative purposes are stated in the balance sheet at cost or fair value for assets acquired in a business combination less any subsequent accumulated depreciation and impairment losses. No capitalised interest is included in the cost of items of property, plant and equipment.

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Such costs include costs directly attributable to making the asset capable of operating as intended. The cost of property, plant and equipment less their expected residual value is depreciated by equal instalments over their useful economic lives. These lives are as follows:

Buildings 50 years

Related fittings 3 - 20 years

Leasehold properties over the period of the lease

IT Systems (hardware) 3 - 5 years

Plant, vehicles and other equipment 3 - 10 years

Assets held under finance leases are depreciated on a straight line basis over the lease term.

The carrying value of property, plant and equipment is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Any impairment is recognised in the income statement.

i) Inventories

Inventories are stated at the lower of cost and net realisable value. Costs include all costs incurred in bringing each product to its present location and condition. Net realisable value is based on estimated selling price less any further costs expected to be incurred to completion and disposal.

j) Financial instruments

Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. They are classified according to the substance of the contractual arrangements entered into.

Trade receivables

Trade receivables are recognised initially at fair value. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Impairment is recognised in the Income Statement.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits. Bank deposits with an original maturity greater than three months are excluded from cash and cash equivalents for the purpose of the cash flow statement. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

Trade payables

Trade payables are not interest bearing and are recognised initially at fair value.

Debt instruments

Debt is initially recognised in the balance sheet at fair value less transaction costs incurred directly in connection with the issue of the instrument. Finance costs in respect of the instruments, including discounts on issue, are capitalised at inception and charged to the income statement over the term of the instrument using the effective interest method.

Equity instruments (share capital issued by the Group)

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all its liabilities. Equity instruments are recognised at proceeds received less direct issue costs.

Derivative financial instruments

The Group's activities expose it to the financial risk of changes in interest rates. The Group uses interest rate swap contracts to hedge these exposures.

Derivative financial instruments are recorded in the balance sheet at fair value. The fair value of derivative financial instruments is determined by reference to market values for similar financial instruments. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged (see below).

Cashflow hedges

Changes in the fair value of derivative financial instruments that are designated and highly effective as hedges of future cash flows are recognised in other comprehensive income. Any ineffective portion of the hedge is recognised immediately in the profit or loss. Amounts recognised in other comprehensive income are reclassified from equity to profit and loss (within finance costs) in the period when the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss recognised in the other comprehensive income at that time remains in equity and is reclassified when the forecast transaction is ultimately recognised in the income statement.

In order to qualify for hedge accounting, the Group is required to document from inception the relationship between the item being hedged and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge will be highly effective on an on-going basis. This effectiveness testing is performed at each period end to ensure that the hedge remains highly effective.

Impairment of financial assets

The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.

k) Impairment of non-current assets

The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. In addition goodwill and intangible assets not yet available for use are tested for impairment annually.

For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash generating units or "CGUs"). The goodwill acquired in a business combination is allocated to CGUs so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

l) Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all of the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included on the balance sheet as a financial liability. Lease payments are apportioned between finance charges and the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement.

Rentals payable and receivable under operating leases are charged, or credited, to the income statement on a straight-line basis over the term of the relevant lease term. Benefits received and receivable as an incentive to enter into an operating lease are spread on a straight line basis over the lease term.

m) Provisions

A provision is required when the Group has a present legal or constructive obligation as a result of a past event and it is probable that settlement will be required of an amount that can be reliably estimated.

Provisions for restructuring costs are recognised when the Group has a detailed formal plan for the restructuring that has been communicated to affected parties. Provisions are discounted where the impact is material.

In relation to unoccupied properties, where a decision has been made prior to the year end to permanently vacate the property, provision is made for future rent and similar costs net of any rental income expected to be received up to the estimated date of final disposal. Provision is made on a discounted basis.

n) Retirement benefit obligation

The Group's net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets (at bid price) is deducted. The Group determines the net interest on the net defined benefit liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability.

The discount rate is the yield at the reporting date on bonds that have a credit rating of at least AA that have maturity dates approximating the terms of the Group's obligations and that are denominated in the currency in which the benefits are expected to be paid.

Remeasurements arising from defined benefit plans comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest). The Group recognises them immediately in other comprehensive income and all other expenses related to defined benefit plans in administrative and marketing expenses in profit or loss.

When the benefits of a plan are changed, or when a plan is curtailed, the portion of the changed benefit related to past service by employees, or the gain or loss on curtailment, is recognised immediately in profit or loss when the plan amendment or curtailment occurs.

The calculation of the defined benefit obligations is performed by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognised asset is limited to the present value of benefits available in the form of any future refunds from the plan or reductions in future contributions and takes into account the adverse effect of any minimum funding requirements.

For defined contribution schemes, the amounts charged to the profit and loss account are the contributions payable in the year.

o) Revenue recognition

Revenue is measured at the fair value of the consideration receivable provided net of discounts, value added tax and other sales related taxes.

Roadside membership subscriptions and premiums receivable on underwritten insurance products are apportioned on a time basis over the period where the Group is liable for risk cover. The unrecognised element of subscriptions and premiums receivable, relating to future periods, is held within liabilities as deferred income.

Commission income from insurers external to the Group is recognised at the commencement of the period of risk.

Interest revenue in respect of trade receivables is accrued on a time basis, by reference to the principal outstanding and at the effective rate of interest applicable, which is the rate that discounts future estimated cash receipts through the expected life of the financial asset to the asset's net carrying amount. All other interest income is presented under the heading 'Finance income'.

For all other revenue, income is recognised at point of delivery of goods or on provision of service. This includes work which has not yet been fully invoiced, provided that it is considered to be fully recoverable.

p) Insurance contracts

An insurance contract is a contract under which insurance risk is transferred to the issuer of the contract by another party. The Group accepts insurance risk from its customers under roadside recovery service contracts by agreeing to provide services whose frequency and cost is uncertain.

The accounting policy for recognising revenue from these contracts is described in the 'revenue recognition' accounting policy. Claims and expenses arising from these contracts are recognised in profit or loss as incurred.

Amounts receivable from customers for arranging contacts of insurance and the associated amounts payable to insurers are recognised on the balance sheet at the commencement of the period of risk. The Group acts as an agent of the insurer and is not required to segregate and hold in trust client money. The Group retains all the risks and rewards of the associated cash balances.

At the balance sheet date, a liability adequacy test is performed to ensure the adequacy of the insurance contract liabilities. In performing these tests, current estimates of future cash outflows arising under insurance contracts are considered and compared with the carrying amount of deferred income and other insurance contract liabilities. Any deficiency is immediately recognised in profit or loss and an onerous contract provision is established.

The estimation of the ultimate liability from claims made under insurance contracts is not considered to be one of the Group's most critical accounting estimates. This is because the principal insurance claims costs for the Group relate to the provision of roadside assistance services. There is a very short period of time between the receipt of a claim, i.e. a breakdown, and the settling of that claim. Consequently there are no significant provisions for unsettled claims costs in respect of the roadside assistance services.

q) Exceptional items

Exceptional items are events or transactions that fall within the activities of the Group and which by virtue of their size or incidence have been disclosed in order to improve a reader's understanding of the financial statements.

r) Financing income and costs

Financing costs comprise interest payable, finance charges on finance leases recognised in profit or loss using the effective interest method, unwinding of the discount on provisions (including the net defined benefit obligations), and net foreign exchange losses that are recognised in the income statement (see foreign currency accounting policy).

Financing income comprises interest receivable on funds invested and net foreign exchange gains.

Foreign currency gains and losses are reported on a net basis.

s) Taxation

Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

t) Share-based payments

The cost of equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date on which they are granted and is recognised as an expense over the vesting period which ends on the date on which the relevant employees become fully entitled to the award. Fair value is determined by an external valuer using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any service and performance (vesting) conditions other than performance conditions linked to the price of the shares of the Company.

At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement of the vesting conditions. The movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

u) Critical accounting estimates and judgements

Estimates and judgements are evaluated continually and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions about the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The principal estimates and assumptions that have a risk of causing an adjustment to the carrying amounts of assets and liabilities within the next financial period are discussed below.

Taxation

The Group is subject to taxes in the UK and Ireland. At each financial period end, judgement is required in determining the provision for taxes. The Group recognises liabilities for anticipated tax issues based on the best estimates at the balance sheet date. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provisions in the period in which such determination is made.

Management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits. (See note 6).

Vacant property provisions

The Group makes a provision against the future lease costs of vacant properties for the remaining period of the lease, net of sub-letting income. The provision is calculated on a pre-tax discounted basis. (See note 18).

Retirement benefit obligation

The Group's retirement benefit obligation, which is actuarially assessed each period, is based on key assumptions including return on plan assets, discount rates, inflation and future salary and pension costs. These assumptions may be different to the actual outcome. (See note 22).

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash generating unit to which goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash generating unit and apply an appropriate pre-tax discount rate. (See note 23).

2 Segmental information

With the exception of Ireland, all other segments operate wholly in the UK. Turnover by destination is not materially different from turnover by origin.

For management purposes, the Group is organised into business units based on their products and services, with the exception of Ireland, which represents a separate geographical area. The Group has six reportable operating segments as follows:

· Roadside Assistance:This segment is the largest part of the AA business. The AA provides a nationwide service, sending patrols out to members stranded at the side of the road, repairing their vehicles where possible and getting them back on their way quickly and safely.

· Insurance Services:This segment includes the insurance brokerage activities of the AA, primarily in arranging motor and home insurance for customers, its home emergency activities and its intermediary financial services business.

· Driving Services: This segment contains the AA Driving School and the British School of Motoring, which are the two largest driving schools in the UK, as well as AA DriveTech, which provides driver training and educative programmes. The Driving Services segment also includes the AA's publishing and related media activities.

· Ireland: This segment competes in the same segment types as the AA UK business, with the largest part of its business being Roadside Assistance and Insurance Services.

· Insurance Underwriting: This segment consists of a reinsurance company, which historically reinsured certain private motor insurance business from the Acromas Holdings Limited group's dedicated underwriter, Acromas Insurance Company Limited (AICL).

· Head Office costs:This segment includes IT, finance, property and other back office support functions.

Segment performance is primarily evaluated using the Group's key performance measure of Trading EBITDA.

Trading EBITDA is profit after tax as reported adjusted for depreciation, amortisation, net finance costs, exceptional items, share-based payments and acquisition earn-out costs, items not allocated to a segment and tax expense.

Items not allocated to a segment relate to transactions that do not form part of the on-going segment performance and include transactions which are one-off in nature. In the six months ended 31 July 2014 these principally related to the difference between the cash contributions to the pension schemes for on-going service and the calculated annual service cost.

Depreciation, amortisation, share-based payments and acquisition earn-out costs, exceptional items, net finance costs and tax expense are not allocated to individual segments as they are managed on a group basis.

3 Other operating income

See note 14 for information on restricted cash balances.

4 Operating profit

Operating profit is stated after charging:

Exceptional costs incurred in the six months ended 31 July 2014 of £39.4m includes £33.6m relating to the IPO. In the corresponding period in the previous year, exceptional costs of £10.2m included £6.5m of costs relating to the financing transaction that took place on 2 July 2013 (see note 17). The remaining exceptional items of £5.8m in the six months ended 31 July 2014 (2013: £3.7m) principally related to cost restructuring activities.

5 (a) Finance costs

Cash at bank and in hand - restricted (see note 14) includes an amount of pre-funded interest to cover interest payments on the PIK notes until June 2015.

Amortisation of debt issue fees includes £17.9m that was immediately written off following the repayment of the Senior Term Facility in May 2014 (see note 17).

Shareholder loans were fully repaid on 2 July 2013 (see note 17) and no further interest was incurred after this date.

5 (b) Finance income

6 Tax

The major components of the income tax expense are:

Tax for the period has been calculated by applying the forecast effective tax rate for the full year excluding some exceptional items to the profit before tax result for the period (excluding some exceptional items).

Following the IPO, a deferred tax asset of £21.9m has been recognised on tax losses carried forward as the Group now expects to have sufficient taxable profits to be able to recover these losses. Excluding the impact of the recognition of this deferred tax asset and the impact of expenses relating to the IPO that are disallowable for tax purposes of £14.0m, the Group's effective tax rate is 19.0%.

Following the asset-backed funding arrangements on the AA UK pension scheme detailed in note 22, there was a £39.5m release of the AA UK pension deferred tax asset during the year to 31 January 2014. The remaining £12.9m of tax relief relating to this transaction is expected to be utilised in the year ending 31 January 2015.

The Group offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority.

As announced in the Finance Act 2013 the main rate of corporation tax will reduce from 21% to 20% with effect from 1 April 2015. As this reduction was substantively enacted prior to the balance sheet date, the deferred tax balance at 31 July 2014 for the UK has been stated at 20% (2013: 21.0%). For AA Ireland, there has been no change in rates and closing balances are stated at 12.5% (2013: 12.5%).

Reconciliation of tax expense to profit before tax multiplied by UK's corporation tax rate:

Deferred tax by type of temporary difference

 Reconciliation of net deferred tax assets

7 Earnings per share

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.

Immediately prior to the IPO, the existing share capital of the Company was reorganised to have 469.3 million shares. This had no impact on the overall share capital of the Company and therefore for all periods prior to the IPO, the Company has been deemed to have 469.3 million shares outstanding for the purposes of the earnings per share calculation. There is no difference between basic earnings per share and diluted earnings per share.

Profit after tax for the Group includes a number of one-off items including exceptional items and the write-off of debt issue fees following refinancing. To facilitate comparison with prior periods and to assess better trends in financial performance, underlying profit after tax is shown below to calculate adjusted earnings per share.

Reconciliation of reported earnings per share to adjusted earnings per share:

Write off of debt issue fees relates to the £17.9m that was immediately written off following the repayment of the Senior Term Facility (see note 5(a)).

8 Cash flow from operating activities

The cash flows from operating activities are stated net of cash outflows relating to exceptional items of £38.0m (2013: £18.5m). This relates to the cost of the IPO of £27.0m (2013: £nil), re-financing of the Group's borrowings £0.8m (2013: £4.8m), restructuring expenditure costs from the re-organising of Group operations of £8.5m (2013: £11.4m) and onerous property provision lease costs in respect of vacant properties of £1.7m (2013: £2.3m).

9 Goodwill and other intangible fixed assets

Within software, £12.6m (2013: £6.7m) relates to assets under construction which are not amortised.

10 Property, plant and equipment

The net book amount of vehicles includes £43.0m (2013: £24.4m) held under finance lease agreements. The accumulated depreciation on these assets is £34.7m (2013: £43.5m).

The net book amount of other assets includes £1.1m (2013: £2.6m) in respect of plant & machinery held under finance lease agreements. The accumulated depreciation on these assets is £6.9m (2013: £5.2m).

Within plant and equipment, £4.6m (2013: £4.6m) relates to assets under construction which are not amortised.

11 Investments in joint ventures and associates

The principal joint ventures and associates of the Group which are indirectly held are listed below:

* AA plc owns 49% of the ordinary share capital of AA Law Limited, however AA plc has equal representation for all operational and decision-making activities.

12 Inventories

13 Trade and other receivables

Trade receivables from fellow subsidiary undertakings at July 2013 and January 2014 are unsecured, payable within one month and bear no interest.

Included in trade receivables are amounts of £90.3m (July 2013: £84.8m; January 2014: £89.3m) relating to amounts due from insurance broking customers.

14 Cash and cash equivalents

Ring-fenced cash and cash equivalents relate to cash held by AA Intermediate Co Limited and its subsidiaries. There are restrictions on dividends that can be paid to AA plc until certain debt to EBITDA criteria are met.

Cash at bank and in hand - restricted includes £35.3m (July 2013: £nil, January 2014: £55.4m) held as pre-funded interest to cover interest payments on the PIK notes (see note 17) until June 2015 and cannot be used for any other purpose.

Cash at bank and in hand - restricted and fixed term investments (see note 13) includes £23.7m (July 2013: £31.5m, January 2014: £23.7m) held by and on behalf of the Group's insurance businesses which are subject to contractual or regulatory restrictions. These amounts are not readily available to be used for other purposes within the Group.

15 Trade and other payables

Trade payables owed to group undertakings as at July 2013 and January 2014 arose under arrangements permitted by the financing transaction documents. These amounts are unsecured, are payable between one and three months and bear no interest.

Included in trade payables are amounts of £94.6m (July 2013: £93.3m; January 2014: £81.6m) relating to amounts due to underwriters in respect of insurance broking activities.

16 Borrowings and loans

17 Borrowings

A summary of the Group's refinancing transactions since July 2013 is shown below:

On 23 April 2014, a new Senior Term Facility of £663.0m was entered into. The proceeds were used to repay £663.0m of the Initial Senior Term Facility. On 2 May 2014, £250.0m of Class A4 notes were issued and these proceeds were used to repay the remaining £250.0m of the Initial Senior Term Facility.

At 31 July 2014, the Senior Term Facility carried interest at a rate of LIBOR plus a margin of 2%. The variable element has been fully hedged using matching interest rate swap arrangements. All other borrowings have fixed interest rates. The weighted average interest rate for all borrowings of 6.08% has been calculated using the effective interest rate and carrying values on 31 July 2014.

In order to show the Group's net borrowing, the notes and the issue costs have been offset. Issue costs are shown net of any premium on the issue of borrowings. Interest rate swaps are recognised in the Balance Sheet at fair value at the period end (see notes 13 and 16).

All of the Class A notes and Senior Term Facility are secured by first ranking security in respect of the undertakings and assets of AA Intermediate Co Limited and its subsidiaries. The Class A facility security over the AA Intermediate Co group's assets ranks ahead of the Class B notes. The Class B notes have first ranking security over the assets of the immediate parent undertaking of the AA Intermediate Co group, AA Mid Co Limited. There are restrictions on the ability of the AA Mid Co Limited group to pay a dividend until certain net debt to EBITDA ratios have been achieved. The PIK notes are unsecured.

The Class B notes and the PIK notes have an initial non-call period of up to two years from the period end when no voluntary repayments can be made, after this there is a two year period when any voluntary early repayments would incur a make-whole payment. The Class A notes do not have a non-call period, however any voluntary early repayments would incur a make-whole payment.

18 Provisions

The property lease provision relates to future onerous lease costs of vacant properties for the remaining period of the lease, net of expected sub-letting income. A significant element of this provision relates to Service Centre sites not transferred to a third party. These sums are mainly expected to be paid out annually over the next 15 years however it will take 40 years to fully pay out all amounts provided for. The provision has been calculated on a pre-tax discounted basis.

The restructuring provision relates to redundancy and other related costs following the restructuring of operations in the current and prior periods.

Other provisions primarily comprise the provision for credit and rewards in the financial services business. These items are reviewed and updated annually.

19 Insurance technical provisions

Provision is made for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred but not yet reported. The estimated cost of claims includes expenses to be incurred in settling claims. The Group takes all reasonable steps to ensure it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing the claims provisions, it is likely that the final outcome will prove to be different from the original liability established.

20 Called up share capital

The voting rights of the holders of all ordinary shares are the same and all ordinary shares rank pari passu on a winding up.

On 17 June 2014, the A and B ordinary shares were reorganised from 2,015,344 £0.10 shares to 201,534,400 ordinary shares of £0.001 each.

On 20 June 2014, the Company undertook a bonus issue of 267,745,600 shares of £0.001 resulting in a transfer of £0.3m from its share premium account to share capital.

On 26 June 2014, the Company issued 84,720,001 shares at a premium of £199.2m including issue costs.

In addition to the above, on 25 June 2014, AA plc issued 24 million Management Value Participation Shares (MVPS shares) as follows:

The MVPS shares have no voting rights. There are 8 million authorised shares in each of the following MVPS classes: A1, B1 and C1. There are 12 million authorised and unissued shares in each of the following MVPS classes: A2, B2 and C2. In total, there are 60 million authorised MVPS shares.

21 Reserves

Currency translation reserve

The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations, as well as from the translation of liabilities that hedge the Group's net investment in a foreign subsidiary.

Cash flow hedge reserve

The hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

Dividends

No dividend has been declared in the period. For the six months ended 31 July 2013, the Acromas group was paid a dividend of £2,284.2m from the proceeds of the financing transactions that occurred when the Group was owned by Acromas Holdings Limited. No dividends have been proposed by the directors after the balance sheet date.

22 Defined benefit pension scheme liabilities

The Group operates two funded defined benefit pension schemes: the AA UK Pension scheme (AAUK) and the AA Ireland Pension scheme (AAROI). The assets of the schemes are held separately from those of the Group in independently administered funds. New entrants to the AAUK scheme accrue benefits on a career average salary basis. The AAUK scheme has final salary sections that are closed to new entrants but open to future accrual for existing members. The AAROI scheme is closed to new entrants and future accrual of benefits. The Group also operates an unfunded post-retirement Private Medical Plan scheme (AAPMP), which is a defined benefit scheme that is not open to new entrants.

In November 2013, the Group completed the AAUK pension scheme triennial valuations agreeing a deficit of £202m with the pension trustees and implementing an asset backed funding scheme. The asset backed funding scheme provides a long-term deficit reduction plan where the Group has an annual deficit reduction contribution of £12.2m increasing with inflation, over a period of up to 25 years secured on the Group's brands and gave a one-off £198.0m tax deduction that the Group will finish utilising this year.

The valuations have been based on a full assessment of the liabilities of the schemes which have been updated where appropriate to 31 July 2014 by independent qualified actuaries.

The Group expects to pay £24.0m in on-going employer contributions and £13.2m in deficit reduction employer contributions to its defined benefit plans (AAUK and AAROI) in the year ending 31 January 2015.

The amounts recognised in the balance sheet are as follows:

The analysis of amounts recognised in the income statement is as follows:

The analysis of amounts recognised in the statement of comprehensive income is as follows: