Note 1

Basis of Preparation The financial statements are presented in sterling. They are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value:

• Derivative financial instruments used for currency hedging.
• Share options as part of employee share schemes.
• Financial assets used to fund the Group’s defined benefit pension obligations (this fair value is stated net of the actuarial value of the associated pension obligations).

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Those judgements made by management in the application of IFRS that have significant effect on the financial statements and the estimates that are considered by the directors to have a significant risk of material adjustment in the next year are discussed in Note 30.

Statement of Compliance The Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’). The company has elected to prepare its parent company financial statements in accordance with UK GAAP. These are the Group’s first annual consolidated financial statements under IFRS and IFRS 1 has been applied.

An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Group is provided in Note 32.

Exemptions Taken by the Group on Adoption of IFRS IFRS 1 permitted the Group, on adopting IFRS for the first time, to take certain exemptions from the full requirements of IFRS in the transition period from 1 January 2004 to 31 December 2004. The Group took the following exemptions:

i) All cumulative actuarial gains and losses relating to defined benefit pension schemes were recognised in equity at the transition date on 1 January 2004.

ii) The Group did not adopt IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement until 1 January 2005.

iii) The Group adopted the exemption allowing cumulative translation differences on disposal of an operation that arose prior to the transition date, to be reset to zero at that date.

iv) The Group adopted the exemption to apply IFRS 2 Share-based Payments only to awards made after 7 November 2002.

v) The Group elected not to restate any business combinations that occurred before 1 January 2004.

vi) The Group did not adopt the option to restate items of property, plant and equipment to fair value at transition date.