Note 32

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32. Explanation of Transition to IFRSs

As stated in Note 1a, these are the Group’s first consolidated financial statements prepared in accordance with IFRS.

The accounting policies set out in Note 1 have been applied in preparing the financial statements for the year ended 31 December 2005, the comparative information presented in these financial statements for the year ended 31 December 2004 and in the preparation of an opening IFRS balance sheet at 1 January 2004 (the Group’s date of transition).

In preparing its opening IFRS balance sheet, the Group has adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (UK GAAP). An explanation of how the transition from UK GAAP to IFRS has affected the Group’s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.

Balance sheets	UK GAAP £m	IFRS Adjustments £m 1 January 2004	IFRS £m	UK GAAP £m	IFRS Adjustments £m 31 December 2004	IFRS £m
Assets
Non-current assets
Property, plant and equipment	34.5	-	34.5	33.9	(3.2)	30.7
Intangible assets	10.1	(0.4)	9.7	8.2	4.6	12.8
Deferred tax assets		5.9	5.9		7.2	7.2
	44.6	5.5	50.1	42.1	8.6	50.7

Current assets
Inventories	33.2	-	33.2	32.6	-	32.6
Trade and other receivables	42.2	(1.5)	40.7	38.5	(3.5)	35.0
Current tax assets		-	-		2.3	2.3
Cash at bank and in hand	15.6	-	15.6	14.4	(14.4)	-
Cash and cash equivalents		-	-		14.4	14.4
	91.0	(1.5)	89.5	85.5	(1.2)	84.3
Total assets	135.6	4.0	139.6	127.6	7.4	135.0

Liabilities
Current liabilities
Bank overdrafts	-	-	-	1.0	-	1.0
Bank loans	-	-	-	24.7	-	24.7
Trade and other payables	37.3	(6.8)	30.5	33.7	(6.3)	27.4
Current tax liabilities		-	-		2.6	2.6
Provisions		-	-		2.7	2.7
	37.3	(6.8)	30.5	59.4	(1.0)	58.4

Non-current liabilities
Bank loans	26.0	-	26.0	-	-	-
Other payables	0.1	-	0.1	0.1	-	0.1
Post-employment obligations	4.4	4.6	9.0	4.4	5.3	9.7
Provisions	8.0	-	8.0	7.0	(6.8)	0.2
Deferred tax liabilities		(4.1)	(4.1)		2.4	2.4
	38.5	0.5	39.0	11.5	0.9	12.4
Total liabilities	75.8	(6.3)	69.5	70.9	(0.1)	70.8
Net assets	59.8	10.3	70.1	56.7	7.5	64.2

Equity
Share capital	8.2	-	8.2	8.2	-	8.2
Share premium	2.6	-	2.6	2.7	-	2.7
Revaluation reserve	1.5	(1.5)	-	1.4	(1.4)	-
Translation reserves		-	-		(4.0)	(4.0)
Other reserves	1.6	-	1.6	1.6	-	1.6
Retained earnings	45.9	11.8	57.7	42.8	12.9	55.7
Total equity	59.8	10.3	70.1	56.7	7.5	64.2

Shaded areas represent the disclosure of certain line items that are not applicable under the relevant GAAP.

Analysis of IFRS adjustments to the Balance Sheet at 31 December 2004										Additional IFRS adjustments
	Emplo -yee bene -fits (1) £m	Foreign exch -ange (3) £m	Devel -opment costs (4) £m	Posi -tive Good -will (5i) £m	Nega -tive Good -will (5ii) £m	Divid -ends (6) £m	Tax (7) £m	Re -class -ific -ations (8) £m	Total IFRS adjust -ments as reported £m	Empl -oyee bene -fits (1) £m	Re -class -ific -ations (8) £m	Total IFRS adjust -ments £m
Assets
Non-current assets
Property, plant and eqpt	-	-	-	-	-	-	-	(3.2)	(3.2)	-	-	(3.2)
Intangible assets	-	-	(0.3)	1.3	0.4	-	-	3.2	4.6	-	-	4.6
Deferred tax assets	-	-	-	-	-	-	3.4	3.8	7.2	-	-	7.2
	-	-	(0.3)	1.3	0.4	-	3.4	3.8	8.6	-	-	8.6
Current assets
Inventories	-	-	-	-	-	-	-	-	-	-	-	-
Trade and other receivables	(1.0)	-	-	-	-	-	-	(2.3)	(3.3)	(0.2)	-	(3.5)
Current tax assets	-	-	-	-	-	-	-	2.3	2.3	-	-	2.3
Cash at bank and in hand	-	-	-	-	-	-	-	(14.4)	(14.4)	-	-	(14.4)
Cash and cash equivalents	-	-	-	-	-	-	-	14.4	14.4	-	-	14.4
	(1.0)	-	-	-	-	-	-	-	(1.0)	(0.2)	-	(0.2)
Total assets	(1.0)	-	(0.3)	1.3	0.4	-	3.4	3.8	7.6	(0.2)	-	7.4
Liabilities
Current liabilities
Bank overdrafts	-	-	-	-	-	-	-	-	-	-	-	-
Bank loans	-	-	-	-	-	-	-	-	-	-	-	-
Trade and other payables	-	-	-	-	-	(3.7)	-	(2.6)	(6.3)	-	-	(6.3)
Current tax liabilities	-	-	-	-	-	-	-	2.6	2.6	-	-	2.6
Provisions	-	-	-	-	-	-	-	3.4	3.4	-	(0.7)	2.7
	-	-	-	-	-	(3.7)	-	3.4	(0.3)	-	(0.7)	(1.0)
Non-current liabilities
Bank loans	-	-	-	-	-	-	-	-	-	-	-	-
Other payables	-	-	-	-	-	-	-	-	-	-	-	-
Post-employment obligations	5.5	-	-	-	-	-	-	-	5.5	(0.2)	-	5.3
Provisions	-	-	-	-	-	-	-	(7.5)	(7.5)	-	0.7	(6.8)
Deferred tax liabilities	-	-	-	-	-	-	(5.5)	7.9	2.4	-	-	2.4
	5.5	-	-	-	-	-	(5.5)	0.4	0.4	(0.2)	0.7	0.9
Total liabilities	5.5	-	-	-	-	(3.7)	(5.5)	3.8	0.1	(0.2)	-	(0.1)
Net assets	(6.5)	-	(0.3)	1.3	0.4	3.7	8.9	-	7.5	-	-	7.5
Equity
Share capital	-	-	-	-	-	-	-	-	-	-	-	-
Share premium	-	-	-	-	-	-	-	-	-	-	-	-
Revaluation reserve	-	-	-	-	-	-	-	-	-	-	(1.4)	(1.4)
Translation reserves	-	0.1	-	-	(0.1)	-	(0.5)	(3.5)	(4.0)	-	-	(4.0)
Other reserves	-	-	-	-	-	-	-	-	-	-	-	-
Retained earnings	(6.5)	(0.1)	(0.3)	1.3	0.5	3.7	9.4	3.5	11.5	-	1.4	12.9
Total equity	(6.5)	-	(0.3)	1.3	0.4	3.7	8.9	-	7.5	-	-	7.5

Analysis of IFRS adjustments to the Balance Sheet at 31 December 2003							Additional IFRS adjustments
	Employee benefits (1) £m	Develop- ment costs (4) £m	Negative Goodwill (5ii) £m	Dividends (6) £m	Tax (7) £m	Total IFRS adjustments as reported £m	Reclassific -ations (8) £m	Total IFRS adjustments £m
Assets
Non-current assets
Property, plant and eqpt	-	-	-	-	-	-	-	-
Intangible assets	-	(0.5)	0.1	-	-	(0.4)	-	(0.4)
Deferred tax assets	-	-	-	-	5.9	5.9	-	5.9
	-	(0.5)	0.1	-	5.9	5.5	-	5.5
Current assets
Inventories	-	-	-	-	-	-	-	-
Trade and other receivables	(1.5)	-	-	-	-	(1.5)	-	(1.5)
Current tax assets	-	-	-	-	-	-	-	-
Cash at bank and in hand	-	-	-	-	-	-	-	-
Cash and cash equivalents	-	-	-	-	-	-	-	-
	(1.5)	-	-	-	-	(1.5)	-	(1.5)
Total assets	(1.5)	(0.5)	0.1	-	5.9	4.0	-	4.0
Liabilities
Current liabilities
Bank overdrafts	-	-	-	-	-	-	-	-
Bank loans	-	-	-	-	-	-	-	-
Trade and other payables	-	-	-	(6.8)	-	(6.8)	-	(6.8)
Current tax liabilities	-	-	-	-	-	-	-	-
Provisions	-	-	-	-	-	-	-	-
	-	-	-	(6.8)	-	(6.8)	-	(6.8)
Non-current liabilities
Bank loans	-	-	-	-	-	-	-	-
Other payables	-	-	-	-	-	-	-	-
Post-employment obligations	4.6	-	-	-	-	4.6	-	4.6
Provisions	-	-	-	-	-	-	-	-
Deferred tax liabilities	-	-	-	-	(4.1)	(4.1)	-	(4.1)
	4.6	-	-	-	(4.1)	0.5	-	0.5
Total liabilities	4.6	-	-	(6.8)	(4.1)	(6.3)	-	(6.3)
Net assets	(6.1)	(0.5)	0.1	6.8	10.0	10.3	-	10.3
Equity
Share capital	-	-	-	-	-	-	-	-
Share premium	-	-	-	-	-	-	-	-
Revaluation reserve	-	-	-	-	-	-	(1.5)	(1.5)
Translation reserves	-	-	-	-	-	-	-	-
Other reserves	-	-	-	-	-	-	-	-
Retained earnings	(6.1)	(0.5)	0.1	6.8	10.0	10.3	1.5	11.8
Total equity	(6.1)	(0.5)	0.1	6.8	10.0	10.3	-	10.3

Notes to the IFRS adjustments to the Balance Sheet on transition (1 January 2004) and at 31 December 2004

A summary of the principal differences between UK GAAP and IFRS are as follows:

1 Employee Benefits

Principal difference
Under UK GAAP, the liability/asset on the balance sheet represents the timing differences between the SSAP 24 charge and the payments made to the pension and post-retirement healthcare schemes. Under IFRS, the liability/asset on the balance sheet represents the deficit/surplus in respect of pension and post-retirement healthcare schemes, as determined in accordance with IAS19. This balance encompasses all assets/liabilities arising from defined benefit schemes.

Transition impact

UK
A post-retirement benefit liability of £5.2 million has been recognised at the transition date. The pension prepayment (within debtors) on the UK GAAP balance sheet of £0.8 million has also been reversed. The net effect before tax is a reduction in shareholders’ funds of £6.0 million on transition.

ITALY
A post-retirement net benefit liability of £2.8 million remains unchanged at the transition date, and there is no net effect on shareholder funds.

GERMANY
The post-retirement net benefit liability on transition increases from £0.4 million to £0.5 million. The net effect before tax is a reduction in shareholders’ funds of £0.1 million on transition.

Closing balance sheet impact

UK
Throughout the year all movements in the deficit on pension and post-retirement healthcare schemes are recognised against the liability. At the end of the year, the liability of £5.8 million reflects the closing deficit of the pension and post-retirement healthcare schemes. This has been adjusted to reflect the actuarial loss for the year of £0.3 million that has been recognised directly in reserves.

ITALY
Throughout the year all movements in the deficit on pension and post-retirement healthcare schemes are recognised against the liability. At the end of the year, the liability of £2.9 million reflects the closing deficit of the pension and post-retirement healthcare schemes. This has been adjusted to reflect the actuarial loss for the year of £0.2 million that has been recognised directly in reserves.

GERMANY
Throughout the year all movements in the deficit on the pension scheme is recognised against the liability. At the end of the year, the liability of £0.6 million reflects the closing deficit of the pension scheme. This has been adjusted to reflect the actuarial loss for the year of £0.1 million that has been recognised directly in reserves.

2 Share-based Payments

Principal difference
Under UK GAAP, a liability has been recognised for schemes where shares are awarded based on the intrinsic value of the awards. Under IFRS, the balance sheet entry is based on the fair value of all awards (awards of shares and options) and results in either a credit to liabilities for cash settled awards or a credit to equity for equity-settled awards. Substantially all the Group schemes are equity-settled.

Transition impact
The adoption of IFRS 2 is equity-neutral for equity-settled transactions.
A transitional adjustment of £0.1 million has been recognised in retained earnings, offset by the charge of £0.1 million to the income statement.

Closing balance sheet impact
The adoption of IFRS 2 is equity-neutral for equity-settled transactions.
The liability recognised in the equity share reserve has increased by £0.1 million, with a corresponding charge to the income statement.

3 Foreign Exchange

There is no effect on the balance sheet as a result of changes to the treatment of foreign exchange under IFRS. However, cumulative translation exchange losses of £0.1 million arising in the year have been reclassified from the profit and loss account reserve to a separate translation reserves at 31 December 2004.

4 Development Costs

Principal difference
IFRS introduces more objective and stringent criteria than UK GAAP for the recognition of costs that must be capitalised as development expenditure. The Group’s policy to comply with IFRS is to capitalise costs incurred after the ‘field evaluation’ project development stage, but only if they exceed £150,000. Tooling costs are always capitalised. Development expenditure capitalised prior to the transition date in accordance with UK GAAP does not now meet the criteria for capitalisation under the Group’s new policy, and has therefore been de-recognised and charged to the transition date retained earnings.

Transition impact
The unamortised development expenditure balance of £0.5 million has been reversed from fixed assets and charged to reserves.

Closing balance sheet impact
The 2004 UK GAAP amortisation of previously recognised development expenditure (the Drake Freespeak project) of £0.2 million has been reversed, resulting in a corresponding increase in reserves.

5 Goodwill

i) Positive goodwill

Principal difference
Under IFRS, goodwill is no longer amortised but frozen at the UK GAAP carrying value on transition and tested annually for impairment.

Closing balance sheet impact
The 2004 UK GAAP amortisation charge of £1.6 million has been reversed, and an impairment charge of £0.3 million was made in respect of goodwill that arose on the acquisition of Vega Holdings Inc. in 1999, resulting in an increase of £1.3 million in the net book value of goodwill.

ii) Negative goodwill

Principal difference
UK GAAP requires negative goodwill to be amortised over its expected useful economic life. Under IFRS, excess of the fair value of net identifiable assets over the cost of acquisition is not recognised and is credited to income immediately.

Transition impact
The amount of negative goodwill of £0.1 million has been released to reserves.

Closing balance sheet impact
The negative goodwill of £0.6 million which arose on the acquisition of Charter Broadcast America Inc in 2004 has been credited to income, whilst its amortisation write back of an amount of £0.2 million in the year under UK GAAP has been reversed, resulting in an increase of £0.4 million in the net book value of goodwill. Currency translation gain relating to these, of an amount of £0.1 million has also been reversed.

6 Dividends

Principal difference
Under UK GAAP, the practice is to recognise dividends in the period to which they relate, whereas under IFRS the dividend is recognised in the period in which it is declared. As a consequence of this, the dividend creditor is also not recognised until the dividend is declared. Therefore the dividend creditor recognised at each year-end needs to be adjusted accordingly.

Transition impact
As the 2003 interim dividend had been paid and the 2003 final proposed dividend had not been declared at 31 December 2003, there is no dividend creditor in the transition balance sheet. The opening UK GAAP dividend creditor of £6.8 million has been reversed.

Closing balance sheet impact
At the year-end, the 2004 interim dividend had been paid and the 2004 final proposed dividend not yet been declared. Therefore the closing dividend creditor of £3.7 million under UK GAAP has been reversed.

7 Tax

i) US goodwill

Principal difference
The Group has US goodwill with a tax basis that is significantly higher than the recognised accounting value. The future tax deductions for this US goodwill will generate significant reductions in the tax paid in the US. Under UK GAAP, the Group recognised a deferred tax liability, representing the difference between the tax benefit given and the potential accounting charge for goodwill. Under IFRS, the Group recognises a deferred tax asset, representing the difference between the tax and book values.

Transition Impact
An increase in deferred tax assets of £3.1 million and a reduction in deferred tax liabilities of £5.0 million have been recognised at the transition date.

Closing balance sheet impact
The year end value for deferred tax assets and liabilities is reduced by the charge to profit of £0.3 million and a reduction on the sterling value of the tax assets of £0.5 million.

ii) German Tax

Principal difference
The Group has a difference between its German tax assets and the book value of its assets that is not expected to reverse. Under UK GAAP the Group was not required to recognise a deferred tax asset for this difference. Under IFRS, the Group recognises a deferred tax asset, representing the difference between the tax and book values.

Transition Impact
A deferred tax asset of £1.6 million has been recognised at the transition date.

Closing balance sheet impact
The year end value for the deferred tax asset is reduced by the charge to profit of £0.2 million.

iii) Reversal of SSAP 24 pension prepayment

Transition Impact
As a result of the reversal of the SSAP 24 pension prepayment, deferred tax liabilities are reduced by £0.3 million.

8 Other Reclassifications

IFRS replaces the term ‘cash’ with ‘cash and cash equivalents’, where cash equivalents are defined as short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant changes in value. They usually have a maturity date less than three months from acquisition. This has resulted in a reclassification of £14.4 million from ‘Cash’ to ‘Cash and cash equivalents’.
IFRS states that provisions expected to be settled within one year of the balance sheet date should be classified as current liabilities, except for employee benefit assets and liabilities which can be all classified as non-current liabilities. This has resulted in a reclassification of £2.7 million from non-current liabilities to current liabilities.
IFRS requires computer software that is not an integral part of the hardware to be treated as an intangible asset. Under UK GAAP, Group policy was to categories all capitalised software as tangible assets. This has resulted in a balance sheet reclassification of £3.2 million.
Under UK GAAP, the net deferred tax liability is shown within provisions. Under IFRS, the deferred tax asset and deferred tax liability are shown separately on the face of the balance sheet. This has resulted in an initial reclassification of £3.8 million to deferred tax assets and £7.9 million to deferred tax liabilities.
Under UK GAAP, the current tax liability is shown within trade creditors and other payables on the face of the balance sheet. Under IFRS, the current tax liability is shown separately on the face of the balance sheet. This has resulted in £2.6 million being reclassified from trade creditors and other payables to current tax liability, and £2.3 million being reclassified from trade and other receivables to current tax asset.
Cumulative translation exchange losses of £3.5 million arising in the year have been reclassified within reserves from the profit and loss account reserve to the translation reserve as at 31 December 2004.
An amount of £1.5 million at 1 January 2004, and £1.4 million at 31 December 2004 has been reclassified from a revaluation reserve recognised under previous GAAP to retained earnings. The amount represents the balance on the revaluation reserve at 1 January 2004 in respect of land and buildings that are measured on the basis of deemed cost under IFRSs.
The net investment held in respect of grants under share option schemes of £0.5 million have been reclassified within reserves from retained earnings to Reserve for own shares.

Reconciliation of profit for 2004

	UK GAAP				Total IFRS adjust -ments	IFRS
					Total IFRS adjust -ments		Significant items
	Before except -ional items, good -will amorti -sation & impair -ment £m	Except -ional items £m	Good -will amorti -sation & impair -ment £m	Total £m	£m	Before signif -icant items £m	Financial expense £m	Restruct -uring costs £m	Good -will impair -ment £m	Nega -tive good -will £m	Total £m
Revenue
Continuing operations	180.1			180.1	-
Acquisitions	5.3			5.3	-
	185.4			185.4	-	185.4					185.4
Cost of sales	(108.9)			(108.9)	-	(108.9)					(108.9)
Gross profit	76.5			76.5	-	76.5					76.5
Other operating income	-	-	-	-	-	-	-	-	-	-	-
Operating expenses	(58.7)	(2.1)	(1.8)	(62.6)	1.7	(58.7)	-	(2.1)	(0.7)	0.6	(60.9)
Operating profit
Continuing operations	17.1	(2.1)	(1.8)	13.2	1.7	17.1	-	(2.1)	(0.7)	0.6	14.9
Acquisitions	0.7	-	-	0.7	-	0.7	-	-	-	-	0.7
	17.8	(2.1)	(1.8)	13.9	1.7	17.8	-	(2.1)	(0.7)	0.6	15.6
Interest payable on bank
borrowings	(1.7)			(1.7)	-	(1.7)					(1.7)
Interest income	0.1			0.1	-	0.1					0.1
Pension scheme:											-
Interest charge	-			-	(1.1)	(1.1)					(1.1)
Expected return on assets	-			-	1.4	1.4					1.4
Other financial expense	-			-	(0.1)	-	(0.1)				(0.1)
Net financial expense	(1.6)			(1.6)	0.2	(1.3)	(0.1)				(1.4)
Profit before tax	16.2	(2.1)	(1.8)	12.3	1.9	16.5	(0.1)	(2.1)	(0.7)	0.6	14.2
Overseas tax	(6.8)	0.9	-	(5.9)	(0.6)	(7.4)		0.9	-	-	(6.5)
Profit for the year (attributable to Equity Shareholders)	9.4	(1.2)	(1.8)	6.4	1.3	9.1	(0.1)	(1.2)	(0.7)	0.6	7.7
Dividends				(6.1)	6.1
Retained profit/(loss) for the year				0.3	7.4
Earnings per share
Basic earnings per share				15.6p	3.2p						18.8p
Diluted earnings per share				15.5p	3.2p						18.7p

Shaded areas represent the disclosure of certain line items that are not applicable under the relevant GAAP.

Analysis of IFRS adjustments to the profit for 2004

												Addit -ional IFRS adjust -ments
	Empl -oyee bene -fits (1) £m	Share based pay -ments (2) £m	Divid -ends (4) £m	Develop -ment costs (5) £m	Tax (6) £m	Adjust -ments before signi -ficant items & good -will impair -ment £m	Fore -ign exch -ange (3) £m	Posi -tive Good -will (7i) £m	Nega -tive Good -will (7ii) £m	Total IFRS adjust -ments as reported £m	Empl -oyee bene -fits Germany (1iii) £m	Total IFRS adjust -ments £m
Revenue
Continuing operations	-	-	-	-	-	-	-	-	-	-	-	-
Acquisitions	-	-	-	-	-	-	-	-	-	-	-	-
	-	-	-	-	-	-	-	-	-	-	-	-
Cost of sales	-	-	-	-	-	-	-	-	-	-	-	-
Gross profit
Other operating income	-	-	-	-	-	-	-	-	-	-	-
Operating expenses	(0.2)	(0.1)	-	0.2	-	(0.1)	-	1.3	0.4	1.6	0.1	1.7
Operating profit
Continuing operations	(0.2)	(0.1)	-	0.2	-	(0.1)	-	1.3	0.4	1.6	0.1	1.7
Acquisitions	-	-	-	-	-	-	-	-	-	-	-	-
	(0.2)	(0.1)	-	0.2	-	(0.1)	-	1.3	0.4	1.6	0.1	1.7
Interest payable on bank borrowings						-				-		-
Interest income						-				-		-
Pension scheme:						-				-		-
Interest charge	(0.1)					(0.1)				(0.1)	(1.0)	(1.1)
Expected return on assets	0.4					0.4				0.4	1.0	1.4
Other financial expense						-	(0.1)			(0.1)		(0.1)
Net financial expense	0.3	-	-	-	-	0.3	(0.1)	-	-	0.2	-	0.2
Profit before tax	0.1	(0.1)	-	0.2	-	0.2	(0.1)	1.3	0.4	1.8	0.1	1.9
Income tax	-	-	-	-	(0.6)	(0.6)	-	-	-	(0.6)	-	(0.6)
Profit for the financial year (attributable to Equity Shareholders)	0.1	(0.1)	-	0.2	(0.6)	(0.4)	(0.1)	1.3	0.4	1.2	0.1	1.3
Dividends	-	-	6.1	-	-	6.1	-	-	-	6.1	-	6.1
Retained profit/(loss) for the year	0.1	(0.1)	6.1	0.2	(0.6)	5.7	(0.1)	1.3	0.4	7.3	0.1	7.4

Notes to the IFRS adjustments to the profit for 2004

A summary of the principal differences between UK GAAP and IFRS as applicable to the profit of the Group is as follows:

1 Employee Benefits

Principal difference
Under UK GAAP, the Group measures pension commitments and other related benefits in accordance with SSAP 24 Accounting for Pension Costs. Additional disclosures are given in accordance with FRS 17 Retirement Benefits. Under IFRS, the Group measures pension commitments and other related benefits in accordance with IAS 19 Amended Employee Benefits.

IAS 19 is similar to FRS 17 in that it adopts a balance sheet approach, bringing the deficit/surplus of the pension/post-retirement benefit schemes onto the balance sheet. However, FRS 17 dictates that all actuarial gains and losses are to be recognised directly in reserves, whereas IAS 19 also includes an alternative option allowing actuarial gains and losses to be held on the balance sheet and released to the income statement over a period of time. The Group has elected not to adopt this alternative option and therefore will be accounting for post-retirement benefits in a manner consistent with FRS 17. IAS 19 also requires the fair value of assets to be taken as the bid price of the investments held, as opposed to the mid market price used for FRS 17. Using bid prices in accordance with IAS 19, the fair value of the Group’s pension scheme assets is £0.2 million less than an FRS 17 mid market valuation.

Rather than showing solely an operating charge in the income statement, as is the case under current UK GAAP, under IAS 19 a finance charge or income is also recognised. The finance charge relates to the unwinding of the discount applied to the liabilities of the post-retirement benefit schemes. The finance income relates to the expected return on the assets of the schemes.

The Group has three pension schemes, which are required to be accounted for as defined benefit schemes under IFRS.

1i) UK

Impact
Under SSAP 24, a post-retirement benefit charge of £1.5 million was recognised in operating profit in 2004. Under IFRS the net charge of £1.3 million reflects an operating charge of £1.7 million, a finance charge of £1.0 million and a finance income of £1.4 million. Therefore, net effects are a charge to operating costs of £0.2 million and a credit to net financial expenses of £0.4 million. Overall, the aggregate charge under IFRS is lower than the charge under SSAP 24 by £0.2 million.

1ii) Italy

Impact
Under SSAP 24, a post-retirement benefit charge of £0.3 million was recognised in operating profit in 2004. Under IFRS the total net charge of £0.3 million is split between an operating charge of £0.2 million and a finance charge of £0.1 million. Therefore, there is a net credit in operating costs of £0.1 million and a charge to financial expenses of £0.1 million. Overall, the aggregate charge under IFRS is the same as the charge under SSAP 24.

1iii) Germany

Impact
Under SSAP 24, a post-retirement benefit charge of £nil was recognised in operating profit in 2004. Under IFRS the total net charge is £0.1 million, an increase of £0.1 million.

2 Share-based Payments

Principal difference
The Group operates a range of share-based incentive schemes (both awards of options and awards of shares) that are impacted by IFRS 2 Share-based payments. Under UK GAAP an expense has only been recognised for the awards of shares and this expense has been calculated based on the intrinsic value (the difference between the exercise price and the market value at date of the award). For all other schemes, the intrinsic value was nil. Under IFRS, an expense is recognised in the income statement for all share-based payments (both awards of options and awards of shares). This expense has been calculated based on the fair value at the date of the award using the Black-Scholes pricing model.

Impact
Due to awards under the Group’s share-based incentive schemes during the year, a charge is recognised for the full year of £0.1 million.

3 Foreign Exchange

Principal difference
The Group has a range of inter-company funding arrangements in place in order to optimise the sourcing of finance for the Group and optimise the funding of its subsidiaries. Under both UK GAAP and IFRS, foreign exchange gains/losses on intra- group loans are recognised in the income statement, unless the loans can be designated as part of the Group’s investment in its foreign operations, when the exchange gains/losses can then be recognised in reserves. However, IFRS is stricter in determining which loans can be designated as part of the Group’s investment in its foreign operations, including exclusion of intra-group loans that are not in the functional currency of either the lender or the borrower and intra-group loans that are not long term.

Impact
This has resulted in £0.1 million being transferred from reserves to net finance expense in the income statement.

4 Dividends

Principal difference
Under UK GAAP, the dividend charge is recognised in the profit and loss account when it is proposed. Under IFRS, the dividend charge is not recognised in the income statement but is recognised directly in reserves, and only when the dividend is declared.

Impact
Both the first interim dividend and the final proposed dividend for 2004, £6.1 million in total, have been reversed from the income statement.

5 Development Costs

Principal difference
The Group took the decision on adoption of IFRS to amend its policy for the capitalisation of development costs. The Group’s policy to comply with IFRS is to capitalise costs incurred after the ‘field evaluation’ project development stage, but only if they exceed £150 thousand. Tooling costs are always capitalised. Development expenditure capitalised prior to the transition date does not now meet the criteria for capitalisation under the Group’s new policy, and has therefore been de-recognised and charged to the transition date retained earnings.

Impact
The amortisation cost of previously recognised development expenditure (the Drake Freespeak project), totalling £0.2 million has been reversed from the income statement.

6 Tax

i) US goodwill

Principal difference
The Group has US goodwill with a tax basis that is significantly higher than the associated book value. The future tax deductions for this US goodwill will generate significant reductions in the tax paid in the US. Under UK GAAP, the Group recognised a deferred tax liability, representing the difference between the tax benefit given and the potential accounting charge for goodwill. Under IFRS, the Group recognises a deferred tax asset, representing the difference between the tax and book values.

Impact
The additional amortisation of this deferred tax asset generates an additional deferred tax charge of £0.3 million.

ii) German Tax

Principal difference
The Group has a difference between its German tax assets and the book value of the associated assets that is not expected to reverse. Under UK GAAP the Group was not required to recognise a deferred tax asset for this difference. Under IFRS, the Group recognises a deferred tax asset, representing the difference between the tax and book values.

Impact
The additional amortisation of this deferred tax asset generates an additional deferred tax charge of £0.2 million.

iii) Reversal of SSAP 24 pension prepayment

Impact
The impact of the reversal of the SSAP 24 pension prepayment is to generate an additional deferred tax charge of £0.1 million.

7 Goodwill

i) Positive goodwill

Principal difference
UK GAAP requires goodwill to be amortised over its expected useful economic life. Under IFRS, goodwill is no longer amortised but held at carrying value on the balance sheet and tested annually for impairment (with a specific requirement for goodwill to be tested at the date of transition).

Impact
The goodwill amortisation of £1.6 million charged in the year under UK GAAP has been reversed. Under UK GAAP all goodwill had been tested for impairment for the year ended 31 December 2004, and an impairment charge of £0.3 million was deemed necessary in respect of goodwill that arose on the acquisition of Vega Holdings Inc, in 1999. There is therefore a net increase in net income of £1.3 million.

ii) Negative goodwill

Principal difference
UK GAAP requires negative goodwill to be recognised in the profit and loss account in the periods in which the non-monetary assets are recovered. Under IFRS, the excess of the fair value of net identifiable assets over the cost of acquisition is not recognised and is credited to income immediately.

Impact
The negative goodwill of £0.6 million which arose on acquisition of Charter Broadcast North America Inc., in the year ended 31 December 2004 has been credited to income, whilst the negative goodwill amortisation of £0.2 million in the year under UK GAAP has been reversed, resulting in an increase in net income of £0.4 million.

Reconciliation of opening equity by component of equity

As at 1 January 2004	Share capital £m	Share premium £m	Revaluation reserve £m	Translation reserves £m	Other reserves £m	Retained earnings £m	Total equity £m
UK GAAP	8.2	2.6	1.5	-	1.6	45.9	59.8
IFRS adjustments
Reclassification			(1.5)			1.5
Employee benefits						(6.1)	(6.1)
Development costs						(0.5)	(0.5)
Dividends						6.8	6.8
Equity settled transactions - reserve						0.1	0.1
Equity settled transactions - expense						(0.1)	(0.1)
Negative goodwill						0.1	0.1
Tax						10.0	10.0
IFRS Adjustments			(1.5)			11.8	10.3
IFRS	8.2	2.6	-	-	1.6	57.7	70.1

Reconciliation of closing equity by component of equity

As at 31 December 2004	Share capital £m	Share premium £m	Revaluation reserve £m	Translation reserves £m	Capital redemption reserve £m	Retained earnings £m	Total equity £m
UK GAAP	8.2	2.7	1.4	-	1.6	42.8	56.7
IFRS adjustments
Opening equity adjustments			(1.5)			11.8	10.3
Reclassification			0.1	(3.4)		3.3
Employee benefits						(0.4)	(0.4)
Development costs						0.2	0.2
Dividends						(3.1)	(3.1)
Equity settled transactions - reserve						0.1	0.1
Equity settled transactions - expense						(0.1)	(0.1)
Negative goodwill				(0.1)		0.4	0.3
Positive goodwill						1.3	1.3
Tax				(0.5)		(0.6)	(1.1)
IFRS	8.2	2.7	-	(4.0)	1.6	55.7	64.2

Explanation of material adjustments to the cash flow statement for 2004

Cash and cash equivalents identified in the cash flow include an overdraft amount of £1.0 million.

The move from UK GAAP to IFRS does not change the net cash flow of the Group. The IFRS cash flow format is similar to UK GAAP but presents various cash flows in different categories and in a different order from the UK GAAP cash flow statement.

Information correct at 02/05/2006