Interim Results

ITV PLC 07 September 2005 ITV plc interim results for six months to 30 June 2005 Building on multichannel success Interim operating profit* doubled in two years Financial highlights • Revenue before joint ventures up 9% at £1,044 million • Revenue before joint ventures, and excluding ITV1 advertising and sponsorship revenues, up 36% • Operating profit* up 65% at £201 million • Profit before tax* up 60% at £205 million • EPS* up 46% at 3.5 pence • Interim dividend up 20% at 1.32 pence with intention for greater increase in final dividend • Cash generated from operations £196 million Operating highlights • Advertising revenue ('NAR') in H1 - ITV plc total NAR up 3.4% including GMTV - ITV2 and ITV3: - NAR doubled on 2004 - Delivered half of all multichannel advertising revenue growth - NAR from ITV1, ITV2, ITV3 and ITV News down 0.3% • Multichannel strategy delivering ratings growth - ITV total commercial viewing share in multichannel homes up 5% to 33.7% - ITV4 launching 1 November 2005 - Launch of ITV children's channel in 2006 • Modernising regulation - Digital licences completed - 63% (£135 million) reduction in 2005 licence fees - Licence fees to reduce to £4 million at digital switchover - Reduction in PSB requirements for religion, children and regional non-news • Driving digital - Additional DTT channel capacity contracted from Crown Castle - 136 million acquisition of SDN - ITV now operates 38% of DTT commercial capacity - Additional DSat channel capacity contracted from SES - DSat transmissions to be un-encrypted - Working with BBC on free satellite service • Granada - The most cost efficient deliverer of commercial impacts for ITV1 - Production turnover from continuing operations up £19 million - Seven series produced for US television - Delivered seven of ITV1's top ten ranking programmes • ITV Consumer - Mobile portal launched as entertainment destination - ITV Local broadband trials in Hastings and Brighton • Costs and operating margin - On track for early delivery of £120 million of merger savings - Operating margin increased by six percentage points • Pension Scheme - £325 million lump sum funding will significantly reduce actuarial funding valuation deficit with expected investment returns enabling the scheme to move towards a fully funded basis Outlook for quarter to September 2005 • Strong Autumn schedule - additional investment in programmes • Advertising revenue performing better in Q3 than in the first half - ITV plc total NAR up 4.3% including GMTV - NAR from ITV2 and ITV3 up 87% - NAR from ITV1, ITV2, ITV3 and ITV News up £2 million Commenting, Charles Allen, Chief Executive of ITV said: 'These results show very clearly that ITV has rapidly come of age as a balanced and diverse broadcaster. ITV is now a genuine family of channels united under a strong brand and appealing to a broadening demographic profile. 'Revenues from operations outside ITV1 advertising and sponsorship are growing strongly and were up by 36% to £317 million in the period; representing 30% of total revenue. ITV2 and ITV3 are helping us to grow our overall share of commercial impacts in multichannel homes and the launch of ITV4 and an ITV children's channel will broaden our reach still further. We are confident that ITV has the diversity and balance of quality channels to provide a solid platform for growth.' * from continuing operations before amortisation and material non-recurring items For further enquiries please contact: ITV plc Tel: 020 7620 1620 Press enquiries Charles Allen - Chief Executive Henry Staunton - Finance Director Brigitte Trafford - Communications Director Analysts' enquiries James Tibbitts - Company Secretary Georgina Blackburn - Head of Investor Relations Caroline Bailey - Investor Relations Analyst Citigate Dewe Rogerson Tel: 020 7638 9571 Jonathan Clare Simon Rigby Anthony Kennaway Website: www.itv.com, investor information www.itvplc.com An analysts presentation will be held at 09.30hrs on 7 September 2005 at the City Presentation Centre, 4 Chiswell Street, London EC1Y 4UP Chairman's statement During the first half of 2005 we have made excellent progress in shaping our business for the digital age. Our profits are significantly ahead of last year with adjusted basic earnings per share (before amortisation and material non-recurring items) up by 46% on the comparable period last year to 3.5 pence per share. We have decided to increase the interim dividend this year by 20% to 1.32 pence per share, payable on 9 January 2006 to shareholders on the register on 11 November 2005. The ex-dividend date will be 9 November 2005. As we have previously outlined, we intend to rebalance over the medium term, the respective levels of interim and final dividend, such that the interim dividend represents approximately one-third of the total. At the full year, the Board therefore intends, in the absence of any unforeseen circumstances, to recommend an increase in the final dividend by more than the increase in the interim dividend. ITV is proud to be celebrating 50 years as the UK's leading commercial broadcaster this year. Since the historic opening broadcast in September 1955 the channel has produced more than 70% of the nation's most popular television programmes. Programming therefore is at the heart of the ITV50 celebrations this autumn. The channel will broadcast a series of special programmes including Avenue of the Stars and a major television event in which viewers will select their favourite shows from ITV's 50 Greatest Shows. Other programming highlights include star studded dramas, Ant and Dec's Gameshow Marathon and special news and sport events. Off screen the anniversary will be marked by the release of a special collection of ITV50 stamps from the Royal Mail and a major three year project where ITV viewers will determine the allocation of £65 million of Lottery funds. Broadcasting On 29 June 2005 Ofcom confirmed the new financial terms for our Channel 3 licences. Our cash payments have reduced by approximately £135 million, but we still are paying a very substantial amount. Our strategy of developing our multichannel offer is progressing well. ITV2 and ITV3 have continued to beat both internal targets and external forecasts for ratings and for revenues. We aim to match and build on their success with the launch of ITV4 in November. We have acquired additional broadcasting bandwidth on the digital terrestrial television platform which will ensure that we have transmission capacity for our channels following digital switchover. New revenue streams We have established a dedicated consumer team to provide a clear focus on the creation of new revenue streams through different platforms, including mobile and broadband, and through new channels including interactive and transactional elements. The first two elements of this work are already being delivered with our mobile portal now in operation and with the first trials of an ITV local broadband service planned during the coming months. Pension schemes At the Annual General Meeting in May I said that we expected to address the funding deficit in our defined benefit pension schemes before the end of the calendar year. Many defined benefit arrangements in the UK have a funding deficit due to a combination of factors, of which the most significant include the effect of poor market performance at the beginning of the decade and the effects of increased life expectancy with the current low level of long-term real interest rates, both of which raise the net present value of liabilities. We have decided to address this issue by making a £325 million lump sum contribution into our schemes. Based upon an analysis carried out for the Company by our actuaries, we expect that this sum, together with future investment returns on the schemes' assets, will enable the schemes to move towards being fully funded (on an ongoing basis) over an appropriate period of time. This substantial injection of funds will give our pension scheme members greater confidence in their individual positions and should be seen as a proactive step in administering our defined benefit arrangements. People Finally, I would like to extend the Board's thanks to our executives and all our colleagues for their contribution to our results. They have continued to improve the efficiency of our business and have delivered the full merger savings. The success of our new channels is clear evidence of the strength and popularity of our programmes. The Board and I look forward to working with our colleagues as we continue to structure the business to take increasing advantage of our undoubted business strengths in the digital age. Sir Peter Burt Chairman Operating review Introduction Following the completion of the merger we are now focused on our current strategic initiatives to drive the business forward. We have achieved a substantial improvement in our first half results. Our revenue for the six months to 30 June 2005 was up 9% at £1,044 million. Revenue, excluding advertising revenue and sponsorship from our ITV1 channel, was up by 36% to £317 million and now represents over 30% of our total revenue. As explained below, this was driven by strong performances from our new channels ITV2 and ITV3. Our operating profit before amortisation and material non-recurring items was up 65% at £201 million compared to the same period in 2004 and has doubled compared to the same period in 2003 prior to the merger. Profit before tax, amortisation and material non-recurring items was up by 60% at £205 million on the same basis. We remain ahead of schedule on the timing of delivery of the £120 million of merger savings and are continually seeking opportunities to improve the operating efficiency of the ongoing business. Clear evidence of this can be seen in the improving margin, with operating profit, before amortisation and material non-recurring items, as a percentage of revenue up by more than 6 percentage points. Our cash flow has, once again, been strong in the first half with cash generated from operations of £196 million. A detailed financial review is included in this report. Modernise regulation 2005 has already seen a significant move for us with the setting of new financial terms for our Channel 3 licences. In 2004 the combined licence payments (including GMTV) were £215 million net of the digital rebate. In 2005 we expect that figure to be less than £80 million, a reduction of over 60%. The payment will continue to fall as digital penetration increases and will reduce to around £4 million in current terms by the time analogue transmissions cease. The reduced financial terms reflect the declining value of the analogue broadcasting spectrum and will allow us to continue to invest in high quality programming across our family of channels and in our digital strategy. In both our provision of Public Service Broadcasting and Ofcom's forthcoming TV advertising market review, ITV will continue to look for more appropriate regulations for the multichannel world in which we now operate. UK advertising market ITV plc's net advertising revenue was up 3.4% in the first six months of 2005 reflecting strong growth in our digital channels (ITV2 and ITV3), up by more than 100% on 2004, and a first time contribution from GMTV. The net advertising revenue of our eleven ITV1 licences was down by 3.5%. This was due to several factors including the Contract Rights Renewal (CRR) remedy. CRR, agreed as a condition of the merger, ties our ITV1 share of the UK TV advertising market to the ITV1 share of commercial viewing. Our commercial impact performance is affected as viewers move to digital platforms (Freeview, cable and satellite) where there is more channel choice and the viewing levels of all the five main terrestrial channels are inevitably lower than in analogue homes. As digital viewing approaches saturation this effect will reduce. In the second quarter, ITV1's advertising performance was influenced by the general election, which led to depressed advertising in part due to reduced Government spending. This accentuated the already tough comparisons to 2004, when the European Football Championship attracted significant advertising revenue. Without any major sporting event this year we have seen a reduction in first half revenue from cars, finance and alcoholic drinks which traditionally advertise around major sporting events. The category which has grown most is food with spend up by 25% in the first half. Entertainment and telecoms have also seen good year-on-year growth. ITV continues to promote the benefits of television advertising. This includes new digital opportunities, such as interactive advertising. Examples of this work are our 'Values of Fame' campaign and our 'Fame Metrics' initiative which demonstrates that brand fame is linked to company profitability. These initiatives enable us to engage with our advertisers and show them the benefits of TV advertising to improving both consumer loyalty and earnings. Driving multichannel In the first half, the viewing share of our ITV channels grew on both digital terrestrial and digital satellite platforms. ITV1 remains the most popular channel in peak time and continues to maintain its mass market leadership against a backdrop of increasing audience fragmentation. It is the most watched commercial channel across all multichannel homes with an 18.4% share of individuals in the first half, increasing to 22.3% in Freeview homes. We have had notable successes such as the Champions League Final between Liverpool and AC Milan which peaked close to 15 million viewers at the penalty shoot out, ranking as the highest peak audience for ITV1 since Euro 2004. ITV2 and ITV3 viewing shares continue to grow strongly. By share of adult commercial impacts ITV2 and ITV3 are the first and third largest commercial digital channels in multichannel homes over the first half of the year, and these two channels alone contributed 55% of the growth in multichannel adult commercial impact volume for the approximately 200 digital channels during that period. ITV2 and ITV3 also accounted for half of the total multichannel advertising revenue growth over the first half of the year. The success of our channels results largely from our strategy of scheduling the separate channels to attract different demographic audiences and actively using cross promotion of their complementary schedules. ITV2's programming has a 16-34 audience profile whilst ITV3 targets a 35+ demographic. Amongst ITV2's successes have been the Tour de France, UEFA Champions League and Extra Time, a brand extension of Footballers' Wives. The viewing share for individuals of our combined ITV channels in multichannel homes in the first half was 21.9%, up by 2% on the same half year period three years ago. This is a considerable achievement given the ever increasing number of channels available. We remain firmly on track to achieve at least our target of £150 million pa of multichannel revenue by the end of 2007. We are now looking at opportunities to invest in US acquired programming and other popular material for the channels to drive their viewing shares even harder. Freeview and free satellite service Freeview continues to be the digital platform on which ITV performs best, and is by far the fastest growing platform accounting for approximately 75% of all new digital homes. It is therefore a strategic objective for us to support the growth of Freeview. In April we announced the acquisition of SDN (making ITV the operator of 38% of the commercial capacity on DTT excluding the BBC) at a total cost of £136 million. SDN owns the licence to operate digital terrestrial Multiplex A which currently broadcasts ten channels on Freeview. This acquisition, which provides a new revenue stream for ITV, is immediately earnings enhancing (before amortisation of intangible assets), and is an exciting step forward in our digital strategy. It gives ITV the potential for additional broadcast capacity from 2010 and the prospect of advances in digital compression technology allowing an extra channel to be added to the multiplex in 2007. We are working with the BBC on the marketing of a free satellite service and will be moving to decrypt our digital satellite transmissions for ITV1, ITV2 and ITV3 so that they are freely available to viewers equipped with digital satellite receivers. Content for the future Our production business continues to focus on delivering high quality programming and excellent value for broadcasters. In the first half of 2005 Granada productions have accounted for seven of the top ten highest rating programmes on ITV1. Granada productions are the most efficient source of programmes for the channel having delivered 55% of adult commercial impacts during network programming in 2004 in return for just 40% of the network programme budget. Our soaps have been performing strongly with Coronation Street winning its timeslot the whole year. Emmerdale has been on a roll and on 17 March this year celebrated its 4,000th episode with an hour-long special. Emmerdale has consistently been closing the ratings gap on the BBC's EastEnders, and in some weeks has beaten EastEnders outright. Diamond Geezer was a great success attracting almost 10 million viewers, a 44% share of adults. Heartbeat remains the top performing long-running drama series on television consistently achieving an audience share of over 35%. In entertainment programming the ITV1 success in the first half was Granada's Ant & Dec's Saturday Night Take Away which returned an average 41% viewing share of 16-34s over the series. Our international production business has also seen considerable success. Revenue was up by 26% as we delivered a number of series to our US Network customers. These include Nanny 911 and Hell's Kitchen for Fox Broadcasting Network, Celebrity Fit Club for VH1 and Hit Me Baby One More Time for NBC. International secondary sales of our programmes to other broadcasters continued to be a source of high margin revenue with the top selling title being Agatha Christie's Poirot generating £2.4 million in the six months. As well as producing Nanny 911 in America, we hold the international rights to that production which we have sold to 20 major territories and we have also licensed the programme format. We have made further progress on video-on-demand trials and are in the process of assessing the revenue opportunities for downloadable archives via broadband. We have expanded our DVD sales, both through sales to the public and by leasing the rights to newspapers and other publications throughout the UK. Granada International have also been winning mandates to represent third parties. News ITV's commitment to investment in the latest news technology has resulted in both improved ratings for our early evening regional bulletin and cost savings. We have continued to install new digital TV centres and digital news rooms, with Central, Meridian, Manchester, Newcastle and Leeds completed so far this year and Norwich to be fully equipped before the year end. Editorial content continues to benefit from a single news management with ITN achieving a number of notable news scoops. This was particularly evident with ITV News' 48 hour coverage of the 2012 Olympic bid and the London bombings on 7 July when we were able to bring our viewers the top stories ahead of our competitors through our ability to co-ordinate the deployment of both network and regional resources. ITV has also won 'News Programme of the Year' at the Broadcast Awards and Alastair Stewart won 'Presenter of the Year' at the RTS Journalism Awards 2005. New revenue streams The role of ITVC, our new Consumer team, is to build ITV's non Free-to-Air business, with a focus on direct consumer revenues. We have appointed Jeff Henry as Chief Executive to drive these opportunities. His experience in running pay television operations is being complemented by a team with experience in other fields that will help us to develop ways to exploit our content and aggregation skills through mobile, broadband and new technologies such as DVB-H and other consumer devices. ITVC has launched our mobile portal in three different versions: WAP, Flash and Java, making it the most accessible TV mobile portal. Driven primarily by ITV content, it will provide up-to-date news and weather services, TV guides and entertainment stories. We are planning trials of a broadband based ITV Local Service with news, travel, classified advertising and other transactional services for towns and cities in our regions. We have an enormous quantity of popular library material and high rating current productions which lend themselves to the creation of must-view content for delivery direct to consumers across a variety of platforms. Outlook ITV channels The ITV1 2005 Autumn schedule focuses on ITV's core strengths of big name stars, strong programme brands and must-see entertainment. In Drama we will see an exciting selection of series and two-part programmes starring high-profile faces such as Ray Winston, Robert Carlyle, Robert Lindsay, Rik Mayall, Caroline Quentin, Sarah Lancashire, Tamzin Outhwaite and Matthew Kelly and the return of David Jason in A Touch of Frost and Martin Clunes in Doc Martin. In Entertainment I'm A Celebrity Get Me Out Of Here will be returning for a new series in November, fronted by Ant and Dec. X Factor, featuring Simon Cowell, Louis Walsh and Sharon Osbourne has also returned to the screen and Michael Parkinson's hugely successful Saturday night chat show will follow later in the Autumn. We have also secured the rights to the network premiere of Harry Potter and the Chamber of Secrets and have a number of new movie deals starting in early 2006 with the Hollywood studios. Sport remains a key area of focus for ITV1 and we look forward to screening the UEFA Champions League and the FIFA football World Cup in 2006 and have secured the FIFA football World Cup rights for 2010 and 2014. Boxing has now returned to ITV with a two year contract signed with Frank Warren and we will continue to screen the best of Formula 1 action. We are looking forward to the launch of ITV4 which will target a male demographic, one which is particularly sought after by advertisers. ITV4 will be an entertainment channel showcasing a mix of brand new US drama, top end British drama, comedy, movies, sport, sci-fi and factual programming. We will also be launching an ITV children's channel in the next six months. This channel will be the only commercial children's channel available on all platforms, using the rich heritage of CiTV's multi-award winning programmes. The channel will also premiere new programmes and cover every genre. Advertising Advertising revenue in the third quarter is stronger than in the first half. ITV plc's advertising revenue in the quarter to 30 September 2005 will be up approximately 4% on the same period last year including a first time contribution from GMTV. ITV plc's combined advertising revenue from our channels, excluding GMTV, over that period will be up by approximately 0.7% on the same period last year. I would particularly like to join with Sir Peter Burt in expressing our thanks to everyone in ITV for their continuing dedication to bringing the best television to our screens and for their contribution to delivering these results for our shareholders. Charles Allen Chief Executive Financial review Statutory results for the six months ended 30 June 2005 Revenue for the six months to 30 June 2005 was up 9% at £1,044 million (2004: £956 million). Operating profit increased to £150 million (2004: £39 million) with underlying operating profit before amortisation and material non-recurring items up 65% at £201 million (2004: £122 million). Profit before tax, amortisation and material non-recurring items increased by 60% to £205 million (2004: £128 million). Profit before tax includes a £9 million gain on sale of property, principally arising from the sale of the Nottingham Studios. Tax was charged on profits before amortisation and material non-recurring items at an effective rate of 28% (2004: 27%). Adjusted basic earnings per share before amortisation and material non-recurring items were up 46% at 3.5 pence (2004: 2.4 pence). Pro forma result for six months ended 30 June 2004 For the six months ended 30 June 2004 pro forma results were prepared to show the results of ITV as if the merger between Granada plc and Carlton Communications Plc had taken place before the start of that period. In summary, and adjusted for IFRS, these are: Published Pro forma Published 2005 2004 2004 £m £m £m Revenue 1,044 986 956 Operating margin EBITA* 201 123 122 Profit before tax* 205 128 128 Operating margin (EBITA* as a percentage of revenue) 19.3% 12.5% 12.8% Adjusted* earnings per share - basic 3.5p 2.3p 2.4p * Pre amortisation and material non-recurring items On this basis, revenue for the six months to 30 June 2005 was up 6% at £1,044 million (2004: £986 million). Operating profit before amortisation and material non-recurring items was up 63% at £201 million (2004: £123 million). Profit before tax, amortisation and material non-recurring items increased by 60% to £205 million (2004: £128 million). The increase in revenue reflects movements in net advertising revenue (NAR) as follows: 2005 2004 Change £m £m % ITV1 710 736 (3.5) ITV2, ITV3, ITV News, Men & Motors 48 24 100 GMTV 28 - - Total NAR 786 760 3.4 The increase in operating profit reflects the reduction in licence fees as follows: 2005 2004 Saving £m £m £m PQR Levy 103 132 29 Cash bid payment 2 33 31 Digital licence rebate (65) (64) 1 Total 40 101 61 Dividend The interim dividend is increased by 20% to 1.32 pence per share (2004: 1.1 pence). This is covered 2.65 times by the earnings per share (before amortisation and material non-recurring items) of 3.5 pence. Acquisition of businesses During the period, ITV acquired SDN at a total cost of £136 million. As required by IFRS 3 (Business combinations) SDN's assets have been adjusted to reflect the fair value of the acquired net assets at the date of acquisition by ITV. Intangible assets of £82 million (in respect of the multiplex licence and customer contracts) have been recognised along with an associated deferred tax liability of £25 million. Goodwill is £80 million. Further details are given in note 6 to the accounts. Net debt The principle movements in net debt during the period are shown in the table below: £m Net debt at 31 December 2004 (280) Adjustment for IAS 32 and IAS 39 (see note 9) (47) Net debt at 1 January 2005 (restated) (327) Cash generated from operations 196 Acquisition of SDN (136) Taxation paid (66) Dividends paid (45) Other movements (6) Net debt at 30 June 2005 (384) Cash generated from operations was £196 million (2004: £207 million) reflecting the strong trading in the six months to 30 June 2005. This is after a net outflow of £47 million cash in respect of licence fees in excess of the income statement charge for the period. Excluding this, the working capital inflow would be £48 million and cash generated from operations, £243 million. The total cash outflow to acquire SDN was £136 million. Taxation paid of £66 million includes payments on account during the period and payment following the settlement of prior years' Group relief with United Business Media plc which had been previously provided for. The 2004 interim dividend of £45 million was paid at the beginning of 2005. During the period €125 million of the Exchangeable bond was repaid. International Financial Reporting Standards (IFRS) ITV plc adopted IFRS on 1 January 2005 and has presented its accounts under IFRS for the first time in this report. The basis of preparation, along with ITV plc's significant accounting policies, is set out in note 11. The 2004 comparative financial information has been restated and represented under IFRS. Details of this conversion are given later in this report and further information is given in ITV plc's Preliminary International Financial Reporting Standards Financial Statements for 2004 which is available on the corporate website www.itvplc.com. Consolidated income statement 2005 2004 For the six months ended 30 June: Note £m £m Group and share of joint ventures' revenue 1,073 991 Less share of joint ventures' revenue (29) (35) Revenue 1,044 956 Operating costs before depreciation, amortisation of intangible assets and (828) (815) material non-recurring items Operating costs - material non-recurring items 1 (1) (23) EBITDA 215 118 Depreciation of property, plant and equipment (15) (19) EBITA 200 99 Amortisation of intangible assets 5 (50) (60) Total operating costs (894) (917) Operating profit 150 39 Financing income 7 9 Financing costs (18) (17) Net financing costs (11) (8) Share of profit of associates and joint ventures 4 5 Investment income 2 4 Gain on sale of property 9 5 Profit before tax 154 45 Taxation (43) (8) Profit for the period 111 37 Profit attributable to minority interest (2) (5) Profit attributable to equity shareholders of the Company 109 32 Basic earnings per share 2 2.7p 0.8p Diluted earnings per share 2 2.7p 0.8p All results are from continuing operations. Consolidated balance sheet 30 June 31 December 30 June 2005 2004 2004 Note £m £m £m Non-current assets Property, plant and equipment 240 258 259 Intangible assets 5 3,909 3,797 3,756 Distribution rights 16 12 18 Investments in joint ventures and associates 7 85 83 113 Other investments 7 170 140 151 Deferred tax asset in respect of pension scheme deficits 204 202 168 Other deferred tax balances (144) (136) (129) Net deferred tax asset 60 66 39 4,480 4,356 4,336 Current assets Current asset investments - - 174 Assets held for resale - - 59 Programme rights and other stock 321 368 271 Trade and other receivables due within one year 356 349 336 Trade and other receivables due after more than one year 10 8 30 Trade and other receivables 366 357 366 Cash and cash equivalents 8 415 582 400 1,102 1,307 1,270 Current liabilities Borrowings 8 (10) (10) (412) Trade and other payables due within one year (622) (713) (617) Trade and other payables due after more than one year - - (20) Trade and other payables (622) (713) (637) Current tax liabilities (221) (225) (222) Provisions (28) (32) (20) (881) (980) (1,291) Net current assets/(liabilities) 221 327 (21) Non-current liabilities Borrowings 8 (789) (852) (557) Defined benefit pension deficit (679) (672) (559) Other payables (6) (7) (7) Provisions (41) (43) (62) (1,515) (1,574) (1,185) Net assets 3,186 3,109 3,130 Attributable to equity shareholders Share capital 10 423 422 422 Share premium account 10 94 91 90 Merger and other reserves 10 2,666 2,666 2,660 Translation reserve 10 (3) (2) (1) Available for sale reserve 10 18 - - Retained earnings 10 (22) (84) (63) Total attributable to equity shareholders 10 3,176 3,093 3,108 Minority interest 10 10 16 22 Total equity 10 3,186 3,109 3,130 Consolidated cash flow statement 2005 2004 For the six months ended 30 June: Note £m £m £m £m Cash flows from operating activities Operating profit before material non-recurring items 151 62 Depreciation of property, plant and equipment 15 19 Amortisation of intangible assets 50 60 Movement in working capital** 1 96 Cash generated from operations before material 217 237 non-recurring items Cash flow relating to material non-recurring items: Operating loss (1) (23) Increase in debtors (11) - Decrease in creditors and provisions* (9) (7) Cash outflow from material non-recurring items (21) (30) Cash generated from operations 196 207 Interest received 7 7 Interest paid on bank and other loans (20) (25) Interest paid on finance leases (2) (2) Investment income 2 4 Dividends received from investments in joint ventures and - 2 associates Taxation paid (66) (8) (79) (22) Net cash from operating activities 117 185 Cash flows from investing activities Acquisition of subsidiary undertakings, net of cash and 6 (136) 461 cash equivalents acquired, and debt repaid on acquisition Proceeds from sale of property, plant and equipment 23 19 Acquisition of minority interest - (140) Acquisition of property, plant and equipment (16) (7) Acquisition of investments (30) (2) Purchase from sale of subsidiaries 5 - Proceeds from sale of investments - 2 Net cash from investing activities (154) 333 Cash flows from financing activities Proceeds from issue of ordinary share capital 46 7 Purchase of US held shares (42) - Bank and other loans repaid (88) (85) Capital element of finance lease payments (2) (2) Preference dividends paid to shareholders - (5) Redemption of redeemable shares on merger - (200) Equity dividends paid (45) (28) Net cash used in financing activities (131) (313) Net (decrease)/increase in cash and cash equivalents (168) 205 Cash and cash equivalents at 1 January 582 185 Effects of exchange rate changes and fair value movements on cash and cash equivalents 1 10 Cash and cash equivalents at 30 June 415 400 *Includes £6 million (2004: £6 million) relating to expenditure against provisions held in respect of activities which have been previously discontinued. ** Licence fees paid in the period were £47 million greater than the income statement charge. This excess has now been repaid and will represent a working capital inflow in the second half of the year. Consolidated statement of recognised income and expense 2005 2004 For the six months ended 30 June: £m £m Exchange differences on translation of foreign operations (1) (1) Movements in respect of cash flow hedges (2) - Revaluation of available for sale investments 5 - Net income recognised directly in equity 2 (1) Profit for the period 111 37 Total recognised income and expense for the period 113 36 Attributable to: Equity shareholders of the Company 111 31 Minority interests 2 5 Total recognised income and expense for the period 113 36 Notes to the accounts 1. Material non-recurring items 2005 2004 For six months ended 30 June: £m £m Operating items: Reorganisation and integration costs (12) (23) Receipt from the liquidators of ITV Digital 11 - Total material non-recurring items (1) (23) 2. Earnings per share 2005 2004 Basic Diluted Basic Diluted For the six months ended 30 June: £m £m £m £m Profit for the financial period attributable to shareholders 109 109 32 32 Material non-recurring items (including related tax effect of £nil, 2004: £6 milllion) 1 1 17 17 Profit before material non-recurring items 110 110 49 49 Amortisation of intangible assets (including related tax effect of £15 million, 2004: £18 million) 35 35 42 42 Profit for the financial period before material 145 145 91 91 non-recurring items and amortisation of intangible assets Weighted average number of shares in issue - million 4,075 4,075 3,824 3,824 Dilution impact of share options - million - 49 - 70 4,075 4,124 3,824 3,894 2.7p 2.7p 0.8p 0.8p Earnings per ordinary share Adjusted earnings per share Basic earnings per share 2.7p 2.7p 0.8p 0.8p Add: Loss per share on material non-recurring items - - 0.5p 0.4p Earnings per share before material non-recurring items 2.7p 2.7p 1.3p 1.2p Add: Loss per ordinary share on amortisation of intangible assets 0.8p 0.8p 1.1p 1.1p Earnings per share for the financial period before material non-recurring items and amortisation of intangible assets 3.5p 3.5p 2.4p 2.3p All profits arise from continuing operations. An adjusted earnings per share has been disclosed because in the view of the directors this gives a true reflection of the results of the underlying business. 3. Dividends Dividends are recognised in equity during the period in which they are declared. Dividends recognised in equity for the six months ended 30 June 2005 total £53 million (six months ended 30 June 2004: £20 million) and represent the 2004 final dividend declared by the Company on 8 March 2005 (six months ended 30 June 2004: 2003 final dividend declared on 3 March 2004). The Company has declared a dividend in respect of the six months ended 30 June 2005 of 1.32 pence (six months ended 30 June 2004: 1.1 pence) per ordinary share totalling £54 million (six months ended 30 June 2004: £45 million) which will be paid on 9 January 2006 to shareholders on the register at 11 November 2005. The ordinary shares will be quoted ex dividend from 9 November 2005. 4. Segmental analysis ITV comprises one main producer/broadcaster business segment. This segment includes all activities related to the production and broadcasting of television programmes and channels, including the exploitation of related rights and assets. Any businesses falling outside of this main segment are grouped together as other operations. Producer/ Other broadcaster operations Consolidated 2005 2004 2005 2004 2005 2004 For the six months ended 30 June: £m £m £m £m £m £m Segment revenue 1,001 917 43 39 1,044 956 Segment result 149 37 1 2 150 39 5. Intangible assets Goodwill Brands Licences Customer Film Total contracts and libraries and relationships other £m £m £m £m £m £m Cost At 31 December 2004 3,294 173 48 319 81 3,915 Acquisitions 80 - 73 9 - 162 At 30 June 2005 3,374 173 121 328 81 4,077 Amortisation At 31 December 2004 4 15 4 86 9 118 Charge for period - 9 3 35 3 50 At 30 June 2005 4 24 7 121 12 168 Net book value At 30 June 2005 3,370 149 114 207 69 3,909 At 31 December 2004 3,290 158 44 233 72 3,797 6. Acquisition of businesses On 27 April 2005, the Group acquired 50.1% of the shares in SDN Ltd and 100% of the shares in United Media & Information Ltd (which holds the remaining shares in SDN Ltd) for a total consideration of £83 million in cash. As part of the acquisition, loan amounts due by these companies, totalling £53 million, were repaid bringing the total cash outflow of the Group to £136 million. SDN holds the licence to operate Multiplex A on digital terrestrial television. In the two months to 30 June 2005 the acquired entities contributed £1 million to the consolidated operating profit of the Group (before additional amortisation of £1 million). Had the acquisition occurred on 1 January 2005, the estimated revenue for the Group would have been £7 million higher at £1,051 million and operating profit before amortisation and material non-recurring items £2 million higher at £203 million (additional amortisation would have been £2 million) for the six months ended 30 June 2005. The acquired net assets of SDN are set out in the table below. Book value before acquisition Fair value Fair value to adjustments ITV plc £m £m £m Intangible assets - 82 82 Trade and other receivables 6 - 6 Borrowings (53) - (53) Trade and other payables (7) - (7) Deferred tax liability - (25) (25) Net assets and liabilities (54) 57 3 Goodwill on acquisition 80 Consideration paid 83 Borrowings settled at date of acquisition 53 Total cash outflow 136 The intangible assets recognised at a fair value of £82 million include the multiplex licence and customer contracts. A deferred tax liability of £25 million has been recognised in respect of these intangible assets. The goodwill recognised represents the wider strategic benefits of the acquisition to ITV plc. Principally these are the enhanced ability to promote Freeview as a platform, business relationships with the channels which are on Multiplex A and the additional capacity available from 2010. These, in combination with existing ITV assets, including the ITV brand and programming, generate the goodwill on acquisition. 7. Investments Joint Associated Listed Unlisted Total ventures undertakings investments investments £m £m £m £m £m At 31 December 2004 55 28 128 12 223 Adjustment for IAS 32 and IAS 39 (note 9) - - 13 - 13 1 January 2005 (restated) 55 28 141 12 236 Additions at market value - - 13 - 13 Share of attributable profits 1 2 - - 3 Revaluation of listed investments to - - 4 - 4 market value at 30 June 2005 Other - (1) - - (1) At 30 June 2005 56 29 158 12 255 8. Analysis of net debt Adjustment Currency and 30 June for IAS 32 non-cash 31 and IAS 39 1 January Net cash movements 2005 December (note 9) 2005 £m £m 2004 £m (restated) flow and £m £m acquisitions £m Cash and cash equivalents 582 - 582 (168) 1 415 Loans and loan notes due within one year (7) - (7) - - (7) Loans and loan notes due after one year (774) (39) (813) 88 12 (713) Preference shares - (8) (8) - 8 - Finance leases (81) - (81) 2 - (79) (862) (47) (909) 90 20 (799) Net debt (280) (47) (327) (78) 21 (384) Included within cash and cash equivalents is £79 million (31 December 2004: £81 million) the use of which is restricted to meeting finance lease commitments. €125m of the Exchangeable bond was repaid in January 2005. The Preference shares were redeemed on 29 June 2005. 9. Adoption of IAS 32 and IAS 39 The Group has taken the IFRS 1 option to apply IAS 32 and IAS 39 prospectively from 1 January 2005. The impact on the Group's opening balance sheet at 1 January 2005, by balance sheet category, is outlined below: Effect of 31 December IAS 32 and 1 January 2004 IAS 39 2005 £m £m £m Other investments (a) 140 13 153 Net deferred tax asset (b) 66 2 68 Trade and other receivables due within one year (c) 349 34 383 Trade and other payables due within one year (d) (713) 2 (711) Borrowings (non-current) (e) (852) (47) (899) Impact on net assets 4 a) Revaluation of investments to 1 January 2005 fair values. b) Deferred tax effect of IAS 39 adjustments. c) Reclassification of currency option relating to Exchangeable bond from borrowings. d) Revaluation of interest rate swaps and foreign exchange contracts to 1 January 2005 fair values e) Reclassification of currency option to trade and other receivables (see c above), revaluation of loans and loan notes to 1 January 2005 fair values and reclassification of Carlton Preference shares from minority interests. 10. Consolidated statement of changes in equity Attributable to equity shareholders Share Share Merger Translation Available Retained Total Minority Total capital premium and other reserve for sale earnings interest equity reserves reserve £m £m £m £m £m £m £m £m £m At 31 December 2004 422 91 2,666 (2) - (84) 3,093 16 3,109 Adjustment for IAS 32 and IAS 39 (note 9) - - - - 13 (1) 12 (8) 4 1 January 2005 (restated) 422 91 2,666 (2) 13 (85) 3,105 8 3,113 Cancellation of shares (3) (39) - - - - (42) - (42) Shares issued in the period 4 42 - - - - 46 - 46 Total recognised income and expense - - - (1) 5 107 111 2 113 Movements due to share based compensation - - - - - 9 9 - 9 Equity dividends - - - - - (53) (53) - (53) At 30 June 2005 423 94 2,666 (3) 18 (22) 3,176 10 3,186 Attributable to equity shareholders Share Share Merger Translation Retained Total Minority Total capital premium and other reserve earnings interest equity reserves £m £m £m £m £m £m £m £m At 31 December 2003 277 - 1,191 - (81) 1,387 1 1,388 Business combinations 143 85 1,669 - - 1,897 167 2,064 Redemption of Granada redeemable shares - - (200) - - (200) - (200) Purchase of minority interest - - - - - - (146) (146) Shares issued in the period 2 5 - - - 7 - 7 Total recognised income and expense - - - (1) 32 31 5 36 Movements due to share based compensation - - - - 6 6 - 6 Dividends paid to non-equity shareholders - - - - - - (5) (5) Equity dividends - - - - (20) (20) - (20) At 30 June 2004 422 90 2,660 (1) (63) 3,108 22 3,130 11. Significant accounting policies a) Basis of preparation EU law (IAS Regulation EC 1606/2002) requires that the Group's next annual consolidated financial statements, for the year ending 31 December 2005, be prepared in accordance with International Financial Reporting Standards and International Accounting Standards adopted by the International Accounting Standards Board (IASB), and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB as adopted for use in the EU (called 'IFRS' in this document). This interim financial information has been prepared on the basis of the recognition and measurement requirements of IFRSs in issue that either are endorsed by the EU and effective (or available for early adoption) at 31 December 2005 or are expected to be endorsed and effective (or available for early adoption) at 31 December 2005, the Group's first annual reporting date at which it is required to use adopted IFRSs. Based on these adopted and unadopted IFRSs, assumptions have been made about the accounting policies expected to be applied, when the first annual IFRS financial statements are prepared for the year ending 31 December 2005. In particular, it has been assumed that the amendment to IAS 19 (Employee Benefits) and the fair value option amendment to IAS 39 (Financial Instruments: Recognition and Measurement) will be adopted by the EU in sufficient time that they will be available for use in the annual IFRS financial statements for the year ending 31 December 2005. Were these standards not to be endorsed in time for 2005 financial reporting then the accounting policies or presentation of certain financial information contained in this document may need to be changed. It is therefore possible that further changes will be required to this information before it is presented in the 2005 annual report. The comparative information presented in these accounts has been restated and represented under IFRS. In respect of financial instruments, the Group's policy, as permitted under IFRS 1, has been to adopt IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS 39 (Financial Instruments: Recognition and Measurement) from 1 January 2005. Comparatives have therefore not been restated to reflect the requirements of IAS 32 and IAS 39 and continue to be prepared in accordance with UK GAAP for the comparative period. Note 9 sets out the impact of the adoption of IAS 32 and IAS 39 at 1 January 2005. Further details on the restatement of comparative information and conversion to IFRS are given later in this report. The accounting policies set out below have been applied consistently in presenting this financial information. b) Revenue recognition Revenue is stated exclusive of VAT and consists of sales of goods and services to third parties. Revenue from services is recognised when the outcome can be estimated reliably and by reference to the stage of completion of the transaction. Revenue from the sale of goods is recognised when the Group has transferred the significant risks and rewards of ownership and control of the goods sold and the amount of revenue can be measured reliably. Key classes of revenue are recognised on the following basis: Advertising and sponsorship on transmission Programme production on delivery Programme rights when contracted and available for exploitation Revenue on barter transactions is recognised only when the goods or services being exchanged are of a dissimilar nature. c) Subsidiaries, associates and joint ventures Subsidiaries are entities that are directly or indirectly controlled by the Group. Control exists where the Group has the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. The proportion of net income and net assets attributable to minority shareholders is presented separately as a minority interest in the consolidated income statement and consolidated balance sheet. A joint venture is an entity in which the Group holds an interest under a contractual arrangement where the Group and one or more other parties undertake an economic activity that is subject to joint control. The Group accounts for its interests in joint ventures using the equity method. An associate is an entity, other than a subsidiary or joint venture, over which the Group has significant influence. Significant influence is the power to participate in the financial and operating decisions of an entity but is not control or joint control over those policies. These investments are accounted for using the equity method. d) Current/non-current distinction Current assets include assets held primarily for trading purposes, cash and cash equivalents, and assets expected to be realised in, or intended for sale or consumption in, the course of the Group's operating cycle. All other assets are classified as non-current assets. Current liabilities include liabilities held primarily for trading purposes, liabilities expected to be settled in the course of the Group's operating cycle and those liabilities due within one year from the reporting date. All other liabilities are classified as non-current liabilities. e) Property, plant and equipment Owned assets Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Certain items of property, plant and equipment that had been revalued to fair value prior to 1 January 2004, the date of transition to IFRS, are measured on the basis of deemed cost, being the revalued amount at the date of that revaluation. Leases Finance leases are those which transfer substantially all the risks and rewards of ownership to the lessee. Assets held under such leases are capitalised within property, plant and equipment and depreciation is provided where appropriate. Outstanding finance lease obligations, which comprise the principal plus accrued interest, are included within borrowings. The finance element of the agreements is charged to the income statement over the term of the lease on a systematic basis. All other leases are operating leases the rentals on which are charged to the income statement on a straight line basis over the lease term. Depreciation Depreciation is provided to write off the cost of property, plant and equipment less estimated residual value on a straight line basis over their estimated future lives. The major categories of property, plant and equipment are depreciated as follows: Vehicles, equipment and fittings 3 to 10 years Plant and machinery 10 to 15 years Properties: television studios 50 years leaseholds shorter of residual lease term or 50 years Freehold land not depreciated Freehold buildings up to 50 years f) Intangible assets Business combinations and goodwill All business combinations that have occurred since 1 January 2004 are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the identifiable net assets acquired. Subsequent adjustments to the fair values of assets acquired made within 12 months of the acquisition date are accounted for from the date of acquisition. The interim financial information presented has been restated to reflect changes to the fair value adjustments made subsequent to the prior year's interim accounts. For business combinations prior to this date, but after 30 September 1998, goodwill is included at its deemed cost, which represents the amount recorded under the relevant GAAP at that time. The classification and accounting treatment of business combinations occurring prior to 1 January 2004, the date of transition to IFRS, has not been reconsidered as permitted under IFRS 1. Goodwill is stated at cost less any accumulated impairment losses and is allocated to cash generating units. Goodwill is not amortised but tested annually for impairment. Goodwill arising on acquisitions prior to 30 September 1998 was recognised as a deduction from equity. Other intangible assets Other intangible assets acquired by the Group are stated at cost less accumulated amortisation except those acquired as part of a business combination which are shown at fair value at the date of acquisition (in accordance with IFRS 3 (Business Combinations)) less accumulated amortisation. Amortisation Amortisation is charged to the income statement over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill is not amortised but is tested for impairment at each balance sheet date. The useful lives and amortisation methods for each major class of intangible asset are as follows: Film libraries 20 years sum of digits Licences 11 to 17 years straight line Brands 11 years straight line Customer contracts up to 6 years straight line Customer relationships 7 to 10 years straight line g) Distribution rights Programme rights acquired primarily for the purposes of distribution are classified within the balance sheet as non-current assets. They are recognised initially at cost and charged through the income statement over either a 3 or 5 year period depending on genre. h) Other investments Other investments comprise equity securities which do not meet the definition of subsidiaries, joint ventures and associates, and are stated at fair value, with any resultant gain or loss recognised directly in the available for sale reserve in equity. Prior to the Group's adoption of IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS 39 (Financial Instruments: Recognition and Measurement) from 1 January 2005, investments in equity securities were held at initial cost less any impairment subsequently recognised. The effect of adopting IAS 32 and IAS 39 is shown in note 9. i) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the asset's carrying amount exceeds its recoverable amount. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. 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. In respect of assets other than goodwill, 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. Impairment losses in respect of goodwill are not reversed. j) Foreign currencies Foreign currency transactions Transactions in foreign currencies are translated into sterling at the rate of exchange ruling at the date of the transaction. Foreign currency monetary assets and liabilities at the balance sheet date are translated into sterling at the rate of exchange ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities measured at historical cost are translated into sterling at the rate of exchange on the date of the transaction. Financial statements of foreign operations The assets and liabilities of foreign operations are translated into sterling at the rate of exchange ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at the average rate of exchange ruling during the financial period. Exchange differences arising on translation are recognised directly in the translation reserve in equity. Net investment in foreign operations Exchange differences arising on the translation of the net investment in foreign operations, and of related hedges, are taken directly to the translation reserve within equity. In respect of all foreign operations only those translation differences arising since 1 January 2004, the date of transition to IFRS, are presented as a separate component of equity as permitted under IFRS 1. k) Programme rights Where programming, sports rights and film rights are acquired for the primary purpose of broadcasting these are recognised within current assets. An asset is recognised when the Group controls, in substance, the respective assets and the risks and rewards associated with them. For acquired programme rights an asset is recognised as payments are made and is recognised in full when the acquired programming is available for transmission. Programming produced internally either for the purpose of broadcasting or to be sold in the normal course of the Group's operating cycle is recognised within current assets at production cost. Programme costs and rights are written off to operating costs in full on first transmission except certain film rights which are written off over a number of transmissions. Films and programme costs not yet written off at the balance sheet date are included on the balance sheet at the lower of cost and net realisable value. l) Cash and cash equivalents Cash and cash equivalents comprises cash balances and call deposits with maturity of less than or equal to three months. m) Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation arising from past events and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows by a rate which reflects current market assessments of the time value of money and the risks specific to the liability. n) Borrowings Borrowings consist of loans, loan notes and finance leases. Borrowings are recognised initially at fair value, less attributable transaction costs. In subsequent periods loans accounted for using the fair value option amendment to IAS 39 are stated at fair value with the movement recorded in the income statement. Other loans and borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. Prior to the Group's adoption of IAS 32 and IAS 39 from 1 January 2005, amounts were recognised in the balance sheet at cost. The effect of adopting IAS 32 and IAS 39 is shown in note 9. o) IFRS 5 (Non-Current Assets Held for Sale and Discontinued Operations) IFRS 5 applies prospectively for periods beginning on or after 1 January 2005 and has therefore not been adopted for the comparative period. p) Taxation The tax charge for the period comprises both current and deferred tax. Taxation 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 calculated based on the expected rate of tax payable on the taxable income for the year and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method on any temporary differences between the carrying amounts for financial reporting purposes and those for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. A deferred tax asset is recognised only to the extent that it is probable sufficient taxable profit will be available to utilise the temporary difference. q) Employee benefits Defined contribution schemes Obligations under the Group's defined contribution schemes are recognised as an expense in the income statement as incurred. Defined benefit plans The Group's obligation in respect of defined benefit pension plans is calculated separately for each plan 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 plan assets is deducted. The discount rate is the yield at the valuation date on high quality corporate bonds. The calculation is performed by a qualified actuary using the projected unit credit method. A full valuation is carried out at the full year only. The pension cost for the interim period is calculated on a year to date basis by using the actuarially determined pension cost rate at the end of the prior financial year, adjusted for significant market fluctuations since that time and for significant curtailments, settlements, or other significant one-time events. In accordance with IFRS 1 ITV has chosen to recognise the full pensions deficit on the balance sheet at 1 January 2004. The Group has taken the option of adopting early the amendment to IAS 19 (Employee Benefits) issued on 16 December 2004. As a result, actuarial gains and losses are recognised in full in the period in which they arise through the statement of recognised income and expense. Share based compensation The Group operates a number of share based compensation schemes. The fair value of the equity instrument is measured at grant date and spread over the vesting period through the income statement with a corresponding increase in equity. The fair value of the share options and awards is measured using either a Monte-Carlo or Black-Scholes model as appropriate taking into account the terms and conditions of the individual scheme. The amount recognised as an expense is adjusted to reflect the actual vesting except where forfeiture is due only to market based criteria not being achieved. r) Derivatives and other financial instruments The Group uses a limited number of derivative financial instruments to hedge its exposure to fluctuations in interest and other foreign exchange rates. The Group does not hold or issue derivative instruments for speculative purposes. Derivative financial instruments are initially recognised at cost and are subsequently remeasured at fair value. Changes in the fair value of derivatives that are designated and qualify as fair value hedges in respect of on-balance sheet assets and liabilities are recorded in the income statement. Foreign exchange differences on the hedged asset or liability and any movements in the fair value of any hedged bond that is attributable to the hedged risk are also recorded in the income statement. The accounting treatment applied to cash flow hedges in respect of off-balance sheet assets and liabilities relating to contractual purchases of foreign currency sports, programme and film rights can be summarised as follows: • For qualifying hedges, the effective component of changes in the fair value of the foreign currency forward contract is deferred within a separate component of retained earnings. Releases from equity occur via a basis adjustment when the right is recognised on-balance sheet in accordance with the Group's policy. • The ineffective component of the changes in fair value of the hedging instrument is recorded immediately in the income statement. The fair value of foreign currency forward contracts is determined by using forward exchange market rates at the balance sheet date. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of swap counterparties. For qualifying hedge relationships, the Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge. The Group also documents both at the hedge inception and on an on-going basis, its assessment of whether the hedging derivatives are effective in offsetting changes in fair values or cash flows of the hedged items. Prior to the Group's adoption of IAS 32 and IAS 39 from 1 January 2005 interest receipts and payments under interest rate swap and option agreements were accrued so as to match the net income or cost with the related finance expense. No amounts were recognised in respect of future periods. The difference between the fair value and book value of bonds and derivative instruments arising on the acquisition accounting for Carlton was amortised through net interest over the remaining life of the instruments. The effect of adopting IAS 32 and IAS 39 is shown in note 9. s) Dividends Dividends are recognised through equity in the period in which they are declared. t) Investment income Investment income comprises dividends received from the Group's investments. Dividend income is recognised in the income statement on the date the Group's right to receive payments is established. Conversion to International Financial Reporting Standards (IFRS) Following ITV plc's adoption of IFRS, the 2004 comparative financial information in these accounts has been restated and represented under IFRS. The reconciliations below highlight the key impacts on both the profit attributable to equity shareholders and on total equity. ITV plc has produced Preliminary International Financial Reporting Standards Financial Statements for 2004 which set out in greater detail the impact of IFRS on ITV plc's 2004 results and include detailed reconciliations from UK GAAP of the balance sheets at 1 January 2004, 30 June 2004 and 31 December 2004 and the income statements for the six months ended 30 June 2004 and the year ended 31 December 2004. This document is available on the ITV plc corporate website at www.itvplc.com. Reconciliation of profit attributable to equity shareholders from UK GAAP to IFRS 12 months ended Six months 31 December 2004 ended 30 June 2004 £m £m Profit attributable to equity shareholders (UK GAAP) 139 37 IAS 19 (Employee benefits) * (3) (1) IFRS 2 (Share based payment) * (3) (1) IFRS 3 (Business combinations) * 5 (3) Other (1) - Profit attributable to equity shareholders (IFRS) 137 32 * Includes related deferred tax effect Reconciliation of total equity from UK GAAP to IFRS 31 December 2004 30 June 1 January 2004 2004 £m £m £m Total equity (UK GAAP) 3,418 3,378 1,656 IAS 10 (Events after the balance sheet date) 53 45 20 IAS 19 (Employee benefits) * (389) (301) (274) IFRS 3 (Business combinations) * 39 20 - IAS 12 (Taxation) (5) (5) (9) Other (7) (7) (5) Total equity (IFRS) 3,109 3,130 1,388 * Includes related deferred tax effect This information is provided by RNS The company news service from the London Stock Exchange

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