Accounting Policies

Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted in the European Union and as applied in accordance with the provisions of the Companies Act 1985.

The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value.

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Basis of consolidation

1. Subsidiaries
   The consolidated financial statements include the financial statements of UBM plc and its subsidiaries as at 31 December each year. The financial statements of subsidiaries are prepared to the same reporting date as the parent company, using consistent accounting policies.

   All intercompany balances and transactions, including unrealised profits arising from intragroup transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered.

   Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group.

   The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

2. Associates
   The Group’s investments in its associates are accounted for under the equity method of accounting. These are entities in which the Group has the power to participate in the financial and operating policy decisions of the investee and which are neither subsidiaries nor joint ventures. The financial statements of the associates are used by the Group to apply the equity method. The reporting dates of the associates and the Group are identical and the accounts are prepared on the basis of consistent accounting policies.

   Under the equity method, the income statement reflects the share of the results of operations of the associates. Where there has been a change recognised directly in the associates’ equity, the Group recognises its share of any changes.

   When the Group’s share of losses in an associate equals or exceed its interest in the associate, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

3. Joint ventures
   The Group has a number of contractual arrangements with other parties which represent joint ventures. The Group’s interests in its joint ventures are accounted for using the equity method of accounting. These are entities over which the Group has entered into an agreement with a third party to share control. The financial statements of the joint ventures are used by the Group to apply the equity method. The reporting dates of the joint ventures and the Group are identical and the accounts are prepared on the basis of consistent accounting policies.

   Under the equity method, the income statement reflects the share of the results of operations of the joint ventures. Where there has been a change recognised directly in the joint ventures’ equity, the Group recognises its share of any changes.

   When the Group’s share of losses in a joint venture equals or exceed its interest in the joint venture, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint venture.

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Changes in accounting policies

The accounting policies adopted are consistent with those of the previous financial year except as follows:

The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards and interpretations, with the exception of IFRIC 14, did not have any effect on the financial statements of the Group. Some did however give rise to additional disclosures:

• IFRS 7 Financial instruments: Disclosures
• IFRIC 7 Applying the Restatement Approach under IAS Financial Reporting in Hyperinflationary Economies
• IFRIC 9 Re-assessment of embedded derivatives
• IFRIC 10 Interim Financial Reporting and Impairment
• IFRIC 11 IFRS 2 – Group and Treasury Share Transactions
• IFRIC 12^* Service Concession Arrangements
• IFRIC 13^* Customer Loyalty Programmes
• IFRIC 14^* The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

^*These interprepatation are yet to be adopted by the European Union, however the Group has early adopted them because they provide guidance on the application of existing standards which have been endorsed for use in the EU via the EU Endorsement mechanism.

The principal effects of these changes are as follows:

IFRS 7 Financial instruments: Disclosures
The Group adopted this standard on 1 January 2007. This requires the Group to make disclosures to enable users of the financial statements to evaluate the significance of the Group’s financial instruments and the nature and extent of risks arising from those financial instruments. These new disclosures are included throughout the financial statements.

IFRIC 7 Applying the Restatement Approach under IAS Financial Reporting in Hyperinflationary Economies
As of 1 January 2007, the Group adopted this interpretation which requires the application of IAS 29 in the reporting period in which an entity first identifies the existence of hyperinflation in the economy of its functional currency as if the economy had always been hyperinflationary. Since the Group does not have operations in any country with hyperinflationary conditions, the change has no impact as at 31 December 2007 or 31 December 2006.

IFRIC 9 Re-assessment of embedded derivatives
The Group adopted IFRIC Interpretation 9 as of 1 January 2007, which establishes that the existence of an embedded derivative should be determined at the date an entity first becomes party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows. This change in accounting policy did not have an effect on the financial statements of the Group.

IFRIC 10 Interim Financial Reporting and Impairment
The Group adopted IFRIC Interpretation 10 as of 1 January 2007, which requires that an entity must not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument or financial asset carried at cost. As the Group had no impairment losses recognised at the interim in either 2007 or 2006, the interpretation had no effect on the financial statements of the Group.

IFRIC 11 – IFRS 2 – Group and Treasury Share Transactions
The Group adopted IFRIC Interpretation 11 as of 1 January 2007, insofar as it applies to consolidated financial statements. This interpretation requires arrangements whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an equity-settled scheme, even if the entity buys the instruments from another party, or the shareholders provide the equity instruments needed. This change in accounting policy did not have an effect on the financial statements of the Group.

IFRIC 12 Service Concession Arrangements
The Group adopted IFRIC Interpretation 12 as of 1 January 2007, which outlines an approach to account for contractual arrangements arising from entities providing public services. This change in accounting policy did not have an effect on the financial statements of the Group because the Group does not enter into such arrangements.

IFRIC 13 Customer Loyalty Programmes
The Group early adopted IFRIC Interpretation 13 as of 1 January 2007, which requires that entities which grant loyalty award credits to customers should allocate some of the proceeds of the initial sale as a liability, being its obligation to provide the awards. The amount allocated to the award credits is measured at fair value, that is, the amount for which the award credits could have been sold separately. The deferred portion of the proceeds shall be recognised as revenue only when the entity has fulfilled its obligations by supplying the awards. This change in accounting policy did not have a material impact on the financial statements of the Group.

IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
The Group early adopted IFRIC Interpretation 14 as of 1 January 2007, which sets out when refunds or reductions in future contributions should be regarded as available in accordance with IAS 19 ‘Employee Benefits’, how a minimum funding requirement might affect the availability of reductions in future contributions and when a minimum funding requirement might give rise to a liability. This change in accounting policy has led to the Group recognising a surplus of £3.1m on one of its defined benefit pension schemes that had previously been treated as irrecoverable. This adjustment has been recognised in retained earnings at 1 January 2006.

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Significant accounting judgements, estimates and assumptions

The preparation of financial statements in conformity with IFRS requires the use of accounting estimates and assumptions. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. Management continually evaluate these estimates, assumptions and judgements based on available information and experience. The areas involving a higher degree of judgement or complexity are described below.

Impairment of goodwill
The Group determines whether goodwill is impaired on at least an annual basis. This requires an estimation of the higher of fair value less costs to sell and value in use of the cash generating units (‘CGUs’) to which goodwill is allocated. Estimating the fair value less costs to sell is based on the best information available, and refers to the amount at which the CGU could be bought or sold in a current transaction between willing parties. The valuation methods are based on an earnings multiple approach. The earnings multiple approach uses precedent transaction multiples, obtained from comparable businesses in the media sector. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects management’s estimate of return on capital employed required in each CGU which is subject to a value in use calculation. The Group uses external advisors to calculate the fair value less costs to sell and value in use of its CGU. The carrying amount of goodwill at 31 December 2007 was £783.2m (2006: £690.8m) which the directors do not consider is impaired. Further details are given in note 12.

Intangible assets
The Group recognises intangible assets acquired as part of business combinations at fair value at the date of acquisition. The determination of these fair values is based upon management’s judgement and includes assumptions on the timing and amount of future incremental cash flows generated by the assets and the selection of an appropriate cost of capital. Furthermore, management must estimate the expected useful lives of intangible assets and charge amortisation on these assets accordingly. The Group uses external advisors to calculate the fair value of intangibles acquired as part of business combinations.

Deferred tax assets
Significant management judgement is required to determine the amount of deferred tax assets arising from unused tax losses that can be recognised. Management reassesses unrecognised deferred tax assets at each balance sheet date. Based upon the likely timing and level of future taxable profits together with future tax planning strategies, management has concluded that no deferred tax assets should be recognised at either 31 December 2007 or 31 December 2006. The amount of unrecognised tax losses at 31 December 2007 was £49.2m (2006: £30.3m). Management will closely monitor the opportunities for the recoverability of these tax losses and will reassess the need to recognise unrecognised deferred tax assets at subsequent balance sheet dates. Further details are given in note 9.

Current tax liabilities
The group has an accrual for tax liabilities which is measured at the directors’ prudent estimate of corporate tax that will become payable. These tax provisions are estimates and the actual amounts and timing of future cash flows are dependent on future events. Any difference between expectations and the actual future liability will be accounted for in the period such determination is made.

Retirement benefit obligations
The cost of defined benefit pension plans is determined using actuarial valuations prepared by independent firms of actuaries. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. The assumptions and the resulting estimates are reviewed annually and, when appropriate, changes are made which affect the actuarial valuations and, hence, the amounts of retirement benefit expense recognised in profit and loss and the amounts of actuarial gains and losses recognised in the statement of recognised income and expenses. The carrying amount of retirement benefit obligations at 31 December 2007 was a surplus of £36.2m (2006: deficit of £3.8m). Further details are given in note 25.

Provision for bad and doubtful debts
The Group provides services and sells goods to a large number of businesses, mainly on credit terms. Management knows that certain debts due to us will not be paid through the default of a small number of our customers. Estimates are used in determining the level of debts that management believes will not be collected. These estimates reflect such factors as the current state of the local economies, particular industry issues and past experience of payment history.

Provisions
The Group recognises provisions for onerous property leases, reorganisation and restructuring costs and other obligations which exist at the balance sheet date and obligations arising from businesses or assets disposed of on or before the balance sheet date. These provisions are estimates and the actual cost and timing of future cash flows are dependent on future events. Management reassesses the amounts of these provisions at each balance sheet date in order to ensure that they are measured at the current best estimate of the expenditure required to settle the obligation at the balance sheet date. Any difference between the amounts previously recognised and the current estimates is recognised immediately in the consolidated income statement.

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Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.

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Revenue

Revenue is recognised when it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable for the sale of goods and services, net of trade discounts, VAT, other sales related taxes, and after eliminating sales within the Group. Revenue is recognised as follows:

(a) Sales of services
Revenue is recognised in the accounting period in which the services are rendered by reference to stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.

Publishing: advertising revenue is recognised on issue of the publication. Revenue from subscriptions is recognised over the life of the subscription.

Exhibitions: revenue is recognised when the show has been completed. Deposits received in advance are recorded as deferred income in the balance sheet.

News distribution: revenue is recognised on message delivery. Revenue from subscriptions is recognised over the life of the subscription.

Directories: advertising revenue is recognised on issue of the directory and copy sales revenue is recognised on the sale of the directory.

Online: revenue is recognised at the point of delivery or fulfilment for single/discrete services and over the life of subscriptions for subscription services.

Data/services: revenue from data subscriptions is recognised over the life of the subscription. Revenue from data projects for immediate delivery is recognised on delivery of the data. Revenue from data projects for future delivery is recognised on a percentage completion basis over the life of the project.

(b) Sale of goods
Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably.

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Interest and other income

1. Interest income
   Income is recognised as the interest accrues using the effective interest rate method; that is, the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset.
   
   
2. Dividend income
   Dividend income is recognised when the right to receive the payment is established.
   
   
3. Rental income
   Rental income is recognised on a straight-line basis over the lease terms on ongoing leases.

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Goodwill and intangible assets

1. Goodwill
   Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination including directly related professional fees over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired.
   
   As at the acquisition date, any goodwill acquired is allocated to the relevant cash-generating unit (‘CGU’). Impairment is determined by assessing the recoverable amount of the CGU to which the goodwill relates. The recoverable amount of a CGU is the higher of the CGU’s fair value less costs to sell and its value in use. Where the recoverable amount of the CGU is less than the carrying amount, an impairment is recognised. Where goodwill forms part of a CGU and part of the CGU is disposed of, the goodwill associated with the disposal is included in the net assets attributed to the disposal when determining the gain or loss on disposal.
   
   
2. Intangible assets
   Internally generated intangible assets, including internally generated software, are recognised as an expense in the year in which the expenditure is incurred except for website development costs relating to the application and infrastructure development, graphical design and content development stages incurred with third parties which are recognised as assets and measured at cost.
   Intangible assets acquired separately from third parties, including major software systems and website development costs are recognised as assets and measured at cost.
   
   Intangible assets acquired in a business combination are measured at fair value at the date of acquisition.
   
   Following initial recognition, intangible assets are measured at cost or fair value at the date of acquisition less any amortisation and any impairment losses.
   
   Intangible assets are amortised over their useful lives as follows:
   
   

   	Useful Lives	Method
   Brands	10 years	Straight line
   Software	5-6 years	Straight line
   Customer contracts and relationships	1-10 years	Straight line
   Subscription lists	2-5 years	Straight line
   Trademarks	10 years	Straight line
   Databases	2-10 years	Straight line
   Website development costs	3 years	Straight line

   Useful lives are also examined on an annual basis and adjustments, where applicable are made on a prospective basis.

   The Group does not have any intangible assets with indefinite lives.

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Property, plant and equipment

Property, plant and equipment is stated at cost less any depreciation and any impairment losses. Depreciation is provided on all items except freehold land. Depreciation rates are calculated so that assets are written down to residual value in equal annual instalments over their expected useful lives, which are as follows:

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset is included in the income statement in the year the asset is derecognised.

The assets residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at each financial year end.

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Impairment of assets

Property, plant and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For purposes of assessing impairment, assets that do not individually generate cash flows are assessed as part of the cash generating unit to which they belong. Cash generating units are the lowest levels for which there are cash flows that are largely independent of the cash flows from other assets or groups of assets.

Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired.

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Inventories

Inventories and work in progress are valued on the first in first out basis at the lower of cost and net realisable value. Cost comprises materials and directly attributable production costs.

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Leases

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases.

The Group does not have any finance leases. The Group is also not involved in any arrangements which fall within the scope of IFRIC 4 Determining Whether an Arrangement Contains a Lease.

Group as a lessee
Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term.

Group as a lessor
Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same bases as rental income.

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Trade and other receivables

Trade receivables, which generally have 30–90 day terms, are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

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Cash and cash equivalents

Cash and cash equivalents include cash at bank and in hand, deposits and short-term deposits with an original maturity of three months or less.

For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts which are shown within borrowings.

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Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect is material, expected future cash flows are discounted using a current pre-tax rate that reflects, as appropriate, the risks specific to the liability.

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Deferred tax

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of goodwill or of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary difference can be utilised.

Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

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Foreign currencies

Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the income statement, except where hedge accounting is applied and for differences on monetary assets and liabilities that form part of the Group’s net investment in a foreign operation. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in profit or loss.

The assets and liabilities of foreign operations are translated into sterling at the rate of exchange ruling at the balance sheet date. Income and expenses are translated at weighted average exchange rates for the year. The resulting exchange differences are taken directly to a separate component of equity, which was set to zero on first time adoption of IFRS. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

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Pension costs

The Group sponsors a number of defined benefit schemes and defined contribution schemes.

For the defined contribution schemes, the contributions payable to the scheme in respect of employee service rendered during the accounting period is recognised as an expense in that period.

For the defined benefit pension schemes, the liability for the benefits earned by employees in return for service rendered in the current and prior periods is determined using the projected unit credit method. The discount rate used is the current rate of return on an AA corporate bonds of equivalent term and currency to the liabilities. Plan assets are measured at their market value at the balance sheet date. The extent to which the schemes’ assets exceed the liability is shown as a surplus in the balance sheet only to the extent that a surplus is recoverable by the Group.

The following is charged to operating profit:

• the increase in the present value of pension scheme liabilities arising from employee service in the current period;
• the increase in the present value of pension scheme liabilities as a result of benefit improvements over the period during which such improvements vest; and
• gains and losses arising on settlements/curtailments.

A credit in respect of the expected return on the schemes’ assets and a charge in respect of the increase during the period in the present value of the schemes’ liabilities because the benefits are one period closer to settlement are shown in the income statement as ‘financing income – pension schemes’.

Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside profit or loss and presented in the consolidated statement of recognised income and expense.

Defined benefit pension surpluses are recognised where scheme rules indicate that such surpluses are available to the Group in the form of either an unconditional right to refund if the scheme were to be wound up or reductions in future contributions.

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Share-based payment transactions

Employees (including directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (‘equity-settled transactions’).

Equity-settled transactions
The Group has applied the requirements of IFRS 2 Share-based Payments to all grants of equity instruments made after 7 November 2002 that were unvested at 1 January 2005.

The cost of equity settled transactions with employees is measured by reference to the fair value at the grant date of the equity instruments granted. The fair value is determined by an external valuer using the Black Scholes or Monte Carlo methods as appropriate.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the periods in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’). At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the achievement or otherwise of non-market conditions and of the number of equity instruments that will ultimately vest or, in the case of an instrument subject to a market condition, be treated as vesting as described below. The movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

No expense or increase in equity is recognised for awards that do not ultimately vest. Awards where vesting is conditional upon a market condition are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.

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Share capital

Ordinary shares
Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

B shares
The Group’s existing B shares of 8²³/₄₄p each are classified as equity.

Treasury shares
Where any Group company purchases the Company’s equity share capital, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders.

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Borrowing costs

Borrowing costs are recognised as an expense when incurred.

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Financial instruments

Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. Financial liabilities within the scope of IAS 39 are classified as either financial liabilities at fair value through profit and loss (derivative financial liabilities) or financial liabilities at amortised cost (borrowings and trade and other payables).

When financial instruments are recognised initially, they are measured at fair value, and in the case of investments not at fair value through profit or loss, after taking account of directly attributable transaction costs.

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Derivative financial instruments

Derivative financial instruments are measured at fair value at each balance sheet date. The fair value of forward exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap contracts is determined by reference to market rates of interest.

For the purpose of hedge accounting, hedges are classified as either fair value hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability; or as cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a forecast transaction.

Changes in the fair value of derivative financial instruments that are designated and effective as cash flow hedges of forecast transactions are recognised directly in equity. Amounts deferred in this way are recognised in the income statement in the same period in which the hedged firm commitments or forecast transactions are recognised in the income statement.

In relation to fair value hedges which meet the conditions for hedge accounting, any gain or loss from remeasuring the hedging instrument at fair value is recognised in the income statement. Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and recognised in the income statement.

Changes in the fair value of the derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gains or losses on the hedging instrument recognised in equity are retained until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement for the period.

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Other financial assets

The Group classifies its other financial assets as available-for-sale financial assets. Management determines the classification of its investments at initial recognition.

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Listed and unlisted investments are stated at fair value, except where there is no market value in an active market and where the fair value cannot be reliably measured, in which case they are measured at cost. Gains and losses on remeasurement to fair value are included in equity until the investment is disposed of or deemed to be impaired when they are transferred to profit or loss.

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Convertible bond

The convertible bond is split into two components: a debt component and a component representing the embedded derivatives in the bond. The debt component represents the Group’s liability for future interest coupon payments and the redemption amount. The embedded derivatives represent the value of the option that bondholders have to convert into ordinary shares of the Company. As the debt is denominated in US dollars and the ordinary shares are denominated in UK sterling, the embedded derivative is a liability rather than an equity instrument.

The debt component of the convertible bond is measured at amortised cost and therefore increases as the present value of the interest coupon payments and redemption amount increases, with a corresponding charge to finance cost – other than interest. The debt component decreases by the cash interest coupon payments made. The embedded derivatives are measured at fair value at each balance sheet date, and the change in the fair value is recognised in the income statement. The remaining convertible bond was either repurchased and cancelled or converted to ordinary shares during 2006. No convertible bond remains outstanding.

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Borrowings

All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowings. After initial recognition, loans and borrowings are subsequently measured at amortised cost, and any difference between the proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.

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Derecognition of financial assets and liabilities

Financial assets
A financial asset is derecognised where:

• the rights to receive cash flows from the asset have expired; or
• the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; or
• the Group has transferred its right to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) hasneither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to pay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled of similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as derecognition of the original liability and recognition of a new liability, and the difference between the carrying amounts of the original liability and the fair value of the new liability is recognised in the income statement.

Future changes in accounting policies
The following IAS and IFRS have been issued but are not effective for the year ended 31 December 2007:

• IAS 1 – Presentation of Financial Statements (revised) – which makes a number of changes to the presentation of the primary statements, including the requirement to present a new statement of comprehensive income which may be presented alongside a separate income statement as a separate primary statement or combined with the income statement as a single statement. The revised standard becomes effective for financial years beginning on or after 1 January 2009. The adoption will necessitate changes to the way in which the Group currently presents its financial statements;
• IAS 23 – Borrowing Costs (revised) – which removes the option to expense borrowing costs and requires them to be capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset. The revised standard becomes effective for financial years beginning on or after 1 January 2009. The adoption is not expected to have an impact on the Group’s financial statements when implemented;
• IFRS 2 – Share-Based Payment (amendment) – which specifies that only service and performance conditions are vesting conditions. All other features of a sharebased payment, for example market-related vesting conditions, are not vesting conditions and so should be included in the grant date fair value of the sharebased payment. All cancellations, whether by the Group or by other parties, should result in an acceleration of the vesting period. The revised standard becomes effective for financial years beginning on or after 1 January 2009. The adoption is not expected to have an impact on the Group’s financial statements when implemented;
• IFRS 3 – Business Combinations (revised) – which makes a number of significant changes to the treatment of acquisition costs and contingent consideration relating to an acquisition and provides an option (‘the full goodwill method’) to recognise 100% of the goodwill of an acquired entity not just the acquiring entity’s portion of the goodwill, with corresponding increases to goodwill and minority interests. This revised standard becomes effective for financial years beginning on or after 1 July 2009 and so the Group will apply it prospectively to all business combinations on or after 1 January 2010. The impact of the revised standard is expected to lead to changes in the Group’s accounting treatment of acquisition costs, which are currently included within goodwill, but will need to be expensed. The standard will also require the Group to estimate contingent consideration at the date of acquisition and include that amount in the cost of acquisition and, hence, effect goodwill. Any revisions to estimates of contingent consideration are currently reflected with a corresponding entry to goodwill. However, on adoption of the revised standard, changes resulting from post-acquisition events, such as meeting revenue and earnings targets, will be recorded in the income statement;
• IAS 27 – Consolidated and Separate Financial Statements (revised) – which no longer restricts the allocation to minority interest of losses incurred by a subsidiary to the amount of the non-controlling equity investment in the subsidiary. A partial disposal of equity interest in a subsidiary that does not result in a loss of control will be accounted for as an equity transaction and will have no impact on goodwill nor will it give rise to any gain or loss. Where there is loss of control of a subsidiary, any retained interest will have to be remeasured to fair value, which will impact the gain or loss recognised on disposal. This revised standard applies retrospectively for annual periods beginning on or after 1 January 2010. The adoption is not expected to have a significant impact on the Group’s financial statements when implemented;
• IFRS 8 – Operating Segments – which requires segmental disclosures that reflect the segments that management uses internally for evaluating the performance of operating segments and allocating resources to those segments. This standard was issued in November 2006 and becomes effective for financial years beginning on or after 1 January 2009. The adoption will result in additional disclosure, but is not expected to impact the segments for which the Group currently presents information.

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