Notes to the Accounts

1. Accounting Policies

Accounting policies have been consistently applied. Corporate expenses less other income', previously shown separately within the sector analysis, have been allocated to profit centres. Comparative figures in the profit and loss account and balance sheet have been restated to reflect the revised presentation of results (see note 2).

A) Basis of accounting The accounts are prepared under the historical cost convention, modified by the revaluation of certain land and buildings and investments, and in accordance with applicable accounting standards. A summary of the significant accounting policies is set out below.

B) Basis of consolidation  The consolidated accounts include the accounts of all subsidiary undertakings made up to 31 December. Where companies have become or ceased to be subsidiary or associated undertakings during the year the Group profit includes profits for the period during which they were subsidiary or associated undertakings.

Goodwill, being either the net excess of the cost of shares in subsidiary undertakings, partnerships and associated undertakings over the value attributable to their net tangible assets on acquisition or the cost of other goodwill by purchase, is deducted from reserves in the year of acquisition. On disposal or closure, goodwill previously charged to reserves is written back and the profit or loss is adjusted accordingly.

The profit of the Group includes the Group's share of the profit of partnerships and associated undertakings, and the consolidated balance sheet includes the Group's interest in partnerships and associated undertakings at the book value of attributable net tangible assets. The figures included in the financial statements have been based on audited accounts, adjusted where necessary by reference to unaudited management accounts for the subsequent period to 31 December.

C) Sales Sales represent the amount of goods and services, net of valued added tax and other sales taxes, and excluding trade discounts, provided to external customers and associated undertakings.

D) Foreign currencies Profit and loss accounts in overseas currencies are translated into sterling at weighted average rates. Balance sheets are translated into sterling at the rates ruling at 31 December. Exchange differences arising on consolidation are taken directly to reserves. Other exchange differences are taken to the profit and loss account where they relate to trading transactions and directly to reserves where they relate to investments.

The principal overseas currencies for the Group are the US dollar and the Spanish peseta. The weighted average rates for the year against sterling were $1.63 and Pts242.1 (1996: $1.58 and Pts199.6) and the year end rates were $1.65 and Pts250.8 (1996: $1.71 and Pts222.6).

E) Pension costs The regular pension cost of the Group's defined benefit pension schemes is charged to the profit and loss account in order to apportion the cost of pensions over the service lives of employees in the schemes. Variations arising from a significant reduction in the number of employees are adjusted in the profit and loss account to the extent that the year's regular pension cost, reduced by other variations, exceeds contributions payable for that year. Other variations are apportioned over the expected service lives of current employees in the schemes.

F) Post-retirement benefits other than pensions Post-retirement benefits other than pensions are accounted for on an accruals basis to recognise this obligation over the expected service lives of the employees concerned.

G) Channel 5 The Group's share of certain Channel 5 initial costs is being amortised. These costs will be amortised by the end of the 10 year licence period. The Group's share of other profits and losses is being equity accounted.

H) Tangible fixed assets The cost or subsequent valuation of tangible fixed assets other than freehold land and investment properties is depreciated over estimated economic lives in equal annual amounts at the rates indicated in note 10.

I) Leases Finance lease rentals are capitalised at the total amount of rentals payable under the leasing agreement (excluding finance charges) and depreciated in accordance with policy H above. Finance charges are written off over the period of the lease in reducing amounts in relation to the written down carrying cost. Operating lease rentals are expensed as incurred.

J) Fixed asset investments Fixed asset investments are stated at cost less provisions for diminution in value, or as revalued by the directors.

K) Stocks Stocks and work in progress are valued at the lower of cost and net realisable value. Television programme production costs and direct costs incurred in the development of titles prior to their publication are included in stocks. These costs are amortised over their estimated economic lives.

L) Deferred taxation Deferred taxation is provided, using the liability method, at the expected applicable rates, on all timing differences between accounting and taxation treatments, including those arising from the revaluation of fixed assets, which are expected to reverse in the foreseeable future. Deferred taxation relief is accounted for in full on long-term timing differences in respect of provisions for unfunded retirement benefits.

M) Capital instruments Capital instruments are included at cost, adjusted for discount accretion or premium amortisation where the intention is to hold them to maturity. Interest receivable thereon and the premium or discount where relevant is taken to the profit and loss account so as to produce a constant rate of return over the period to the date of expected redemption.

Forward foreign exchange contracts and other off-balance sheet instruments are valued at the market prices prevailing at the balance sheet date. Borrowing is classified according to the maturity date of the respective individual holdings.

N) Liquid resources Liquid resources comprise short-term deposits of less than one year and investments which are readily realisable and held on a short-term basis.

O) Retained profits of overseas subsidiary and associated undertakings No provision is made for any additional taxation, less double taxation relief, which would arise on the remittance of profits retained.