REG - ITV PLC - ITV Preliminary Results 2016 <Origin Href="QuoteRef">ITV.L</Origin> - Part 6
01/03/2017 07:07
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454 451
Later than one year and not more than five years 789 633
More than five years 112 141
1,355 1,225
Studios production costs
Production inventory comprises the costs incurred by ITV Studios in producing a programme, where the programme is part way
through the production process and not yet available for delivery to a broadcaster. They are recognised within current
assets at the production cost incurred, and are expensed in operating costs on delivery of episodes.
Also included here are dramas that that are typically more expensive to produce. The production cost of a drama is partly
funded by the commissioning network licence fee and tax credits, if available. The remaining deficit is funded by the Group
and is recovered by future distribution sales. Once the production is complete the deficit is classified as a Distribution
Right.
The Studios programme rights and other inventory at the year end are shown in the table below:
2016 2015
£m £m
Production costs 153 171
3.1.2 Distribution rights
Accounting policies
Distribution rights are programme rights the Group buys from producers to derive future revenue, principally through
licensing to broadcasters. These are classified as non-current assets as these rights are used to derive long-term economic
benefit for the Group.
Distribution rights are recognised initially at cost and charged through operating costs in the income statement over a
period not exceeding five years, reflecting the value and pattern in which the right is consumed. Advances paid for the
acquisition of distribution rights are disclosed as distribution rights as soon as they are contracted. These advances are
not expensed until the programme is available for distribution. Up to that point they are assessed annually for impairment
through the reassessment of the future sales expected to be earned from that title.
The net book value of distribution rights at the year end are as follows:
2016 2015
£m £m
Distribution rights 31 29
The movement during the year comprises new rights acquired of £40 million (2015: £43 million) and amounts charged to the
income statement of £38 million (2015: £27 million).
3.1.3 Trade and other receivables
Accounting policies
Trade receivables are recognised initially at the value of the invoice sent to the customer and subsequently at the amounts
considered recoverable (amortised cost). Where payments are not due for more than one year, they are shown in the financial
statements at their net present value to reflect the economic cost of delayed payment. The Group provides goods and
services to substantially all its customers on credit terms.
Estimates are used in determining the level of receivables that will not, in the opinion of the Directors, be collected.
These estimates include such factors as historical experience, the current state of the UK and overseas economies and
industry specific factors. A provision for impairment of trade receivables is established when there is sufficient evidence
that the Group will not be able to collect all amounts due.
The carrying value of trade receivables is considered to approximate fair value. During the year £35 million of trade
receivable invoices were sold under a receivables purchase agreement (see note 4.2 for more details). Trade and other
receivables can be analysed as follows:
2016 2015
£m £m
Due within one year:
Trade receivables 315 328
Other receivables 39 37
Prepaid employment linked consideration (see note 3.4) 21 55
Prepayments and accrued income 151 111
526 531
Due after more than one year:
Trade receivables 12 8
Prepaid employment linked consideration (see note 3.4) - 18
Accrued income and other receivables 27 7
Total trade and other receivables 565 564
Prepaid employment linked consideration totalling £21 million (2015: £55 million) relates to the acquisition of Talpa Media
in 2015 (see note 3.4 for details). This represents the portion of the initial consideration of E150 million that is
recoverable from the seller in the event he leaves within the initial two years following acquisition. This amount is
amortised over the two years to 31 March 2017 and recognised as exceptional expense (see note 2.2).
£327 million (2015: £336 million) of total trade receivables that are not impaired are aged as follows:
2016 2015
£m £m
Current 299 308
Up to 30 days overdue 19 17
Between 30 and 90 days overdue 6 8
Over 90 days overdue 3 3
327 336
The balance above is stated net of a provision of £4 million (2015: £5 million) for impairment of trade receivables. Of the
provision total, £3 million relates to balances overdue by more than 90 days (2015: £4 million) and £1 million relates to
current balances (2015: £1 million).
Movements in the Group's provision for impairment of trade receivables can be shown as follows:
2016 2015
£m £m
At 1 January 5 7
Charged during the year 3 3
Unused amounts reversed (4) (5)
At 31 December 4 5
3.1.4 Trade and other payables due within one year
Accounting policies
Trade payables are recognised at the value of the invoice received from a supplier. The carrying value of current and
non-current trade payables is considered to approximate fair value. Trade and other payables due within one year can be
analysed as follows:
2016 2015
£m £m
Trade payables 71 65
VAT and social security 61 71
Other payables 291 177
Accruals 332 289
Deferred income 205 184
960 786
Other payables include £105 million (2015: £3 million) of acquisition related liabilities due in 2017, of which £72 million
is employment linked contingent consideration and £33 million is payable to sellers under put options agreed on
acquisition.
3.1.5 Trade and other payables due after more than one year
Trade and other payables due after more than one year can be analysed as follows:
2016 2015
£m £m
Trade payables 57 48
Other payables 63 89
120 137
Trade payables primarily relate to film creditors for which payment is due after more than one year. Other payables include
the non-current portion of acquisition related liabilities of £53 million (2015: £82 million), of which £38 million is
employment linked contingent consideration and £15 million is payable to sellers under put options agreed on acquisition.
3.1.6 Working capital management
Cash and working capital management continues to be a key focus. During the year the cash outflow from working capital was
£28 million (2015: outflow of £59 million) derived as follows:
2016 2015
£m £m
(Increase)/decrease in programme rights and other inventory and distribution rights (35) 4
(Increase) in receivables (56) (21)
Increase/(decrease) in payables 63 (42)
Working capital outflow (28) (59)
The working capital outflow for the year excludes the impact of balances acquired on the acquisition of subsidiaries during
the year (see note 3.4).
3.2 Property, plant and equipment
Keeping it simple
The following section shows the physical assets used by the Group to operate the business, generating revenues and profits.
These assets include office buildings and studios, as well as equipment used in broadcast transmission, programme
production and support activities.
The cost of these assets is the amount initially paid for them. A depreciation expense is charged to the income statement
to reflect annual wear and tear and the reduced value of the asset over time. Depreciation is calculated by estimating the
number of years the Group expects the asset to be used (useful economic life). If there has been a technological change or
decline in business performance the Directors review the value of the assets to ensure they have not fallen below their
depreciated value. If an asset's value falls below its depreciated value an additional one-off impairment charge is made
against profit.
This section also explains the accounting policies followed by ITV and the specific estimates made in arriving at the net
book value of these assets.
Accounting policies
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Certain items of
property, plant and equipment that were 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 less depreciation up to the date of transition.
Leases
Finance leases are those which transfer substantially all the risks and rewards of ownership to the lessee.
Determining whether a lease is a finance lease requires judgement as to whether substantially all of the risks and benefits
of ownership have been transferred to the Group. Estimates used by management in making this assessment include the useful
economic life of assets, the fair value of the asset and the discount rate applied to the total payments required under the
lease. Assets held under such leases are included within property, plant and equipment and depreciated on a straight-line
basis over their estimated useful lives.
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 an effective
interest 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 (see note 2.1 for further details of operating lease commitments).
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 useful lives. The annual depreciation charge is sensitive to the estimated useful
life of each asset and the expected residual value at the end of its life. The major categories of property, plant and
equipment are depreciated as follows:
Asset class Depreciation policy
Freehold land not depreciated
Freehold buildings up to 60 years
Leasehold improvements shorter of residual lease term or estimated useful life
Vehicles, equipment and fittings * 3 to 20 years
* Equipment includes studio production and technology assets.
Impairment of assets
Property, plant and equipment that is subject to depreciation is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Indicators of impairment may include changes in
technology and business performance.
Property, plant and equipment
Property, plant and equipment can be analysed as follows:
Freehold land and buildings Improvements to leasehold land and buildings Vehicles, equipment Total
and fittings
£m Long Short Owned Finance leases £m
£m £m £m £m
Cost
At 1 January 2015 120 67 17 237 16 457
Additions - - 1 37 - 38
Disposals and retirements (31) (1) - (10) - (42)
At 31 December 2015 89 66 18 264 16 453
Additions 3 - 2 28 - 33
Foreign exchange - - - 6 - 6
Reclassifications - - - 3 (3) -
Disposals and retirements - - - (29) (13) (42)
At 31 December 2016 92 66 20 272 - 450
Depreciation
At 1 January 2015 17 13 15 150 14 209
Charge for the year 1 2 - 24 - 27
Disposals and retirements (12) (1) - (9) - (22)
At 31 December 2015 6 14 15 165 14 214
Charge for the year 1 2 1 27 - 31
Foreign exchange - - - 3 - 3
Reclassifications - - - 1 (1) -
Disposals and retirements - - - (29) (13) (42)
At 31 December 2016 7 16 16 167 - 206
Net book value
At 31 December 2016 85 50 4 105 - 244
At 31 December 2015 83 52 3 99 2 239
Additions in the year includes £4 million (2015: £6 million) relating to assets owned by subsidiaries acquired during the
year.
Included within property, plant and equipment are assets in the course of construction of £19 million (2015: £16 million).
In 2016, the Group retired £42m of assets from use with a net book value of £Nil. In 2015, the Group disposed of the Quay
Street site and related assets in Manchester for £23 million, representing a gain on sale of £5 million.
In 2013 the Group acquired the freehold for the London Television Centre for £58 million, although the Directors' view is
that fair value of the property would be significantly higher than the carrying value.
Capital commitments
There are £4 million of capital commitments at 31 December 2016 (2015: £2 million).
3.3 Intangible assets
Keeping it simple
The following section shows the non-physical assets used by the Group to generate revenue and profits.
These assets include formats and brands, customer contracts and relationships, contractual arrangements, licences, software
development, film libraries and goodwill. The cost of these assets is the amount that the Group has paid or, where there
has been a business combination, the fair value of the specific intangible assets that could be sold separately or which
arise from legal rights. In the case of goodwill, its cost is the amount the Group has paid in acquiring a business over
and above the fair value of the individual assets and liabilities acquired. The value of goodwill is 'intangible' value
that comes from, for example, a uniquely strong market position and the outstanding productivity of its employees.
The value of intangible assets, with the exception of goodwill, reduces over the number of years the Group expects to use
the asset, the useful economic life, via an annual amortisation charge to the income statement. Where there has been a
technological change or decline in business performance the Directors review the value of assets, including goodwill, to
ensure they have not fallen below their amortised value. Should an asset's value fall below its amortised value an
additional one-off impairment charge is made against profit.
This section explains the accounting policies applied and the specific judgements and estimates made by the Directors in
arriving at the net book value of these assets.
Accounting policies
Goodwill
Goodwill represents the future economic benefits that arise from assets that are not capable of being individually
identified and separately recognised. The goodwill recognised by the Group has all arisen as a result of business
combinations. Goodwill is stated at its recoverable amount being cost less any accumulated impairment losses and is
allocated to the business to which it relates.
Due to changes in accounting standards goodwill has been calculated using three different methods depending on the date the
relevant business was purchased.
Method 1: All business combinations that have occurred since 1 January 2009 were accounted for using the acquisition
method. Under this method, goodwill is measured as the fair value of the consideration transferred (including the
recognition of any part of the business not yet owned (non-controlling interests)), less the fair value of the identifiable
assets acquired and liabilities assumed, all measured at the acquisition date. Any contingent consideration expected to be
transferred in the future will be recognised at fair value at the acquisition date and recognised within other payables.
Contingent consideration classified as an asset or liability that is a financial instrument is measured at fair value with
changes in fair value recognised in the income statement. The determination of fair value is based on discounted cash
flows. The key assumptions take into consideration the probability of meeting each performance target and the discount
rate.
Where less than 100% of a subsidiary is acquired, and call and put options are granted over the remaining interest, a
non-controlling interest is initially recognised in equity at fair value, which is established based on the value of the
put option. A call option is recognised as a derivative financial instrument, carried at fair value. The put option is
recognised as a liability within other payables, carried at the present value of the put option exercise price, and a
corresponding charge is included in merger and other reserves. Any subsequent remeasurement of the put option liability is
recognised within finance income or cost.
Subsequent adjustments to the fair value of net assets acquired can only be made within 12 months of the acquisition date,
and only if fair values were determined provisionally at an earlier reporting date. These adjustments are accounted for
from the date of acquisition.
Acquisitions of non-controlling interests are accounted for as transactions with owners and therefore no goodwill is
recognised as a result of such transactions. Transaction costs incurred in connection with those business combinations,
such as legal fees, due diligence fees and other professional fees, are expensed as incurred.
Method 2: All business combinations that occurred between 1 January 2004 and 31 December 2008 were accounted for using the
purchase method in accordance with IFRS 3 Business Combinations (2004). Goodwill on those combinations represents the
difference between the cost of the acquisition and the fair value of the identifiable net assets acquired and did not
include the value of the non-controlling interest. Transaction costs incurred in connection with those business
combinations, such as legal fees, due diligence fees and other professional fees, were included in the cost of
acquisition.
Method 3: For business combinations prior to 1 January 2004, goodwill is included at its deemed cost, which represents the
amount recorded under UK GAAP at that time less accumulated amortisation up to 31 December 2003. 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.
Other intangible assets
Intangible assets other than goodwill are those that are distinct and can be sold separately or which arise from legal
rights.
Within ITV there are two types of other intangible assets: those assets directly purchased by the Group for day-to-day
operational purposes (such as software licences and development) and intangible assets identified as part of an acquisition
of a business.
Intangible assets acquired directly by the Group are stated at cost less accumulated amortisation. Those separately
identified intangible assets acquired as part of an acquisition or business combination are shown at fair value at the date
of acquisition less accumulated amortisation.
The main intangible assets the Group has valued are formats, brands, licences, contractual arrangements, customer contracts
and relationships and libraries.
Each class of intangible assets' valuation method on initial recognition, amortisation method and estimated useful life is
set out in the table below:
Class of intangible asset Amortisation method Estimated useful life Valuation method
Brands Straight-line 8 to 14 years Applying a royalty rate to the expected future revenue over the life of the brand.
Formats Straight-line up to 8 years Expected future cash flows from those assets existing at the date of acquisition are estimated. If applicable, a contributory charge is deducted for the use of other assets needed to exploit the cash flow. The net cash flow is then discounted back to present value.
Customer Straight-line or reducing balance as appropriate up to 6 years
contracts
Customer relationships Straight-line 5 to 10 years
Contractual arrangements Straight-line up to 10 years depending on Expected future cash flows from those contracts existing at the date of acquisition are estimated. If applicable, a contributory charge is deducted for the use of other assets needed to exploit the cash flow. The net cash flow is then discounted back to present value.
the contract
terms
Licences Straight-line 11 to 29 years depending on Start-up basis of expected future cash flows existing at the date of acquisition. If applicable, a contributory charge is deducted for the use of other assets needed to exploit the cash flow. The net cash flow is then discounted back to present value.PSB licences are valued as a start-up business with only the license in place.
term of licence
Libraries and other Sum of digits or straight line as appropriate up to 20 years Initially at cost and subsequently at cost less accumulated amortisation.
Software licences and development Straight-line 1 to 5 years Initially at cost and subsequently at cost less accumulated amortisation.
Determining the fair value of intangible assets arising on acquisition requires judgement. The Directors make estimates
regarding the timing and amount of future cash flows derived from exploiting the assets being acquired. The Directors then
estimate an appropriate discount rate to apply to the forecast cash flows. Such estimates are based on current budgets and
forecasts, extrapolated for an appropriate period taking into account growth rates, operating costs and the expected useful
lives of assets. Judgements are also made regarding whether, and for how long, licences will be renewed; this drives our
amortisation policy for those assets.
The Directors estimate the appropriate discount rate using pre-tax rates that reflect current market assessments of the
time value of money and the risks specific to the assets or businesses being acquired.
Amortisation
Amortisation is charged to the income statement over the estimated useful lives of intangible assets unless such lives are
judged to be indefinite. Indefinite life assets, such as goodwill, are not amortised but are tested for impairment at each
year end.
Impairment
Goodwill is not subject to amortisation and is tested annually for impairment and when circumstances indicate that the
carrying value may be impaired.
Other intangible assets are subject to amortisation and are reviewed for impairment whenever events or changes in
circumstances indicate that the amount carried in the statement of financial position is less than its recoverable amount.
Determining whether the carrying amount of intangible assets has any indication of impairment requires judgement. Any
impairment is recognised in the income statement.
An impairment test is performed by assessing the recoverable amount of each asset, or for goodwill, the cash-generating
unit (or group of cash-generating units) related to the goodwill. Total assets (which include goodwill) are grouped at the
lowest levels for which there are separately identifiable cash flows ('cash-generating unit' or CGU).
The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. The value in use is
based on the present value of the future cash flows expected to arise from the asset.
In testing for impairment, estimates are used in deriving cash flows and the discount rates. Such estimates reflect current
market assessments of the risks specific to the asset and the time value of money. The estimation process is complex due to
the inherent risks and uncertainties associated with long-term forecasting. If different estimates of the projected future
cash flows or a different selection of an appropriate discount rate or long-term growth rate were made, these changes could
materially alter the projected value of the cash flows of the asset, and as a consequence materially different amounts
would be reported in the financial statements.
Impairment losses in respect of goodwill cannot be reversed. 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.
Intangible assets
Intangible assets can be analysed as follows:
Goodwill Formats Customer Contractual Licences Libraries Software Total
£m and brands contracts and arrangements £m and other licences and £m
£m relationships £m £m development
£m
Cost
At 1 January 2015 3,627 201 385 10 121 97 89 4,530
Additions 102 273 23 - - 1 15 414
Foreign exchange 15 7 3 - - 1 - 26
At 31 December 2015 3,744 481 411 10 121 99 104 4,970
Additions 44 3 - - 55 - 13 115
Foreign exchange 47 51 9 1 - 4 - 112
At 31 December 2016 3,835 535 420 11 176 103 117 5,197
Amortisation and impairment
At 1 January 2015 2,654 177 347 5 90 57 71 3,401
Charge for the year - 27 17 2 4 8 9 67
Foreign exchange - 1 1 - - - - 2
At 31 December 2015 2,654 205 365 7 94 65 80 3,470
Charge for the year - 44 16 2 6 9 12 89
Foreign exchange - 5 6 1 - 2 - 14
At 31 December 2016 2,654 254 387 10 100 76 92 3,573
Net book value
At 31 December 2016 1,181 281 33 1 76 27 25 1,624
At 31 December 2015 1,090 276 46 3 27 34 24 1,500
All intangible asset additions in the year, excluding software, are due to the acquisition of UTV Limited, as detailed in
note 3.4 (2015: four companies acquired).
Goodwill impairment tests
The carrying amount of Goodwill for each CGU is represented as follows:
2016 2015
£m £m
Broadcast & Online 386 342
SDN 76 76
ITV Studios 719 672
1,181 1,090
There has been no impairment charge for any CGU during the year (2015: £nil).
When assessing impairment, the recoverable amount of each CGU is based on value in use calculations. These calculations
require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax market
discount rate.
Cash flow projections are based on the Group's current five-year plan. Beyond the five-year plan these projections are
extrapolated using an estimated long-term growth rate of 2% (2015: 2%). The growth rate used is consistent with the
long-term average growth rates for both the industry and the countries in which they are located and is appropriate because
these are long-term businesses.
The discount rate has been revised for each CGU to reflect the latest market assumptions for the risk-free rate, the equity
risk premium and the net cost of debt. There is currently no reasonably possible change in discount rate that would reduce
the headroom in any CGU to zero.
Broadcast & Online
The goodwill in this CGU arose as a result of the acquisition of broadcasting businesses since 1999, the largest of which
was the merger of Carlton and Granada in 2004 to form ITV plc, which was treated as an acquisition of Carlton for
accounting purposes. Broadcast & Online goodwill also includes the goodwill arising on acquisition of UTV Limited in
February 2016.
The main assumptions on which the forecast cash flow projections for this CGU are based include: the share of the
television advertising market; share of commercial impacts; programme and other costs; and the pre-tax market discount
rate.
The key assumption in assessing the recoverable amount of Broadcast & Online goodwill is the size of the television
advertising market. In forming its assumptions about the television advertising market, the Group has used a combination of
long-term trends, industry forecasts and in-house estimates, which place greater emphasis on recent experience. No
impairment was identified. Also as part of the impairment review, a sensitivity of up to -10% was applied to 2017 and -3%
to 2018 with no subsequent recovery, again with no impairment identified. The Directors believe that currently no
reasonably possible change in these assumptions would reduce the headroom in this CGU to zero.
An impairment charge of £2,309 million was recognised in the Broadcast & Online CGU in 2008, as a result of the downturn in
the short-term outlook for the advertising market. The advertising market has substantially improved since then however the
impairment cannot be reversed. The impairment review set out above results in significant headroom in excess of the 2008
impairment amount.
A pre-tax market discount rate of 10.4% (2015: 9.7%) has been used in discounting the projected cash flows.
SDN
Goodwill was recognised when the Group acquired SDN (the licence operator for DTT Multiplex A) in 2005. It represented the
wider strategic benefits of the acquisition specific to the Group, principally the enhanced ability to promote Freeview as
a platform, business relationships with the channels which are on Multiplex A and additional capacity available from 2010.
The main assumptions on which the forecast cash flows are based are: income to be earned from medium-term contracts; the
market price of available multiplex video streams; and the pre-tax market discount rate. These assumptions have been
determined by using a combination of current contract terms, recent market transactions and in-house estimates of video
stream availability and pricing. No impairment was identified.
As part of the impairment review, sensitivity was applied to the main assumptions with no impairment identified (2017: -10%
growth, 2018: 0% growth). The Directors believe that currently no reasonably possible change in the income and availability
assumptions would reduce the headroom in this CGU to zero.
A pre-tax market discount rate of 11.7% (2015: 11.5%) has been used in discounting the projected cash flows.
ITV Studios
The goodwill for ITV Studios has arisen as a result of the acquisition of production businesses since 1999. Significant
balances were created from the acquisition by Granada of United News and Media's production businesses in 2000 and the
merger of Granada and Carlton in 2004 to form ITV plc. ITV Studios goodwill also includes all of the goodwill arising from
recent acquisitions since 2012, with the largest acquisitions being Leftfield in 2014, followed by Talpa and Twofour Group
in 2015.
The key assumptions on which the forecast cash flows for the whole CGU were based include revenue (including international
revenue and the ITV Studios share of ITV output, growth in commissions and hours produced), margins and the pre-tax market
discount rate. These assumptions have been determined by using a combination of extrapolation of historical trends within
the business, industry estimates and in-house estimates of growth rates in all markets. No impairment was identified.
As part of the impairment review sensitivity was applied to the main assumptions with no impairment identified (2017: -10%
growth, 2018: 0% growth). The Directors believe that currently no reasonably possible change in the income and availability
assumptions would reduce the headroom in this CGU to zero.
A pre-tax market discount rate of 11.6% (2015: 10.1%) has been used in discounting the projected cash flows.
There have been no changes to the ITV Studios CGU in the year and the Directors consider that a single ITV Studios CGU
continues to remain appropriate.
3.4 Acquisitions
Keeping it simple
The following section outlines what the Group has acquired in the year.
Most of the deals are structured so that a large part of the payment made to the sellers ('consideration') is determined
based on future performance. This is done so that the Group can both align incentives for growth, while reducing risk so
that total consideration reflects actual performance, not expected.
IFRS accounting standards require some of this consideration to be included in the purchase price used in determining
goodwill ('contingent consideration'). Examples of contingent consideration include top-up payments and recoupable
performance adjustments. Any remaining consideration is required to be recognised as a liability or expense outside of
acquisition accounting (put option liabilities and employment-linked contingent payments known as 'earnout' payments).
The Group considers the income statement impact of all consideration to be capital in nature and therefore excludes it from
adjusted profit. Therefore, for each acquisition below, the distinction between the types of consideration has been
explained in detail.
Acquisitions
During the period, the Group completed the acquisition of UTV Limited, which has been included in the results of the
Broadcast & Online operating segment. The business fits with the strategy of strengthening the Group's free-to-air business
and enables it to run a more efficient network. The following section provides a summary of the acquisition.
UTV Limited
On 29 February 2016 the Group acquired a 100% controlling interest in UTV Limited which, together with its 100% subsidiary
UTV Ireland Limited, owned the television assets of UTV Media plc. UTV is the market leading commercial broadcaster in
Northern Ireland, broadcasting ITV content alongside high-quality local programming. The strategic rationale for the
acquisition was to purchase the Northern Irish Channel 3 license.
UTV Limited launched a new dedicated channel for the Republic of Ireland in 2015 via its subsidiary UTV Ireland Limited.
Management concluded that the best prospect of delivering a strong and sustainable Irish broadcaster was to bring UTV
Ireland under common ownership with TV3. ITV therefore sold the company to Virgin Media, owner of TV3 on 30 November 2016,
for consideration of E10million. Further details are included in note 2.5.
Key terms:
The Group purchased the businesses for a cash consideration of £100 million.
UTV Limited acquisition accounting:
Intangibles, being the value placed on brands and licences of £58 million were identified and goodwill was valued at £44
million. Goodwill represents the value placed on the opportunity to diversify and grow the business by the Group. The
goodwill arising on acquisition is not expected to be deductible for tax purposes. Other fair value adjustments have been
made to the opening balance sheet, though none of them are individually significant.
Acquisitions in 2015
In 2015 the Group made four acquisitions, all of which are included in the results of the ITV Studios operating segment.
Talpa Media B.V.
On 30 April 2015 the Group acquired a 100% controlling interest in Talpa Media B.V. and its subsidiaries.
Key terms:
Cash consideration of £362 million (E500 million) was paid at acquisition and the maximum total consideration for 100% of
the business, including the initial payment, was £796 million (E1,100 million, undiscounted). All future payments are
performance based.
The deal structure allows for a further £434 million (E600 million) payable after two, five and eight years, on the
achievement of stretching performance targets for the business in the years following acquisition. For these amounts to be
payable in the future, the deal requires the seller to remain with the business during the earnout period. Further, if the
seller leaves within the first two years following acquisition, E150 million of the initial consideration would be refunded
to ITV. While accounting standards determine that these payments are treated as an expense, even the E150 million
refundable, the Group considers these payments as capital in nature, and therefore expenses in relation to these payments
are excluded from adjusted profits as exceptional items.
Talpa Media B.V. acquisition accounting:
Intangibles, being the value placed on formats, brands, customer contracts, non-compete arrangements and libraries, of £276
million (E382 million) were identified and goodwill was valued at £41 million (E57 million). Goodwill represents the value
placed on the opportunity to diversify and grow the content and formats produced by the Group. The goodwill arising on
acquisition is not expected to be deductible for tax purposes. Other fair value adjustments have been made to the opening
balance sheet, though none of them are individually significant.
Twofour Group
On 24 June 2015 the Group acquired Boom Supervisory Limited, the holding company of Twofour Group.
Key terms:
The Group purchased 100% of the Twofour Group for a cash consideration of £55 million. Subsequently the sellers subscribed
to 25% of the share capital of the acquiring company. Put and call options have been granted over this 25% in Twofour
Group; these options both being exercisable over the next three to five years. The transaction has been accounted for on an
anticipated acquisition basis and a non-controlling interest has not been recognised. The maximum total consideration,
including the initial payment, is £280 million (undiscounted). These payments are dependent on future performance of the
business and linked to ongoing employment, therefore accounted for as expense. The Group considers these payments as
capital in nature, and therefore expenses in relation to these payments are excluded from adjusted profits as exceptional
items.
Twofour Group acquisition accounting:
Intangibles, being the value placed on formats, brands, customer contracts, non-compete arrangements and libraries, of £18
million were identified and goodwill was valued at £50 million. Goodwill represents the value placed on the opportunity to
diversify and grow the content and formats produced by the Group. The goodwill arising on acquisition is not expected to be
deductible for tax purposes. Other fair value adjustments have been made to the opening balance sheet, though none of them
are individually significant.
Other 2015 acquisitions
The Group made initial payments totalling £15 million for two smaller acquisitions, Cats on the Roof Media Ltd and Mammoth
Screen Ltd, with a view that these acquisitions will strengthen and complement ITV's existing position as a producer for
major television networks in the UK. The maximum additional consideration that the Group could pay is £66 million
(undiscounted). Goodwill totalling £11 million arising on these acquisitions is not expected to be deductible for tax
purposes.
Effect of acquisition
The acquisitions noted above had the following impact on the Group assets and liabilities:
£m 2016 2015
UTV Total
Consideration transferred:
Initial consideration (net of cash acquired) (Note A) 97 406
Less: consideration classified as prepaid employment linked consideration (Note B) - (109)
Total consideration 97 297
Fair value of net assets acquired:
Property, plant and equipment 4 6
Intangible assets 58 297
Deferred tax liabilities (11) (71)
Trade and other receivables 5 101
Trade and other payables (7) (138)
Net assets held for sale 4 -
Fair value of net assets 53 195
Goodwill 44 102
Contributions to the Group's performance:
From date of acquisition
Revenue 27 185
EBITA before exceptionals (Note C) 8 29
Proforma - January to December
Revenue 33 306
EBITA before exceptionals (Note C) 9 49
Note A: Consideration for all acquisitions is net of cash acquired and estimated debt and working capital settlements. Cash
acquired during the year is £3 million (2015: £33 million).
Note B: In 2015 total consideration was net of employment linked consideration of £109 million (E150 million). IFRS
requires the employment linked consideration to be treated as remuneration. See note 3.1.4 for further detail of this
prepayment.
Note C: UTV profit for the ten months from date of acquisition is £8 million and £9 million for January to December 2016,
both excluding the effect of discontinued operations. This represents UTV's contribution to Group profits. On a
consolidated basis the acquisition resulted in a reduction in ITV Non-NAR revenues previously earned from UTV, which on a
Group basis is offset by the reduction in UTV's costs.
3.5 Investments
Keeping it simple
The Group holds non-controlling interests in a number of different entities. Accounting for these investments, and the
Group's share of any profits and losses, depends on the level of control or influence the Group is granted via its
interest. The three principal types of non-consolidated investments are: joint arrangements (joint ventures or joint
operations), associates and available for sale investments.
A joint venture is an investment where the Group has joint control, with one or more third parties. An associate is an
entity over which the Group has significant influence (i.e. power to participate in the investee's financial and operating
decisions). Any other investment is an available for sale investment.
Accounting policies
For joint ventures and associates the Group applies equity accounting. Under this method, it recognises the investment in
the entity at cost and subsequently adjusts this for its share of profits or losses, which are recognised in the income
statement within non-operating items and included in adjusted profit. Where the Group has invested in associates by
acquiring preference shares or convertible debt instruments, the share of profit recognised is usually £nil as no equity
interest exists. Available for sale investments are held at fair value unless the investment is a start-up business, in
which case it is valued at cost and assessed for impairment.
The carrying amount of each category of our investments is represented as follows:
2016 2015
£m £m
Joint ventures 4 1
Associates 60 18
Available for sale investments 12 11
76 30
The increase in the year is due to investment in New Form, a digital producer-broadcaster, and increased investment in ITV
Tomorrow Studios, a scripted studio launched in 2014. Further smaller investments have been made in line with Group's
strategy to grow the international content business.
Please refer to the Annual Report for the list of principal investments held at 31 December 2016.
3.6 Provisions
Keeping it simple
A provision is recognised by the Group where an obligation exists relating to events in the past and it is probable that
cash will be paid to settle it.
A provision is made where the Group is not certain how much cash will be required to settle a liability, so an estimate is
required. The main estimates relate to the cost of holding properties that are no longer in use by the Group, the
likelihood of settling legal claims and contracts the Group has entered into that are now unprofitable.
Accounting policies
A provision is recognised in the statement of financial position when the Group has a present legal or constructive
obligation arising from past events, it is probable cash will be paid to settle it and the amount can be estimated
reliably. Provisions are determined by discounting the expected future cash flows by a rate that reflects current market
assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised
as a financing cost in the income statement. The value of the provision is determined based on assumptions and estimates in
relation to the amount and timing of actual cash flows which are dependent on future events.
Provisions
The movements in provisions during the year are as follows:
Contract Property Legal and Other Total
provisions provisions provisions £m
£m £m £m
At 1 January 2016 6 2 25 33
Additions - 1 - 1
Utilised (6) - (4) (10)
Released - (1) - (1)
At 31 December 2016 - 2 21 23
Provisions of £19 million are classified as current liabilities (2015: £28 million). Unwind of the discount is £nil in 2016
and 2015.
Contract provisions comprised onerous commitments on transmission infrastructure that were expected to be utilised over the
remaining contract period and onerous technology services contracts which would not be utilised.
Legal and Other provisions totalling £21 million (2015: £25 million) primarily relate to potential liabilities that may
arise as a result of Boxclever having been placed into administrative receivership, most of which relate to pension
arrangements. In 2011 the Determinations Panel of the Pensions Regulator determined that Financial Support Directions
(FSDs) should be issued against certain Group companies, which would require the Group to put in place financial support
for the Boxclever Scheme. The Group is challenging this in the Upper Tribunal. The process is ongoing and aside from
procedural issues there were no substantive case developments in the period. The Directors have obtained leading counsel's
opinion and extensive legal advice in connection with the proceedings and continue to believe that the provision held is
appropriate. The reduction in provisions during the year was due to settlement of various other legal matters.
3.7 Pensions
Keeping it simple
In this note we explain the accounting policies governing the Group's pension scheme, followed by analysis of the
components of the net defined benefit pension deficit, including assumptions made, and where the related movements have
been recognised in the financial statements. In addition, we have placed text boxes to explain some of the technical terms
used in the disclosure.
What are the Group's pension schemes?
There are two types of pension schemes. A 'Defined Contribution' scheme that is open to ITV employees, and a number of
'Defined Benefit' schemes that have been closed to new members since 2006 and will close to future accrual in 2017. In 2016
on acquisition of UTV Limited the Group took over the UTV Defined Benefit Scheme.
What is a Defined Contribution scheme?
The 'Defined Contribution' scheme is where the Group makes fixed payments into a separate fund on behalf of those employees
that have elected to participate in saving for their retirement. ITV has no further obligation to the participating
employee and the risks and rewards associated with this type of scheme are assumed by the members rather than the Group. It
is the members' responsibility to make investment decisions relating to their retirement benefits.
What is a Defined Benefit scheme?
In a 'Defined Benefit' scheme, members receive cash payments during retirement, the value of which is dependent on factors
such as salary and length of service. The Group makes contributions to the scheme, a separate trustee-administered fund
that is not consolidated in these financial statements, but is reflected on the defined benefit pension deficit line on the
consolidated statement of financial position. It is the responsibility of the Trustee to manage and invest the assets of
the Scheme and its funding position. The Trustee, appointed according to the terms of the Scheme's documentation, is
required to act in the best interest of the members and is responsible for managing and investing the assets of the scheme
and its funding position.
In the event of poor returns the Group needs to address this through a combination of increased levels of contribution or
by making adjustments to
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