REG - ITV PLC - Preliminary Results - year ended 31 December 2015 <Origin Href="QuoteRef">ITV.L</Origin> - Part 5
02/03/2016 07:12
- Part 5: For the preceding part double click ID:nRSB7134Qd
materially different amounts would be reported in the financial statements.
Impairment losses in respect of goodwill are not 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£m Formats andbrands£m Customer contractsand relationships£m Contractual arrangements£m Licences£m Libraries andother£m Software licences and development Total£m
Cost
At 1 January2014 3,467 179 352 10 121 81 78 4,288
Additions 146 21 30 - - 16 11 224
Foreignexchange 14 1 3 - - - - 18
At 31 December2014 3,627 201 385 10 121 97 89 4,530
Additions 102 273 23 - - 1 15 414
Foreignexchange 15 7 3 - - 1 - 26
At 31 December2015 3,744 481 411 10 121 99 104 4,970
Amortisation andimpairment
At 1 January2014 2,654 159 326 2 83 50 60 3,334
Charge for theyear - 18 21 3 7 7 11 67
At 31 December2014 2,654 177 347 5 90 57 71 3,401
Charge for theyear - 27 17 2 4 8 9 67
Foreignexchange - 1 1 - - - - 2
At 31 December2015 2,654 205 365 7 94 65 80 3,470
Net bookvalue
At 31 December2015 1,090 276 46 3 27 34 24 1,500
At 31 December2014 973 24 38 5 31 40 18 1,129
All intangible asset additions in the year, excluding software, are due to the acquisition of four production companies, as
detailed in note 3.4 (2014: three production companies acquired).
Goodwill impairment tests
The carrying amount of Goodwill for each CGU is represented as follows:
2015£m 2014£m
Broadcast &Online 342 342
SDN 76 76
ITV Studios 672 555
1,090 973
There has been no impairment charge for any CGU during the year (2014: £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% (2014: 2%). The growth rate used is consistent with the
long-term average growth rates for both the industry and the country 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.
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 -15% was applied to 2016, 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.
A pre-tax market discount rate of 9.7% (2014: 10.6%) 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 in the period up to and beyond digital switchover; 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 (2016: -5%
growth, 2017: -10% 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 11.5% (2014: 12.6%) 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 in 2012 to 2015, with the largest acquisition addition to goodwill being Leftfield in 2014, followed by
Talpa and Twofour in 2015.
The key assumptions on which the forecast cash flows were based include revenue (including international revenue and the
ITV Studios share of ITV output, growth in commissions and hours produced), margin growth 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 (2016: -5%
growth, 2017: -10% 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 10.1% (2014: 11.7%) has been used in discounting the projected cash flows.
Following the acquisitions made by ITV Studios in 2015, the Directors considered how assets and resources are shared across
the Studios division and the level of integration within the management structure for the purposes of reporting and
strategic decision- making. They concluded 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.
All of the deals are structured so that a large part of the payment made to the sellers is determined based on future
performance ('consideration'). 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 are therefore excluded
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 four acquisitions, all of which have been included in the results of the ITV Studios
operating segment. Each of the businesses fit with the strategy of growing the Group's content business and to work with
other parts of the ITV Studios segment to exploit that content globally. The following section provides a summary of the
material acquisitions.
Talpa Media B.V.
On 30 April 2015 the Group acquired 100% controlling interests in Talpa Media B.V. and its subsidiaries. Talpa Media is the
entertainment show producer behind The Voice, The Voice Kids, I Love My Country, Dating In The Dark and Dance Dance Dance.
The Group consolidates 100% of the earnings of the business.
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, is £796 million (E1,100 million, undiscounted).
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, a significant portion of the initial consideration would be
refunded to ITV.
Structuring the deal in this way helped manage risks in terms of initial capital outlay and created a joint incentive
between ITV and the seller to grow the business, however IFRS requires any payment that links a seller to remaining in the
business as an employment cost. The Group considers these payments as capital in nature, and therefore expenses in relation
to these payments are excluded from adjusted profits as an exceptional item.
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. Twofour Group owns 51%
of Mainstreet Pictures. Twofour Group is an independent production business with a range of scripted and unscripted
programmes including The Jump, Educating Series (Educating Essex, Educating Yorkshire), Hotel Inspector, Taking New York
and Ibiza Weekender.
Key terms:
The Group purchased the Twofour Group for a cash consideration of £55 million, subsequently the sellers subscribed to 25%
of the share capital of the acquiring company. A put and call option has 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 for 100% of the
business, including the initial payment, is £280 million (undiscounted). These payments are dependent on future performance
of the business and linked to ongoing employment. The Group considers these payments as capital in nature, and therefore
expenses in relation to these payments are excluded from adjusted profits as an exceptional item.
Provisional 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 The Group is currently in the process of completing the valuations for the net
assets acquired with the businesses. The Group expects to finalise the valuations of acquired assets and liabilities in the
first half of 2016.
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 an initial payment of £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, which represents the value placed on the opportunity to grow the content produced by the Group, has been
provisionally valued at £11 million. The goodwill arising on these acquisitions are not expected to be deductible for tax
purposes.
Acquisitions in 2014
Leftfield Entertainment was acquired for an initial consideration (net of cash acquired) of £214 million ($360 million) for
80% of the membership interests in May 2014. The remaining 20% equity interest was acquired in December 2015. In
consideration for the acquisition of the minority interest the Group assumed certain obligations of the seller, most
notably earnout arrangements for its subsidiaries. No additional cash consideration was payable to the seller as a result
of the purchase of the remaining minority interest.
The total maximum additional consideration payable by ITV for the acquisition of 100% of the membership interest of
Leftfield Entertainment, including the additional assumed earnout obligations, is £65 million ($100 million) and is
dependent on future performance and is linked to ongoing employment.
Intangible assets of £65 million ($109 million) were identified in 2014, being the value placed on brands, customer
contracts, non- compete arrangements andlibraries.
The Group also acquired 51% of the membership interest in DiGa Vision, a US-based producer and 100% of the controlling
interest in United Productions, a company based in Denmark. The total initial consideration (net of cash acquired) was £5
million and the maximum additional amount payable is £32 million (undiscounted). The final payout is dependent on future
performance and is linked to ongoing employment.
Intangibles of £2 million were identified, largely reflecting the value placed on brands, customer contracts and
contractual arrangements.
Effect of acquisition
The acquisitions noted above had the following impact on the Group assets and liabilities:
Recognisedvaluesonacquisition
£m TalpaMedia Twofour Other 2015Total 2014 Total
Considerationtransferred:
Initialconsideration(netofcashacquired)(NoteA) 347 49 10 406 214
Less: consideration classified as prepaid employment linked consideration (NoteB) (109) - - (109) (29)
Totalconsideration 238 49 10 297 185
Fair value of net assetsacquired:
Property, plant andequipment 2 4 - 6 5
Intangibleassets 276 18 3 297 67
Deferred taxliabilities (66) (5) - (71) -
Trade and otherreceivables 78 15 8 101 32
Trade and otherpayables (93) (33) (12) (138) (45)
Fair value of netassets 197 (1) (1) 195 59
Non-controlling interest measured at fair value (NoteC) - - - - 20
Goodwill 41 50 11 102 146
Otherinformation:
Presentvalueoftheliabilityonoptions - - - - 20
Presentvalueatacquisitionoftheearnoutpayment (NoteD) 186 10 27 223 4
Contributions to the Group'sperformance:
From date ofacquisition
Revenue 121 42 22 185 62
EBITA before exceptionals (NoteE) 25 2 2 29 14
Proforma - January toDecember
Revenue 193 80 33 306 88
EBITA before exceptionals (NoteF) 45 3 1 49 20
Note A: Consideration for all acquisitions is net of cash acquired and estimated debt and working capital settlements. Cash
acquired during the year comprises Talpa
£22 million, Twofour £6 million and Other £5 million.
Note B: Total consideration is net of employment linked consideration of £109 million. IFRS 3 (R) requires the employment
linked consideration to be treated as remuneration. This amount is repayable to the Group should the seller terminate the
service agreement within the first two years following completion. The remaining balance is shown within trade and other
receivables and is expensed over two years.
Note C: Non-controlling interest arises where the Group acquires less than 100% of the equity interest in a business, but
obtains control.
Note D: This represents the present value of earnouts as at acquisition.
Note E: Adjusting for exceptional costs relating to employment linked consideration reduces the contribution to the Group's
profit after tax for the period from the date of acquisition to a loss of £35 million for Talpa, a profit of £1 million for
Twofour and £nil on other acquisitions.
Note F: Adjusting for exceptional costs relating to employment linked consideration reduces the contribution to the Group's
profit after tax on a full year proforma basis to a loss of £38 million for Talpa, a profit of £1 million for Twofour and a
loss of £1 million on other acquisitions.
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. 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 value of all investments are shown as non-current assets on the Statement of Financial Position. The £16
million increase in the year comprises £14 million in relation to the acquisition of associates and available for sale
investments and £2 million of funding to existing joint ventures.
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:
Contractprovisions£m Propertyprovisions£m Legal andotherprovisions£m Total£m
At 1 January2015 3 3 15 21
Additions 5 - 10 15
Utilised (2) - - (2)
Released - (1) - (1)
At 31 December2015 6 2 25 33
Provisions of £28 million are classified as current liabilities (2014: £17 million). Unwind of the discount is £nil in 2015
and 2014.
Contract provisions comprise onerous commitments on transmission infrastructure that are expected to be utilised over the
remaining contract period and onerous technology services contracts which will notbe utilised.
Legal and Other provisions totalling £25 million (2014: £15 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 reference 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 increase in provisions during the year was primarily due to anticipated costs of
settling 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.
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 manages the necessary investment, mortality and inflation risks in order to
meet these obligations. 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 the scheme. Schemes can be funded, where regular cash contributions are
made by the employer into a fund which is invested, or
unfunded, where no regular money or assets are required to be put aside to cover future payments.
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.
Accounting policies
Defined contribution scheme
Obligations under the Group's defined contribution schemes are recognised as an operating cost in the income statement as
incurred. For 2015, total contributions expensed were £16 million (2014: £14 million).
Defined benefit scheme
The Group's obligation in respect of the Defined Benefit Scheme (the 'Scheme') is calculated by estimating the amount of
future retirement benefit that eligible employees ('members') have earned in return for their services. That benefit
payable in the future is discounted to today's value and then the fair value of scheme assets contributed by the Group is
deducted to measure the net pension deficit.
The liabilities of the Scheme are measured by discounting the best estimate of future cash flows to be paid using the
'projected unit' method. This method is an accrued benefits valuation method that makes allowance for projected earnings of
members in the future up to retirement.
These calculations are complex and are performed by a qualified actuary. There are many judgements and estimates necessary
to calculate the Group's estimated liabilities, the main assumptions are set out later in this section. Movements in
assumptions during the year are called 'actuarial gains and losses' and these are recognised in the period in which they
arise through the statement of comprehensive income.
The latest triennial valuation of the Scheme was undertaken as at 1 January 2014 by an independent actuary appointed by the
Trustee of the Scheme and agreed in early 2016. The next triennial valuation will be as at 1 January 2017 and is expected
to be agreed in 2018. This will drive subsequent contribution rates.
An unfunded scheme in relation to previous Directors is accounted for under IAS 19 and the Group is responsible for meeting
the pension obligations as they fall due. It is securitised by assets held outside of the ITV Pension Scheme in the form of
gilts and included within cash and cash equivalents (see note 4.1).
The defined benefit pension deficit
The net pension deficit at 31 December 2015 was £176 million (2014: £346 million).
The net assets and liabilities of the Scheme are recognised in the consolidated statement of financial position and shown
within non-current liabilities. The totals recognised in the current and previous years are:
2015£m 2014£m
Total defined benefit schemeobligations (3,446) (3,687)
Total defined benefit schemeassets 3,270 3,341
Net pensiondeficit (176) (346)
The remaining sections provide further detail of the value of the Scheme's assets and liabilities, how these are accounted
for and the impact on the income statement.
Defined benefit scheme obligations
Keeping it simple
What cause movements in the defined benefit pension obligations?
The areas that impact the defined benefit obligation (the pension scheme liabilities) position at the year end are as
follows:
· Current service cost - the cost to the Group of the future benefits earned by members that relates to the members'
service in the current year. This is charged to operating costs in the income statement.
· Interest cost - the pension obligations payable in the future are discounted to the present value at year end. A
discount factor is used to determine the current value today of the future cost. The interest cost is the unwinding of one
year's movement in the present value of the obligation. It is broadly determined by multiplying the discount rate at the
beginning of the period by the updated present value of the obligation during the period. The discount rate is a key
assumption explained later in this section. This interest cost is recognised through net financing costs in the income
statement (see note 4.4).
· Actuarial gains or losses - there are broadly two causes of actuarial movements. 'Experience' adjustments, which arise
when comparing assumptions made when estimating the liabilities and what has actually occurred, and adjustments resulting
from changes in actuarial assumptions e.g. movements in corporate bond yields. Key assumptions are explained in detail
later in this section. Actuarial gains or losses are recognised through other comprehensive income.
· Benefits paid - any cash benefits paid out by the Scheme will reduce the obligation.
The movement in the present value of the Group's defined benefit obligation is analysed below:
2015£m 2014£m
Defined benefit obligation at 1January 3,687 3,315
Current servicecost 8 7
Interestcost 126 144
Actuarial (gain) /loss (217) 366
Benefitspaid (158) (145)
Defined benefit obligation at 31December 3,446 3,687
Of the above total defined benefit obligation at 31 December 2015, £46 million relates to unfunded schemes (2014: £48
million). See note 4.1 for details.
Assumptions used to estimate the Scheme obligations
Keeping it simple
What are the main assumptions used to estimate the Scheme obligations?
The main assumptions are:
· future salary levels
· future pensionable salary levels
· an estimate of increases in pension payments
· the life expectancy of members
· the effect of inflation on all these factors
· the discount rate used to estimate the present day fair value of these obligations
How do we determine the appropriate assumptions?
The Group takes independent actuarial advice relating to the appropriateness of the assumptions used.
IFRS requires that we estimate a discount rate by reference to high quality fixed income investments in the UK that match
the estimated term of the pension obligations.
The inflation assumption has been set by looking at the difference between the yields on fixed and index-linked Government
bonds. The inflation assumption is used as a basis for the remaining financial assumptions, except where caps have been
implemented.
The discount rate has therefore been obtained using the yields available on AA rated corporate bonds which match projected
cash flows. The Group's estimate of the weighted average term of the liabilities is 15 years (2014: 15 years).
The principal assumptions used in the Scheme's valuations at the year end were:
2015 2014
Discount ratefor:
Past serviceliabilities 3.80% 3.50%
Future serviceliabilities 4.00% 3.70%
Inflation assumptionfor:
Past serviceliabilities 3.00% 3.00%
Future serviceliabilities 3.10% 3.05%
Rate of pensionable salaryincreases 0.90% 0.90%
Rateofincreaseinpensionpayment(LPI1 5%pensionincreases) 2.90% 2.90%
Rateofincreasetodeferredpensions(CPI) 2.00% 2.00%
1. Limited Price Index.
The table below reflects published mortality investigation data in conjunction with the results of investigations into the
mortality experience of Scheme members. The assumed life expectations on retirement are:
2015 2015 2014 2014
Retiring today atage 60 65 60 65
Males 28.0 23.2 27.9 23.1
Females 30.6 25.7 30.5 25.6
Retiring in 20 years atage 60 65 60 65
Males 30.0 25.0 29.9 24.9
Females 32.6 27.6 32.5 27.5
Keeping it simple
Which assumptions have the biggest impact on estimating the Scheme liabilities?
It is important to note that comparatively small changes in the assumptions used may have a significant effect on the
consolidated income statement and statement of financial position. This 'sensitivity' to change is analysed below to
demonstrate how small changes in
assumptions can have a large impact on the estimation of the Scheme's liabilities.
The sensitivities regarding the principal assumptions used to measure the defined benefit obligation are set out below:
Assumption Changeinassumption Impactondefinedbenefitobligation
Discountrate Increase/decrease by0.1% Decrease/increase by £50 million / £55million
Rate of inflation (Retail PriceIndex) Increase/decrease by0.1% Increase/decrease by £15 million / £15million
Rate of inflation (Consumer PriceIndex) Increase/decrease by0.1% Increase/decrease by £10 million /£10 million
Lifeexpectations Increase by oneyear Increase by £90million
The analysis above considers the impact of the single change in the assumption while keeping the other assumptions
unchanged, except for inflation. The inflation sensitivities allow for consequential changes to all pension increases
linked to the relevant index. The sensitivity analyses have been determined by extrapolating the impact on the defined
benefit obligation at the year end with changes in key assumptions that might reasonably occur.
In practice, changes in one assumption may be accompanied by offsetting changes in another assumption (although this is not
always the case). Changes in the assumptions may occur at the same time as changes in the market value of Scheme assets,
which may or may not offset the changes in assumptions.
The sensitivity analysis for the impact of life expectations on the defined benefit liability does not include the
potential offsetting benefit of the longevity swap classified as a Scheme asset. It is estimated that a £75 million benefit
would arise on the value of the longevity swap from a one year increase in the market-based assumption of mortality.
(Please refer to the 'Keeping it simple' box in the following section for further information on the longevity swap).
Total defined benefit scheme assets
Keeping it simple
The Scheme holds assets across a number of different classes which are managed by the Trustee, who consults with the Group
on changes to its investment policy.
What are the pension Scheme assets?
At 31 December 2015 the Scheme's assets were invested in a diversified portfolio that consisted primarily of equity and
debt securities. The tables below set out the major categories of assets.
Financial instruments are in place in order to provide protection against changes in market factors (interest rates and
inflation) which could act to increase the net pension deficit. These financial instruments are classified as Scheme
assets.
One such instrument is the longevity swap which the Scheme transacted in 2011 to obtain protection against the effect of
increases in the life expectation of the majority of pensioner members at that date. Under the swap, the Trustee agreed to
make pre-determined payments in return for payments to meet the specified pension obligations as they fall due,
irrespective of how long the members and their dependants live. The difference in the present values of these two streams
of payments is reflected in the Scheme assets. The swap had a nil valuation at inception and, using market-based
assumptions, is subsequently adjusted for changes in the market life expectancy and market discount rates.
How do we measure the pension Scheme assets?
Defined benefit scheme assets are measured at their fair value and can change due to the following:
· Interest income on scheme assets - this is determined by multiplying the fair value of the Scheme assets by the discount
rate, both taken as of the beginning of the year. This is recognised through net financing costs in the income statement.
· Return on assets arise from differences between the actual return and interest income on Scheme assets and are
recognised through other comprehensive income.
· Employer's contributions are paid into the Scheme to be managed and invested.
· Benefits and administrative expenses paid out by the Schemes will lower the fair value of the Scheme's assets
The movement in the fair value of the defined benefit scheme's assets is analysed below:
2015£m 2014£m
Fair value of Scheme assets at 1January 3,341 2,870
Interest income on Schemeassets 116 128
(Loss)/returnonassets,excludinginterestincome (126) 390
Employercontributions 102 103
Benefitspaid (158) (145)
Administrative expensespaid (5) (5)
Fair value of Scheme assets at 31December 3,270 3,341
The actual return on the Scheme's assets, being the sum of the interest income on Scheme assets and return on Scheme
assets, for the year ended 31 December 2015 was a decrease of £10 million (2014: increase of £518 million).
How are the Scheme's assets invested?
At 31 December 2015 the Scheme's assets were invested in a diversified portfolio that consisted primarily of equity and
debt securities. The fair value of the Scheme's assets are shown in the following table by major category:
Marketvalue2015£m Marketvalue2014£m
Quotedequities 651 654
Quotedbonds* 2,219 2,329
Total quotedassets 2,870 2,983
Property 55 51
Infrastructure 68 77
Hedgefunds/alternatives 196 183
Insurancepolicies 40 42
Cash and cashequivalents 86 50
Other 20 22
Longevity swap fairvalue (65) (67)
Total unquotedassets 400 358
Total Schemeassets 3,270 3,341
* Quoted bonds include interest rate and inflation swaps.
Included in the above are overseas assets of £1,198 million (2014: £1,218 million), comprised of equities of £564 million
(2014:£569 million) and bonds of £634 million (2014: £649 million).
When selecting the mix of assets to hold, and considering their related risks and returns, the Trustee will weigh up the
variability of returns against the target long-term rate of return on the overall portfolio.
Keeping it simple
What was the impact of movements on the Scheme's assets and liabilities?
The sections above describe how the Scheme obligations and assets are comprised and measured. The following section sets
out the impact of various movements and expenses on the Scheme on the Group's financial statement.
Amounts recognised through the income statement
Amounts recognised through the income statement are as follows:
2015£m 2014£m
Amount charged to operatingcosts:
Current servicecost (8) (7)
Scheme administrationexpenses (5) (5)
(13) (12)
Amount charged to net financingcosts:
Net interest on defined benefitobligation (10) (16)
Total charged in the consolidated incomestatement (23) (28)
Amounts recognised through the consolidated statement of comprehensive income
The amounts recognised through the consolidated statement of comprehensive income/(cost) are:
2015£m 2014£m
Remeasurementgainsand(losses):
(Loss)/Returnonschemeassetsexcludinginterestincome (126) 390
Actuarialgains/(losses)onliabilitiesarisingfromchangein:
- inflationexperience 48 -
- financialassumptions 169 (402)
- updated valuationdata - 36
217 (366)
Totalrecognisedintheconsolidatedstatementofcomprehensiveincome 91 24
The £217 million actuarial gain on the Scheme's liabilities was principally due to an increase in bond yields over the
year, which has resulted in a decrease in the liabilities. The £126 million loss on the Scheme's assets primarily results
from decreases in the market values of gilts and swaps, which has led to assets underperforming expectations.
Addressing the net pension deficit
Keeping it simple
The Group works closely with the Trustee to agree appropriate levels of funding for the Scheme. This involves agreeing a
Schedule of Contributions at each triennial valuation, which specifies the contribution rates for the employer and scheme
members and the date these contributions are due. A recovery plan setting out the steps that will be taken to address a
funding shortfall is also agreed.
In the event that the Group's defined benefit scheme is in a net liability position, the Directors must take steps to
manage the size of the deficit. Apart from the funding agreements mentioned above, this could involve pledging additional
assets to the Scheme, as was the case in the SDN and London Television Centre ('LTVC') pension funding partnerships
(explained below).
The levels of ongoing contributions to the Scheme are based on the current service costs (as assessed by the Scheme
Trustee) and the expected future cash flows of the Scheme. Normal employer contributions in 2016 for current service are
expected to be in the region of £12 million (2015: £11 million) and deficit funding contributions in 2016 are expected to
be £66 million (2015: £76 million), assuming current contribution rates continue as agreed with the Trustee.
Under the SDN pension partnership, set up in 2010, the Group has agreed to make payments of £11 million for 12 years from
2011. The LTVC partnership, established in March 2014, commits the Group to an annual payment of £2 million in 2016,
increasing by 5% per annum until 2038.
IFRIC 14 clarifies how the asset ceiling should be applied, in particular, how local minimum funding rules work. The Group
has determined that it has an unconditional right to a refund of surplus assets if the Schemes are run off until the last
member dies, on which basis IFRIC 14 does not cause any change in the balance sheet disclosures before tax.
Section 4: Capital Structure and Financing Costs
In this section
This section outlines how the Group manages its capital structure and related financing costs, including its balance sheet
liquidity and access to capital markets.
The Directors determine the appropriate capital structure of ITV, specifically, how much is raised from shareholders
(equity) and how much is borrowed from financial institutions (debt) in order to finance the Group's activities both now
and in the future. Maintaining capital discipline and balance sheet efficiency remains important to the Group, as seen
through the issuance of a new Eurobond during the year. Any potential courses of action will take into account the Group's
liquidity needs, flexibility to invest in the
business, pension deficit initiatives and impact on credit ratings.
The Directors consider the Group's capital structure and dividend policy at least twice a year ahead of announcing results
and do so in the context of its ability to continue as a going concern, to execute the strategy and to invest in
opportunities to grow the business and enhance shareholder value.
A Tax and Treasury committee acting under delegated authority from the Board, approves certain financial transactions and
monitors compliance with the Group's tax and treasury policies.
4.1 Net cash/ (debt)
Keeping it simple
Net cash / (debt) is the Group's key measure used to evaluate total cash resources net of the current outstanding debt.
Adjusted net debt is also monitored by the Group and more closely reflects how credit agencies see the Group's gearing. To
arrive at the adjusted net debt amount, we add our total undiscounted expected contingent payments on acquisitions, our IAS
19 pension deficit
and our undiscounted operating lease commitments. A full analysis and discussion of adjusted net debt is included in the
Financial and Performance Review.
The tables below analyse movements in the components of net cash during the year:
1January2015£m Net cashflowand acquisitions£m Currencyand non-cash movements£m 31December2015£m
Cash 234 3 1 238
Cashequivalents 63 (6) (1) 56
Total cash and cashequivalents 297 (3) - 294
Loansandfacilitiesduewithinoneyear (78) 73 - (5)
Financeleasesduewithinoneyear (7) 7 (6) (6)
Loans and facilities due after oneyear (161) (433) (4) (598)
Finance leases due after oneyear (10) - 6 (4)
Totaldebt (256) (353) (4) (613)
Net cash /(debt) 41 (356) (4) (319)
1January2014£m Net cashflowand acquisitions£m Currency and non-cash movements£m 31December2014£m
Cash 438 (199) (5) 234
Cashequivalents 80 (17) - 63
Total cash and cashequivalents 518 (216) (5) 297
Loansandfacilitiesduewithinoneyear (41) 41 (78) (78)
Financeleasesduewithinoneyear (21) 21 (7) (7)
Loans and facilities due after oneyear (301) 62 78 (161)
Finance leases due after oneyear (17) - 7 (10)
Totaldebt (380) 124 - (256)
Currencycomponentofswapsheldagainsteuro denominatedbonds 26 (26) - -
Netcash 164 (118) (5) 41
Cash and cash equivalents
Included within cash equivalents is £10 million (2014: £16 million), the use of which is restricted to meeting finance
lease commitments under programme sale and leasebacks (see note 4.2), and gilts of £38 million (2014: £39 million) in
respect of which a charging deed was executed on the unfunded pension commitments of four former Granada executives. Legal
action has commenced to try and remove the charge.
Loans and facilities due within one year
In October 2015 the unsecured £78 million Eurobond matured, resulting in a net payment by the Group of £76 million, after
settlement of the Group's related outstanding interest rate swaps.
At various periods during the year the Group drew down on the Revolving Credit Facility ('RCF') to meet short-term funding
requirements. All short-term drawings were repaid by the end of the year. The maximum draw down of the RCF during the year
wasE500 million (£362 million) in April to fund the acquisition of Talpa Media. The maximum draw down on the RCF during
2014 was£321 million to fund the 2014 acquisitions.
Loans and loan notes due after one year
In September 2015 the Group issued a seven year E600 million Eurobond at a fixed coupon of 2.125% which will mature in
September 2022. The bond refinanced the 12 month bridge loan facility of E500 million that was used to repay the RCF, which
initially funded the purchase of Talpa Media in April.
The Group also has an unsecured £161 million Eurobond which matures in January 2017 and has a coupon of 6.125%.
4.2 Borrowings and finance leases
Keeping it simple
The Group borrows money from financial institutions in the form of bonds, bank facilities and other financial instruments.
The interest payable on these instruments is shown in the net financing costs note in note 4.4.
There are Board-approved policies in place to manage the Group's financial risks. Macroeconomic market risks, which impact
currency transactions and interest rates, are discussed in note 4.3. Credit and liquidity risks are discussed below.
· Credit risk: the risk of financial loss to the Group if a customer or counterparty fails to meet its contractual
obligations and
· Liquidity risk: the risk that the Group will not be able to meet its financial obligations as they fall due
The Group is required to disclose the fair value of its debt instruments. The fair value is the amount the Group would pay
a third party to transfer the liability. It is calculated based on the present value of future principal and interest cash
flows, discounted at the market rate of interest at the reporting date. This calculation of fair value is consistent with
instruments valued under level 2 in note 4.5.
Accounting policies
Borrowings
Borrowings are recognised initially at fair value less directly attributable transaction costs, with subsequent measurement
at amortised cost using the effective interest rate method. Under the amortised cost method the difference between the
amount initially recognised and the redemption value is recorded in the income statement over the period of the borrowing
on an effective interest basis.
Finance leases
Historically, ITV has entered into sale and leaseback agreements in relation to certain programme titles. Related
outstanding sale and leaseback obligations, which comprise the principal and accrued interest, are included within
borrowings. The finance related element of the agreement is charged to the income statement over the term of the lease on
an effective interest basis. Sale and leaseback obligations are secured against an equivalent cash balance held within cash
and cash equivalents.
Managing credit and liquidity risk
Credit risk
The Group's maximum exposure to credit risk is represented by the carrying amount of derivative financial assets (see note
4.3), trade receivables (see note 3.1.4), and cash and cash equivalents (note 4.1).
Trade and other receivables
The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The majority
of trade receivables relate to airtime sales contracts with advertising agencies and advertisers. Credit insurance has been
taken out against these companies to minimise the impact on the Group in the event of a possible default.
Cash
The Group operates investment guidelines with respect to surplus cash that emphasise preservation of capital. The
guidelines set out procedures and limits on counterparty risk and maturity profile of cash placed. Counterparty
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