The Group will report its financial results in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union ("EU"), from 1 July 2005. The transition date for the Group's adoption of IFRS of 1 July 2004 is determined in accordance with IFRS 1 "First-time Adoption of International Financial Reporting Standards".

As noted in the 2004 Annual Report and Accounts, the Group established an IFRS transition steering committee to oversee the transition to IFRS. The Committee's main responsibilities have been monitoring the progress of a dedicated transition working group, making key decisions relating to the transition, and reporting to the Audit Committee in relation to the transition. Implementation plans have been completed to modify the Group's procedures, systems and controls, and an IFRS training programme for the Group's finance function has also been completed.

Indicative guidance on the impact of the transition to IFRS on the Group's financial results was made available during the first quarter of the year ending 30 June 2006, and can be accessed from the British Sky Broadcasting web page at www.sky.com/corporate. This indicative guidance was prepared on the basis of IFRS, as endorsed by the EU, as at 30 June 2005. Some uncertainties remain as to whether the International Accounting Standards Board ("IASB") and other related bodies will issue new or revised standards that, subject to their adoption by the EU, will either be mandatory for the Group's 30 June 2006 financial statements, or may be adopted early voluntarily. Such uncertainties limit the Group's ability to assess the final impact of IFRS on its financial statements. As a result, the IFRS financial results reported in the Group's 2006 Annual Report and Accounts for the comparative year ended 30 June 2005 may vary from those presented in the indicative guidance.

Particular uncertainty surrounds IAS 39 "Financial Instruments: Recognition and Measurement", which has been adopted by the EU on a partial basis, with certain requirements of the standard issued by the IASB having been removed (the "carve-outs"). The carve-outs relate to the use of the full fair value option in accounting for certain types of financial liabilities that the Group does not currently hold and a method of hedging interest rate risk that the Group currently does not employ. Therefore, the current modifications to IAS 39 have not affected the Group and we expect that the Group will be compliant with both the IASB and the EU versions of the standards.

The adoption of IFRS will lead to some significant changes in the Group's accounting policies, results, and the presentation of its financial statements, which are currently in accordance with UK GAAP. Based on the Group's assessment of current IFRS requirements, the principal effects on the Group's financial statements are as follows:

• Share-based payments
  Under UK GAAP, the Group recognises a charge in the profit and loss account for its Long-Term Incentive Plan ("LTIP"), Equity Bonus Plan ("EBP") and Key Contributor Plan ("KCP") based on the difference between the exercise price of the award and the price of a BSkyB share on the date of grant (the "intrinsic value"). No charge is recognised in respect of the Executive Share Scheme, as the awards had an intrinsic value of nil, nor in respect of the Sharesave scheme due to a specific exemption under UK GAAP for such schemes.
  
  Under IFRS 2 "Share-based Payment", the Group is required to recognise a charge in the income statement for all share options and awards, based on the fair value of the awards as calculated at the grant date using an option-pricing model as necessary. This method of valuation is used to calculate the charge for all share option schemes, including the Executive and Sharesave Schemes, resulting in an additional charge under IFRS compared to UK GAAP.
  
  
• Financial instruments and hedge accounting
  The Group manages its interest rate and foreign currency exposures using a combination of interest rate swaps, cross-currency swaps, swaptions, forward exchange contracts and zero cost currency option structures (collars).
  
  Under UK GAAP, where the Group has taken out financial instruments to provide an economic hedge for foreign currency exposures, the rates inherent in the hedging contracts are used to translate the hedged items. The derivative financial instruments are not recognised on the balance sheet, and the gain or loss on the instrument is not recognised in the profit and loss account until maturity of the instrument.
  
  Under IFRS, the Group is required to record all foreign currency transactions at spot exchange rates at the transaction date, and to state all foreign currency monetary assets and liabilities at closing exchange rates at each balance sheet date. This results in a restatement of foreign currency creditors, programming additions and amortisation, US dollar debt and accrued interest thereon at the transaction date, with restatement of foreign currency creditors, US dollar debt and accrued interest at the balance sheet date. The Group is required to recognise its derivative financial instruments on the balance sheet at fair value from inception of the contract, with changes in fair value being recognised in the income statement. Where hedge accounting of cash flows is achieved, the portion of the gain or loss on the hedging instrument (i.e. the change in its fair value) that is determined to be an effective hedge is initially recognised through equity in a hedging reserve, and is then reclassified to the income statement during the same periods in which the underlying hedged exposure affects the income statement.
  
  The Group's foreign exchange hedging policy was revised during the year to extend the maturity profile of hedging instruments to match the time horizon of the underlying contracts more appropriately, and to extend the range of permitted instruments to protect exposures rather than fix transaction rates. The Group does not see a requirement to change its current hedging policy as a result of the new requirements for achieving hedge accounting under IAS 39 and expects to be able to achieve hedge accounting for the majority of its derivative financial instruments.
  
  
• Goodwill
  Under UK GAAP, the Group amortises goodwill on a straight-line basis over periods of no longer than 20 years. Under IFRS, the Group's goodwill balances that existed at the date of transition to IFRS are no longer amortised but instead are subject to annual impairment testing.
  
  Furthermore, under UK GAAP, goodwill arising on acquisitions which had been written off to reserves is recycled to the profit and loss account on disposal of the investment. Under IFRS, any such goodwill remains written off against reserves, resulting in a different gain or loss on disposal of such investments.
  
  
• Dividends
  Under UK GAAP, a dividend declared after the balance sheet date, but before the date of signing the financial statements, is treated as an adjusting post balance sheet event, and the associated dividend payable is recorded as a liability within the year end balance sheet. Under IAS 10 "Events after the Balance Sheet Date", such a dividend is recorded as a liability in the accounting period in which it is approved.
  
  
• Intangible assets
  Certain assets, principally software acquired and developed that is not integral to a related item of hardware, which are classified as tangible fixed assets under UK GAAP must instead be classified as intangible assets under IAS 38 "Intangible Assets". These assets are reclassified on transition to IFRS, and continue to be amortised over their useful economic lives, which have not changed as a result of the reclassification. In addition, under UK GAAP, the Group has chosen to expense certain development costs. IFRS requires all of these development costs to be capitalised if certain criteria are met.
  
  
• Presentation of the financial statements
  IAS 1 "Presentation of Financial Statements" does not provide definitive guidance on the format of the income statement or balance sheet, but stipulates certain line items that, as a minimum, must be disclosed. Additional line items, headings and subtotals are presented on the face of the Group's income statement and balance sheet where such presentation is relevant to the understanding of the Group's financial performance. IAS 1 includes a requirement that all deferred tax assets must be classified as non-current assets under IFRS.

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