Note 1 Accounting and valuation principles

Modern Times Group MTG AB is a company domiciled in Sweden. The Company’s registered office is located at Skeppsbron 18, P.O. Box 2094, SE-103 13 Stockholm, Sweden. The consolidated financial statements of the Company for the year ended 31 December 2008 comprise the Company and its subsidiaries and the share of participation in joint ventures and associated companies.

The financial statements were authorised for issue by the Board of Directors on 20 March 2009. The consolidated income statement and balance sheet, and the income statement and the balance sheet of the parent company will be presented for adoption by the Annual General Meeting on 11 May 2009.

The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and its interpretations provided by the International Financial Reporting Interpretations Committee (IFRIC) as endorsed by the European Commission. Recommendation RFR 1.1 on Supplementary Accounting Rules for Groups as issued by the Swedish Financial Reporting Board has also been applied in the preparation of the report.

The consolidated accounts have been prepared based on the acquisition values except that the following assets and liabilities are stated at their fair value: derivative financial instruments and financial instruments classified as available-for-sale. The changes in the available-for-sale instruments are reported directly to equity, with the exception of assets with a significant long-term decrease in value where the value change is reported in the income statement.

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, unless otherwise stated below.

Change in accounting principles and new accounting standards
Standards and interpretations as issued by IASB

The following interpretation was applied from 1 January 2008:
IFRIC 11 IFRS 2 – Group and Treasury Share Transactions – relate to the recognition of share-based payments

The change has not affected the consolidated accounts.

The following Accounting standards and interpretations will be applied from 1 January 2009:
IFRS 2 Share-based payment – amendments relating to vesting and non-vesting conditions and in respect of cancellation

IFRS 7 Financial instruments: Disclosures – amendments to fair vale measurement disclosures and additional disclosure requirements regarding liquidity risks

IFRS 8 Operating Segments – the reports should reflect the management segments

IFRIC 13 Customer Loyalty Programmes

IAS 1 Presentation of Financial Statements – changes in the presentation of financial statements

IAS 27 Consolidated and Separate Financial Statements – amendments related to the treatment of dividends, where dividends received before the date of acquisitions should be recognised as revenue as opposed to reducing the cost of the investment

IAS 38 Intangible Assets – amendments clarify that expenditure on advertising and promotional activities is recognised as an expense at the time that the benefit or goods or services become available to the entity

The changes will affect the consolidated accounts regarding IFRS 2, regarding the 2008 option programme, IFRIC 13 if and when such a customer loyalty programme will be introduced, and IAS 27 if and when such a dividend is received.  All other changes relate to the presentation of the financial statements and disclosures. Operating segments remain unchanged.

The following Accounting standards and interpretations have been changed and have an effect on the Group’s financial reports. They will be applied from 1 January 2010:
IFRS 3 Business combinations - amendments

IAS 27 Consolidated and Separate Financial Statements - amendments

Classification Non-current assets and liabilities comprise in all material aspects amounts expected to be recovered or paid after twelve months or more from the closing day. Current assets and liabilities comprise in all material aspects amounts expected to be recovered or paid within twelve months from the closing day.

Consolidated accounts The consolidated accounts include the parent company and all subsidiaries, and the share of participation in joint ventures and associated companies. All companies in which the Group holds or controls more than 50% of the votes, or in which the Group through agreements exercises decisive influence, are consolidated as subsidiaries. The holdings in the Prima Group and in Balkan Media Group are examples of the latter, with 50% of the votes, but where the Group exercises a decisive influence through agreements.

The consolidated accounts for the year were prepared based on the purchase method, as specified in the International Financial Reporting Standards, as well as in previous years. By this method, the book value of the parent company’s shares in each subsidiary is netted against that subsidiary’s acquisition value, in other words, the subsidiary’s shareholders’ equity (including the equity component of untaxed reserves) at the time of acquisition based on the fair value of that subsidiary’s net assets. Results for companies acquired during the year are included in the consolidated income statement only for the period during which they were controlled.

The Group’s shareholders’ equity includes only that part of each subsidiary’s equity added after acquisition. The difference between the acquisition value of shares in a subsidiary and identifiable assets, liabilities and contingent liabilities measured at fair values at the date of acquisition is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of identifiable net assets acquired is recognised in the profit and loss in the period of acquisition.
Additional investments for business combinations achieved in stages without change in control are accounted for as an equity transaction. During 2008, the acquisition of part of the minority in MTG Russia AB relate to the described principle.

Functional currency and reporting currency The functional currency of the parent company is the Swedish krona (SEK).This is also the reporting currency for the Group and the parent company.

Financial statements of foreign operations The balance sheets of the Group’s foreign subsidiaries are translated into Swedish krona (SEK). The translation is based on the exchange rates ruling at the balance sheet date, while the income statements are translated using an average rate for the period. The resulting translation differences are charged directly to equity in the translation reserve.

Transactions eliminated on consolidation Intra-group balances and any unrealised gains and losses or revenues and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.

Minority interest In subsidiaries not wholly owned, the share of equity owned by external shareholders is recorded as minority interest. For negative shareholders’ equity, a receivable is reported for the minority to the extent that minority owners are expected to contribute their share of the deficit through a binding commitment and have an ability to fulfil this. The minority interest is reported in total equity.

Accounts of associated companies and joint ventures  Associated companies are reported based on the equity method. An associated company is a company in which the Group exercises significant influence. Normally, this means companies in which the Group holds voting rights of at least 20% and no more than 50%. This applies to among other CTC Media (39.4%). The Group’s share of earnings in associated companies’ pre-tax profits or losses are reported under Profit/loss on shares and participations in associated companies in operating income. The operations of the associated companies are related to Broadcasting, Radio and Modern Studios. The share of associated companies’ tax expense is reported among the Group’s tax expenses. Surplus values are attributable to assets in each associated company or to goodwill. Differences between the acquisition value and the acquired equity are treated in accordance with the principles for consolidation of subsidiaries described in “Consolidated accounts” above. The accounts of associated companies are adjusted before the share of earnings is calculated, if necessary, so that the accounts comply with MTG’s accounting and valuation principles.
The joint ventures are recognised according to the proportional method, whereby the income statement and the balance sheet items are proportionately consolidated in accordance with the percentage owned. This applies to TV 2 Sport A/S Denmark, Viastrong Holding AB with its Ukrainian subsidiaries and That’s Strix Entertainment AS. The proportionate method is applied from the date that joint control commences until the date that joint control ceases.

Revenue recognition Revenue is recognised at the time the service is performed. Accordingly, the Group reports revenue from:

• TV and radio advertising at the time of broadcast
• Subscription fees for pay-TV over the subscription period
• Cable revenues as the services are provided to the cable wholesalers, based on the number of subscribers taking the Viasat channels, as reported by the cable companies
• Sale of goods in accordance with the terms of sales, i.e. when the goods have been transferred to the shipping agent, less returns
• Sale of services when the services are provided
• TV productions where recognition is based on the percentage of completion for each project in the same relation as accrued expenses are related to the total cost for the entire project
• Film rights when a contract is signed, the product is complete and delivered, and the license term has commenced
• Distribution rights for films when the films are beginning to be shown
• Dividend income from investments when the shareholders’ right to receive payment has been established. Dividends from associated companies decrease the book value of the asset.

Barter transactions Barter entails the exchange of air time on TV or radio for non-similar other goods or services. Barter transactions are reported at the fair value of the goods or services involved. The fair value is determined by agreements made with other customers for the same type of transactions. Revenues from barter transactions are reported when the commercial is broadcast. Expenses are reported when the goods or service is consumed.

Receivables and liabilities denominated in foreign currencies The Group’s monetary receivables and liabilities that are denominated in foreign currencies are translated into local currency using exchange rates prevailing on the closing date. Realised and unrealised gains/losses on foreign exchange (exchange rate differences) are reported in the income statements. Exchange rate differences attributable to operating receivables and liabilities are reported in operating profit/loss, while differences attributable to financial assets or liabilities denominated in foreign currencies are reported under financial items. Exchange rate differences on financial loans, representing an expansion or reduction of the parent company’s net investment in the subsidiary, are reported directly to equity.

Non-current tangible and intangible assets Non-current assets are reported net after deductions for accumulated depreciation and amortisation according to plan. Depreciation and amortisation according to plan are normally calculated on a straight-line schedule based on the acquisition value of the asset and its estimated useful life. The non-current assets are classified in the following categories:

Capitalised expenses Expenditure on development activities, whereby new or substantially improved products and processes, is capitalised if the process is technically and commercially feasible and the Group has sufficient resources to complete development. The expenditure capitalised includes the direct costs and, when appropriate, cost of direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised expenditures are stated at cost less accumulated amortisation and impairment losses.

Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary and any contingent liabilities.

Goodwill is recognised as an asset and reviewed for impairment test at least annually. Any impairment is recognised immediately in the income statement and cannot be reversed.

Goodwill arising from acquisitions of associated companies is included in the reported value of shares in associated companies. Impairment tests are made on the total asset. Goodwill arising on acquisitions before the date of transition to IFRS, 1 January 2004, has been retained at the previous Swedish GAAP amounts, subject to being tested for impairment at that date.

Other intangible assets Other intangible assets, such as beneficial rights, broadcasting licenses and patents and trademarks, are stated at cost less accumulated amortisation and impairment losses. Trademarks forming part of a purchase price allocation are normally judged to have indefinite useful lives.

Machinery and equipment Items of machinery and equipment are stated at cost less accumulated depreciation and impairment losses. Where parts of an item of machinery and equipment have different useful lives, they are accounted for as separate items of machinery and equipment.

Impairment of tangible and intangible non-current assets At the balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Any impairment loss is recognised as an expense immediately.

Financial instruments Financial assets and liabilities include liquid funds, securities, derivative instruments, other financial receivables, accounts receivables, accounts payable, leasing undertakings and loan liabilities.

Financial assets available-for-sale The Group’s holdings in listed shares available-for-sale are valued at market price based on bid price as per the balance sheet day. Changes in the market values of these shares will impact equity directly, or, when there is significant decrease in value (above 20%) or if the decrease continues for a longer period of time, is charged to the profit and loss accounts in the income statement.

Accounts receivable Accounts receivable are stated at their cost less impairment losses. The receivables are reviewed monthly to determine whether there is an indication of impairment. Doubtful accounts receivable are reported with the amount at which, after a careful assessment, it is deemed likely to be paid.

Other liabilities Other liabilities are stated at cost and include accounts payable, leasing undertakings and other liabilities.

Loan liabilities Loan liabilities are recognised initially at the amount received less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.

Derivative instruments The Group uses forward contracts to hedge its exposure to foreign exchange arising from operational activities. The major part of contracted programme acquisition outflows in US dollars, British pounds and Swiss francs, and before 2008 euros, is hedged on a rolling twelve months basis. Derivatives that do not qualify for hedge accounting due to the rules in IAS 39 are accounted for as trading instruments.

Derivative financial instruments are recognised initially at cost and re-valued at fair value thereafter. The effective part of the gain or loss in the cash flow hedge revaluation is recognised directly in equity. When the forecasted transaction results in the recognition of programme inventory, the cumulative gain or loss is removed from equity and included in the initial cost of inventory. Any gains or losses from hedging transactions discontinued are recognised immediately in the income statement.

MTG hedges part of the book value of the net investment in Nova against fluctuation in currency rates, that is, the risk related to changes in currency rates between the Swedish krona and Bulgarian leva. Part of the financing of the acquisition of Nova was raised in euro, which is recognised as a hedging instrument.

Accounting for leases A financial lease is a contract that entails the lessee to a material extent enjoying all economic benefits and bearing all economic risks associated with the asset regardless of whether or not the lessee retains the legal right of ownership of the asset. For financial leases, the leasing asset is reported as a non-current asset and the obligation for future payments as a liability in the lessee’s balance sheet. An operating lease is a lease that does not fulfil the conditions for a financial lease. For operating leases, the rental expense is reported in the lessee’s accounts distributed equally over the period during which the asset is used.

Inventories Inventories are valued at the acquisition cost or net realisable value, whichever is lower. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is based on the first-in-first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition.

A significant portion of the amount reported as inventory by the Group refers to the TV channels’ catalogue of programme rights. Programme rights are reported as inventory when the license period has begun, the programme itself is available for its first broadcast, the cost of the programme is known, and the programme content has been approved by the TV channel. Programme rights invoiced but where the license period has not started and the programme cannot be judged as inventory is reported as prepaid expenses. Future payment commitments in respect of contractual programme rights that have not yet been reported as inventory are reported as a memorandum item, note 23. Programme rights are normally acquired for a specific number of runs, which can be played out during a determined license period in certain territories. The programme rights are expensed per run according to how revenue is expected to accrue.

Prepaid subscriber acquisition expenses Prepaid expenses include incremental direct variable subscriber acquisition costs incurred to obtain new customers in fixed-term contracts, i.e. the contract includes fixed revenue over the subscription period. The costs are balanced since it is probable that the future economic benefit will flow to the company and the value can be measured with reliability. The costs are allocated over the contract period. Costs exceeding the contracted revenues are expensed when incurred.

Corporate income tax Tax expenses reported includes actual Swedish and foreign corporate income taxes and deferred tax arising from temporary differences between accounts for financial reporting and accounts for tax assessment, calculated using the liability method. Such temporary differences are caused mainly by differences between taxable value and the reported value of assets and liabilities. A deferred tax asset is reported corresponding to the value of loss carry forwards if it is judged likely that they will be applied to taxable income in the foreseeable future. Profit/loss for the year is charged with tax on taxable earnings for the year and with tax estimated for the change in temporary differences for the year as current tax and deferred tax expenses respectively in each Group company.

Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and the amount can be reliably calculated. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Pensions There are mainly defined-contribution pension plans within the Group. The Group’s payments to defined contribution plans are reported as costs in the period when the employee performed the services to which the fee relates. A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts.

One Swedish subsidiary has defined-benefit plans in Alecta, a multi-employer defined-benefit plan. The Group reports these pension costs as defined-contribution plans, in accordance with the statement UFR 3. Independent actuaries calculate the size of the obligations for each defined-benefit plan separately. The estimates are made using the so-called Projected Unit Credit method in a way that distributes the costs over the employee’s working life. The obligations are revaluated each year. The obligations are valued at the present value of the expected future payments using a discounting interest rate corresponding to the interest rate on first-class corporate or government bonds. The obligations are reported as provisions and as costs in the period when the employee performed the services to which the fees relate. The amounts relating to the defined-benefit pension plans are immaterial.

Share-based payments The Group applies the requirements of IFRS 2 Share-based payments. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that was unvested as of 1 January 2005. Information about the 2001 programme is disclosed in the note 25.
The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments including social security costs are expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. A bonus may be paid three years following each participant’s acquisition of warrants, provided the participant is still employed by the Group. The bonus and social security costs are allocated over the vesting period. The fair value is re-valued each quarter as a basis for the calculation of social security costs. All changes are reported in the income statement as personnel costs and in equity.
Fair value is measured by use of the Black & Scholes’ model, taking into consideration the terms and conditions of the allotted financial instruments.

Parent company The parent company has prepared the Annual Report according to the Swedish Annual Accounts Act and the Swedish Financial Reporting Board recommendation RFR 2.1 Accounting for Legal Entities. RFR 2.1 involves application of all IFRSs and interpretations endorsed of by the European Commission, except where the possibility to apply IFRS is restricted by the Swedish Company Act and due to tax rules. The principles applied by the company have not been changed during 2008.

Group contributions The parent company reports Group contributions in accordance with UFR 2. Group contributions are therefore reported according to their economic reality, namely having the purpose of minimising the Group’s tax. Since they do not constitute consideration for fulfilment of services, they are taken directly to equity after deducting the tax component.

Shareholders’ contribution Shareholders’ contribution paid is recognised as an increase in shares in subsidiaries. When the contribution is given to cover losses made, an impairment test is made. Impairment is recognised in the profit and loss accounts of the income statement.