Financial review

Results
In 2005, RTÉ achieved its best financial performance for many years, earning a net surplus, pre FRS 17, of €9.3m, an increase of €2.5m on 2004.

RTÉ is mandatorily required to fully implement Financial Reporting Standard 17 – Retirement Benefits (FRS 17) for the first time in 2005 and these financial statements reflect the impact of this requirement. RTÉ earned a net surplus, post FRS 17, of €16.5m in 2005 which compares with a post FRS 17 net surplus in 2004 of €18.7m. Pension benefits were previously accounted for in accordance with Statement of Standard Accounting Practice 24 – Accounting for Pension Costs.

The methodology adopted and mandatorily prescribed by FRS 17 exposes those entities who sponsor defined benefit pension schemes with sizeable long-term liabilities to significant volatility in corporate reported earnings, primarily reflecting current short-term movements in long-term bond markets. In the case of those organisations where the assets and earnings of the pension scheme are substantially greater than the net assets and net surplus of the sponsoring employer, as is the case with RTÉ and the RTÉ Superannuation Scheme, this volatility is exacerbated and has, we believe, the potential to distort a view of the underlying operational and financial performance for the year. As a result, the outcome for the year in this commentary is reviewed pre FRS 17, whilst full disclosure is made within this annual report in respect of the post FRS 17 outcome.

The increased surplus arose from increased television and radio advertising revenue. As this increase in advertising revenue became apparent during the year, RTÉ had the resources to increase the level and range of indigenous programming, in line with our public service obligations and our corporate strategy.

The individual businesses within RTÉ contributed to this result as follows:

	2005	2004
	€m	€m
Television	7.4	8.4
Radio	2.3	2.2
News & Current Affairs	(2.3)	(2.2)
Performing Groups	-	-
Network	5.9	(0.5)
Publishing	0.6	1.1
Corporate HQ	(5.1)	(4.6)
Building impairment	-	(10.8)
Disposal of surplus site	-	13.3
Consolidation adjustments	0.5	(0.1)
Group total	9.3	6.8

TG4
In accordance with the accounting policy adopted at the time of its establishment for Seirbhísí Theilifís na Gaeilge Teoranta (STnaG), the RTÉ subsidiary that operates TG4, the advertising revenues of STnaG are offset against its operational costs.

In previous years, this resulted in STnaG having no impact on the Group statement of income and expenditure, as STnaG always operated at breakeven.

STnaG had a deficit of €0.8m in 2005, after exceptional insurance proceeds of €1.1m, primarily as a result of increased programme expenditure and an increase in transmission charges from RTÉNL. Consequently, STnaG’s result appears on the face of the Group statement of income and expenditure for the first time in 2005.

Commercial Revenue
The key factors behind the growth in commercial revenue were:

	€m
Television advertising	+ 17.7
Radio advertising	+3.2
Other factors	+2.2
Year on year increase	23.1
Commercial revenue 2004	176.7
Commercial revenue 2005	199.8

Television licence revenue
An Post collects television licence monies from the general public, acting as agent of the Minister for Communications, Marine and Natural Resources. Monies in respect of “free” television licences are paid directly to the Department of Communications, Marine and Natural Resources (DCMNR) by the Department of Social and Family Affairs. DCMNR makes a non-repayable grant-in-aid of appropriate amounts to RTÉ.

The key factors behind the growth in licence revenue were:

	€m
Increase in Licence Fee from €152 to €155 from 1 Apr 2005	2.3
Increase in licence population	3.2
Increase in collection and other miscellaneous charges	(1.6)
Year on year increase	3.9
Licence income 2004	166.2
Licence income 2005	170.1

Licence evasion continues to be a problem however. RTÉ estimates that circa 16% of eligible households do not hold a valid television licence. The level of licence evasion appears to have deteriorated in recent years despite the level of new licences acquired following the large increase in net new household formations. We understand that Ireland’s level of licence evasion is more than double the level prevailing in the UK.

Operating costs
The key factors behind the growth in operating costs, before interest, tax, depreciation and amortisation, were:

	€m
Commissioned programmes	+ 21.2
PPF salary increases	+ 5.3
Increase in employee numbers	+ 6.4
Reduced network maintenance charges	(4.2)
Other costs	+ 2.3
	31.0
Operating costs 2004	315.3
Operating costs 2005	346.3

The discretionary increase in commissioned programmes was decided during the year, as a result of the increase in advertising revenue being generated. The spend primarily related to additional drama, entertainment, music, lifestyle and documentary programmes.

Network maintenance charges were lower as the Network IBD undertook a significant additional maintenance programme in 2004, covering all key transmission sites.

Employee numbers
At 31 December 2005, excluding Seirbhísí Theilifís na Gaeilge Teoranta, there were 2,287 (2004: 2,169) employees of which 450 (2004: 407) were part-time/casual employees.

Taxation
Television Licence Fee income was exempt from corporation tax up to 31 December 2005. We understand it may be the intention of the Revenue Commissioners to make Television Licence Fee income subject to corporation tax from 1 January 2006.

Cash flow
RTÉ again generated significant positive cash flow in 2005, as is discussed separately below.

Licence Fee attribution and use
A large majority of RTÉ’s activities are public service activities, albeit that the cost of providing them is substantially in excess of the amount of public funding received in the form of Licence Fee revenue. Accordingly, RTÉ engages in a range of ancillary commercial activities, which in turn generate commercial revenues in support of these public service activities.

Building on the approach first enunciated in 2003, the segment analysis (note 1 to the financial statements) sets out RTÉ’s methodology for the attribution of Licence Fee revenue to enable RTÉ to report on how Licence Fee revenue is spent. In doing so, it is important to note that some of RTÉ’s public service activities are attributed with complete public funding, some with limited public funding and some with no public funding. Similarly, no element of public funding is utilised for any non-public service activities carried out by RTÉ.

The chart below shows the attribution of licence revenues, received by RTÉ during 2005, to some of the public service activities carried out. The table below separately sets out a representation of how monies collected in respect of each individual licence sold by An Post on behalf of DCMNR or issued by the Department of Social and Family Affairs (DSFA) was utilised during 2005, as not all of the Licence Fee collected goes to RTÉ.

Utilisation of individual Licence Fees collected

	2005	2004
	€	€
RTÉ One	63.07	61.44
RTÉ Two	31.19	32.28
RTÉ Radio 1	9.87	10.28
RTÉ RnaG	8.78	8.57
RTÉ lyric fm	5.01	5.18
RTÉ Performing Groups	10.56	10.36
Support for TG4	7.58	7.03
Total RTÉ share	136.06	135.14
Broadcasting fund	7.25	7.12
Collection costs:
An Post/ DCMNR/ DSFA	10.83	9.74
Average cost of each individual broadcasting licence1	154.14	152.00

1 : The Licence Fee increased from €152 to €155 with effect from 1 April 2005

Attribution of Licence Revenue received by RTÉ in 2005


Pensions
RTÉ operates a contributory defined benefit scheme and a number of contributory defined contribution schemes for its employees.

Contributory defined benefit scheme
As at 31 December 2005, RTÉ had 603 employees who were members of the RTÉ Superannuation Scheme. In addition, RTÉ continues to make contributions to this scheme for 155 former employees, as part of their severance package.

The RTÉ Superannuation Scheme is a defined benefit scheme with funds under management at 31 December 2005 of €940m, at market value. No new employees have been admitted to this scheme since 2 July 1989.

At the request of the trustees, the actuaries to the scheme have carried out a long term funding actuarial valuation as at 1 January 2006 and reported a surplus of €36.8m at 1 January 2006 (1 January 2005: €31.1m) using the attained age method to compute future service liabilities and adopting a 2% investment gap as a key financial assumption.

The scheme actuaries have separately prepared information in accordance with the markedly different methodology mandated by FRS 17 and have reported a surplus on this basis of €3.3m as at 31 December 2005 (31 December 2004: €3.2m).

Full implementation of FRS 17 is required for the first time in our results for the financial year under review. Consequently, in accordance with the provisions of FRS 17, the surplus of €3.3m is recorded on the balance sheet for the first time this year.

The accounting treatment prescribed by FRS 17 has the ability to expose RTÉ to materially significant volatility in its future reported results as a consequence of the manner by which FRS 17 seeks to reflect short term movements in current equity market performance, together with the method FRS 17 chooses to discount long term future liabilities.

Contributory defined contribution schemes
All RTÉ employees who are not members of the RTÉ Superannuation Scheme are eligible for membership of a contributory defined contribution scheme or are eligible for PRSA type pension arrangements.

1,189 employees are members of the RTÉ Defined Contribution Pension Scheme.

International financial reporting standards (IFRS)
RTÉ currently prepares its financial statements in accordance with accounting principles generally accepted in the Republic of Ireland (Irish GAAP). Although not yet required to do so, RTÉ has, for reasons of good corporate governance, set a target to adopt IFRS with effect from the financial year commencing on 1 January 2007.

Significant progress has been made to date in identifying the principal changes for RTÉ arising from the move from Irish GAAP to IFRS and developing the system changes required.

The principal changes of practical significance are currently viewed as:

• inventorisation of costs of programmes which have been incurred, where the programme has not yet been broadcast; and
• recognition and measurement of financial instruments at fair value and the use of hedge accounting for derivative transactions.

The impact of the IFRS restatement on the 2006 Group financial statements will be included within the 2007 financial statements.

Financial risk management
The RTÉ Authority has approved policies for the main areas of financial risk faced by the Group.

Group Treasury is responsible for managing all treasury activities, in accordance with the treasury policies, including cash management, foreign exchange transactions and counterparty credit risk.

Foreign exchange management
The majority of RTÉ’s business is transacted in Ireland. Consequently, operating and investing cash flows are substantially denominated in Euro. Foreign currency exposures arise primarily from payments for acquired programmes and sports rights.

RTÉ’s policy is to have the majority of its committed principal foreign currency exposures hedged at the beginning of each financial year.

Liquidity and cash management
Excess cash is primarily invested in term deposit accounts, spread over a number of institutions.

Liquid funds held at 31 December 2005 of €67.8m compared with liabilities under the various restructuring schemes of €27.0m. The greater portion of these restructuring costs will be settled over the next five years.

In light of the level of cash balances held, it has not been considered necessary to hold committed bank borrowing facilities. The Group does maintain a small overdraft facility however.

Credit risk
As significant cash balances are held and invested on a short-term basis, RTÉ is exposed to credit risk on amounts due from the institutions with whom it holds its bank accounts and transacts cash investment and derivative business. RTÉ’s policy is to limit its exposure to each financial institution, primarily depending on its credit rating.

Given the nature of the advertising and other markets within which RTÉ operates, RTÉ had significant exposures to individual advertising agencies and other customers throughout the year. RTÉ’s policy is to assign limits to the aggregate amount of exposure to each individual customer. These exposures and the related limits are subject to ongoing review and monitoring.

Insurance
Insurance cover is held for certain significant insurable risks, including major catastrophe, subject to appropriate deductions and exclusions.

Legal proceedings
RTÉ and its subsidiaries are party to a wide variety of legal proceedings, including some in which claims have been asserted against RTÉ or its subsidiaries, the outcome of which is uncertain at this point. Based on the advice received, RTÉ is of the view that appropriate steps have been taken to ensure the outcome of all of these proceedings will not, in aggregate, have a long term material adverse effect on RTÉ’s financial condition, results or liquidity.

Looking ahead
Trading performance to date in early 2006 has been good, with commercial income maintaining last year’s levels.

In 2006, the key financial priorities for RTÉ include:

• continued cost control and value for money initiatives;
• progression of our plans for the funding of Digital Terrestrial Television; and
• development of financing proposals in respect of the medium term conversion of production facilities and processes to a digital server based environment.