2006 2005
For the year ended 31 December dm am
Profit attributable to ordinary shareholders 458 338
Share of joint ventures’ net (expense)/income recognised directly in equity (50) 138
Share of joint ventures’ transfer to net profit from hedge reserve (4) (14)
Total recognised income and expense for the year 404 462
Consolidated reconciliation of shareholders’ equity
2006 2005
For the year ended 31 December Note dm am
Total recognised net income 404 462
Equity dividends declared 6 (272) (245)
Issue of ordinary shares, net of expenses 68 18
Increase in shares held in treasury (including in joint ventures) 14 (210) (20)
Increase in share based remuneration reserve 36 42
Equalisation adjustments 1 –
Net increase in shareholders’ equity 27 257
Shareholders’ equity at start of year 1,438 1,181
These consolidated financial statements, which have been prepared under the historic cost convention, report the statements of income, cash flow and financial position of Reed Elsevier NV. Unless otherwise indicated, all amounts shown in the financial statements are in millions of euros. As required by a regulation adopted by the European Parliament, the consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (IFRS) as endorsed by the European Union.
The Reed Elsevier combined financial statements presented in pounds sterling on pages 54 to 90 form an integral part of the notes to Reed Elsevier NV’s statutory financial
statements. The primary combined financial statements and selected notes are presented in euros on pages 94 to 103. As a consequence of the merger of the company’s businesses with those of Reed Elsevier PLC, described on page 26, the shareholders of Reed Elsevier NV and Reed Elsevier PLC can be regarded as having the interests of a single economic group, enjoying substantially equivalent ordinary dividend and capital rights in the earnings and net assets of the Reed Elsevier combined businesses. The Reed Elsevier NV consolidated financial statements are presented incorporating Reed Elsevier NV’s investments in the Reed Elsevier combined businesses accounted for using the equity method, as adjusted for the effects of the equalisation arrangement between Reed Elsevier NV and Reed Elsevier PLC. The arrangement lays down the distribution of dividends and net assets in such a way that Reed Elsevier NV’s share in the profit and net assets of the Reed Elsevier combined businesses equals 50%, with all settlements accruing to shareholders from the equalisation arrangements taken directly to reserves.
Because the dividend paid to shareholders by Reed Elsevier NV is, other than in special circumstances, equivalent to the Reed Elsevier PLC dividend plus the UK tax credit received by certain Reed Elsevier PLC shareholders, Reed Elsevier NV normally distributes a higher proportion of the combined profit attributable than Reed Elsevier PLC. Reed Elsevier PLC’s share in this difference in dividend distributions is settled with Reed Elsevier NV and is credited directly to consolidated reserves under equalisation. Reed Elsevier NV can pay a nominal dividend on its R-shares held by a subsidiary of Reed Elsevier PLC that is lower than the dividend on the ordinary shares. Equally, Reed Elsevier NV has the possibility to receive dividends directly from Dutch affiliates. Reed Elsevier PLC is compensated by direct dividend payments by Reed Elsevier Group plc. The
settlements flowing from these arrangements are also taken directly to consolidated reserves under equalisation.
Parent company financial statements
In accordance with 2:402 of the Netherlands Civil Code, the parent company financial statements only contain an abridged profit and loss account.
Combined financial statements
The accounting policies adopted in the preparation of the combined financial statements are set out on pages 58 to 61. These include policies in relation to intangible assets. Such assets are amortised over their estimated useful economic lives which, due to their longevity, may be for periods in excess of five years.
Basis of valuation of assets and liabilities
Reed Elsevier NV’s 50% economic interest in the net assets of the combined businesses has been shown on
the consolidated balance sheet as investments in joint ventures, net of the assets and liabilities reported as part of Reed Elsevier NV. Joint ventures are accounted for using the equity method.
Cash and cash equivalents are stated at fair value. Other assets and liabilities are stated at historical cost, less provision, if appropriate, for any impairment in value. Foreign exchange translation
Transactions in foreign currencies are recorded at the rate of exchange prevailing on the date of the transaction. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rate prevailing on the balance sheet date. Exchange differences arising are recorded in the income statement. The gains or losses relating to the retranslation of Reed Elsevier NV’s 50% interest in the net assets of the combined businesses are classified as equity and transferred to the translation reserve.
When foreign operations are disposed of, the related cumulative translation differences are recognised within the income statement in the period.
Taxation
The tax expense represents the sum of the tax payable on the current year taxable profits, adjustments in respect of prior year taxable profits and the movements on deferred tax that are recognised in the income statement. Tax arising in joint ventures is included in the share of results of joint ventures. The tax payable on current year taxable profits is calculated using the applicable tax rate that has been enacted, or substantively enacted, by the balance sheet date. Deferred tax is the tax arising on differences between the carrying amounts of assets and liabilities in the financial statements and their corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that, based on current forecasts, it is probable that taxable profits will be available against which deductible temporary
differences can be utilised.
Deferred tax is calculated using tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Full provision is made for deferred tax which would become payable on the distribution of retained profits from foreign subsidiaries, associates or joint ventures. Movements in deferred tax are charged and credited in the income statement, except when they relate to items charged or credited directly to equity, in which case the deferred tax is also recognised in equity.
Standards, amendments and interpretations not yet effective
Recently issued standards, amendments and interpretations are not expected to have any significant impact when adopted.
1 Administrative expenses
Administrative expenses are stated after the gross remuneration for present and former directors of Reed Elsevier NV in respect of services rendered to Reed Elsevier NV and the combined businesses. Fees for members of the Supervisory Board of Reed Elsevier NV of a0.2m (2005: a0.2m) are included in gross remuneration. In so far as gross remuneration is
related to services rendered to Reed Elsevier Group plc group and Elsevier Reed Finance BV group, it is borne by these groups. Reed Elsevier NV has no employees (2005: nil).