ORANGE 6-K 2006
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
February 15, 2006
Commission File No. 1-14712
(Translation of registrants name into English)
6, place dAlleray, 75505 Paris Cedex 15, France
(Address of principal executive offices)
Indicate by check mark whether the Registrant files or will file
annual reports under cover of Form 20-F or Form 40-F
Form 20-F X Form 40-F
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Enclosure: France Telecom consolidated financial statements for the years ended December 31, 2005 and 2004.
Consolidated Financial Statements
Cette traduction anglaise des comptes consolidés rédigés en langue française a été préparée pour le confort des lecteurs anglophones. Malgré tout le soin apporté à cette traduction, certaines erreurs, omissions ou approximations peuvent y subsister. France Télécom, ses représentants et ses salariés nen assumeront aucune responsabilité.
This English language translation of the consolidated financial statements prepared in French has been prepared solely for the convenience of English speaking readers. Despite all the efforts devoted to this translation, certain errors, omissions or approximations may subsist. France Telecom, its representatives and employees decline all responsibility in this regard.
For the periods ended
December 31, 2005 and December 31, 2004
(Amounts in millions of euros, except share data)
(Amounts in millions of euros)
(Amounts in millions of euros)
Supplementary disclosures: see Note 31.
1.1 Description of business
The France Telecom Group, including in particular its main subsidiaries Orange, Amena (the Spanish mobile operator and its subsidiaries, acquired in November 2005), TP Group (the Polish telecommunications operator TP SA and its subsidiaries), Equant and PagesJaunes Group, provides consumers, businesses and other telecommunications operators with a wide range of services including fixed telephony and mobile telecommunications, data transmission, Internet and multimedia, and other value-added services.
1.2 Basis of preparation of 2005 financial data
In accordance with European regulation 1606/2002 dated July 19, 2002, the 2005 consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) as adopted for use by the European Union. Comparative figures are presented for 2004 compiled using the same basis of preparation.
The principles applied to prepare financial data relating to the financial year 2005 are described in Note 2, and are based on:
In preparing the Groups accounts, France Telecoms management is required to make estimates, insofar as many elements included in the financial statements cannot be measured with precision. Management reviews these estimates if the circumstances on which they were based evolve, or in the light of new information or experience. Consequently, estimates made at December 31, 2005 may subsequently be changed.
Lastly, where a specific transaction is not dealt with in any standards or interpretations, management uses its judgment in developing and applying an accounting policy that results in information that is relevant and reliable, in that the financial statements:
The consolidated financial statements are presented in euros, and have been prepared under the responsibility of the Board of Directors of February 13, 2006.
2.1 Significant accounting policies
This note describes the accounting principles applied to prepare the 2005 consolidated financial statements in accordance with IFRSs endorsed by the European Commission at December 31, 2005.
2.1.1 Early application of standards, amendments and interpretations
To enhance comparability between the data for 2004 and 2005, the Group opted for early application of the following texts, with effect from January 1, 2004:
However, France Telecom has not opted for early application of the following standards, amendments and interpretations (already adopted or in the process of being adopted by the European Union):
France Telecom Group is currently analyzing the practical consequences of these new standards and interpretations and the impact of their application on its financial statements.
The Group is not concerned by interpretations IFRIC 2 Members Shares in Co-operative Entities and Similar Instruments, and IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Funds.
2.1.2 Accounting positions adopted by France Telecom Group in accordance with paragraphs 10 to 12 of IAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors
The accounting positions described below are not specifically dealt with by any standards or interpretations endorsed by the European Commission.
Acquisitions of minority interests
These transactions are not addressed in any IAS or IFRS and the Group has therefore applied the French GAAP accounting treatment of acquisitions of minority interests, which consists of recognizing in goodwill the difference between the cost of acquisition of minority interests and the Groups equity in the book value of the underlying net assets, without making any fair value adjustments to the assets and liabilities acquired. Depending on the IASBs decision (Business Combinations Phase II), the accounting treatment described above may be changed.
The main items of goodwill arising on acquisitions of minority interests in 2005 concern Equant (213 million), Orange Romania (272 million), Orange Slovensko (375 million) and Orange Dominicana (24 million).
Commitments to purchase minority interests (put options)
Commitments to purchase minority interests and put options granted to minority shareholders are currently recognized as a financial debt and as a reduction in minority interests in equity, in accordance with IAS 27 Consolidated and Separate Financial Statements and IAS 32 Financial Instruments: Disclosure and Presentation. Where the amount of the commitment exceeds the amount of the minority interest, the difference is recorded as a reduction in shareholders equity attributable to the equity holders of France Telecom SA. The fair value of commitments to purchase minority interests is revised at each balance sheet date and the corresponding financial debt is adjusted with a contra-entry to financial income or expense. Since this accounting treatment does not reflect the economic substance of the transactions and due to possible differing interpretations of the texts regarding the commitments concerned, particularly those arising from the conditional put options, the Group submitted the issue to the IFRIC for consideration, in order to obtain guidance on the appropriate accounting treatment and the scope of application of the related texts. Depending on the findings of the IFRIC and IASB, the accounting treatment described above may be changed.
Conditional put options granted to minority shareholders amounted to 73 million at December 31, 2005 and 547 million at December 31, 2004. The overall effect on equity attributable to equity holders of France Telecom SA arising from the recognition of these commitments as a debt is 45 million at December 31, 2005 (422 million at December 31, 2004).
Transfers of consolidated shares with the Group resulting in changes in ownership interest
In the absences of specific quidance in IASs/IFRS, the Group applied and accounting policy to account for intercompany transfers of consolidated shares resulting in changes in ownership interest. The transferred shares are maintained at historical cost and the gain or loss on the transfer is fully eliminated in the account of the acquiring entities. The minority interests are adjusted to reflect the change in their share in the equity with the corresponding and opposite effect on the Group retained earnings, resulting in no impact on the profit and floss nor the shareholders equity.
IASs/IFRSs do not specifically address the accounting treatment of loyalty programs and the Group has therefore applied the French GAAP accounting treatment, which is based on Comité dUrgence (Emerging Accounting Issues Committee) recommendation 2004-E dated October 13, 2004. Two types of loyalty program exist within the Group, with and without a contract renewal obligation. For both types of program, the Group defers part of the invoiced revenue over the vesting period of the related customer rights based on the fair value of these obligations. The IFRIC is currently examining the accounting treatment of these programs under IAS/IFRS. The liability recognized for these programs amounts to 360 million at December 31, 2005 (383 million at December 31, 2004).
Employee share offer
The Group considers that the grant date for the employee share offer corresponds to the date on which the main terms of the offer are announced. This treatment complies with the recommended method set out in the CNC communication dated December 21, 2004 on employee share ownership plans (Plans dépargne dentreprise PEE), which interprets this announcement date as being the grant date defined in IFRS 2 Share-based Payment. The expense recognized for employee share offers in the 2005 financial statements amounts to 120 million (190 million in 2004). If the grant date were the end of the subscription period, a further 2 million would have been expensed in 2005 (177 million in 2004), mainly reflecting the change in the share price between the announcement date and the end of the subscription period.
Individual rights to training for employees (Droit Individuel à la Formation - DIF)
In accordance with Opinion 2004-F issued on October 13, 2004 by the CNCs Comité durgence (Emerging Accounting Issues Committee) concerning statutory training rights, any expenditure incurred in this respect is recorded as a current expense and no provision is recognized. The credit of training hours is to be disclosed in the notes to the financial statements, together with the number of training hours still to be claimed by employees.
In the limited number of cases (request for training leave, redundancy or resignation) where these costs cannot be considered as remuneration of future services, the resulting short-term obligation is provided for as soon as its settlement becomes probable or certain.
2.1.3 Options available under IASs/IFRSs and used by France Telecom Group
Certain IASs/IFRSs offer alternative methods of measuring and recognizing assets and liabilities. In this respect, the Group has chosen:
Under IFRS 1 First-time Adoption of International Financial Reporting Standards, certain exemptions are available regarding the retrospective application of IASs/IFRSs at the transition date (January 1, 2004 for the France Telecom Group). Accordingly, in order to prepare its opening balance sheet, the Group chose:
France Telecom is not affected by the exemption regarding hybrid financial instruments as the liability component of its perpetual bonds redeemable for shares (TDIRAs) was not extinguished at the date of transition to IFRS.
The Group is not concerned by the provisions of IFRS 4 Insurance Contracts at the transition date.
2.1.4 Presentation of the financial statements
As allowed under IAS 1 Presentation of Financial Statements, expenses are presented by nature in the consolidated income statement. The presentation of the income statement under IFRS is significantly different from that under French GAAP, with the inclusion in operating income of items presented as non-operating income and expense in the French GAAP income statement and of goodwill amortization and impairment losses.
Under IFRS, operating income corresponds to net profit before:
Gross operating margin, a sub-total calculated by France Telecom in accordance with paragraph 83 of IAS 8, corresponds to operating income before:
In accordance with IFRS 5, the assets and liabilities of controlled entities that are considered as being held for sale are reported on a separate line in the consolidated balance sheet. Profits or losses of discontinued operations are reported on a separate line of the income statement. IFRS 5 defines a discontinued operation as a component of an entity comprising operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity, that either has been disposed of, or is classified as held for sale, and represents a separate major line of business or geographical area of operations.
2.1.5 Earnings per share
The Group discloses both basic earnings per share and diluted earnings per share. The number of shares used to calculate diluted earnings per share takes into account the conversion into ordinary shares of potentially dilutive instruments outstanding at year-end. These include stock options backed by a liquidity contract set up by the Group in favor of Orange option holders, and Wanadoo stock options. Diluted earnings per share are calculated based on earnings per share attributable to the equity holders of France Telecom SA, adjusted for the finance cost of dilutive debt instruments and their impact on employee profit-sharing, net of the related tax effect. When earnings per share are negative, diluted earnings per share are identical to basic earnings per share. In the event of an issuance of shares at a price lower than the market price, and in order to ensure comparability of earnings per share information, the weighted average numbers of shares outstanding from current and previous periods are adjusted. Treasury shares deducted from consolidated equity are not taken into account in the calculation of basic or diluted earnings per share.
2.1.6 Consolidation rules
Subsidiaries that are controlled exclusively by France Telecom, directly or indirectly, are fully consolidated. Control is deemed to exist when the Group owns more than 50% of the voting rights of an entity, or when one of the following four criteria is met:
Companies that are controlled jointly by France Telecom and a limited number of other shareholders are proportionally consolidated; if these companies have any exclusively controlled, fully consolidated subsidiaries that are not wholly owned, indirect minority interests in these subsidiaries are recognized separately in the France Telecom consolidated financial statements.
Companies over which France Telecom exercises significant influence (generally corresponding to an ownership interest of 20% to 50%) are accounted for using the equity method.
When assessing the level of control or significant influence exercised over a subsidiary or associate, account is taken of the existence and effect of any exercisable or convertible potential voting rights at the balance sheet date.
Material intercompany transactions and balances are eliminated in consolidation.
2.1.7 Effect of changes in foreign exchange rates
Translation of financial statements of foreign subsidiaries
The financial statements of foreign subsidiaries whose functional currency is not the euro or the currency of a hyperinflationary economy are translated into France Telecoms presentation currency (euros) as follows:
The financial statements of subsidiaries whose functional currency is the currency of a hyperinflationary economy are adjusted for the effects of inflation prior to translation into euros as follows:
The financial statements of foreign subsidiaries previously adjusted for inflation as described above are subsequently translated into euros as follows:
Transactions in foreign currencies
The principles covering the measurement and recognition of transactions in foreign currencies are set out in IAS 21 The Effects of Changes in Foreign Exchange Rates. In accordance with this standard, transactions in foreign currencies are converted by the subsidiary into its functional currency at the exchange rate at the transaction date. Monetary assets and liabilities are remeasured at each balance sheet date at the year-end exchange rate and the resulting translation differences are recorded in the income statement:
Derivative instruments are measured and recognized in accordance with the general principles described in Note 2.1.16. Currency derivatives are recognized in the balance sheet at fair value at each period-end. Gains and losses arising from remeasurement at fair value are recognized:
2.1.8 Net revenues
Revenues from France Telecom activities are recognized and presented as follows, in accordance with IAS 18 Revenue:
Revenues from equipment sales are recognized when the significant risks and rewards of ownership are transferred to the buyer.
When the equipment is sold by a third-party retailer (indirect distribution channel) who purchases it from the Group and receives a commission for signing up the customer, the related revenue is recognized when the equipment is sold to the end-customer in an amount reflecting the Groups best estimate of the retail price.
In accordance with IFRIC 4 Determining Whether an Arrangement Contains a Lease, equipment for which a right of use is granted in analyzed in accordance with IAS 17 Leases.
Equipment lease revenues are recognized on a straight-line basis over the life of the lease agreement, except in the case of finance leases which are accounted for as sales on credit. Deferred tax is recognized on restatements of finance leases.
Telephone service and Internet access subscription fees are recognized in revenue on a straight-line basis over the service period.
Charges for incoming and outgoing telephone calls are recognized in revenue when the service is rendered.
Revenues from the sale of transmission capacity on terrestrial and submarine cables (indefeasible rights of use IRU) are recognized on a straight-line basis over the life of the contract.
Service Level Agreement penalties paid to customers are recorded as a deduction from revenues.
Revenue-sharing arrangements (premium rate numbers, audiotel, special numbers for Internet dial-up) are recognized gross, or net of content or service provider fees when the provider is responsible for the service rendered and for setting the price to be paid by subscribers.
Revenues from the supply of content are also recognized gross, or net of the amount due to the content provider, when the latter is responsible for the service content and for setting the price to subscribers.
Revenues from Internet advertising and from the sale of advertising space in online directories are recognized over the period during which the advertisement appears. Revenues from the sale of advertising space in printed directories are recognized when the directory is published.
Separable components of packaged and bundled offers
Sales of packaged mobile and Internet offers are considered as comprising identifiable and separate components to which general revenue recognition criteria can be applied separately. Numerous service offers on the Groups main markets are made up of two components, a product (e.g. mobile handset) and a service. Once the separate components have been identified, the amount received or receivable from the customer is allocated based on each components fair value. The sum allocated to delivered items is limited to the amount that is not dependent on the delivery of other items. For example, the sum allocated to delivered equipment generally corresponds to the price paid by the end-customer for that equipment. The balance of the amount received or receivable is contingent upon the future delivery of the service.
Offers that cannot be analyzed between separately identifiable components, because the commercial effect cannot be understood without reference to the series of transactions as a whole, are treated as bundled offers. Revenues from bundled offers are recognized in full over the life of the contract. The main example is connection to the service: this does not represent a separately identifiable transaction from the subscription and communications, and connection fees are therefore recognized over the average expected life of the contractual relationship.
France Telecom offers customized solutions in particular to its business customers. The related contracts are analyzed as multiple-elements transactions (including management of the telecommunication network, access, voice and data transmission and migration). The commercial discounts granted under these contracts if certain conditions are fulfilled are recorded as a deduction from revenue based on the specific terms of each contract.
Migration costs incurred by France Telecom under these contracts are recognized in expenses when they are incurred, except in the case of contracts that include an early termination penalty clause.
Revenues are stated net of discounts. For certain commercial offers where customers are offered a free service over a certain period in exchange for signing up for a fixed period (time-based incentives), the total revenue generated under the contract is spread over the fixed, non-cancelable period.
Loyalty programs consist of granting future benefits to customers (such as call credit and product discounts) in exchange for present and past use of the service (volume-based incentives).
Two types of loyalty program exist, with and without a contract renewal obligation. For both types of program, the Group defers part of the invoiced revenue over the vesting period of customer rights, at the fair value of these obligations.
Exchanges of goods or services
Revenues from barter transactions are recognized only when the actual value of the exchanged services can be determined, at the fair value of the goods or services provided or received, whichever is more readily determinable, irrespective of whether or not the bartered goods or services are similar. The fair value is determined by reference to non-barter sales, i.e. similar sale transactions of the Group with other third parties in identical conditions, the fair value of which can be measured reliably. If fair value cannot be estimated reliably, the transaction is valued either at the book value of the asset given in the exchange or at a nil value. Accordingly:
2.1.9 Subscriber acquisition costs, advertising and related costs
Subscriber acquisition and retention costs, other than loyalty program costs (see Note 2.1.8), are recognized as an expense for the period in which they are incurred.
Advertising, promotion, sponsoring, communication and brand marketing costs are also expensed as incurred.
2.1.10 Borrowing costs
The Group does not capitalize interest expense for the period of construction and acquisition of property, plant and equipment and intangible assets.
2.1.11 Share issuance costs
External costs directly related to share issues are deducted from the related premium, net of any tax saving. Other costs are expensed as incurred.
Goodwill represents the excess of the purchase cost of shares in consolidated companies, including transaction expenses, over the Groups corresponding equity in the fair value of the underlying net assets at the date of acquisition. When full control is acquired, goodwill is deemed equal to fair value as established by reference to the market value of the underlying shares, or in the absence of an active market, by using generally accepted valuation methods such as those based on revenues or costs. Where full control is not acquired, the assets and liabilities acquired are not remeasured.
Impairment tests and Cash Generating Units
In accordance with IFRS 3 Business Combinations, goodwill is not amortized but is tested for impairment at least once a year or more frequently when there is an indication that it may be impaired. IAS 36 Impairment of Assets requires these tests to be performed either at the level of each Cash Generating Unit (CGU) to which the goodwill has been allocated (a Cash Generating Unit is defined as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets); or at the level of a group of CGUs within a business or geographical segment that represent the lowest level at which management monitors return on investment of these acquisitions.
France Telecom generally measures the recoverable amount of goodwill at the level of the group of activities within the business segment or the geographical segment.
To determine whether goodwill has been impaired, the carrying value of the assets and liabilities of the CGU (or group of CGUs) is compared to its recoverable amount. The recoverable amount of a CGU is the higher of its fair value less costs to sell and its value in use.
Fair value less costs to sell is the best estimate of the amount obtainable from the sale of a CGU in an arms length transaction between knowledgeable, willing parties, less the costs of disposal. This estimate is determined on the basis of available market information taking into account specific circumstances.
Value in use is the present value of the future cash flows expected to be derived from the CGU or group of CGUs, including goodwill. Cash flow projections are based on economic and regulatory assumptions, license renewal assumptions and forecast trading conditions drawn up by France Telecom management, as follows:
Goodwill impairment losses are recorded in the income statement as a deduction from operating income.
If the business is intended to be sold, the recoverable amount is determined based on the best estimate of the fair value less costs to sell.
2.1.13 Intangible assets
Intangible assets, consisting mainly of trademarks, subscriber bases, licenses, development costs and software, are stated at acquisition or production cost.
When intangible assets are acquired in a business combination, their cost is generally determined in connection with the purchase price allocation based on their respective market values. When their market value is not readily determinable, cost is determined using generally accepted valuation methods based on revenues, costs or other appropriate criteria.
Internally developed trademarks and subscriber bases are not recognized in intangible assets.
Trademarks have an indefinite useful life and are not amortized, but are tested for impairment (see Note 2.1.15). Finite-lived trademarks are amortized over their expected useful lives.
Subscriber bases are amortized over the expected life of the commercial relationship, estimated at between three and seven years.
Licenses to operate mobile telephone networks are amortized on a straight-line basis over the license period from the date when the network is technically ready and the service can be marketed. The right to operate a third generation mobile network (UMTS) in France is recorded in an amount corresponding to the fixed portion of the royalties due when the license was granted. The variable user fee (corresponding to 1% of qualifying revenues generated by the third generation network) is expensed as incurred.
Research and development costs
Under IAS 38 Intangible Assets, development costs must be recognized as an intangible asset when the following can be demonstrated:
Research costs, and development costs not fulfilling the above criteria, are expensed as incurred. Development costs recognized as an intangible asset are amortized on a straight-line basis over their estimated useful life, generally not exceeding three years.
Patents are amortized on a straight-line basis over the expected period of use, not to exceed twenty years.
Software is amortized on a straight-line basis over the expected life, not to exceed five years.
Other development costs
Website development costs are capitalized when all of the following conditions are met:
Website development costs are expensed as incurred or recognized as an intangible asset depending on the phase:
2.1.14 Property, plant and equipment
The cost of tangible assets corresponds to their purchase or production cost, including costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
It also includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, representing the obligation incurred by the Group.
The cost of networks includes design and construction costs, as well as capacity improvement costs.
The total cost of an asset is allocated among its different components and each component accounted for separately, when the components have different useful lives or when the pattern in which their future economic benefits are expected to be consumed by the entity varies. Depreciation is then revised accordingly.
Indefeasible Rights of Use (IRU)
Indefeasible Rights of Use (IRU) correspond to the right to use a portion of the capacity of a terrestrial or submarine transmission cable granted for a fixed period. IRUs are recognized as an asset when France Telecom has the specific indefeasible right to use an identified portion of the underlying asset, generally optical fibers or dedicated wavelength bandwidth, and the duration of the right is for the major part of the underlying assets economic life. They are depreciated over the shorter of the expected period of use and the life of the contract.
France Telecom may receive non-repayable government grants in the form of direct or indirect funding of capital projects, mainly provided by local and regional authorities. These grants are deducted from the cost of the related assets and recognized in the income statement, based on the pattern in which the related assets expected future economic benefits are consumed.
Assets acquired under leases that transfer the risks and rewards of ownership to France Telecom are recorded as assets and an obligation in the same amount is recorded in liabilities. The risks and rewards of ownership are considered as having been transferred to France Telecom when:
Assets leased by France Telecom as lessor under leases that transfer the risks and rewards of ownership to the lessee are treated as having been sold.
Maintenance and repair costs are expensed as incurred, except where they serve to increase the assets productivity or prolong its useful life.
Items of property, plant and equipment are depreciated to write off their cost less any residual value on a basis that reflects the pattern in which their future economic benefits are expected to be consumed. Therefore, the straight-line basis is usually applied over the following estimated useful lives:
These useful lives are reviewed annually and are adjusted if current estimated useful lives are different from previous estimates. These changes in accounting estimates are recognized prospectively (see Note 2.2).
2.1.15 Impairment of non-current assets other than goodwill
In the case of an other-than-temporary decline in the recoverable amount of an item of property, plant and equipment or an intangible asset to below its net book value, due to events or circumstances occurring during the period (such as obsolescence, physical damage, significant changes to the manner in which the asset is used, worse than expected economic performance, a drop in revenues or other external indicators) an impairment loss is recognized.
Each group of assets (Cash Generating Unit) is tested for impairment by comparing its recoverable amount to its net book value. When an asset or group of assets is found to be impaired, the recognized impairment loss is equal to the difference between its net book value and recoverable amount.
The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use.
The recoverable amount of an asset is generally determined by reference to its value in use, corresponding to the future economic benefits expected to be derived from the use of the asset and its subsequent disposal. It is assessed by the discounted cash flows method, based on managements best estimate of the set of economic conditions that will exist over the remaining useful life of the asset and the assets expected conditions of use.
2.1.16 Financial assets and liabilities
Financial assets include available-for-sale assets, held-to-maturity assets, assets held for trading, derivative instruments, cash collateral paid on derivative instruments, loans and receivables and cash and cash equivalents.
Financial liabilities include borrowings, other financing and bank overdrafts, derivative instruments, cash collateral received on derivative instruments and accounts payable.
Financial assets and liabilities are measured and recognized in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
Measurement and recognition of financial assets
Held-to-maturity assets are non-derivative financial assets with fixed or determinable payments and fixed maturity, other than loans and receivables, that the Group has the positive intention and ability to hold to maturity. They are recognized initially at fair value and are subsequently measured at amortized cost by the effective interest method.
At each balance sheet date, the Group assesses whether there is any objective evidence that held-to-maturity assets are impaired. If any such evidence exists, the assets recoverable amount is calculated. If the recoverable amount is less than the assets book value, an impairment loss is recognized in the income statement.
Available-for-sale assets consist mainly of shares in non-consolidated companies and marketable securities that do not fulfill the criteria for classification in any of the other categories of financial assets. They are measured at fair value and gains and losses arising from remeasurement at fair value are recognized in equity.
Fair value corresponds to market price for listed securities and estimated fair value for unlisted securities, determined according to the most appropriate financial criteria in each case.
When there is objective evidence that available-for-sale assets are impaired, the cumulative impairment loss included in equity is taken to income.
Loans and receivables
Loans and receivables include loans to and receivables from non-consolidated companies, other loans and receivables and trade receivables. They are recognized initially at fair value and are subsequently measured at amortized cost by the effective interest method. Short-term receivables with no stated interest rate are measured at the original invoice amount if the effect of discounting is immaterial. Cash flows on loans and receivables at variable rates of interest are remeasured periodically, to take into account changes in market interest rates.
At each balance sheet date, the Group assesses whether there is any objective evidence that loans or receivables are impaired. If any such evidence exists, the assets recoverable amount is calculated. If the recoverable amount is less than the assets book value, an impairment loss is recognized in the income statement.
Assets at fair value through profit or loss
Assets at fair value through profit or loss are assets held for trading that the Group acquired principally for the purpose of selling them in the near term in order to realize a profit, that form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. This category also includes assets not fulfilling the above criteria that the Group has opted to measure using the fair value option.
Assets at fair value through profit or loss, consisting mainly of mutual fund units, are carried in the balance sheet under Other financial and current assets.
Cash and cash equivalents
Cash equivalents are held primarily to meet the Groups short-term cash needs rather than for investment or other purposes. They consist of highly-liquid instruments that are readily convertible into known amounts of cash and are not exposed to any material risk of impairment.
Measurement and recognition of financial liabilities
With the exception of financial liabilities held for trading, bonds redeemable for STM shares, Amenas credit lines, and derivative instruments which are measured at fair value through profit or loss, borrowings and other financial liabilities are initially recognized at fair value and subsequently measured at amortized cost by the effective interest method.
Transaction costs that are directly attributable to the acquisition or issue of the financial liability are deducted from the liabilitys carrying value. This is because financial liabilities are initially recognized at cost, corresponding to the fair value of the sums paid or received in exchange for the liability. The costs are subsequently amortized over the life of the debt, by the effective interest method.
The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial instrument or, when appropriate, through the period to the next interest adjustment date, to the net carrying amount of the financial liability. The calculation includes all fees and points paid or received between parties to the contract.
Certain borrowings are designated as being hedged by fair value hedges. A fair value hedge is a hedge of the exposure to changes in fair value of a recognized liability or an identified portion of the liability, that is attributable to a particular risk and could affect profit or loss.
Certain other financial liabilities are designated as being hedged by cash flow hedges. A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized liability or a highly probable forecast transaction (such as a purchase or sale) and could affect profit or loss.
Concerning the bonds redeemable for STM shares, it is not possible to measure the embedded derivative separately from the host contract either at acquisition or at a subsequent financial reporting date; consequently, the entire combined contract is treated as a financial liability at fair value through profit or loss.
Certain financial instruments comprise both a liability component and an equity component. They include perpetual bonds redeemable for shares (TDIRAs), bonds convertible into or exchangeable for new or existing shares (OCEANEs) and bonds with an exchange option.
On initial recognition, the fair value of the liability component is the present value of the contractually determined stream of future cash flows discounted at the rate of interest applied at that time by the market to instruments of comparable credit status and providing substantially the same cash flows, on the same terms, but without the conversion option.
The equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component.
Financial liabilities held for trading
Financial liabilities held for trading are measured at fair value.
Measurement and recognition of derivative instruments
Derivative instruments are recognized in the balance sheet and measured at fair value. Except as explained below, gains and losses arising from remeasurement at fair value of derivative instruments are systematically recognized in the income statement.
Derivative instruments may be designated as fair value hedges or cash flow hedges:
A hedging relationship qualifies for hedge accounting when:
The effects of applying hedge accounting are as follows:
Inventories are stated at the lower of cost and net realizable value, taking into account expected revenues from the sale of packages comprising a mobile handset and a subscription. Cost corresponds to purchase or production cost determined by the weighted average cost method.
2.1.18 Deferred taxes
In accordance with IAS 12 Income Taxes, deferred taxes are recognized for all temporary differences between the book values of assets and liabilities and their tax basis, as well as for unused tax losses, using the liability method. Deferred tax assets are recognized only when their recovery is considered probable.
IAS 12 requires, in particular, the recognition of deferred tax liabilities on all intangible assets recognized in business combinations (trademarks, subscriber bases, etc.).
A deferred tax liability is recognized for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, except to the extent that both of the following conditions are satisfied:
In practice, this means that for fully and proportionally consolidated companies, a deferred tax liability is recognized for taxes payable on planned dividend distributions by these companies.
In accordance with IAS 12, deferred tax assets and liabilities are not discounted.
2.1.19 Commitments to purchase minority interests (put options)
In accordance with IAS 27 Consolidated and Separate Financial Statements, minority interests are included in total equity.
Pursuant to IAS 27 and IAS 32 Financial Instruments: Disclosure and Presentation, in their current form, commitments to purchase minority interests and put options granted to minority shareholders are recognized at fair value as a financial debt and as a reduction in minority interests. Where the amount of the commitment exceeds the amount of the minority interest, the difference is recorded as a deduction from equity attributable to equity holders of France Telecom SA. The fair value of commitments to purchase minority interests is revised at each year-end and the corresponding financial debt is adjusted with a contra-entry to financial income or expense.
In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision is recognized when the Group has a present obligation towards a third party and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
The obligation may be legal, regulatory or contractual or it may represent a constructive obligation deriving from the Groups actions where, by an established pattern of past practice, published policies or a sufficiently specific current statement, the Group has indicated to other parties that it will accept certain responsibilities, and as a result, has created a valid expectation on the part of those other parties that it will discharge those responsibilities.
The estimate of the amount of the provision corresponds to the expenditure likely to be incurred by the Group to settle its obligation. If a reliable estimate cannot be made of the amount of the obligation, no provision is recorded and the obligation is deemed to be a contingent liability.
Contingent liabilities corresponding to probable obligations that are not recognized because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the Groups control, or to present obligations arising from past events that are not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or because the amount of the obligation cannot be measured with sufficient reliability are disclosed in the notes to the financial statements.
Provisions for restructuring costs are recognized only when the restructuring has been announced and the Group has drawn up or has started to implement a detailed formal plan, prior to the balance sheet date.
Provisions for dismantling and restoring sites
The Group is required to dismantle equipment and restore sites. In accordance with paragraphs 36 and 37 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the provision was based on the best estimate of the amount required to settle the obligation. It is discounted by applying a discount rate that reflects the passage of time, based on a risk-free rate of return. The amount of the provision is revised yearly and adjusted where appropriate, with a contra-entry to the asset to which it relates.
2.1.21 Pensions and similar benefits
These benefits are offered under defined contribution and defined benefit plans. The Groups obligation under defined contribution plans is limited to the payment of contributions, which are expensed as incurred.
In accordance with IAS 19, obligations under defined benefit plans are measured by the projected unit credit method. This method sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation which is then discounted.
The calculation is based on demographic assumptions concerning retirement age, rates of future salary increases, staff turnover rates, and financial assumptions concerning future interest rates (to determine the discount rate) and inflation. These assumptions are made at the level of each individual entity, based on its local macro-economic environment.
Civil servants pension plans in France
Civil servants employed by France Telecom are covered by the government-sponsored civil and military pension plan. France Telecoms obligation under these plans is limited to the payment of annual contributions (Act no. 96-660 dated July 26, 1996). Consequently, France Telecom has no obligation to fund future deficits of the pension plans covering its own civil servant employees or any other civil service plans.
Retirement bonuses and other similar benefits
Under the laws of some countries, employees are entitled to certain lump-sum payments or bonuses subsequent to retirement. The amount of these payments depends on their years of service and end-of-career salary.
Benefits other than pensions
France Telecom offers retired employees certain benefits such as free telephone lines and coverage of certain healthcare costs.
Other long-term benefits
Other long-term benefits consist mainly of long-service awards and paid long-term leaves of absence, for which the related obligations are also measured on an actuarial basis.
Early retirement plan in France
France Telecom has set up an early retirement plan for civil servants and employees under contract. Under the terms of the plan, which will expire on December 31, 2006, France Telecom employees aged 55 and over who have completed at least 25 years service, are eligible to take early retirement at 70% of their salary for the period up to the statutory retirement age of 60. Participants also receive a lump-sum payment which is equal to one years salary if they take early retirement at 55 and is reduced progressively as the age at which they elect to retire approaches the statutory retirement age.
Under IAS 19, the benefit is treated in the same way as lump-sum benefits payable on termination of service and a provision is recognized for the obligation, based on actuarial assumptions.
Other termination benefits
Any other termination benefits are also determined on an actuarial basis and covered by provisions.
For all commitments where termination of employment contracts would trigger payment of an indemnity, actuarial gains and losses are recognized in profit or loss for the period when the assumptions are revised.
2.1.22 Share-based compensation
In accordance with IFRS 2 Share-based Payment, the fair value of stock options, employee share issues and share grants without consideration (concerning the shares of France Telecom or its subsidiaries) is determined on the grant date.
Employee share offers
Following the sale by the State of a portion of France Telecoms capital, shares were offered to the Groups current and former employees, in accordance with Article 11 of the 1986 French Privatization Act.
The Group considers that the grant date of this employee share offer corresponds to the date on which the main terms of the offer were announced. This treatment complies with the recommended method set out in the CNC communication dated December 21, 2004 on employee share ownership plans (Plans dépargne dentreprise PEE ).
Shares granted to employees were valued by the Group at fair value at the grant date. As no vesting period applies, the amount was recorded immediately in personnel costs, with an adjustment to equity.
Other share-based payments
The cost of the employee share offer corresponds to the fair value of the rights to shares at the grant date. The value of stock options is generally determined by reference to the exercise price, the life of the options, the current price of the underlying shares, the expected share price volatility, expected dividends and the risk-free interest rate over the life of the options. The amount so determined is recognized in personnel costs on a straight-line basis over the period between the grant date and the exercise date corresponding to the vesting period and in equity for equity-settled plans or in debt for cash-settled plans.
2.1.23 Treasury shares
Treasury shares are recorded as a deduction from equity, at cost. When shares are sold out of treasury shares, the resulting profit or loss is recorded in equity net of tax.
2.2 Changes in estimates
Property, plant and equipment are depreciated to write off their cost less any residual value on a basis that reflects the pattern in which their future economic benefits are expected to be consumed.
As described in Note 2.1.14, useful lives of assets are reviewed annually and are adjusted if current estimated useful lives are different from previous estimates. These changes in accounting estimates are recognized prospectively, in accordance with IAS 8, and the depreciation charge for the current year and future accounting periods is adjusted accordingly. The main impacts of this analysis carried out within Group companies in 2005 are described below.
Home Communications Services
The useful lives of assets belonging to entities in the Home segment were revised in light of France Telecoms highly successful broadband network service offering, and the lack of any genuine alternative technologies that have emerged to support these services. This led to a reduction in the depreciation expense for 2005.
The impact on subsequent accounting periods of extending the useful lives of these non-current assets will depend on new inflows of assets within the asset categories concerned. Accordingly, no specific forecasts can be made in respect of future trends.
As a result of work carried out in Poland, a greater number of components were identified for local loop assets and transmission/switching equipment. The impact of these newly identified components and the corresponding revised useful lives amounts to 51 million at December 31, 2005 and mainly concerns public infrastructure and cables. The impact on subsequent accounting periods of extending the useful lives of these non-current assets will depend on new inflows of assets within the asset categories concerned. Accordingly, no specific forecasts can be made in respect of future trends.
Personal Communications Services
The analysis carried out in this segment concerns mainly public infrastructure and pylons belonging to entities which previously formed part of Orange, leading to a decrease of 55 million in the depreciation expense for 2005.
The impact on subsequent accounting periods of extending the useful lives of these non-current assets will depend on new inflows of assets within the asset categories concerned. Accordingly, no specific forecasts can be made in respect of future trends.
NOTE 3 RESTATED SEGMENT INFORMATION
Following the changes in the Groups management structure, effective as from January 1, 2005, the Group now has four reportable business segments. To facilitate period-on-period comparisons, in the segment analyses presented below the 2004 information has been adjusted to reflect the new organization applicable in 2005.
The Groups four reportable business segments are now:
Each of the above reportable segments has its own resources, although they may also share certain resources in the areas of networks and information systems, research and development, distribution networks and other shared competencies.
The use of shared resources is taken into account in segment results based on the terms of contractual agreements between legal entities, or external benchmarks, or by allocating costs among all the segments. The supply of shared resources is included in inter-segment revenues of the service provider, and use of the resources is included in expenses taken into account for the calculation of the service users gross operating margin.
Segment results correspond to operating income, excluding gains and losses on disposals of assets and the share of the profits or losses of associates not directly related to the segment concerned.
The Group has six geographic segments, including the four main geographic markets (France, the United Kingdom, Poland and Spain), Other European countries and the Rest of the world.
3.1 Analysis by business segment
3.1.1 Main operating indicators per segment for the year ended December 31, 2005
Income statement for the year ended December 31, 2005:
Balance sheet at December 31, 2005:
3.1.2 Main operating indicators per segment for the year ended December 31, 2004:
Income statement for the year ended December 31, 2004:
Balance sheet at December 31, 2004:
3.2 Analysis by geographic segment
3.2.1 Revenue contribution
3.2.2 Investments in property, plant and equipment and intangible assets (including finance leases)
3.2.2 Property, plant and equipment and intangible assets, net (excluding goodwill)
YEAR ENDED DECEMBER 31, 2005
On November 9, 2005, France Telecom acquired 36.1% of Orange Slovensko (representing 12,197,012 shares) from a group of minority stakeholders for a total cash consideration of USD 628 million (502 million). This transaction raised the Groups total stake in the company from 63.9% to 100.0%. Goodwill relating to this transaction amounted to 375 million. The conditional commitment to purchase the shares was recognized under financial debt in the balance sheet at December 31, 2004 in an amount of 500 million (see Note 19). On November 9, 2005, this liability was reversed to reflect the cash paid out.
Details of the transaction
According to the terms of an agreement signed July 29, 2005 with the shareholders of Auna, France Telecom acquired 28,971,688 Auna shares and 260,554 Multimedia Cable shares on November 8, 2005 for a total cash consideration of 6.4 billion. As a result of the acquisition, France Telecom now holds 79.4% of Auna shares. Auna has a 97.9% stake in Retevision Movil SA, the mobile operator trading under the name of Amena, and referred to as Amena in the document. Goodwill relating to this transaction amounted to 4,454 million.
Auna and Retevision Movil SA are fully consolidated from the acquisition date. Their measurement and presentation principles applied in accounting for these companies have been harmonized with those of France Telecom.
Cost and purchase price allocation
The Group has identified the assets and liabilities acquired in order to determine how Aunas purchase price should be allocated. The main items are as follows:
The trademark was measured according to the royalty savings methodology, which takes the present value of fees that would have been paid to a third party for use of the trademark had the Group not owned it.
The licenses were measured globally according to the Greenfield method, using the present value of future cash flows for a new entrant onto a new market.
The existing subscriber base was measured by taking the future cash flow generated by existing customers at the acquisition date.
The preliminary allocation of the acquisition price was determined according to Amenas situation on November 8, 2005. Any changes in value, including price adjustments, will be taken into account over the allocation period (12 months from the transaction date).
Breakdown of net assets acquired:
At the time of the acquisition by France Telecom, on November 8, 2005, of almost 80% of the share capital of Auna Operadores de Telecomunicaciones SA, which owns 97.9% of Retevision Movil SA (Amena), those shareholders holding the residual interest in Auna undertook not to sell their shares for a period of three years except in the event of a transfer to a Spanish entity that is not a competitor of France Telecom.
At the end of three year period, and for an initial period of one month, the minority shareholders may approach France Telecom in order to determine whether it would be interested in buying their shares, in which case discussions could begin.
After this one-month period, and for a period of six months, certain minority shareholders may decide to sell all of their shares provided that they received from a third party a Bona Fide Offer, defined as an offer at least equal to a floor valuation of the shares as established by two investment banks. After receiving the Bona Fide Offer, the minority shareholders are required to notify France Telecom, which may decide to acquire the shares or not.
In the event that France Telecom chooses not to exercise its preemption right, it has undertaken to indemnify the minority shareholders for the difference, if negative between the price of the Bona Fide Offer and 90% of the price of each Auna share acquired by France Telecom, plus capitalized annual interest of 4.5% (the Guaranteed Price). This price guarantee given to minority shareholders has been accounted for as a synthetic derivative and measured at fair value at the acquisition date in an amount of 258 million.
After the six-month period during which the minority shareholders are entitled to sell their shares, said shareholders may ask for their shares to be listed. The value of the shares must then be established by two investment banks. At any moment up to the date a prospectus is filed with the relevant stock exchange authorities, France Telecom can exercise its preemption right on the shares held by the minority shareholders, at a price at least equal to the Guaranteed Price per share.
As from three years and seven months after November 8, 2005 and the fifth anniversary of the acquisition date, France Telecom holds a call option on the shares held by the minority shareholders, that may be exercised at a price equal to the higher of (i) the fair value of the shares; and (ii) the Guaranteed Price.
Revenue and net income for the financial year 2005, including Amena for the full year, would have been 51,715 million and 6,369 million, respectively.
Amenas net income is included within that of France Telecom as from the acquisition date, and amounts to (243) million, of which (224) million corresponds to the impairment loss taken on the Amena trademark, net of the deferred tax effect (see Note 7).
In 2006, France Telecom plans to merge Auna, Retevision Movil SA and France Telecom España, which operates the Groups fixed telephony and internet business in Spain under the Wanadoo banner.
On September 8, 2005, France Telecom acquired 14.0% of Orange Dominicana (representing 2,454,019 shares) from a minority shareholder for a cash consideration of USD 37.7 million (30.3 million), raising the Groups total stake in the company from 86.0% to 100.0%. Goodwill relating to this transaction amounted to 24 million. The conditional commitment to purchase the shares was recognized under financial debt in the balance sheet at December 31, 2004 in an amount of 19 million (see Notes 19 and 32). On September 8, 2005, this liability was reversed to reflect the cash paid out.
On September 8, 2005, TP Group acquired 19.5% of Wirtualna Polska, representing 873,485 shares (see Note 33), for a cash consideration of PLN 221 million (54.7 million), raising its interest in the company from 80.5% to 100%. At December 31, 2005, goodwill relating to this transaction amounted to 22 million (see Note 7).
On April 13, 2005, France Telecom acquired 23.5% of Orange Romania (representing 220,390,775 shares) from a group of minority shareholders for a cash consideration of USD 527.5 million (404.2 million), raising the Groups total stake in the company from 73.3% to 96.8%. Goodwill relating to this transaction amounted to 272 million.
On February 10, 2005, France Telecom announced that it had signed a definitive agreement with Equant NV for the acquisition by France Telecom of all the assets and liabilities of Equant that it did not already own. Equant is France Telecoms 54.1%-owned subsidiary specialized in global communications services for businesses. The agreements final terms were approved by France Telecoms Board of Directors on February 9, 2005, during which an independent expert attested to the fairness, from a financial point of view, of the terms of the offer for Equant NVs minority shareholders. At this meeting, the legal counsel, comprising one Dutch and one French legal expert, presented its preliminary report. This report confirmed, after completion of the requisite due diligence, that the transaction was in compliance with corporate governance rules, applicable regulations (particularly stock market regulations) and the corporate interests of France Telecom and Equant NV.
Equant NVs shareholders approved the transaction during their extraordinary general meeting of May 24, 2005. The assets were transferred on May 25, 2005 for a total amount of 578 million, and Equant NV was wound up on December 31, 2005. The proceeds of the sale were paid to Equant NV shareholders on May 25, 2005 on the basis of 4.30 per Equant share.
An amount of 12 million in acquisition-related costs was capitalized. Goodwill relating to the assets acquired amounted to 214 million.
Other changes in the scope of consolidation
On November 15, 2005, France Telecom exchanged its minority interest in Portugal-based Optimus, Novis and Clix against shares in their parent company Sonaecom. The exchange was realized through a share issue reserved for France Telecom. Following this operation, France Telecom held 23.7% of Sonaecoms capital (70,276,868 shares), representing 250 million based on the share price at the transaction date (see Note 15). At December 31, 2005, the net gain on disposal before tax was 113 million (see Notes 8 and 31). France Telecoms interest in Sonaecom is consolidated by the equity method.
This operation led to the cancellation of the conditional commitments concerning Clix signed by France Telecom and Sonae, a shareholder in Sonaecom. New agreements between France Telecom and Sonae have been signed (see Note 32).
Following the amendment of the shareholders agreement with the Senegalese government, Sonatel was fully consolidated with effect from July 1, 2005. France Telecoms interest in Sonatel was previously consolidated according to the proportional method. The remeasurement of the assets and liabilities of Sonatel and its subsidiaries led to the recognition of 288 million in existing subscriber bases in France Telecoms consolidated financial statements, and the corresponding deferred tax liability of 79 million, which had a net impact on equity of 209 million (see Note 13). After taking account of minority interests, full consolidation of Sonatel has a positive impact on equity of 469 million, including 83 million on equity attributable to equity holders of the Group.
On January 17, 2005, France Telecom acquired 3.57% of the shares of TP SA, which were previously held by Tele Invest II. The price paid by France Telecom to Tele Invest II was 351 million, enabling Tele Invest to fully pay down its 349 million debt (see Note 22). Tele Invest II shares were deconsolidated following this operation.
On November 4, 2005, TP SA acquired 34% of PTK-Centertel from FT Mobiles International, a wholly-owned subsidiary of France Telecom, for a cash consideration of PLN 4.88 billion. As a result of this transaction, TP SA owns 100% of its mobile subsidiary PTK-Centertel and France Telecoms shareholding in PTK-Centertel decreased from 65.3% as of December 31, 2004 to 47.5% as of December 31, 2005. This transaction is a transfer of consolidated shares within the France Telecom Group. As IAS/IFRS do not specifically address such transaction, the Group develop an applied an accounting policy as described in note 2.1.2. The shares of PTK-Centertel acquired by TP SA were maintained at historical cost and the gain on the transfer was fully eliminated in the accounts of TP SA. As the minority interest were adjusted to reflect the change in their share in the equity of TP SA and PTK-Centertel with a corresponding opposite effect on the Group retained earnings, the profit and loss and the shareholders equity remain unchanged.
Following its August 6, 2002 issue of bonds exchangeable for STMicroelectronics NV shares, France Telecom redeemed all of the remaining bonds in circulation on the maturity date (August 6, 2005) by delivering on August 11, 2005, STMicroelectronics shares on the basis of 1.25 STMicroelectronics share per bond, in accordance with the conditions attached to the bonds. At December 31, 2005, the net gain on disposal before tax was 162 million (see Notes 8, 15, 21, 31 and 32). France Telecom no longer holds any STMicroelectronics shares.
On May 2, 2005, France Telecom announced the sale of its 27.3% interest in Mobilcom AG to Texas Pacific Group (TPG), a US investment fund, for a total consideration of 265 million. France Telecom continues to own 1% of MobilCom. At December 31, 2005, the net gain on disposal before tax was 265 million (see Notes 8, 15, 16 and 33).
Further to their announcement of December 22, 2004, France Telecom, the Canal+ group and TDF sold their cable network activities to the Ypso consortium, controlled by the fund manager Cinven and 10%-owned by cable operator Altice, on March 31, 2005. At December 31, 2005, the net gain from this sale before tax amounted to 18 million (see Notes 4 and 32).
Within the scope of this transaction, France Telecom sold to the Ypso group its France Telecom Câble subsidiary, as well as the cable networks that it owned and that were operated by France Telecom Câble or NC Numéricâble, a subsidiary of the Canal+ group. The total consideration for the sale amounted to 348 million. France Telecom and the Canal+ group each hold 20% of Ypso, representing an immaterial amount. France Telecoms interest in Ypso is subject to put and call options (see Note 32). The operation is shown on the consolidated statement of cash flows net of a shareholders loan amounting to 37 million granted by France Telecom to Ypso Holding. This shareholders loan was paid down in full in December 2005 when Ypso arranged refinancing, enabling France Telecom to cash in 76 million. In January 2006, France Telecom sold its interest in Ypso and consequently, all options were cancelled (see Note 35).
Under the terms of this transaction, France Telecom agreed not to distribute audiovisual programs via cable networks in France (excluding ADSL in particular) for a period of two years.
On February 10, 2005, France Telecom sold 22,303,169 shares, or 8% of the share capital, of PagesJaunes to institutional investors through an accelerated placement for a price of 440.5 million, as a result of which its interest in PagesJaunes group was reduced to 54%. At December 31, 2005, the net gain on disposal before tax was 386 million (see Note 8).
On January 27, 2005, pursuant to an agreement entered into on November 8, 2004, France Telecom sold its interest in Tower Participations SAS for an amount of 400 million. At December 31, 2005, the net gain on disposal before tax was 377 million (see Notes 8, 15 and 32).
On January 28, 2005, Intelsat announced the finalization of its merger with Zeus Holding. Pursuant to this transaction, France Telecom sold the entirety of its stake in Intelsat (5.4%) for a consideration of USD 164 million. The net gain on disposal before tax was 51 million (see Notes 8 and 16).
YEAR ENDED DECEMBER 31, 2004
Following the decision of the Paris Court of Appeal to reject the claims of certain minority shareholders, France Telecom proceeded with the compulsory purchase of the outstanding shares in Orange on April 23, 2004, raising its interest in Orange to 100%.
At December 31, 2004, the goodwill corresponding to the additional 1.0% of Orange SA shares acquired by France Telecom amounted to 249 million.
Further to a simplified mixed public tender and exchange offer (offre publique mixte simplifiée dachat et déchange) for Wanadoo shares launched on February 25, 2004, France Telecom acquired 370,267,396 additional Wanadoo shares on May 3, 2004, raising its ownership in Wanadoo to 1,426,228,769 shares, representing 95.9% of the outstanding shares of Wanadoo. As consideration for the shares acquired, France Telecom issued 64,796,795 new France Telecom shares representing a total acquisition cost of 1,344 million based on France Telecoms closing share price of 20.75 on April 28, 2004, the date on which the French Financial Markets Council (Conseil des marchés financiers CMF) published the results of the offer and paid 1,805 million in cash.
On June 29, 2004, France Telecom filed a public tender offer (offre publique de retrait) followed by a compulsory purchase procedure (retrait obligatoire) relating to outstanding shares in Wanadoo, at a price of 8.86 per share. The tender offer subsequently ran from July 12, 2004 to July 23, 2004, and the compulsory purchase procedure took place on July 26, 2004. By acquiring a total of 62,429,567 shares for the sum of around 553 million, France Telecom gained 100% ownership of Wanadoo.
The expenses incurred in respect of these acquisitions were capitalized as part of the acquisition cost of securities in the amount of 15 million before tax.
At December 31, 2004, goodwill corresponding to the additional 29.1% of Wanadoo SA shares acquired by France Telecom (net of the dilutive impact) amounted to 1,276 million.
Other changes in the scope of consolidation
On October 12, 2004, France Telecom acquired a 10% stake less one share of TP SA, previously owned by Tele Invest. The price paid by France Telecom to Tele Invest was 1,902 million, enabling Tele Invest to fully pay down its debt of the same amount. Tele Invest shares were deconsolidated following this operation.
On March 9, 2004, France Telecom redeemed all of the bonds exchangeable for STMicroelectronic NV (STM) shares which were due to mature on December 17, 2004. Subsequently, the Group indirectly carried out a block sale of the 30 million shares initially underlying these bonds on December 3, 2004. As a result, France Telecom indirectly sold all remaining interests in STM available at that date, i.e. 3.3% of STMs capital. The net impact on cash of this transaction for France Telecom amounted to 472 million, and the net gain on disposal before tax was 249 million (see Note 8).
At December 31, 2004 France Telecom indirectly held (via FT1CI) 26.42 million STM shares underlying bonds redeemable for STM shares maturing on August 6, 2005.
In accordance with the agreement signed on October 21, 2004, Equant sold its 49% interest in Radianz to Reuters its partner in the joint venture for USD 110 million in cash. Under the terms of the contract, Equant is released from all future funding commitments with respect to Radianz, and all the partnership agreements were terminated.
At December 31, 2004, the net impact on cash of this transaction for France Telecom amounted to 89 million and the net gain on disposal before tax was 73 million (see Note 8).
In accordance with an agreement entered into on July 7, 2004, Orange sold all of its activities operated under the Orange A/S banner in Denmark to TeliaSonera on October 11, 2004. The cash proceeds generated by France Telecom on this transaction amounted to 610 million, and the corresponding gain on disposal before tax was 38 million (see Note 8). Asset and liability warranties granted by France Telecom as part of this disposal agreement are capped at 90 million.
On March 2, 2004, Orange reached an agreement with its partners in Bitco True Corporation Public Company Limited (formerly Telecom Asia) and CP Group on the partial sale of its interest in Bitco. The transaction, which was completed by the parties on September 29, 2004 at a price of 1 Thai baht per Bitco share, concerned 39% of Bitcos share capital. Following the transaction, Oranges interest in Bitco was reduced from 49% to 10% (see Note 16).
Under the above-mentioned agreement, Orange was fully released from all obligations and commitments in respect of the bridge loan taken out in 2002 by TA Orange Company Limited, Bitcos 99.9%-owned subsidiary.
In accordance with the provisions set out in the public exchange offer for Wanadoo shares and the information memorandum approved by the French stock exchange regulatory authority (Autorité des marché financiersAMF) on June 21, 2004 under no. 04-614, in July 2004, when PagesJaunes shares were first traded on the Premier marché of Euronext Paris, Wanadoo placed 101,200,000 existing shares, representing 36.9% of the capital of PagesJaunes, with public investors. The placing price was set at 14.40 per share for institutional investors and 14.10 per share for private investors. In addition, 4,739,610 new PagesJaunes shares resulting from the capital increase reserved for employees were issued at the same time as the placement. Subsequent to these operations, France Telecom held 62% of PagesJaunes SAs capital at December 31, 2004.
At December 31, 2004, the net impact on cash of this transaction for France Telecom amounted to 1,443 million and the net gain on disposal before tax amounted to 199 million (see Note 8).
On June 15, 2004, France Telecom sold its non-consolidated 27% interest in Suez-Lyonnaise Telecom (Noos) to Suez at a price of 1. The value of this investment had been written down to zero in France Telecoms financial statements at January 1, 2004. France Telecom offered no contractual guarantees as part of the disposal agreement.
NOTE 5 NET REVENUES
France Telecom generates substantially all of its revenues from services.
6.1 Personnel costs
Personnel costs break down as follows:
6.2 External purchases
External purchases can be analyzed as follows:
6.3 Other operating income
Other operating income breaks down as follows:
6.4 Other operating expense
Other operating expense breaks down as follows:
NOTE 7 IMPAIRMENT
The Group carries out impairment test annually, or when indicators show that assets may be impaired. This note sets out the main elements of the impairment tests carried out in 2004 and 2005.
Goodwill impairment breaks down as follows:
7.2 Intangible assets and property, plant and equipment
Impairment losses taken on property, plant and equipment and intangible assets net of reversals amount to:
France Telecom has 38 main Cash Generating Units (CGUs), generally corresponding to an activity in a particular country. These CGUs break down as follows by primary business segment:
To carry out the impairment tests, goodwill acquired in a business combination is allocated to each CGU or group of CGUs likely to benefit from acquisition-related synergies. CGUs are combined within a business or geographic segment, as permitted under IAS 36. Combined CGUs identified by France Telecom are as follows:
France Telecom has calculated the fair value less costs to sell, and value in use of all of the above CGUs:
The recoverable amount is then calculated at the level of the CGU groups defined above.
7.3 Cash Generating Units (CGUs)
Impairment tests for global assets are carried out based on groups of Cash Generating Units (CGUs). Global assets include goodwill, intangible assets with indefinite useful lives and assets with finite useful lives (property, plant and equipment, intangible assets with determined useful lives and net working capital).
The table below sets out data relating to the principal groups of CGUs:
On account of the recent date of the transaction (November 8, 2005), the companys fair value is the same as its transaction value. Accordingly, no impairment needs to be recorded on Amenas assets, except as regards the Amena trademark (see Note 7.2). The impairment loss taken on the Amena trademark results from: (i) the value of the assets from the standpoint of a market player at the time of the acquisition, without taking into account the intentions of the acquirer; and (ii) mechanisms that factor into the valuation the economic outlook regarding the use of this asset by the owner.
Key assumptions used to determine the value in use of the other main CGUs:
Key assumptions used to determine the value in use of assets in the telecommunications segment are similar to those described above, and include:
The amounts assigned to each of these parameters reflect past experience adjusted for expected changes over the timeframe of the business plan, but may also be affected by unforeseeable changes in the political, economic or legal framework of certain countries.
The main key assumptions used in the Directories segment relate to net revenue and gross operating margin trends for paper and online directories. The amounts assigned to each of the parameters reflect past experience adjusted for expected changes over the timeframe of the business plan.
NOTE 8 GAINS AND LOSSES ON DISPOSAL OF ASSETS
The main disposals are set out in Note 4.
NOTE 9 RESTRUCTURING COSTS
Restructuring costs, net of restructuring provision reversals, break down as follows:
Changes in restructuring provisions are described in Note 28.
NOTE 10 FINANCE COSTS, NET
Cost of net financial debt includes income from investments and related receivables in an amount of 168 million at December 31, 2005 (compared to 167 million at December 31, 2004).
11.1 France Telecom Group tax proof
Income tax for 2005 is based on the application of the effective tax rate on pre-tax profit for the year ended December 31, 2005. In France, deferred taxes are calculated based on enacted tax rates, i.e. 34.43% for 2006 and thereafter.
The reconciliation between effective income tax expense and the theoretical tax calculated based on the French statutory tax rate is as follows:
11.2 Income tax benefit/(charge)
The income tax split between the tax consolidation group and the other subsidiaries is as follows:
France Telecom SA tax consolidation group
At December 31, 2005, the France Telecom SA tax consolidation group comprised, in particular:
France Telecom SA and a dozen of its direct or indirect subsidiaries, including PagesJaunes, are subject to review by the French Tax Administration since January 2006.
The deferred tax charge in 2005 for the France Telecom SA tax consolidation group mainly consists of:
The deferred tax charge in 2004 mainly consisted of:
11.3 Balance sheet tax position