Virgin Media 2008 Annual Report Download - page 109

VIRGIN MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2—Significant Accounting Policies (Continued)
We adopted FAS 123R on January 1, 2006 and elected to use the modified prospective method,
whereby prior period results were not restated. As a result of the adoption of FAS 123R, we recorded a
cumulative effect of a change in accounting principle of £1.2 million to reduce compensation expense
recognized in previous periods. Stock-based compensation expense is recognized as a component of
selling, general and administrative expenses in the consolidated statement of operations.
Pensions
We account for our defined benefit pension plans using FASB Statement No. 87, Employer’s
Accounting for Pensions, or FAS 87, and the disclosure rules under FASB Statement No. 132 (revised),
Employers Disclosures about Pensions and Other Postretirement Benefits, an Amendment of FASB
Statements 87, 88 and 106, or FAS 132R. Under FAS 87, pension expense is recognized on an accrual
basis over employees’ approximate service periods. Pension expense calculated under FAS 87 is
generally independent of funding decisions or requirements.
In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—An Amendment of FASB Statement No. 87, 88, 106 and 132(R),
or FAS 158. FAS 158 requires that the funded status of defined benefit postretirement plans be
recognized on a company’s balance sheet, and changes in the funded status be reflected in
comprehensive income, effective for fiscal years ending after December 15, 2006, which we adopted for
the year ended December 31, 2006. FAS 158 also requires companies to measure the funded status of
the plan as of the date of its fiscal year-end, effective for fiscal years ending after December 15, 2008.
The impact of adopting the recognition provisions of FAS 158 as of December 31, 2006 was an increase
in liabilities of £9.4 million and a pre-tax increase in the accumulated other comprehensive loss of
£9.4 million.
Derivative Financial Instruments
We are exposed to various market risks, including changes in foreign currency exchange rates and
interest rates. As certain portions of our indebtedness accrue interest at variable rates, we are exposed
to volatility in future cash flows and earnings associated with variable interest rate payments. Also,
substantially all of our revenue and operating costs are earned and paid in pounds sterling and, to a
lesser extent, U.S. dollars and euros, but we pay interest and principal obligations on some of our
indebtedness in U.S. dollars and euros. As a result, we have exposure to volatility in future cash flows
and earnings associated with changes in foreign currency exchange rates on payments of principal and
interest on a portion of our indebtedness. We are also exposed to volatility in future cash flows and
earnings associated with foreign currency payments in relation to operating costs and purchases of fixed
assets incurred in the normal course of business.
Our objective in managing exposure to fluctuations in interest rates and foreign currency exchange
rates is to decrease the volatility of our earnings and cash flows caused by changes in underlying rates.
To achieve this objective, we have entered into derivative financial instruments. We have established
policies and procedures to govern the management of these exposures through a variety of derivative
financial instruments, including interest rate swaps, cross-currency interest rate swaps and foreign
currency forward rate contracts. By policy, we do not enter into derivative financial instruments with a
level of complexity or with a risk that is greater than the exposure to be managed.
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