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Pipex Communications (FFG)

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Tuesday 25 September, 2007

Pipex Communications

Restatement under IFRS

Pipex Communications PLC
25 September 2007

PIPEX COMMUNICATIONS PLC



RESTATEMENT OF FINANCIAL INFORMATION UNDER INTERNATIONAL FINANCIAL REPORTING
STANDARDS

________________________________________________________________________________



Pipex Communications plc will be reporting its financial results in accordance
with International Financial Reporting Standards ("IFRS") as adopted by the
European Union with effect from 1 January 2007.



The financial information in the interim group financial statements for the six
month period ended 30 June 2007 has been prepared in accordance with IFRS for
the first time, and the first annual report to be prepared in accordance with
IFRS will be for the year ended 31 December 2007.



The last set of group financial statements presented by the company under United
Kingdom Generally Accepted Accounting Practice ("UK GAAP") were for the year
ended 31 December 2006. The date of the transition to IFRS was therefore 1
January 2006.



BASIS OF CONSOLIDATION


The consolidated financial statements incorporate the financial statements of
Pipex Communications plc (the "company") and enterprises controlled by the
company (its "subsidiaries", together referred to as the "group"). The excess of
cost of acquisition over the fair values of the group's share of identifiable
net assets acquired is recognised as goodwill. Any deficiency of the cost of
acquisition below the fair value of identifiable net assets acquired (a discount
on acquisition) is recognised directly in the income statement.



The purchase method of accounting is used to account for the acquisition of
subsidiaries by the group.  The cost of an acquisition is measured as the fair
value of the assets given, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are initially measured at fair
value at the acquisition date irrespective of the extent of any minority
interest.



The results of subsidiaries acquired or disposed of during the year are included
in the consolidated income statement from the effective date of acquisition or
up to the effective date of disposal, as appropriate.



Where necessary, adjustments are made to the financial statements of
subsidiaries to bring the accounting policies used into line with those used by
other members of the group.



All intra-group transactions, balances and unrealised gains on transactions
between group companies are eliminated on consolidation. Unrealised losses are
also eliminated unless the transaction provides evidence of an impairment of the
asset transferred.



PROPERTY, PLANT AND EQUIPMENT



Property, plant and equipment are stated at cost less accumulated depreciation
and any recognised impairment losses.



Depreciation is charged so as to write off the cost of assets, other than land,
to their estimated residual values over their estimated useful lives using the
straight-line method on the following bases:


Freehold buildings                      over twenty to twenty-five years
Leasehold improvements                  over the life of the lease
Network infrastructure                  over two to ten years
Plant and machinery                     over three to five years
Office equipment                        over three to five years



Assets held under finance leases are depreciated over their expected useful
lives on the same basis as owned assets or, where shorter, the term of the
relevant lease.



The gain or loss arising on the disposal or retirement of an asset is determined
as the difference between the sales proceeds and the carrying amount of the
asset and is recognised in income. The incremental costs of staff working on
specific network projects are capitalised under network infrastructure costs.



GOODWILL



Goodwill arising on consolidation represents the excess of the cost of
acquisition over the group's interest in the fair value of the identifiable
assets, liabilities and contingent liabilities of a subsidiary, associate or
jointly controlled entity at the date of acquisition.



Upon the acquisition of subsidiaries goodwill is separately disclosed. Goodwill
on acquisition of associates and jointly controlled entities is included in
investment in associates and jointly controlled entities.



Goodwill is recognised as an asset and reviewed for impairment at least
annually. Any impairment is recognised immediately in the income statement and
is not subsequently reversed. Goodwill is allocated to cash generating units for
the purpose of impairment testing. Each of these cash generating units
represents the group's investment in each country of operation by primary
reporting segment.



On disposal of a subsidiary, associate or jointly controlled entity, the
attributable amount of goodwill is included in the determination of the profit
or loss on disposal.



Goodwill arising on acquisitions before the date of transition to IFRS has been
retained at the amount previously calculated under UK GAAP subject to being
tested for impairment at that date. Goodwill written off to reserves under UK
GAAP prior to 1998 has not been reinstated and is not included in determining
any subsequent profit or loss on disposal.



OTHER INTANGIBLE ASSETS



Intangible assets such as patents and trademarks are measured initially at their
purchase cost and amortised on a straight-line basis over their estimated useful
lives, on the following bases:


Patents                                 over ten years
Wireless licence                        over twenty years
Customer lists                          over three years



Intangible assets acquired as part of an acquisition are capitalised at their
fair value where this can be reliably measured.



IMPAIRMENT OF TANGIBLE AND INTANGIBLE ASSETS EXCLUDING GOODWILL



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



Recoverable amount is the higher of fair value less costs to sell and value in
use. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the
asset for which the estimates of future cash flows have been adjusted.



If the recoverable amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment loss
is recognised as an expense immediately.



Where an impairment loss subsequently reverses, the carrying amount of the asset
(cash-generating unit) is increased to the revised estimate of its recoverable
amount, but so that the increased carrying amount does not exceed the carrying
amount that would have been determined had no impairment loss been recognised
for the asset (cash-generating unit) in prior years. A reversal of an impairment
loss is recognised as income immediately, unless the relevant asset is carried
at a revalued amount, in which case the reversal of the impairment loss is
treated as a revaluation increase.



INVESTMENTS IN ASSOCIATES AND JOINTLY CONTROLLED ENTITIES



An associate is an entity over which the group is in a position to exercise
significant influence, but not control or joint control, through participation
in the financial and operating policy decisions of the investee. A jointly
controlled entity is an entity in which the company holds an interest on a
long-term basis and which is jointly controlled by the company and one or more
other venturers under a contractual arrangement.



The results and assets, liabilities and contingent liabilities of associates and
jointly controlled entities are incorporated in these financial statements using
the equity method of accounting except when classified as held for sale (see
below). Investments in associates and jointly controlled entities are carried in
the balance sheet at the group's share of the net assets of the associate or
jointly controlled entity. Losses of the associates or jointly controlled
entities in excess of the group's interest in those associates or jointly
controlled entities are not recognised.



Any excess of cost of acquisition over the group's share of the fair values of
identifiable net assets acquired of the associate or jointly controlled entity
at the date of acquisition is recognised as goodwill. Any deficiency of the cost
of acquisition below the group's share of the fair values of identifiable net
assets of the associate or jointly controlled entity at the date of acquisition
(a discount on acquisition) is recognised in the income statement.



Where a group company transacts with an associate or jointly controlled entity
of the group, unrealised profits and losses are eliminated to the extent of the
group's interest in the relevant associate or jointly controlled entity. Losses
may provide evidence of an impairment of the asset transferred in which case
appropriate provision is made for impairment.



INVENTORIES



Inventories are stated at the lower of cost and net realisable value. Cost
comprises direct materials and, where applicable, direct labour costs and those
overheads that have been incurred in bringing the inventories to their present
location and condition. Cost is calculated using the weighted average method.
Net realisable value represents the estimated selling price less all estimated
costs to completion and costs to be incurred in marketing, selling and
distribution.



NON-CURRENT ASSETS HELD FOR SALE



Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of carrying amount and fair value less costs to sell.



Non-current assets (and disposal groups) are classified as held for sale if
their carrying amount will be recovered through a sale transaction rather than
continuing use. This condition is regarded as met only when the sale is highly
probable and the asset (or disposal group) is available for immediate sale in
its present condition. Management must be committed to the sale which should be
expected to qualify for recognition as a completed sale within one year from the
date of classification.



CASH AND CASH EQUIVALENTS



Cash and cash equivalents comprises cash in hand, deposits repayable on demand
less overdrafts repayable on demand, short-term deposits and restricted
deposits.



FINANCIAL INSTRUMENTS



Financial assets and financial liabilities are recognised on the group's balance
sheet when the group has become a party to the contractual provisions of the
instrument.



Trade receivables

Trade receivables are initially recognised at fair value and then subsequently
measured at amortised cost using the effective interest rate method. Trade
receivables do not carry any interest and are stated at their nominal value as
reduced by appropriate allowances for estimated irrecoverable amounts.



Financial liability and equity

Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into. An equity instrument is
any contract that evidences a residual interest in the assets of the group after
deducting all of its liabilities.



Bank borrowings

Bank borrowings are initially recognised at fair value and then subsequently
measured at amortised cost using the effective interest rate method.
Interest-bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs. Finance charges, including premiums payable
on settlement or redemption, are accounted for on an accrual basis and are added
to the carrying amount of the instrument to the extent that they are not settled
in the period in which they arise.



Convertible loan notes

Convertible loan notes are regarded as compound instruments, consisting of a
liability component and an equity component. At the date of issue, the fair
value of the liability component is estimated using the prevailing market
interest rate for similar non-convertible debt. The liability component is
subsequently measured at amortised cost using the effective interest rate
method. The difference between the proceeds of issue of the convertible loan
notes and the fair value assigned to the liability component, representing the
embedded option to convert the liability into equity of the group, is included
in equity.



Issue costs are apportioned between the liability and equity components of the
convertible loan notes based on their relative carrying amounts at the date of
issue. The portion relating to the equity component is charged directly against
equity.



The interest expense on the liability component is calculated by applying the
prevailing market interest rate for similar non-convertible debt to the
instrument. The difference between this amount and the interest paid is added to
the carrying value of the convertible loan note.



Trade payables

Trade payables are initially recognised at fair value and then subsequently
measured at amortised cost using the effective interest rate method. Trade
payables are not interest bearing and are stated at their nominal value.



Equity instruments

Equity instruments issued by the company are recorded at the proceeds received,
net of direct issue costs.



PROVISIONS



Provisions are recognised when the group has a present obligation as a result of
a past event which it is probable will result in an outflow of economic benefits
that can be reliably estimated. Provisions for restructuring costs are
recognised when the group has a detailed formal plan for the restructuring which
has been notified to affected parties.



LEASING



Leases are classified as finance leases whenever the terms of the lease transfer
substantially all the risks and rewards of ownership to the lessee. All other
leases are classified as operating leases.



Assets held under finance leases are recognised as assets of the group at their
fair value or, if lower, at the present value of the minimum lease payments,
each determined at the inception of the lease. The corresponding liability to
the lessor is included in the balance sheet as a finance lease obligation. Lease
payments are apportioned between finance charges and reduction of lease
obligation so as to achieve a constant rate of interest on the remaining balance
of the liability. Finance charges are charged directly against income, unless
they are directly attributable to qualifying assets, in which case they are
capitalised in accordance with the group's general policy on borrowing costs.



Rentals payable under operating leases are charged to income on a straight-line
basis over the term of the relevant lease. Benefits received and receivable as
an incentive to enter into an operating lease are also spread on a straight line
basis over the lease term.



REVENUE RECOGNITION



Revenue is measured at the fair value of the consideration received or
receivable and represents amounts receivable for goods and services provided in
the normal course of business, net of discounts, Value Added Tax and other sales
related taxes. Sales of goods are recognised when goods are delivered and title
has passed.



In particular, broadband and voice revenue is recognised evenly over the period
for which the customer has received the service. Fees for hosting services,
including share and dedicated hosting, are deferred over the life of the
contract and recognised evenly over the period of that contract. Domain name
income is recognised in full on registration of the domain names.



Interest income is accrued on a time basis, by reference to the principal
outstanding and at the effective interest rate applicable, which is the rate
that exactly discounts estimated future cash receipts through the expected life
of the financial asset to that asset's net carrying amount.



Dividend income from investments is recognised when the shareholders' rights to
receive payment have been established.



FOREIGN CURRENCIES



Transactions in currencies other than Sterling are recorded at the rates of
exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign currencies
are retranslated at the rates prevailing on the balance sheet date. Non-monetary
assets and liabilities carried at fair value that are denominated in foreign
currencies are translated at the rates prevailing at the date when the fair
value was determined. Gains and losses arising on retranslation are included in
the income statement for the period.



On consolidation, the assets and liabilities of the group's overseas operations
are translated at exchange rates prevailing on the balance sheet date. Income
and expense items are translated at the average exchange rates for the period.
Exchange differences arising, if any, are classified as equity and transferred
to the group's translation reserve. Such translation differences are recognised
as income or as expenses in the period in which the operation is disposed.



Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate. The group has elected to treat goodwill and fair
value adjustments arising on acquisitions before the date of transition to IFRS
as Sterling denominated assets and liabilities.



SHARE-BASED PAYMENTS



The group has applied the requirements of IFRS 2: Share-based Payments. In
accordance with the transitional provisions, IFRS 2 has been applied to all
grants of equity instruments after 7 November 2002 that were unvested as of 1
January 2005.



The group issues equity-settled share-based payments to its employees.
Equity-settled share-based payments are measured at fair value at the date of
grant. The fair value determined at the grant date of equity-settled share-based
payments is expensed on a straight-line basis over the vesting period, based on
the group's estimate of shares that will eventually vest.



Fair value is measured by use of a binomial model. The expected life used in the
model has been adjusted, based on management's best estimate, for the effect of
non-transferability, exercise restrictions, and behavioural considerations.



RETIREMENT BENEFIT COSTS



Payments to defined contribution retirement benefit plans are charged as an
expense as they fall due.



Payments made to state-managed retirement benefit schemes are dealt with as
payments to defined contribution plans where the group's obligations under the
schemes are equivalent to those arising in a defined contribution retirement
benefit plan.



TAXATION



The tax expense represents the sum of the current tax and the deferred tax
elements.



The current tax is based on taxable profit for the year. Taxable profit differs
from net profit as reported in the income statement because it excludes items of
income or expense that are taxable or deductible in other years and it further
excludes items that are never taxable or deductible. The group's liability for
current tax is calculated by using tax rates that have been enacted or
substantively enacted by the balance sheet date.



The Finance Bill 2007 received Royal Assent on 19 July 2007 and as a result the
tax rate applicable to the group in the United Kingdom for 2008/2009 will be 28%
(2007/2008 and previous years: 30%).



Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amount of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary
difference arises from the initial recognition of goodwill or from the initial
recognition (other than in a business combination) of other assets and
liabilities in a transaction which affects neither the tax profit nor the
accounting profit.



Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, and interests in jointly
controlled entities, except where the group is able to control the reversal of
the temporary difference and it is probable that the temporary difference will
not reverse in the foreseeable future.



Deferred tax is calculated at the tax rates (and tax laws) that have been
enacted or substantively enacted by the balance sheet date. Deferred tax is
charged or credited in the income statement, except when it relates to items
credited or charged directly to equity, in which case the deferred tax is also
dealt with in equity.



CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS



Estimates and judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.



The group makes estimates and assumptions concerning the future. The resulting
accounting judgements will, by definition, seldom equal the related actual
results. The estimates and assumptions that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the
next financial year are discussed below:



•         Goodwill has been tested for impairment by comparing the amount of
goodwill against expected forecast results including cash flows expected to be
generated in the future by the appropriate asset, cash-generating unit, or
business segment.



•  The fair value of share-based payments is measured using a binomial
   model which inherently makes use of significant estimates and assumptions
   concerning the future applied by the directors.



•  Deferred tax assets and liabilities are assessed on the basis of
   assumptions regarding the future, the likelihood that assets will be realised
   and liabilities will be settled, and estimates as to the timing of those 
   future events and as to the future tax rates that will be applicable.



PIPEX COMMUNICATIONS PLC



RESTATED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
as at 30 June 2006 and as at 31 December 2006

__________________________________________________________________________________________


                                                                                  30 June          31 December
                                                                                     2006                 2006
                                                                                    £'000                £'000
                                                                               Under IFRS           Under IFRS

ASSETS
Non-current assets
Property, plant and equipment                                                      40,946               47,069
Goodwill                                                                          138,306              164,954
Intangible assets                                                                  18,772               23,726
                                                                                  _______              _______
                                                                                  198,024              235,749
Current assets
Inventories                                                                            72                   47
Trade and other receivables                                                        35,240               44,679
Cash and cash equivalents                                                          37,803               48,328
                                                                                  _______              _______
                                                                                   73,115               93,054
                                                                                  _______              _______
TOTAL ASSETS                                                                      271,139              328,803
                                                                                   ======               ======

EQUITY AND LIABILITIES
Equity attributable to the equity holders of the parent
Share capital                                                                    (23,336)             (23,931)
Share premium reserve                                                            (97,567)             (98,524)
Translation reserve                                                                   (7)                   61
Other reserves                                                                   (18,906)             (23,228)
Retained earnings                                                                  45,164               49,274
                                                                                  _______              _______
                                                                                 (94,652)             (96,348)
Non-current liabilities
Long-term borrowings                                                             (86,352)            (125,013)
Long-term provisions                                                              (1,381)              (1,224)
Investments accounted for using the equity method                                 (4,461)              (5,349)
Deferred tax liabilities                                                                -                    -
                                                                                  _______              _______
                                                                                 (92,194)            (131,586)
Current liabilities
Short-term borrowings                                                             (3,650)              (4,461)
Current provisions                                                                  (375)                (337)
Trade and other payables                                                         (80,027)             (95,793)
Current tax liabilities                                                             (241)                (278)
                                                                                  _______              _______
                                                                                 (84,293)            (100,869)
                                                                                  _______              _______
TOTAL EQUITY AND LIABILITIES                                                    (271,139)            (328,803)
                                                                                   ======               ======





PIPEX COMMUNICATIONS PLC



RESTATED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

for the six month period ended 30 June 2006

and for the year ended 31 December 2006

__________________________________________________________________________________________


                                                                                Total operations, including
                                                                                   continuing, discontinued
                                                                                         and acquisitions #
                                                                                   Six month
                                                                                period ended     Year ended
                                                                                     30 June    31 December
                                                                                        2006           2006
                                                                                       £'000          £'000

REVENUE                                                                              119,217        294,359
Cost of sales                                                                       (73,339)      (182,067)
                                                                                     _______        _______
GROSS PROFIT                                                                          45,878        112,292
Administration expenses before
amortisation of intangibles,
depreciation and share based
payment costs                                                                       (34,716)       (89,195)

Amortisation of intangibles                                                          (1,671)        (6,645)

Depreciation                                                                         (5,271)       (12,033)

Share based payment costs                                                              (801)        (2,206)
Administration Expenses                                                             (42,459)      (110,079)
OPERATING PROFIT BEFORE
AMORTISATION OF INTANGIBLES,
DEPRECIATION AND SHARE
BASED PAYMENT COSTS                                                                   11,162         23,097

Amortisation of intangibles                                                          (1,671)        (6,645)

Depreciation                                                                         (5,271)       (12,033)

Share based payment costs                                                              (801)        (2,206)
Operating (loss)/profit                                                                3,419          2,213
Finance income                                                                           369            546

Finance costs                                                                        (2,688)        (6,806)
Net Financing Expenses                                                               (2,319)        (6,260)

Share of loss of jointly
controlled entity                                                                      (262)        (1,150)

PROFIT/(LOSS) BEFORE TAX                                                                 838        (5,197)
Income tax expense                                                                     5,218          5,680
                                                                                     _______        _______
PROFIT/(LOSS) FOR THE PERIOD                                                           6,056            483
                                                                                      ======         ======
Earnings per share:
Basic                                                                                  0.26p          0.02p
                                                                                      ======         ======
Diluted                                                                                0.26p          0.02p
                                                                                      ======         ======



PIPEX COMMUNICATIONS PLC



RESTATED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
for the six month period ended 30 June 2006

__________________________________________________________________________________________


                                                 ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT
                                                      Share
                                          Share     premium   Translation       Other     Retained        TOTAL
                                        capital     reserve       reserve  reserves #     earnings       EQUITY
                                          £'000       £'000         £'000       £'000        £'000        £'000
                                                               Under IFRS               Under IFRS   Under IFRS

BALANCE AT
1 JANUARY 2006
BROUGHT FORWARD
Adjusted balance                         22,101      84,127             -      11,217     (42,430)       75,015

CHANGES IN EQUITY
FOR THE SIX MONTHS
ENDED 30 JUNE 2006
Exchange differences on
translating foreign operations                -           -             7           -            -            7
Net losses not recognised
in the income statement:
Unrealised loss on
disposal of Pipex
Wireless Limited                              -           -             -           -      (9,672)      (9,672)
                                        _______     _______       _______     _______      _______      _______
Net expense recognised
directly in equity                            -           -             7           -      (9,672)      (9,665)
Profit for the period                         -           -             -           -        6,056        6,056
                                        _______     _______       _______     _______      _______      _______
TOTAL RECOGNISED
INCOME AND EXPENSE
FOR THE PERIOD                                -           -             7           -      (3,616)      (3,609)

Issue of share capital                    1,090      12,544             -           -            -       13,634
Exercise of share options                   145         896             -           -            -        1,041
Grant of options                              -           -             -           -          882          882
Equity component of
convertible bonds issued                      -           -             -       7,689            -        7,689
                                        _______     _______       _______     _______      _______      _______
BALANCE AT
30 JUNE 2006
CARRIED FORWARD                          23,336      97,567             7      18,906     (45,164)       94,652
                                         ======      ======        ======      ======       ======       ======



# Other reserves includes a merger reserve of £7,538,000, a capital reserve of
£207,000, an acquisition reserve of £3,472,000, and a bond equity reserve of
£7,689,000.





PIPEX COMMUNICATIONS PLC



RESTATED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
for the six month period ended 31 December 2006

__________________________________________________________________________________________


                                    ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE PARENT
                                                      Share
                                          Share     premium   Translation       Other     Retained        TOTAL
                                        capital     reserve       reserve  reserves #     earnings       EQUITY
                                          £'000       £'000         £'000       £'000        £'000        £'000
                                                               Under IFRS               Under IFRS   Under IFRS

BALANCE AT
1 JULY 2006
BROUGHT FORWARD                          23,336      97,567             7      18,906     (45,164)       94,652

CHANGES IN EQUITY
FOR THE SIX MONTHS
ENDED 31 DECEMBER
2006
Exchange differences on
translating foreign operations                -           -          (68)           -            -         (68)
Net gains not recognised
in the income statement:
Unrealised gain on
disposal of Pipex
Wireless Limited                              -           -             -           -          139          139
                                        _______     _______       _______     _______      _______      _______
Net expense recognised
directly in equity                            -           -          (68)           -          139           71
Loss for the period                           -           -             -           -      (5,573)      (5,573)
                                        _______     _______       _______     _______      _______      _______
TOTAL RECOGNISED
INCOME AND EXPENSE
FOR THE PERIOD                                -           -          (68)           -      (5,434)      (5,502)

Issue of share capital                      432           -             -       4,319            -        4,751
Exercise of share options                   163         957             -           -            -        1,120
Grant of options                              -           -             -           -        1,324        1,324
Equity component of
convertible bonds issued                      -           -             -           3            -            3
                                        _______     _______       _______     _______      _______      _______
BALANCE AT
31 DECEMBER 2006
CARRIED FORWARD                          23,931      98,524          (61)      23,228     (49,274)       96,348
                                         ======      ======        ======      ======       ======       ======



# Other reserves includes a merger reserve of £11,857,000, a capital reserve of
£207,000, an acquisition reserve of £3,472,000, and a bond equity reserve of
£7,692,000.





PIPEX COMMUNICATIONS PLC



RESTATED CONSOLIDATED CASH FLOW STATEMENTS (UNAUDITED)
for the six month period ended 30 June 2006
and for the year ended 31 December 2006

__________________________________________________________________________________________


                                                                                         Six month
                                                                                      period ended     Year ended
                                                                                           30 June    31 December
                                                                                              2006           2006
                                                                                             £'000          £'000
                                                                           Notes        Under IFRS     Under IFRS
CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations                                               1              15,601         34,012
Interest paid                                                                              (1,937)        (4,997)
Income taxes (paid)/received                                                                 (144)            230
                                                                                           _______        _______
NET CASH GENERATED FROM OPERATING ACTIVITIES                                                13,520         29,245

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries                                                                (1,984)       (25,563)
Net overdrafts acquired on acquisitions of subsidiaries                                   (43,146)       (40,589)
Acquisition of businesses                                                                        -       (10,368)
Investment in joint venture                                                                      -          (797)
Purchase of property, plant and equipment                                                 (12,035)       (22,077)
Interest received                                                                              369            546
                                                                                           _______        _______
NET CASH USED IN INVESTING ACTIVITIES                                                     (56,796)       (98,848)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issue of share capital                                                    13,634         13,634
Proceeds from the exercise of share options                                                  1,041          2,161
Proceeds from the issue of convertible bonds                                                88,279         88,279
Proceeds from long-term borrowings                                                          41,082         76,746
Repayments of long-term borrowings                                                        (75,714)       (74,310)
Payment of finance lease liabilities                                                       (1,207)        (2,543)
                                                                                           _______        _______
NET CASH GENERATED FROM FINANCING ACTIVITIES                                                67,115        103,967

                                                                                           _______        _______
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                   23,839         34,364

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF
THE PERIOD                                                                                  13,964         13,964
                                                                                           _______        _______
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD                                                                                  37,803         48,328
                                                                                            ======         ======





EXPLANATION OF TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

__________________________________________________________________________________________



The primary reporting statements adopted by the group under IFRS have resulted
in reclassifications of certain assets and liabilities which have therefore
given rise to representation of information. In addition, for the reasons set
out below, some of the figures have been restated upon adoption of the group's
new set of IFRS compliant accounting policies.



Exemptions applied by the group in the year of transition



The group has taken the exemption in respect of business combinations from the
requirement to restate combinations occurring before the date of transition.



The group has also elected to apply the foreign exchange exemption and set
cumulative exchange translation differences to zero at the date of transition.



Main changes in the basis of preparation between IFRS and UK GAAP



In accordance with the requirements of IFRS 3, goodwill has been frozen at its
brought forward net book value at the date of transition, and amortisation
charged under UK GAAP for the periods ended 30 June 2006 and 31 December 2006
has been reversed.



In addition, under the requirements of IFRS 3, the fair values of customer lists
acquired with the business combinations arising during the periods ended 30 June
2006 and 31 December 2006 have been recognised separately from goodwill and
classified as intangible assets to be amortised over their expected useful
economic lives of 36 months.



Adoption of IFRS also results in a number of minor changes such as holiday pay
accruals, rebasing of residual values on certain property assets, and the
definition of cash and cash equivalents, and the reclassifications of provisions
between current and non-current.



The adoption of IFRS has not however had an impact on the amount of cash
previously disclosed under UK GAAP in any of the periods of account in the
financial statements.





PIPEX COMMUNICATIONS PLC



EXPLANATION OF TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

__________________________________________________________________________________________



Consolidated balance sheet reconciliation at 1 January 2006 (Transition Date)


                                                                                        Effect of
                                                                           UK GAAP in  transition    Reported
                                                                          IFRS format     to IFRS  under IFRS
                                                           Adjustments          £'000       £'000       £'000
ASSETS
Non-current assets
Property, plant and equipment                                                  25,251           -      25,251
Goodwill                                                                       99,231           -      99,231
Intangible assets                                                               4,424           -       4,424
                                                                              _______     _______     _______
                                                                              128,906           -     128,906
Current assets
Inventories                                                                        63           -          63
Trade and other receivables                                                    18,953           -      18,953
Cash and cash equivalents                                                      13,964           -      13,964
                                                                              _______     _______     _______
                                                                               32,980           -      32,980
                                                                              _______     _______     _______
TOTAL ASSETS                                                                  161,886           -     161,886
                                                                               ======      ======      ======
EQUITY AND LIABILITIES
Equity attributable to the equity holders of the parent
Share capital                                                                (22,101)           -    (22,101)
Share premium reserve                                                        (84,127)           -    (84,127)
Translation reserve                                                                 -           -           -
Other reserves                                                               (11,217)           -    (11,217)
Retained earnings                                               a              42,300         130      42,430
                                                                              _______     _______     _______
                                                                             (75,145)         130    (75,015)
Non-current liabilities
Long-term borrowings                                                         (24,871)           -    (24,871)
Long-term provisions                                            b             (2,004)         619     (1,385)
Investments accounted for using the equity method                                   -           -           -
Deferred tax liabilities                                                            -           -           -
                                                                              _______     _______     _______
                                                                             (26,875)         619    (26,256)
Current liabilities
Short-term borrowings                                                        (16,815)           -    (16,815)
Current provisions                                              b                   -       (619)       (619)
Trade and other payables                                        a            (42,605)       (130)    (42,735)
Current tax liabilities                                                         (446)           -       (446)
                                                                              _______     _______     _______
                                                                             (59,866)       (749)    (60,615)
                                                                              _______     _______     _______
TOTAL EQUITY AND LIABILITIES                                                (161,886)           -   (161,886)
                                                                               ======      ======      ======



Adjustments:

a    Holiday pay accruals recognised as at 31 December 2005 (-£130,000)

b    Reclassification of provisions between current and non-current as at 31
     December 2005 (£619,000)





EXPLANATION OF TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

__________________________________________________________________________________________



Consolidated balance sheet reconciliation at 30 June 2006


                                                                                         Effect of
                                                                           UK GAAP in   transition     Reported
                                                                          IFRS format      to IFRS   under IFRS
                                                        Adjustments             £'000        £'000        £'000
ASSETS
Non-current assets
Property, plant and equipment                                a                 40,935           11       40,946
Goodwill                                                   b, f               145,554      (7,248)      138,306
Intangible assets                                            c                      7       18,765       18,772
                                                                              _______      _______      _______
                                                                              186,496       11,528      198,024
Current assets
Inventories                                                                        72            -           72
Trade and other receivables                                                    35,240            -       35,240
Cash and cash equivalents                                                      37,803            -       37,803
                                                                              _______      _______      _______
                                                                               73,115            -       73,115
                                                                              _______      _______      _______
TOTAL ASSETS                                                                  259,611       11,528      271,139
                                                                               ======       ======       ======
EQUITY AND LIABILITIES
Equity attributable to the equity holders of the
parent
Share capital                                                                (23,336)            -     (23,336)
Share premium reserve                                                        (97,567)            -     (97,567)
Translation reserve                                                               (7)            -          (7)
Other reserves                                                               (18,906)            -     (18,906)
Retained earnings                                      a, b, c, d, f           55,882     (10,718)       45,164
                                                                              _______      _______      _______
                                                                             (83,934)     (10,718)     (94,652)
Non-current liabilities
Long-term borrowings                                                         (86,352)            -     (86,352)
Long-term provisions                                         e                (1,756)          375      (1,381)
Investments accounted for using the equity method                             (4,461)            -      (4,461)
Deferred tax liabilities                                                            -            -            -
                                                                              _______      _______      _______
                                                                             (92,569)          375     (92,194)
Current liabilities
Short-term borrowings                                                         (3,650)            -      (3,650)
Current provisions                                           e                      -        (375)        (375)
Trade and other payables                                     d               (79,217)        (810)     (80,027)
Current tax liabilities                                                         (241)            -        (241)
                                                                              _______      _______      _______
                                                                             (83,108)      (1,185)     (84,293)
                                                                              _______      _______      _______
TOTAL EQUITY AND LIABILITIES                                                (259,611)     (11,528)    (271,139)
                                                                               ======       ======       ======



Adjustments:

a    Reduction in the depreciation charge for the period arising as a result of
     rebasing the residual value of a property asset (£11,000)

b    Reversing amortisation charged in the period on goodwill (£7,517,000), and
     reclassifying customer list values previously included in the value of 
     goodwill arising on consolidation (-£20,395,000)

c    Recognition of customer list values at 30 June 2006 (£20,395,000), and the
     amortisation charge thereon for the period (-£1,630,000)

d    Holiday pay accruals recognised as at 30 June 2006 (-£810,000)

e    Reclassification of provisions between current and non-current as at 30
     June 2006 (£375,000)

f     Recognition of a deferred tax liability on intangible assets as at 30 June
      2006 (£5,630,000) and the recognition of a deferred tax asset of the same
      amount





EXPLANATION OF TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

__________________________________________________________________________________________



Consolidated balance sheet reconciliation at 31 December 2006


                                                                                        Effect of
                                                                           UK GAAP in  transition    Reported
                                                                          IFRS format     to IFRS  under IFRS
                                                           Adjustments          £'000       £'000       £'000
ASSETS
Non-current assets
Property, plant and equipment                                   a              46,989          80      47,069
Goodwill                                                      b, g            170,692     (5,738)     164,954
Intangible assets                                               c                   6      23,720      23,726
                                                                              _______     _______     _______
                                                                              217,687      18,062     235,749
Current assets
Inventories                                                                        47           -          47
Trade and other receivables                                                    44,679           -      44,679
Cash and cash equivalents                                                      48,328           -      48,328
                                                                              _______     _______     _______
                                                                               93,054           -      93,054
                                                                              _______     _______     _______
TOTAL ASSETS                                                                  310,741      18,062     328,803
                                                                               ======      ======      ======
EQUITY AND LIABILITIES
Equity attributable to the equity holders of the parent
Share capital                                                                (23,931)           -    (23,931)
Share premium reserve                                                        (98,524)           -    (98,524)
Translation reserve                                                                61           -          61
Other reserves                                                               (23,228)           -    (23,228)
Retained earnings                                          a, b, c, d,         67,383    (18,109)      49,274
                                                              e, g
                                                                              _______     _______     _______
                                                                             (78,239)    (18,109)    (96,348)
Non-current liabilities
Long-term borrowings                                                        (125,013)           -   (125,013)
Long-term provisions                                            f             (1,561)         337     (1,224)
Investments accounted for using the equity method               d             (5,620)         271     (5,349)
Deferred tax liabilities                                                            -           -           -
                                                                              _______     _______     _______
                                                                            (132,194)         608   (131,586)
Current liabilities
Short-term borrowings                                                         (4,461)           -     (4,461)
Current provisions                                              f                   -       (337)       (337)
Trade and other payables                                        e            (95,569)       (224)    (95,793)
Current tax liabilities                                                         (278)           -       (278)
                                                                              _______     _______     _______
                                                                            (100,308)       (561)   (100,869)
                                                                              _______     _______     _______
TOTAL EQUITY AND LIABILITIES                                                (310,741)    (18,062)   (328,803)
                                                                               ======      ======      ======



Adjustments:

a    Reduction in the depreciation charge for the year arising as a result of
     rebasing the residual value of a property asset (£80,000)

b    Reversing amortisation charged in the year on goodwill (£18,152,000), and
     reclassifying customer list values previously included in the value of 
     goodwill arising on consolidation (-£29,578,000)

c    Recognition of customer list values at 31 December 2006 (£29,578,000), and
     the amortisation charge thereon for the year (-£5,858,000)

d    The group's share of development costs recognised as a capital asset as at
     31 December 2006 in the jointly controlled entity (£271,000)

e    Holiday pay accruals recognised as at 31 December 2006 (-£224,000)

f     Reclassification of provisions between current and non-current as at 31
      December 2006 (£337,000)

g    Recognition of a deferred tax liability on intangible assets as at 31
     December 2006 (£5,688,000) and the recognition of a deferred tax asset of 
     the same amount





EXPLANATION OF TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

__________________________________________________________________________________________



Reconciliation of the consolidated income statement for the six month period
ended 30 June 2006


                                                                                        Effect of
                                                                          UK GAAP in   transition     Reported
                                                                         IFRS format      to IFRS   under IFRS
                                                          Adjustments          £'000        £'000        £'000

REVENUE                                                                      119,217            -      119,217
Cost of sales                                                  a            (72,837)        (502)     (73,339)
                                                                             _______      _______      _______
GROSS PROFIT                                                                  46,380        (502)       45,878

Other operating expenses                                       b            (34,538)        (178)     (34,716)
                                                                             _______      _______      _______
OPERATING PROFIT                                                              11,842        (680)       11,162

Amortisation of intangibles                                    c             (7,558)        5,887      (1,671)
Depreciation                                                   d             (5,282)           11      (5,271)
Share based payment costs                                                      (801)            -        (801)
Share of loss of jointly controlled entity                                     (262)            -        (262)
Investment income                                                                369            -          369
Finance costs                                                                (2,688)            -      (2,688)
                                                                             _______      _______      _______
(LOSS)/PROFIT BEFORE TAX                                                     (4,380)        5,218          838

Income tax expense                                             e               (412)        5,630        5,218
                                                                             _______      _______      _______
(LOSS)/PROFIT FOR THE PERIOD                                                 (4,792)       10,848        6,056
                                                                              ======       ======       ======
Earnings per share:
Basic                                                                        (0.21)p        0.47p        0.26p
                                                                              ======       ======       ======
Diluted                                                                      (0.21)p        0.47p        0.26p
                                                                              ======       ======       ======



Adjustments:

a    Holiday pay accruals recognised as at 31 December 2005 (£106,000) and as at
     30 June 2006 (-£608,000)

b    Holiday pay accruals recognised as at 31 December 2005 (£24,000) and as at
     30 June 2006 (-£202,000)

c    Reversing amortisation charged in the period on goodwill (£7,517,000), and
     recognising the amortisation charge on customer list values for the period
     (-£1,630,000)

d    Reduction in the depreciation charge for the period arising as a result of
     rebasing the residual value of a property asset (£11,000)

e    Recognition of a deferred tax liability on intangible assets as at 30 June
     2006 (£5,630,000) and the recognition of a deferred tax asset of the same 
     amount



EXPLANATION OF TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

__________________________________________________________________________________________



Reconciliation of the consolidated income statement for the year ended 31
December 2006


                                                                                        Effect of
                                                                           UK GAAP in  transition      Reported
                                                                          IFRS format     to IFRS    under IFRS
                                                        Adjustments             £'000       £'000         £'000

REVENUE                                                                       294,359           -       294,359
Cost of sales                                                a              (182,004)        (63)     (182,067)
                                                                              _______     _______       _______
GROSS PROFIT                                                                  112,355        (63)       112,292

Other operating expenses                                     b               (89,164)        (31)      (89,195)
                                                                              _______     _______       _______
OPERATING PROFIT                                                               23,191        (94)        23,097

Amortisation of intangibles                                  c               (18,939)      12,294       (6,645)
Depreciation                                                 d               (12,113)          80      (12,033)
Share based payment costs                                                     (2,206)           -       (2,206)
Share of loss of jointly controlled entity                   e                (1,421)         271       (1,150)
Investment income                                                                 546           -           546
Finance costs                                                                 (6,806)           -       (6,806)
                                                                              _______     _______       _______
LOSS BEFORE TAX                                                              (17,748)      12,551       (5,197)

Income tax expense                                           f                    (8)       5,688         5,680
                                                                              _______     _______       _______
LOSS FOR THE YEAR                                                            (17,756)      18,239           483
                                                                               ======      ======        ======
Earnings per share:
Basic                                                                         (0.76)p       0.78p         0.02p
                                                                               ======      ======        ======
Diluted                                                                       (0.76)p       0.78p         0.02p
                                                                               ======      ======        ======



Adjustments:

a    Holiday pay accruals recognised as at 31 December 2005 (£106,000) and at 31
     December 2006 (-£169,000)

b    Holiday pay accruals recognised as at 31 December 2005 (£24,000) and at 31
     December 2006 (-£55,000)

c    Reversing amortisation charged in the year on goodwill (£18,152,000), and
     recognising the amortisation charge on customer list values for the year
     (-£5,858,000)

d    Reduction in the depreciation charge for the year arising as a result of
     rebasing the residual value of a property asset (£80,000)

e    The group's share of development costs recognised as a capital asset as at
     31 December 2006 in the jointly controlled entity (£271,000)

f     Recognition of a deferred tax liability on intangible assets as at 31
      December 2006 (£5,688,000) and the recognition of a deferred tax asset of 
      the same amount



EXPLANATION OF TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

__________________________________________________________________________________________



Reconciliation of the consolidated cash flow statement for the six month period
ended 30 June 2006


                                                                                        Effect of
                                                                          UK GAAP in   transition     Reported
                                                                         IFRS format      to IFRS   under IFRS
                                                            Notes              £'000        £'000        £'000

CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations                                1               15,601            -       15,601
Interest paid                                                                (1,937)            -      (1,937)
Income taxes paid                                                              (144)            -        (144)
                                                                             _______      _______      _______
NET CASH GENERATED FROM OPERATING ACTIVITIES                                  13,520            -       13,520

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries                                                  (1,984)            -      (1,984)
Net overdrafts acquired on acquisitions of subsidiaries                     (43,146)            -     (43,146)
Acquisition of businesses                                                          -            -            -
Investment in jointly controlled entity                                            -            -            -
Purchase of property, plant and equipment                                   (12,035)            -     (12,035)
Interest received                                                                369            -          369
                                                                             _______      _______      _______
NET CASH USED IN INVESTING ACTIVITIES                                       (56,796)            -     (56,796)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issue of share capital                                      13,634            -       13,634
Proceeds from the exercise of share options                                    1,041            -        1,041
Proceeds from the issue of convertible bonds                                  88,279            -       88,279
Proceeds from long-term borrowings                                            41,082            -       41,082
Repayments of long-term borrowings                                          (75,714)            -     (75,714)
Payment of finance lease liabilities                                         (1,207)            -      (1,207)
                                                                             _______      _______      _______
NET CASH GENERATED FROM FINANCING ACTIVITIES                                  67,115            -       67,115

                                                                             _______      _______      _______
NET INCREASE IN CASH AND CASH EQUIVALENTS                                     23,839            -       23,839

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF
THE PERIOD                                                                    13,964            -       13,964
                                                                             _______      _______      _______
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD                                                                    37,803            -       37,803
                                                                              ======       ======       ======



EXPLANATION OF TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

__________________________________________________________________________________________



Reconciliation of the consolidated cash flow statement for the year ended 31
December 2006


                                                                                        Effect of
                                                                         UK GAAP in    transition      Reported
                                                                        IFRS format       to IFRS    under IFRS
                                                              Notes           £'000         £'000         £'000

CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations                                  1            34,012             -        34,012
Interest paid                                                               (4,997)             -       (4,997)
Income taxes received                                                           230             -           230
                                                                            _______       _______       _______
NET CASH GENERATED FROM OPERATING ACTIVITIES                                 29,245             -        29,245

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries                                                (25,563)             -      (25,563)
Net overdrafts acquired on acquisitions of subsidiaries                    (40,589)             -      (40,589)
Acquisition of businesses                                                  (10,368)             -      (10,368)
Investment in jointly controlled entity                                       (797)             -         (797)
Purchase of property, plant and equipment                                  (22,077)             -      (22,077)
Interest received                                                               546             -           546
                                                                            _______       _______       _______
NET CASH USED IN INVESTING ACTIVITIES                                      (98,848)             -      (98,848)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issue of share capital                                     13,634             -        13,634
Proceeds from the exercise of share options                                   2,161             -         2,161
Proceeds from the issue of convertible bonds                                 88,279             -        88,279
Proceeds from long-term borrowings                                           76,746             -        76,746
Repayments of long-term borrowings                                         (74,310)             -      (74,310)
Payment of finance lease liabilities                                        (2,543)             -       (2,543)
                                                                            _______       _______       _______
NET CASH GENERATED FROM FINANCING ACTIVITIES                                103,967             -       103,967

                                                                            _______       _______       _______
NET INCREASE IN CASH AND CASH EQUIVALENTS                                    34,364             -        34,364

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF
THE YEAR                                                                     13,964             -        13,964
                                                                            _______       _______       _______
CASH AND CASH EQUIVALENTS AT THE END OF
THE YEAR                                                                     48,328             -        48,328
                                                                             ======        ======        ======





NOTES TO CASHFLOW

__________________________________________________________________________________________



1.   CASH GENERATED FROM OPERATIONS


                                                                                 Six month
                                                                              period ended       Year ended
                                                                                   30 June      31 December
                                                                                      2006             2006
                                                                                     £'000            £'000


Operating profit                                                                    11,162           23,097

Adjustments for:
Decrease in provisions                                                               (167)            (363)
                                                                                   _______          _______
Operating cash flows before movements in working capital                            10,995           22,734
(Increase)/decrease in inventories                                                     (9)               16
(Increase)/decrease in receivables                                                     813              865
Increase in payables                                                                 3,802           10,397
                                                                                   _______          _______
Cash generated from operations                                                      15,601           34,012
                                                                                    ======           ======




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