a. Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU.

The financial statements were approved by the Board of Directors on 21 February 2008.

b. Basis of measurement

The consolidated financial statements are prepared on the historical cost basis except that derivative financial instruments are stated at their fair value.   The methods used to measure fair values are discussed further in note 4.  

c. Functional and presentation currency

The consolidated financial statements have been prepared in Icelandic krona (ISK), which is the Company's functional currency.  All financial information presented in ISK has been rounded to the nearest million. 

d. Use of estimates and judgements

The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

Significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are: business combinations, measurement of the recoverable amounts of cash-generating units, utilisation of tax losses, accounting for an arrangement containing a lease, provisions and valuation of financial instruments.

e. Pro forma information

As stated in note 1, audited pro forma figures for the whole year 2006 are presented in the consolidated income statement and consolidated statement of cash flows with certain disclosures in the notes. The pro forma figures consist of the consolidated income statement and statement of cash flows of the Group for the whole year 2006, as if the acquisition of Icelandair Group hf. had been effective at the beginning of the year 2006. For this purpose, the consolidated pro forma income statement and statement of cash flows of the Group for the whole year 2006 have been prepared in accordance with the accounting policies disclosed in these consolidated financial statements and are based on the audited financial statements of all subsidiaries of Icelandair Group hf. for the whole year 2006, whereby depreciation and amortisation have been calculated for the whole year 2006 based on the fair values of operating and intangible assets determined as at the acquisition date in October 2006. This adjustment resulted in an increase of depreciation and amortisation in the amount of ISK 122 million and decrease in income tax expense amounting to ISK 22 million.