AmRest Holdings N.V.
Consolidated Financial Statements
as at and for the year ended 31 December 2005

Table of contents:
		Page	
Consolidated income statement		3	
Consolidated balance sheet		4	
Consolidated statement of cash flows		5	
Consolidated statement of changes in equity		6	
Notes to the consolidated  financial statements		7	

Consolidated income statement  
For the year ended 31 December
in thousands of Polish złoty	Note	2005		2004 
(restated)	
					
Restaurant sales 	2	499 810		463 198 	
					
Restaurant expenses:	4				
Cost of food		(167 283)		 (159 133)	
Direct marketing expenses		(24 403)		 (22 905)	
Direct depreciation and amortization expenses		(31 599)		 (30 196)	
Payroll and employee benefits		(91 969)		 (82 879)	
Continuing franchise fees 		(29 700)		 (27 609)	
Occupancy and other operating expenses 		(89 424)		 (81 929)	
Total restaurant expenses		(434 378)		 (404 651)	
					
Gross profit on sales		65 432		 58 547 	
					
General and administrative (G&A) expenses 	4	(37 883)		 (40 315)	
Depreciation and amortization expense (G&A)	4	(2 710)		(1 688)	
(Loss)/gain on disposal of property, plant and equipment and intangibles	4,9	(2 711)		 319 	
Impairment losses 	4	(3 167)		 (2 411)	
Goodwill and negative goodwill amortization	4	-		799	
Initial public offering expenses 	4,18	(1 937)		(500)	
Other operating income 	5	5 767		 5 367 	
Operating profit		22 791		20 118 	
					
Finance income	6	1 351		3 975	
Financing costs 	7	(9 167)		(10 555)	
Share of profit of associates		459		-	
Profit before tax		15 434		13 538 	
Income tax benefit/(expense)	8	6 762		 (1 768)	
Profit for the period		22 196		11 770	
					
Attributable to:					
   Minority interest		(16)		36	
   Equity holders of the parent		22 212		11 734	
Profit for the period		22 196		11 770	
					
Basic and diluted earnings per share in Polish złoty	25	1.79		1.17	

See accompanying notes to the consolidated financial statements

Consolidated balance sheet 
As of 31 December 
in thousands of Polish złoty	Note	2005		2004
(restated)		
 Assets 						
 Property, plant and equipment, net 	9	171 358		168 898		
 Negative goodwill 	11	-		(4 549)		
 Intangible assets 	10	21 045		6 752		
 Investments in associates 		574		80		
 Other non-current assets	12	19 750		8 200		
 Deferred tax asset	8	11 530		3 943		
 Total non-current assets		224 257		183 324		
						
 Investments 		-		42		
 Inventories	13	5 973		5 819		
 Trade and other receivables	14	13 463		8 069		
 Income tax receivable		5 281		-		
 Other current assets 	15	2 380		5 626		
 Cash and cash equivalents	16	31 575		11 486		
 Assets held for sale	17	3 219		-		
 Total current assets		61 891		31 042		
 Total assets 		286 148		214 366		
						
 Equity 	18					
 Issued capital 		519		373		
 Share premium		218 640		138 773		
 Accumulated deficit 		(117 198)		(133 481)		
 Profit for the period 		22 212		11 734		
 Translation Reserve 		(614)		141		
 Equity attributable to shareholders of the parent 		123 559		17 540		
 Minority interest		20		36		
 Total equity 		123 579		17 576		
						
 Liabilities 						
 Interest-bearing loans and borrowings 	19	80 440		20 682		
 Employee benefits	20	791		3 204		
 Provisions 	21	4 690		3 022		
 Deferred tax liabilities 	8	1 263		-		
 Other non-current liabilities		2 168		16		
 Total non-current liabilities 		89 352		26 924		
						
 Interest-bearing loans and borrowings 	19	18 321		119 094		
 Trade and other accounts payable 	22	54 896		50 766		
 Income tax payable		-		6		
 Total current liabilities 		73 217		169 866		
 Total liabilities 		162 569		196 790		
 Total equity and liabilities 		286 148		214 366		

See accompanying notes to the consolidated financial statements

Consolidated statement of cash flows
For the year ended 31 December
in thousands of Polish złoty 	Note	2005	 	2004
(restated)		
						
Cash flows from operating activities						
Profit before tax 		15 434   		13 538   		
Adjustments for:						
Share of profit of associates		(459)   		-		
Negative goodwill amortization		-		(799)   		
Amortization	10	3 817   		2 443   		
Depreciation 	9	30 492   		29 441   		
Interest expense, net	6,7	5 729   		7 542   		
Unrealized foreign exchange (gain)/loss		(1 820)   		(5 675)   		
Loss/(gain) on disposal of property, plant, equipment and intangibles	4	2 711   		(319)   		
Impairment losses	4	5 101   		2 605   		
Equity–settled share based payments expenses	20	2 147   		-		
						
Working capital changes:						
(Increase)/decrease in receivables 		(3 031)   		2 003   		
Decrease in inventories		(373)   		588   		
(Increase) in other assets 		(8 484)   		(920)   		
Increase/(decrease) in payables and other liabilities 		(192)   		(3 838)   		
(Decrease) in other provisions and employee benefits 		(745)   		(2 596)   		
						
Income taxes paid 		(4 513)   		(7 319)   		
Interest paid 	 	(5 876)   		(7 522)   		
Other 		(448)   		436   		
Net cash provided by operating activities 		39 490   		29 608   		
						
Cash flows from investing activities						
Acquisition of subsidiaries, net of cash acquired	3	(17 752)   		(1 427)   		
Proceeds from the sale of property, plant and equipment 	9	489   		3 793   		
Acquisition of property, plant and equipment	9	(34 191)   		(25 795)   		
Acquisition of intangible assets	10	(4 681)   		(1 883)   		
Acquisition of investments in related parties 		(35)   		(765)   		
Loans repaid/(granted)		42   		(436)   		
Net cash used in investing activities 		(56 128)   		(26 513)   		
						
Cash flows from financing activities						
Cash contribution from shareholder	18	-   		2 180   		
Proceeds from issuance of shares	18	77 866   		-		
Proceeds from borrowings		177 815   		125 057   		
Repayment of borrowings		(219 007)   		(127 091)   		
Net cash provided by financing activities		36 674   		146   		
						
Net change in cash and cash equivalents 		20 036   	   	3 241   		
Cash and cash equivalents, beginning of period		11 486   		8 558   		
Effect of foreign exchange rate movements		53   		(313)   		
Cash and cash equivalents, end of period		31 575   		11 486   		

See accompanying notes to the consolidated financial statements

Consolidated statement of changes in equity 
for the year ended 31 December 2005

in thousands of Polish złoty
	Attributable to the shareholders of the parent	

Minority interest	

Total	
	
Share capital	
Share premium	
Accumulated deficit 	
Translation reserve	
Total			
								
As at 1 January 2004, as previously reported	373	136 593	(132 371)	3 362	7 957	-	7 957	
								
Retrospective application of IFRS 2 (note 1(o))	-	-	(1 110)	-	(1 110)	-	(1 110)	
								
As at 1 January 2004 (restated)	373	136 593	(133 481)	3 362	6 847	-	6 847	
								
Translation reserve	-	-	-	(3 221)	(3 221)	-	(3 221)	
								
Profit for the period (restated)	-	-	11 734	-	11 734	36	11 770	
								
Total recognized income and expense for the period		-	11 734	(3 221)	8 513	36	8 549	
								
Additional payment to equity		2 180	-	-	2 180	-	2 180	
								
As at  31 December 2004 (restated)	373	138 773	(121 747)	141	17 540	36	17 576	
								
As at 1 January 2005	373	138 773	 (121 747)	141	17 540	36	17 576	
								
Release of negative goodwill (note 11)	-	-	4 549	-	4 549	-	4 549	
								
As at 1 January 2005 (after change in accounting policy)	373	138 773	 (117 198)	141	22 089	36	22 125	
								
Translation reserve	-	-	-	(755)	(755)	-	(755)	
								
Profit for the period	-	-	22 212	-	22 212	(16)	22 196	
								
Total recognized income and expense for the period		-	22 212	(755)	21 457	(16)	21 441	
								
Share-based payments liabilities assumed by shareholder (note 20)	-	1 944	-	-	1 944	-	1 944	
								
Equity-settled share based payments
(note 20)	-	203	-	-	203	-	203	
								
Issuance of shares	146	77 720		-	77 866	-	77 866	
	 	 	 	 				
As at 31 December 2005	519	218 640	(94 986)	(614) 	123 559	20	123 579	
See accompanying notes to the consolidated financial statements

1	Company overview and significant accounting policies  
(a)	Background
AmRest Holdings N.V. (the “Company”) was incorporated in the Netherlands in October 2000 and remains domiciled in the Netherlands.   The Company and its subsidiaries are collectively referred to as the “Group”.
On 27 April 2005, the shares of AmRest Holdings N.V. commenced trading on the Warsaw Stock Exchange (WSE) in Poland as described in Note 18.
Prior to 27 April 2005, the Company was jointly owned and controlled by International Restaurant Investments, LLC (IRI) of the United States and Kentucky Fried Chicken Poland Holdings BV (KFC BV) of the Netherlands pursuant to the terms of the Shareholders Agreement related to AmRest Holdings N.V. (“Joint Venture Agreement”).   IRI is a wholly-owned subsidiary of American Retail Concepts, Inc. of the United States (ARC). Yum! Brands, Inc. (YUM!) of the United States is the ultimate parent company of KFC BV.  In conjunction with the listing of the Company’s shares on the WSE, YUM! sold all of its shares in the Company and is no longer a shareholder. ARC remains the Company’s largest shareholder with a 39.87% ownership interest at 31 December 2005.
	The principal activity of the Company, conducted through its subsidiaries, is to operate Kentucky Fried Chicken (KFC) and Pizza Hut franchised restaurants in Poland and the Czech Republic and “Ice*Land” ice cream outlets in Poland. At 31 December 2005, the Company operated 169 restaurants. The restaurants, which were contributed to the joint venture at its inception, are operated under a Master Franchise Agreement (the “Master Franchise Agreement”), dated October 6th 2000, with YUM! Restaurants International Switzerland, Sarl (YRIS), a subsidiary of YUM!. New restaurants opened subsequent to the Master Franchise Agreement, are operated under separate franchise agreements with YRIS on substantially the same terms as the Master Franchise Agreement (all such franchise agreements together with the Master Franchise Agreement are referred to as the “Franchise Agreements”). Each Franchise Agreement has a term of ten years, with an option for renewal by the Company for a further ten years, subject to certain conditions being met as described in the agreements.
Prior to 31 December 2005 the Company operated under a development agreement (the “Development Agreement”), concluded on 25 September 2003 with the franchisor, KFC International Holdings (KFCIH), and Pizza Hut International, LLC (PHILLC), subsidiaries of YUM!. Under the agreement, the Company had the right and obligation to develop new KFC and Pizza Hut outlets in Poland and the Czech Republic. Provided that the Company was in compliance with its obligations under the Development Agreement, the Company had a right of first refusal in relation to any new KFC or Pizza Hut restaurant in Poland and the Czech Republic proposed to be developed by the franchisor or in respect of which the franchisor proposes to grant franchise rights.  On 31 December 2005, this agreement expired.

The parties to the Development Agreement agreed that in line with the current strategy of YUM!, which does not provide for the use of similar agreements with franchisees operating in established  markets such as Poland and the Czech Republic, it is not necessary to sign a new agreement. At the same time, YUM! undertook to notify the Company if it enters into a development agreement with another franchisee in Poland or the Czech Republic, at least six months before the first KFC or Pizza Hut restaurant is opened in either of these countries pursuant to said agreement. During this period, the Company has the right to present its opinion on the issue. YUM! has indicated that at present it has no plans to conclude agreements with other prospective franchisees in Poland or the Czech Republic or to open new restaurants in these territories by itself.

In December 2005, the Company entered into a development agreement with PHILLC, a subsidiary of YUM!, concerning the development and construction of a Pizza Hut restaurant in the Ukraine. The term of the agreement is three years. 
The table below presents a summary of the subsidiaries included within the Group at 31 December 2005: 

Name of company 	City and country of incorporation	

Principal activity	

Parent company 	Ownership interest and voting rights	Date of effective control	
American Restaurants  Sp. z o.o.	Wrocław, Poland	Operating Pizza Hut and KFC restaurants in Poland 	AmRest Holdings N.V.	100.00 %	December 2000	
American Restaurants s.r.o. 	Prague, Czech Republic 	Operating KFC restaurants in the Czech Republic	AmRest Holdings N.V.	100.00 %	December 2000	
International Fast Food Polska Sp. z o.o. 	Wrocław, Poland	No current activities 	American Restaurants Sp. z o.o.	100.00 %
	January
2001	
Grifex I Sp. z o.o.	Wrocław, Poland	Operates a childrens’ activity centre in Warsaw which includes a KFC restaurant	American Restaurants Sp. z o.o.	48.00 %	September 2003	
Galeria Arka Sp. z o.o.	Warszawa, Poland	Lessee of a location where a restaurant is planned to be opened	American Restaurants Sp. z o.o.	100.00 %
	March 2005	
Amrest Ukraina t.o.w.	Kiev, Ukraine	Established to develop and operate Pizza Hut restaurants in the Ukraine 	American Restaurants Sp. z o.o.	100.00 %	December 2005	
Pizza Hut s.r.o. 	Prague, Czech Republic	No current activities	American Restaurants s.r.o.
American Restaurants Sp. z o.o.	99.973%
0.027%	December 2000	
Fried Chicken s.r.o. (formerly miklik’s food s.r.o.)	Prague, Czech Republic	No current activities	Pizza Hut s.r.o.	100.00%	May 2005	

The Company has the following associated companies at 31 December 2005 which are accounted for under the equity method:

Name of company 	City and country of incorporation	

Principal activity	

Parent company 	Ownership interest and voting rights	
Date of initial investment	
Worldwide Communication Services LLC 	Nevada, USA	Marketing activity for the Group	American Restaurants Sp. z o.o.	33.33 %
	October
2003	
Global Communication Services Sp. z o.o. in liquidation	Warsaw, Poland	A dormant company	Worldwide Communication Services LLC	33.33 %	May
2002	
Synergy Marketing Partners Sp. z o.o.	Warsaw, Poland	Marketing activity for the Group	Worldwide Communication Services LLC.	26.66%	May
2002	
Red 8 Communications Group Sp. z o.o.	Warsaw, Poland	Marketing activity for the Group	Worldwide Communication Services LLC	17.33%	May
2002	
Synergy Marketing Partners s.r.o.	Prague, Czech Republic	Marketing activity for the Group	Synergy Marketing Partners Sp. z o.o.	24.00%	Established February 2005 	
SCM Sp. z o.o.	Chotomów, Poland	Restaurant supply services provided to the Group 	American Restaurants Sp. z o.o.	35.00%	April 2005	
	
	Worldwide Communication Services LLC (WCS) and its subsidiaries, Global Communication Services Sp. z o.o., Synergy Marketing Partners Sp. z o.o. and Red 8 Communications Sp. z o.o. were consolidated by the Company from January 2004 to 30 December 2004 as the Company had a controlling interest in WCS during that period.  On 30 December 2004, American Restaurants Sp. z o.o. sold 33.33% of its shares in WCS to a third party, thus reducing its ownership interest in WCS to 33.33%.
	
The Group’s corporate offices are located in Wroclaw, Poland. The restaurants operated by the Group are located throughout Poland and the Czech Republic.

(b)	Statement of compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and its interpretations adopted by the International Accounting Standards Board (IASB) as adopted by the European Union, further to the IAS Regulation (EC 1606/2002).
The Company prepared its first IFRS financial statements in 2003. In the preparation of those financial statements, the Company early-adopted the IFRSs below in prior periods:

•	IAS 21 (revised 2003), The Effects of Changes in Foreign Exchange Rates
•	IAS 32 (revised 2003), Financial Instruments: Disclosure and Presentation
•	IAS 39 (revised 2003), Financial Instruments: Recognition and Measurement

Adoption of standards effective from 1 January 2005
As of 1 January 2005, the Company adopted the IFRSs below, which are relevant to its operations.  The financial statements have been amended as required, in accordance with the relevant requirements.
•	IAS 1 (revised 2003 and amended March 2004), Presentation of Financial Statements
•	IAS 2 (revised 2003), Inventories
•	IAS 8 (revised 2003), Accounting Policies, Changes in Accounting Estimates and Errors
•	IAS 10 (revised 2003 and amended March 2004), Events after the Balance Sheet Date
•	IAS 16 (revised 2003 and amended March 2004), Property, Plant and Equipment
•	IAS 17 (revised 2003 and amended March 2004), Leases
•	IAS 24 (revised 2003), Related Party Disclosures
•	IAS 27 (revised 2003 and amended March 2004), Consolidated and Separate Financial Statements
•	IAS 28 (revised 2003 and amended March 2004), Investments in Associates
•	IAS 33 (revised 2003 and amended March 2004), Earnings per Share
•	IAS 36 (revised 2004), Impairment of Assets
•	IAS 38 (revised 2004), Intangible Assets
•	IFRS 2 (issued 2004), Share-based Payments
•	IFRS 3 (issued 2004), Business Combinations
•	IFRS 5 (issued 2004), Non-current Assets Held for Sale and Discontinued Operations

The adoption of IAS 1, 2, 8, 10, 16, 17, 24, 27, 28 and 33 and IFRS 5 did not result in substantial changes to the Company’s accounting policies.  In summary:
•	IAS 1 has affected the presentation of various disclosures.
•	IAS 2, 8, 10, 16, 17, 27, 28 and 33 had no material effect on the Company’s policies.
•	IAS 24 has affected the identification of related parties and some other related-party disclosures.

The adoption of IFRS 2 has resulted in a change in the accounting policy for share-based payments. Prior to the adoption of IFRS 2, a liability was recorded for the estimated value of performance participation units granted to employees under the performance participation plan which had vested at the balance sheet date.  The value was estimated based on the terms of the plan. From 1 January 2005, in accordance with IFRS 2, the fair value of units or options granted under share-based payment plans is determined at the date of grant and expensed over the vesting period as described in the accounting policy. The fair value of the liability under a cash-settled plan is remeasured at each balance sheet date and at the settlement date. At the date of adoption of IFRS 2, the Company’s performance participation plan was considered a cash settled plan.  
The adoption of IFRS 2 resulted in:
	2005	2004	
			
Increase in accumulated deficit at 1 January	(1 424)	(1 110)	
Increase of employee benefits liability at 31 December 	-	1 424	
Increase/(decrease) in general and administrative expenses	-	(276)	
Impact on finance (income)/expense, changes in fair value	-	590	
Change in basic and diluted profit per share	-	(0,03)	

The adoption of IFRS 3, IAS 36 (revised 2004) and IAS 38 (revised 2004) resulted in a change in accounting policy for goodwill and negative goodwill. Prior to the adoption of these standards, goodwill and negative goodwill were amortized on a straight line basis over their estimated useful life and goodwill was assessed for an indication of impairment at each balance sheet date.  In accordance with the provisions of IFRS 3:
-	The Group ceased amortization of goodwill and negative goodwill from 1 January 2005;
-	Accumulated amortization of goodwill as at 31 December 2004 has been eliminated with a corresponding decrease in the cost of goodwill;
-	The carrying amount of negative goodwill at 1 January 2005 is derecognized with a corresponding adjustment to the opening balance of accumulated deficit; and
-	From the year ended 31 December 2005 onwards, goodwill is tested annually for impairment as well as when there are indications of impairment.

At 31 December 2004, the Group had a negative goodwill balance of 4 549 TPLN related to acquisitions made in prior periods. The adoption of IFRS 3 resulted in the derecognition of negative goodwill at 1 January 2005 and resulted in an increase in non-current assets and retained earnings of PLN 4 549 TPLN. There was no impact on opening retained earnings at 1 January 2004 from the adoption of IFRS 3.
All changes in the accounting policies have been made in accordance with the transition provisions in the respective standards. All standards adopted by the Company require retrospective application other than:
•	IAS 16: property, plant and equipment acquired in an asset exchange is accounted at fair value prospectively;
•	IAS 21: prospective accounting for goodwill and fair value adjustments as part of foreign operations;
•	IFRS 2: retrospective application for all equity instruments granted after 7 November 2002 and not vested at 1 January 2005;
•	IFRS 5: prospective accounting for non-current assets or disposal groups that meet the criteria to be classified as held for sale and operations that meet the criteria to be classified as discontinued.

(c)	Basis of preparation
The consolidated financial statements are presented in Polish Zloty (PLN), rounded to the nearest thousand (TPLN) and are prepared on the historical cost basis. Non-current assets held for sale are stated at the lower of the carrying amount and fair value less costs to sell. 
The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of IFRSs that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 28.  

Except for the changes in accounting policies discussed above, the accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.  The accounting policies have been applied consistently by Group entities.
(d)	Basis of consolidation
Subsidiaries
Subsidiaries are those entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Associates
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group's share of the total recognized gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate.

Transactions eliminated on consolidation
Intragroup balances and transactions, and any unrealized gains arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with associates are eliminated to the extent of the Group's interest in the entity. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
(e)	Foreign currency
Functional currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The functional currency of the Polish operations is the PLN while the functional currency of the Czech operations is the Czech Crown.   
As the majority of its operations and transactions are PLN denominated, the consolidated financial statements are presented in PLN which is the Company’s functional and presentation currency.

Foreign currency transactions
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in such currencies at the balance sheet date are translated to the applicable functional currency at the foreign exchange rate prevailing at that date.  All differences arising on translation are recognized in the income statement.  Non-monetary assets and liabilities denominated in foreign currencies that are measured in terms of historical cost, are translated at the foreign exchange rate as of the date of the transaction.
Financial statements of foreign operations
The results and financial position of all group entities, which have a functional currency different from the presentation currency, are translated into the presentation currency as follows:
- the assets and liabilities, including goodwill and fair value adjustments arising on consolidation, are translated into PLN at exchange rates ruling at the balance sheet date,
- the revenues and expenses of foreign operations are translated at rates which approximate the foreign exchange rates ruling at the dates of the transactions,  
- foreign exchange differences arising on translation are recognized directly in equity.  They are released to the income statement upon disposal.
None of the foreign operations has a currency of a hyperinflationary economy.
(f) 	Franchise, license and other fees
As noted in Note 1(a) above, restaurants are operated in accordance with franchise and development agreements with certain subsidiaries of YUM!. The Franchise Agreements typically require that the Group pay an initial, non-refundable fee upon the opening of each new restaurant, pay continuing fees of 6% percent of revenues and commit 5% percent of revenue to advertising as specified in the relevant agreement.  In addition, at the conclusion of the initial term of the franchise agreement, the Group may renew the franchise agreement, subject to a renewal fee.
Initial fees paid are capitalized as other intangible assets and amortized over five to ten years.  Continuing fees are expensed as incurred.  Renewal fees are amortized over the renewal period when a renewal agreement becomes effective. 
(g) 	Property, plant and equipment
Owned assets
Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation (see below) and impairment losses (see accounting policy (m) below). The cost of self-constructed assets includes the cost of materials, direct labor, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads.
Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property, plant and equipment.  

Restaurant development assets
Direct costs associated with site acquisition and the construction of a restaurant on that site, including direct internal payroll and payroll-related costs are capitalized.  Only those site-specific costs incurred subsequent to the time that the site acquisition is considered probable are capitalized and included in restaurant development assets.  If subsequently it is determined that a site for which development costs have been capitalized will not be acquired or developed, any previously capitalized development costs are expensed. Restaurant development assets are amortized over their estimated useful life.

Leased assets
Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. The owner-occupied property acquired by way of finance lease is stated at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation (see below) and impairment losses (see accounting policy (1(m)) below). Lease payments are accounted for as discussed in accounting policy note (1(s)). 

Subsequent costs
The Group recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Company and the cost of the item can be measured reliably.  All other expenditures are recognized in the income statement as an expense as incurred.

Depreciation
Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, and major components that are accounted for separately. Land and assets under construction are not depreciated. The estimated useful lives are as follows:
•	Buildings	30 – 40 years	
•	Restaurant development assets (including leasehold improvements)
•	Machinery and equipment	10 years*
4 – 8 years	
•	Vehicles	     5 years	
•	Other tangible assets	4 – 8 years	
* the lesser of 10 years or the length of the respective lease.

The assets’ residual values, method of depreciation and useful lives are reassessed annually.

(h)	Intangible assets

Goodwill
All business combinations are accounted for by applying the purchase method. Goodwill (positive and negative) represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.  
Goodwill on acquisitions of subsidiaries/businesses is included in intangible assets and stated at cost less accumulated impairment losses.  Goodwill is allocated to cash-generating units and is not amortized but is tested annually for impairment (see accounting policy (m)).  In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate.
Negative goodwill arising on the acquisition of subsidiaries is recognized directly in the income statement.
Favorable leases
Favorable leases represent restaurant location lease contracts acquired on acquisition of subsidiaries with below-market lease payments. Favorable lease intangible assets are recognized initially at fair value and subsequently stated at cost less accumulated amortization (see below) and impairment losses (see accounting policy (m) below).
Other intangible assets
Intangible assets other than goodwill that are acquired by the Group are stated at cost less accumulated amortization (see below) and impairment losses (see accounting policy (m) below).
Expenditure on internally generated goodwill and brands is recognized in the income statement as an expense as incurred.
Amortization  
Amortization is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite.  Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment at each balance sheet date (see accounting policy ((m) below) and are not subject to amortization.  Other intangible assets are amortized from the date they are available for use.
The estimated useful lives of other intangible assets are as follows:
•	Software licenses  	4 - 5 years	
•	Favorable leases	2 – 10 years*	
•	Trademark	5 years	
•	Other intangible assets   	  5 - 10 years	
* Favorable lease intangible assets are amortised over the remaining lease term of the respective lease agreement.
 (i)	Investments
The Group classifies its financial investments in the following categories: available-for-sale financial assets, investments held for trading, loans and receivables and held-to-maturity investments.  The classification depends on the purpose for which the investments were acquired.  Management determines the classification of its investments at initial recognition and re-evaluates this designation at each reporting date. 

Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any other categories described below.  The Group does not have any investments classified as available-for-sale financial assets at the balance sheet dates. 

Investments held for trading
A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held for trading unless they are designated as hedges. Assets in this category are stated at fair value, with any resultant gain or loss recognized in the income statement, and classified as current assets if they are either held for trading or are expected to be realized within 12 months of the balance sheet date. There were no investments classified as held for trading at 31 December 2005 and 2004.

Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. They are carried at amortized cost less impairment losses and are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as other non-current assets. Loans and receivables are included in trade and other receivables in the balance sheet (see accounting policy (j) below).

Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. The Group has certain investments in government bonds, which are classified as held-to maturity investments.

Financial instruments classified as held for trading or available-for-sale investments are recognized/derecognized by the Group on the date it commits to purchase/sell the investments. Securities held to maturity are recognized/derecognized on the day they are transferred to/by the Group.

(j)	Trade and other receivables

Trade and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are recognized initially at fair value and subsequently measured at amortized cost less impairment losses (see accounting policy (m)).  
(k)	Inventories
Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition.
(l)	Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits.
(m)	Impairment 
The carrying amount of the Group’s assets, except for inventories (see accounting policy (k)) and deferred tax assets (see accounting policy (t)), are reviewed at each balance sheet date to determine whether there is any indication of impairment.  If any such indication exists, the assets recoverable amount is estimated. For goodwill, intangible assets	 that have an indefinite useful life and assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date.  An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognized in the income statement.
Impairment of trade and other receivables is recorded when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable.  If there is objective evidence that an impairment loss on receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying value and the present value of estimated future cash flows discounted at the effective interest rate. The amount of the loss is recognized in the income statement.
The recoverable amount of other assets is the greater of their 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 an asset which does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
Restaurants are evaluated using a “one year history of operating losses” as the primary indicator of potential impairment.  For restaurants for which there is an indicator of potential impairment, discounted estimated cash flows are used to assess the recoverable amount of the related assets.  The impairment evaluation is based on the estimated cash flows from continuing operation of the restaurant through the expected disposal date and the expected terminal value.  
In addition, when a decision is made to close a restaurant, the restaurant is reviewed for impairment and depreciable lives are adjusted accordingly.  Likewise, a liability is recorded for any lease termination costs associated with the closing of the restaurant.
Reversals of impairment
An impairment loss in respect of a held-to-maturity security or receivable carried at amortized cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognized.

An impairment loss in respect of goodwill is not reversed.  In respect of other assets, an impairment loss is reversed if there has been an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
 (n)	Interest-bearing borrowings
Interest-bearing borrowings are recognized initially at cost being their fair value, less attributable transaction costs. In subsequent periods, borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the income statement over the period of the borrowings using the effective interest rate method. 
If the loan is settled before the maturity date, any difference between the settled cost and the current cost is recognized in the income statement.

(o)	Employee benefits 
Performance participation plan 
Through 27 April 2005, the Group maintained a performance participation plan under which certain employees were granted participation units with an assigned value that, upon vesting and the occurrence of certain specified events or dates as described in the plan , entitled employees to receive compensation representing the difference between the assigned value of the vested units and the value calculated in accordance with the terms of the plan on the date of the occurrence of the specified events or dates.  The performance participation plan was terminated on 27 April 2005.  As described in Note 20, the unvested units granted under the plan will continue to vest in accordance with the terms of the plan and will be settled by ARC, a shareholder of the Company. Entitled employees whose units were vested at 27 April 2005 had the option to settle the units with the Company for cash compensation by 15 August 2005. Alternatively, the employees could opt to have the units settled by ARC after 15 August 2005 either in cash at an amount equal to the difference between the publicly listed market price of a share on the date of settlement and the strike price of the unit or in shares of the Company held by ARC for consideration equal to the strike price of the unit.
As described in Note 1b above, the adoption of IFRS 2 resulted in a change in the accounting policy for this plan. Prior to the adoption of IFRS 2, a liability was recorded for the estimated value of performance participation units granted to employees under the performance participation plan which had vested at the balance sheet date.  The value was estimated based on the terms of the plan as described in Note 20. From 1 January 2005, in accordance with IFRS 2, the fair value of units or options granted under share-based payment plans is determined at the date of grant and expensed over the vesting period as described in the accounting policy. In addition, as the performance participation plan is considered a cash-settled plan, the fair value of the liability under the plan is remeasured at each balance sheet date and at the settlement date.
In accordance with the transitional provisions of IFRS 2 for share-based payment plans existing at 1 January 2005, the Company applied IFRS 2 retrospectively.
Employee stock option plan 
In April 2005, the Company announced to its employees the Employee Stock Option Plan (“the Stock Option Plan”). The Stock Option Plan allows Group employees to acquire shares of the Company at a specified price. The fair value of options granted is recognized as compensation expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using a trinomial tree model, taking into account the terms and conditions upon which the options were granted. The amount recognized as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting.
Long-term service benefits
The Company’s net obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation represents the Group’s estimate of future benefits that employees have earned in return for their service in the current and prior periods, discounted to its present value.

(p)	Provisions
A provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
A provision for restructuring is recognized when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for.
Site restoration
Management historically has and intends to continue to renew its leased restaurant premises on a long-term basis.  As a result, the Company does not anticipate significant site restoration costs and, accordingly, has not recorded a site restoration provision.
Onerous contracts
A provision for onerous contracts is recognized when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract.
(q)	Trade and other payables 
Trade and other payables are stated at amortised cost.
 (r)	Revenue recognition
Revenues comprise the fair value of the sale of goods, net of value-added tax. Sales of goods are recognized when a Group entity sells a product to the customer.  Sales are typically in cash or by credit card.
(s)	Expenses
Operating lease payments
Payments made under operating leases are recognized in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognized in the income statement as an integral part of the total lease expense.
Finance lease payments
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Net financing costs
Net financing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested and foreign exchange gains and losses that are recognized in the income statement. Interest income is recognized in the income statement as it accrues, taking into account the effective yield on the asset. The interest expense component of finance lease payments is recognized in the income statement using the effective interest rate method.
 (t)	Income tax
Income tax on the profit or loss for the year comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Income tax is recognized in the income statement except when it relates to items recognized directly in equity, in which case it is also recognized in equity.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. No temporary differences are recognized on the initial recognition of goodwill. In addition, the following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, nor differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Additional income taxes that arise from the distribution of dividends are recognized at the same time as the liability to pay the related dividend.
(u) 	 Derivative Financial Instruments
The Group periodically uses derivative financial instruments to hedge its exposure to foreign exchange rate risks arising from operational and financing activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. At the balance sheet dates, the Group did not have any derivative financial instruments. 
Derivative financial instruments are recognized initially at fair value.  Subsequent to initial recognition, derivative financial instruments are stated at fair value. The changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement. 
(v)	Segment reporting
A segment is a distinguishable component of the Group that is engaged in either providing products or services (business segment), or in providing products or services within a particular economic environment (geographic segment), which is subject to risks and rewards that are different than those of other segments.
(x)	Non-current assets held for sale
Immediately before classification as held for sale, the measurement of the assets (and all assets and liabilities in a disposal group) is brought up-to-date in accordance with applicable IFRSs. Then, on initial classification as held for sale, non-current assets are recognized at the lower of carrying amount and fair value less costs to sell.
Impairment losses on initial classification as held for sale are included in profit or loss, even for assets measured at fair value, as are gains and losses on subsequent re-measurement. 
(y)	Business combinations involving entities under common control

A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses ultimately are controlled by the same party or parties both before and after the business combination, and that control is not transitory.
In the absence of more specific guidance, the Group consistently applied the book value measurement method to all common control transactions.
2	Segment reporting 
Geographical segments
The Company’s restaurant operations are managed on a Group-wide basis and considered one business segment given the similar nature of products, customers, business risks and rates of return.  However, the Company operates in two principal geographical areas, Poland and the Czech Republic.
In presenting information on the basis of geographical segments (primary segments), segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets.
Inter-segment pricing is determined on an arm's length basis. 
Geographical segment data as at and for the years ended 31 December 2005 and 2004 is as follows:  
	Poland	Czech	Unallocated	Total	
2005					
					
Revenue from external customers	360 002	139 808	-	499 810	
Profit for the period	14 084	5 259	2 869	22 212	
Segment assets 	192 010	77 017	17 121	286 148	
Segment liabilities	70 686	86 925	4 958	162 569	
Depreciation/amortization	25 381	8 928	-	34 309	
Fixed assets acquired 	25 948	12 924	-	38 872	
Impairment losses/bad debt expense	4 982	119	-	5 101	
					
2004 					
					
Revenue from external customers	324 433	138 765		463 198	
Profit for the period	4 900	7 767	(933)	11 734	
Segment assets	145 020	64 187	5 159	214 366	
Segment liabilities	99 588	99 364	 (2 162)	196 790	
Depreciation/amortization	23 694	8 190	-	31 884	
Fixed assets acquired 	14 567	13 111	-	27 678	
Impairment losses/bad debt expense	2 033	572	-	2 605	
					
The unallocated column relates to balances and transactions of AmRest Holdings N.V. and income tax related amounts.
3	Acquisitions and disposals of subsidiaries  
The acquisition date of subsidiaries is detailed in Note 1 (a); descriptions of current period acquisitions and disposals are presented below. All acquisitions were accounted for using the purchase method of accounting.

Acquisition of Galeria Arka Sp. z o.o. (“Arka”) by American Restaurants Sp. z o.o. (Amrest”)

On 23 March 2005, the Company, through its subsidiary, American Restaurants Sp. z o.o., concluded a share purchase agreement to acquire 100% of the shares in Galeria Arka Sp. z o.o.  Arka is the lessee of commercial space in Warsaw at which the Company intends to open and operate a restaurant. 

The fair value of assets acquired and liabilities assumed was as follows (amounts in TPLN):

Intangible assets (favorable lease)	2 137	
Inventory	68	
Cash and other current assets	264	
Deferred tax provision	(406)	
Accounts payable and accruals	(1 272)	
Net assets acquired	791	
		
Total purchase consideration paid	791	
Less cash acquired	(263)	
Cash paid on acquisition net of cash acquired	528	

Arka did not generate any revenue during the period and incurred a net loss of 475 TPLN as the restaurant location is under development.

Acquisition of miklik’s food s.r.o. (“miklik’s food”) by Pizza Hut Czech s.r.o
On 31 May 2005, the Company, through its subsidiary, Pizza Hut Czech s.r.o., concluded an agreement to acquire 100% of the shares of miklik’s food s.r.o. Miklik’s food operated a chain of nine fast-food chicken restaurants in the Czech Republic under the “Big Food” brand. The acquisition price was 6 053 TPLN (CZK 45,000,000) and was paid in cash. The Company converted eight of the nine locations acquired to KFC restaurants and commenced operations as KFC branded restaurants in June 2005. 

The fair value of assets acquired and liabilities assumed were as follows (amounts in TPLN):

Intangible assets (trademark)	342	
Property, plant and equipment	2 293	
Accounts receivable	417	
Other current assets	8	
Accounts payable and accruals	(1 826)	
Net assets acquired	1 234	
Goodwill	4 819	
		
Total purchase consideration paid (cash)	6 053	
Goodwill has arisen on the acquisition because of increased market share, visibility of brand and anticipated operational synergies from the expansion of the Group’s KFC network in the Czech Republic which do not meet the criteria for recognition as a separate intangible asset.

Subsequent to the acquisition, the restaurant operations of miklik’s food were transferred to American Restaurants s.r.o. Miklik’s food incurred a loss of 199 TPLN during the period.
Acquisition of Spolpep  Sp. z o.o. (“Spolpep”) by American Restaurants Sp. z o.o.
On 1 July 2005, the Company, through its subsidiary, American Restaurants Sp. z o.o., concluded an agreement with ARC, a shareholder of the Company, to acquire 100% of the shares in Spolpep Sp. z o.o. for PLN 13,133,686. Spolpep operates two Pizza Hut restaurants and two KFC restaurants in Warsaw.  
The fair value of assets acquired and liabilities assumed were as follows (amounts in TPLN):

Favorable leases	6 252	
Property, plant and equipment	5 498	
Inventory	147	
Accounts receivable	3 309	
Cash 	1 963	
Other current assets	306	
Deferred tax provision	(971)	
Accounts payable and accruals	(3 370)	
Net assets acquired	13 134	
		
Total purchase consideration paid	13 134	
Less cash acquired	(1 963)	
Cash paid on acquisition net of cash acquired	11 171	
The four restaurant locations operated by Spolpep are leased from a third party. The leases have below market lease terms which have been recognized as a separate intangible asset equal to the estimated fair value of the favorable lease terms. The asset is being amortized over 29 months, the remaining lease term (leases expire on 15 October 2007).
Spolpep generated a profit of 536 TPLN during the period. 
If the above acquisitions had occurred on 1 January 2005, estimated current period consolidated revenue and profit for the period would have been approximately 521 090 TPLN and 21 337 TPLN, respectively.

Acquisition-related fees included in the purchase consideration for the above acquisitions were insignificant. 

As the financial statements of Galeria Arka Sp. z o.o., miklik’s food s.r.o. and Spolpep Sp. z o.o. were not maintained in accordance with IFRS, it was impracticable to determine the carrying amounts of the assets and liabilities of those companies immediately prior to the acquisition in accordance with IFRS. 

Other acquisitions and disposals
In March 2005, proceedings were commenced to liquidate Global Communication Services Sp. z o.o. As at 31 December 2005, the liquidation proceedings are pending and are expected to be completed in 2006.
On 28 April 2005, the Company, through its subsidiary, American Restaurants Sp. z o.o., acquired an 18% ownership interest in a newly-established company, SCM Sp z o.o. for 18 TPLN. The other shareholders of SCM are former employees of the Company. On 29 April 2005, American Restaurants Sp. z o.o. concluded an agreement with SCM Sp. z o.o. for the provision of restaurant supply services, including negotiating the terms of various supplier agreements. On 10 May 2005, the Company acquired an additional 17% ownership interest for 17 TPLN.  As at 31 December 2005, the Company held 35% of the shares of SCM Sp. z o.o. On 3 February 2006, American Restaurants Sp. z o.o., acquired an additional 10% of the shares in SCM for consideration of 17 TPLN, increasing its shareholding to 45% from 35% as at 31 December 2005.
In June 2005, American Restaurants Sp. z o.o. sold 100% of the shares in Surf & Sip Eastern Europe Sp. z o.o., a dormant subsidiary in the process of liquidation, for PLN 50. There was no gain or loss recognized on the transaction.
In September 2005, the merger of American Restaurants Sp. z o.o., Spolpep Sp. z o.o. and Delta Creator Sp. z o.o. was legally approved and the companies were combined into one legal entity, American Restaurants Sp. z o.o. The surviving company, American Restaurants Sp. z o.o. assumed all the rights and obligations of the merged businesses. The merger was undertaken in order to simplify the Company’s holding structure and to reduce the costs of its operations.
In December 2005, the Company, through its subsidiary, American Restaurants Sp. z o.o., established Amrest Ukraina t.o.w. and acquired 100% of shares in that company for 161 TPLN. The company was set up in order to supervise development projects and operate restaurants in the Ukraine.

4	Operating expenses 
Operating expenses can be summarized as follows: 
	2005	2004	
			
Amortization and depreciation	34 309	31 085	
Food and materials	177 242	167 812	
Utilities	16 906	15 315	
External services	36 494	35 769	
Payroll	86 776	79 389	
Social security and other benefits	18 740	17 735	
Rent (see Note 23) 	40 965	38 791	
Marketing expenses	24 403	22 905	
Continuing franchise fees	29 700	27 609	
Loss/(gain) on disposal of property, plant and equipment and intangible assets	2 711	(319)	
Impairment of inventory	434	-	
Impairment of assets held for sale	2 107	-	
Impairment of property, plant and equipment	626	2 411	
Bad debt expense 	1 934	194	
Insurance	2 181	2 092	
Business travel	1 682	1 919	
Onerous contracts	1 668	1 482	
Initial public offering expenses (see Note 18)	1 937	500	
Other 	1 971	3 758	
	482 786	448 447	
5	Other operating income 
Other operating income can be summarized as follows:
	2005	2004	
			
Management fee	985	2 018	
Sublease income	2 001	2 336	
Other operating income	2 781	1 013	
	5 767	5 367	

6	Financing income
	2005	2004	
			
Interest income	743	283	
Foreign exchange gain, net	-	3 692	
Decrease in the fair value of share based payment liabilities	231	-	
Other	377	-	
	1 351	3 975	

7	Financing costs
	2005	2004	
 			
Interest expense	(6 472)	(7 825)	
Foreign exchange loss, net	(1 837)	-	
Loan guarantee commissions 	(858)	(1 542)	
Increase in the fair value of share based payment liabilities	-	(590)	
Other	-	(598)	
	(9 167)	(10 555)	
8	Income taxes 
The Company is subject to income tax regulations in the Netherlands, Poland and the Czech Republic. 
Tax laws applicable to the Group:
Results of operations for tax purposes of the Company are computed in accordance with Dutch tax legislation and, for its primary operating subsidiaries, in accordance with the relevant Polish and Czech Republic tax legislation.

Income tax (benefit)/expense can be summarized as follows:
	2005	2004	
Current tax expense			
Current year	1 450	4 200	
Adjustments to prior years	(490)	(549)	
Deferred tax (benefit)/expense			
Benefit of tax losses recognized	(4 605)	(1 360)	
Origination and reversal of temporary differences	(2 920)	(320)	
Reduction of tax rate in the Czech Republic	(197)	(203)	
Income tax (benefit)/expense presented in the income statement	(6 762)	1 768	

Tax rates applicable to the Company and its subsidiaries are as follows:
	Netherlands	Poland	Czech	USA	
					
2005	34,5%	19%	26%	n/a	
2004	34,5%	19%	28%	35%	
The deferred tax assets and liabilities were calculated using tax rates as follows:
		Poland	Czech	
				
31 December 2005		19%	24%	
31 December 2004		19%	26%	

Reconciliation of tax expense at the Dutch corporate rate to actual tax expense:
	2005	2004	

Profit before tax	15 434	13 538	
			
Income tax using the Dutch corporation rate	5 325	4 671	
Effect of tax rates in Poland	(2 452)	(736)	
Effect of tax rates in the Czech Republic	(325)	(505)	
Effect of tax rates in the USA	-	(3)	
Non-deductible differences	2 865	2 705	
Tax saved on temporary differences (unrecognized in prior periods)	(3 629)	-	
Utilization of losses carried forward which were not recognized as deferred tax assets in prior years	(3 941)	(3 020)	
Deferred tax asset recognized on tax losses carried forward (unrecognized in prior periods)	(4 605)	(1 360)	
Other differences	-	(58)	
Income tax presented in the income statement 	(6 762)	1 768	
Potential benefits of tax loss carry forwards originating in the period	-	(74)	

Deferred income taxes
Deferred income taxes are primarily provided for all the temporary differences between the tax and the accounting basis of assets and liabilities based on the tax rate that is expected to be in effect at the time the deferred income taxes will be realized.  Realization of the deferred income tax assets is dependent upon generating sufficient taxable income in the period that deferred income tax assets are expected to be realized. Deferred tax assets are recognized to the extent that the realization of the related tax benefit through future taxable profits is probable.

Recognized deferred tax assets and liabilities are in respect of the following items:
	Assets	Liabilities	Net	
	31 Dec 2005	31 Dec 2004 	31 Dec 2005	31 Dec 2004 	31 Dec 2005	31 Dec 2004 	
Property, plant and equipment	(5 750)	(1 805)	-	6	(5 750)	(1 799)	
Intangible assets	-	-	1 263	-	1 263	-	
Trade and other receivables	(492)	(29)	533	-	41	(29)	
Provisions	(1 229)	(709)	-	-	(1 229)	(709)	
Tax loss carry forwards	(4 605)	(1 360)		-	-	(4 605)	(1 360)	
Other differences	-	(46)	13	-	13	(46)	
Deferred tax (asset)/liability	(12 076)	(3 949)	1 809	6	(10 267)	(3 943)	
Deferred tax liability	-	-	-	-	1 263	-	
Deferred tax (asset)	-	-	-	-	(11 530)	(3 943)	

Tax loss carry forwards and unrecognized deferred tax assets
In Poland and the Czech Republic, the Group has tax loss carry forwards amounting to 
28 366 TPLN and 3 024 TPLN, respectively.  These tax loss carry forwards expire as detailed in the table below:

Year of expiration	         Amount	
2007	19 375	
2008	9 061	
2009	1 565	
2010	1 389	
	31 390	

At 31 December 2005, the Group has recognized a deferred tax asset relating to 24 235 TPLN of the above tax loss carry forwards at its Polish subsidiaries, respectively, based on its forecasts of stable future taxable income over the allowable loss carry forward period. No deferred tax asset has been recognized with respect to the remaining tax loss carry forwards at the Group’s subsidiaries due to uncertainty regarding their realization.

9 	Property, plant and equipment 
Movements in property, plant and equipment in 2005 and 2004 can be presented as follows: 

Land	
Buildings & Restaurant  development assets	

Machinery & equipment	

Vehicles	

Other tangible assets	

Assets
under construction	

Total	
 2005 								
								
 Acquisition cost 								
 Balance at 1/1/2005 	1 310	212 672	108 226	860	5 635	9 249	337 952	
 Acquisitions (Note 3)	-	6 012	1 428	22	242	87	7 791	
 Additions 	-	8 072	9 708	-	286	16 529	34 595	
 Disposals 	-	(6 425)	(4 326)	(194)	(1 328)	(1 710)	(13 983)	
 Transfers	-	12 473	4 800	-	503	(17 776)	-	
 Assets held for sale	(186)	(6 566)	-	-	-	-	(6 752)	
 Exchange rate differences	-	(372)	(356)	-	-	(25)	(753)	
 Balance at 31/12/2005 	1 124	225 866	119 480	688	5 338	6 354	358 850	
								
 Accumulated depreciation 								
 Balance at 1/1/2005 	-	91 156	64 980	490	4 037	-	160 663	
 Depreciation expense	-	18 291	11 793	91	317	-	30 492	
 Disposals	-	(3 869)	(4 344)	(58)	(795)	-	(9 066)	
 Assets held for sale	-	(1 426)	-	-	-	-	(1 426)	
 Exchange rate differences 	-	(129)	(220)	-	-	-	(349)	
 Balance at 31/12/2005 	-	104 023	72 209	523	3 559	-	180 314	
								
 Impairment losses 								
 Balance at 1/1/2005 	-	6 662	-	-	-	1 729	8 391	
 Increase 	-	626	-	-	-	-	626	
 Disposals 	-	(1 838)	-	-	-	-	(1 838)	
 Exchange rate differences	-	-	-	-	-	(1)	(1)	
 Balance at 31/12/2005	-	5 450	-	-	-	1 728	7 178	
								
 Net book value 1/1/2005 	1 310	114 854	43 246	370	1 598	7 520	168 898 	
 Net book value 31/12/2005 	1 124	116 393	47 271	165	1 779	4 626	171 358	

	

Land	Buildings & Restaurant  development assets	

Machinery & equipment	

Vehicles	
Other tangible assets	
Assets
under construction	

Total	
 2004 								
								
 Acquisition cost 								
 Balance at 1/1/2004 	306	211 950	105 310	874	5 735	3 557	327 732	
 Acquisitions	1 004	2 128	128	-	415	-	3 675	
 Additions 	-	8 519	14 083	62	371	6 534	29 569	
 Disposals 	-	(6 977)	(8 507)	(76)	(886)	(523)	(16 969)	
 Exchange rate differences 	-	(2 948)	(2 788)	-	-	(319)	(6 055)	
 Balance at 31/12/2004 	1 310	212 672	108 226	860	5 635	9 249	337 952	
 								
 Accumulated depreciation 								
 Balance at 1/1/2004 	-	78 021	61 692	395	4 344	-	144 452	
 Depreciation expense 	-	16 843	11 904	122	572	-	29 441	
 Disposals 	-	(2 751)	(7 292)	(27)	(879)	-	(10 949)	
 Exchange rate differences 	-	(957)	(1 324)	-	-	-	(2 281)	
 Balance at 31/12/2004 	-	91 156	64 980	490	4 037	-	160 663	
								
 Impairment losses 								
 Balance at 1/1/2004 	-	7 253	135	-	-	1 299	8 687	
 Increase 	-	1 612	-	-	-	695	2 307	
 Disposals 	-	(2 203)	(135)	-	-	(265)	(2 603)	
 Balance at 31/12/2004 	-	6 662	-	-	-	1 729	8 391	
								
 Net book value 1/1/2004 	306	126 676	43 483	479	1 391	2 258	174 593	
 Net book value 31/12/2004 	1 310	114 854	43 246	370	1 598	7 520	168 898	

A calculation of the loss on the disposal of fixed assets and a summary of impairment losses incurred during 2005 and 2004 are presented in the table below: 
			
	2005	2004	
			
Proceeds from the sale of property, plant and equipment and intangible assets	489	3 793	
Net book value of property, plant and equipment and intangible assets disposed	(5 038)	(6 077)	
Impairment reserves relating to fixed assets sold	1 838	2 603	
(Loss)/gain on disposal of property, plant and equipment and intangible assets	(2 711)	319	
Impairment losses	(626)	(2 411)	
Impairment losses recognized in 2005 and 2004 relate primarily to underperforming restaurants where either a decision has been made to close the restaurant or the restaurant assets or a portion of the assets, primarily leasehold improvements, were not considered to be recoverable based on an analysis of future estimated discounted cash flows. The estimates of recoverable amount were based on the restaurants value in use, determined using a discount rate of approximately 7%.
Property, plant and equipment used as collateral for the Company’s bank borrowings are described in Note 22. The net book value of property, plant and equipment used as collateral for borrowings amounted to 50 369 TPLN.
10	 Intangible assets 
Intangible assets movements in 2005 and 2004 can be presented as follows: 
	
Trademark 	
Favorable leases	

Goodwill	
Software licenses	Other intangible assets	
Total	
 2005 							
							
 Acquisition cost 				  			
 Balance at 1/1/2005 	-	-	-	424	18 884	19 308	
 Acquisitions (Note 3) 	342	8 389 	4 819	-	-	13 550	
 Additions 	-	-	-	 -	4 780	4 780	
 Disposals 	-	-	-	-	(328)	(328)	
 Exchange rate differences 	(4)	-	(54)	-	(66)	(124)	
 Balance at 31/12/2005 	338	8 389	 4 765	424	23 270	37 186	
							
 Accumulated amortization 							
 Balance at 1/1/2005	-	-	-	424	12 028	12 452	
 Amortization expense 	40	1 377	-	-	2 400	3 817	
 Disposals 	-	-	-	-	(207)	(207)	
 Exchange rate differences 	(1)	-	-	-	(24)	(25)	
 Balance at 31/12/2005 	39	1 377	-	424	14 197	16 037	
							
 Impairment losses 							
 Balance at 1/1/2005 	-	-	-	-	104	104	
 Increase 	-	-	-	-	-	-	
 Disposals	-	-	-	-	-	-	
 Exchange rate differences	-	-	-	-	-	-	
 Balance at 31/12/2005 	-	-	-	-	104	104	
							
 Net book value 1/1/2005 	-	-	-	-	6 752	6 752	
 Net book value 31/12/2005 	299	7 012	4 765	-	8 969	21 045	

	
Goodwill	
Software licenses	Other intangible assets	
Total	
 2004 					
					
 Acquisition cost 					
 Balance at 1/1/2004 	4 284	424	17 631	22 339	
 Acquisitions (Note 3)	-	-	15	15	
 Additions 	-	-	1 827	1 827	
 Disposals 	-	-	(475)	(475)	
 Exchange rate differences 	-	-	(114)	(114)	
 Balance at 31/12/2004 	4 284	424	18 884	23 592	

 Accumulated amortization 					
 Balance at 1/1/2004	4 284	413	10 184	14 881	
 Amortization expense 	-	11	2 432	2 443	
 Disposals 	-	-	(418)	(418)	
 Exchange rate differences 	-	-	(170)	(170)	
 Balance at 31/12/2004 	4 284	424	12 028	16 736	
					
Impairment losses					
 Balance at 1/1/2004	-	-	-	-	
 Increase	-	-	104	104	
 Balance at 31/12/2004	-	-	104	104	
					
 Net book value 1/1/2004 	-	11	7 447	7 458	
 Net book value 31/12/2004 	-	-	6 752	6 752	

Other intangible assets are comprised primarily of initial franchise fees (see Note 1(f)). Related amortization is included in direct depreciation and amortization expenses in the income statement.

Goodwill in the amount of 4 765 TPLN and trademark in the amount of 338 TPLN relate to the acquisition of miklik’s food s.r.o. in May 2005 as described in Note 3.

Favorable lease intangible assets relate to leases with below-market lease terms acquired in the Arka and Spolpep acquisitions, described in Note 3.

Impairment tests for cash-generating units containing goodwill
As noted above, the goodwill balance relates to the Company’s acquisition of miklik’s food during the current period. As the restaurants acquired in the acquisition are being converted to KFC restaurants and will be operated by the same management team as the Group’s other KFC restaurants in the Czech Republic, the Czech Republic business is considered to be a group of cash generating units expected to benefit from the synergies of the combination. This group of cash generating units is consistent with the Company’s reportable segment as determined in accordance with IAS 14, Segment Reporting.

The recoverable amount of the cash generating unit is based on a calculation of value in use. This calculation uses cash flow projections based on actual operating results and the five-year business plan. Cash flows for years subsequent to the five-year business plan are assumed to remain at the level of the last year covered by the business plan.  A pre-tax discount rate of approximately 7 per cent has been used in discounting the projected cash flows.
11	Negative goodwill  
At 31 December 2004, the negative goodwill balance of 4,549 TPLN related to the acquisitions of International Fast Foods Polska Sp. z o. o. and Kids Play in prior periods. As described in Note 1 (b), the adoption of IFRS 3 resulted in the derecognition of negative goodwill at 1 January 2005. 
12	Other non-current assets 
The other non-current assets balance at 31 December 2005 and 2004 is summarized in the table below:
	2005	2004	
			
Rent prepayments	13 586	3 331	
Rent deposits	5 117	3 450	
Other	1 047	1 419	
	19 750	8 200	

As described in Note 27, in July 2005, American Restaurants Sp.z o.o. concluded a sub-lease agreement with ARS based on which it would sub-lease the restaurant locations from ARS for a ten year period commencing 16 October 2007 for a fixed fee per month plus an upfront rent prepayment. In August 2005, American Restaurants Sp. z o.o. paid ARS the prepayment of 10 500 TPLN.  The prepayment will be amortised on a straight line basis over the lease term. 
13	Inventories 
Inventories as at 31 December 2005 and 2004 comprise primarily food and packaging materials used in restaurant operations. Inventories are stated net of a provision of 594 TPLN and 160 TPLN at 31 December 2005 and 31 December 2004, respectively.  There are no inventories subject to retention of title clauses.
14	Trade and other receivables  
The trade and other receivables balance at 31 December 2005 and 2004 is summarized in the table below: 
	2005	2004	
			
Trade receivables - third party	7 572	5 997	
Trade receivables - related parties	1 038	929	
Other taxes receivable	6 793	2 211	
Other receivables	1 348	857	
Provision for receivables	(3 288)	(1 925)	
	13 463	8 069	
The Company has recognized a loss of 1 934 TPLN for the impairment of receivables during the year ended 31 December 2005.  The loss has been included in general and administrative (G&A) expenses in the income statement.
15	Other current assets 
The other current assets balance at 31 December 2005 and 2004 is summarized in the table below: 
	2005	2004	
			
Prepaid property insurance	715	1 520	
Prepaid rent	1 173	1 242	
Deferred professional fees	-	1 766	
Prepaid utilities	95	85	
Credit insurance	282	291	
Prepaid marketing services	-	57	
Loyalty program	-	234	
Other 	115 	431	
	2 380	5 626	
Deferred professional fees at 31 December 2004 included accounting, audit and legal fees incurred through 31 December 2004 relating to the Company’s planned listing on the Warsaw Stock Exchange (WSE). As described in Note 18, the Company’s shares were listed on the, WSE on 27 April 2005 and the related deferred professional fees were deducted from the proceeds received from the listing. 

16	Cash and cash equivalents 
The cash and cash equivalents balance at 31 December 2005 and 2004 is summarized in the table below:
	2005	2004	
			
Cash at bank	26 277	8 120	
Cash on hand	5 298	3 366	
	31 575	11 486	
17.	Non-current assets held for sale
In November 2005, the Company entered into an agreement to sell two buildings located in Poland in which the Company operates restaurants to a third party for total consideration of PLN 5 000 TPLN.    Pursuant to the terms of the agreement, the sale of the buildings is expected to take place in April 2006.  Accordingly, at 31 December 2005, each building is classified as held for sale and recorded at the lower of its carrying amount and its fair value less costs to sell.

The fair value less costs to sell of one of the buildings was less than its carrying value resulting in the recognition of an impairment loss of 2 107 TPLN in 2005.  The fair value less costs to sell of the other building exceeded its carrying value.  The resulting gain will be recognized when the sale is completed in 2006.  The carrying amount of the assets, net of an impairment loss of 2 107 TPLN is 3 219 TPLN at 31 December 2005.

18	Equity 
Share capital and share premium
The share capital and share premium balances at 31 December 2005 and 2004 are summarized in the table below:
			      		2005	    	2004
Share capital		       	 519 	     	  373
Share premium	    	       218 640              138 773
On 30 September 2004, the Company registered new articles of association in the Netherlands which included specific provisions related to the potential initial public offering of the Company's shares on the Warsaw Stock Exchange (WSE).  These provisions included a 100 for 1 stock split increasing the number of ordinary shares from 100 000 to 10 000 000 and decreasing the nominal value from Euro 1.0 to Euro 0.01 per share.  The authorized shares increased from 150 000 to 15 000 000 shares. 
On 21 February 2005, the Company received approval from the Polish Securities and Exchange Commission to list its shares on the WSE in Poland. On 27 April 2005, the Company issued 3.5 million shares at PLN 24 per share and trading in the Company’s shares commenced. Total proceeds from the listing were 84 000 TPLN.  As the listing included both existing and new shares of the Company, the listing expenses of 8 571 TPLN were allocated proportionally to the issuance of new shares and existing shares resulting in a reduction in the listing proceeds of 6 134 TPLN with the remaining 2 437 TPLN expensed as incurred.
As of 31 December 2005, there are 13 500 000 shares issued and outstanding. All issued shares are fully paid.
Share premium includes the following:
•	value of the assets contributed to the joint venture by KFC BV and IRI pursuant to the terms of the Joint Venture Agreement described in Note 1 and additional shareholder contributions made by each joint venture partner through the date of the listing of its shares on the WSE;
•	the excess of net proceeds received from the listing of shares on the WSE on 27 April 2005 over the nominal value of the shares issued; and
•	share premium related to the Employee Stock Option Plan implemented in April 2005.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholder meetings of the Company.
Translation Reserve
The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations of the Company into PLN.

19	Interest-bearing loans and borrowings 
The table below presents the period of maturity of third party and related party interest-bearing loans and borrowings at 31 December 2005 and 2004: 
	2005	2004	
Current	18 321	119 094	
Due between 1 to 2 years	38 071	15 308	
Due between 2 to 5 years	42 369	5 374	
Total interest bearing loans	98 761	139 776	
The tables below present current and non-current interest bearing loans and borrowings at 31 December:  
(A) Non-current		Interest rate %	           2005	              2004	
					
In Polish złoty	BRE Bank	3,20% - 4,60% + 1M LIBOR	-	15 396	
	BPH-PBK	2,5% + 1M WIBOR	1 240	1 660	
	ABN Amro	1,5% + 1M WIBOR  	24 778	-	
In US dollars	YUM!	8%	1,332	-	
In Czech crowns	Commerzbank	3,00%+ 3M PRIBOR	-	14 520	
	ABN Amro	1,5%+ 1M PRIBOR	68 878	-	
			96 228	31 576	
					
Interest bearing loans - related parties  		8%	1 727	2 236	
					
Less current portion of non-current loans and borrowings		
					
In Polish złoty	BRE Bank	3,20% - 4,60% + 1M LIBOR	-	8 965	
	BPH-PBK	2,5% + 1M WIBOR	420	420	
	ABN Amro	1,5% + 1M WIBOR	889	-	
In Czech crowns	Commerzbank	3,0%+ 3M PRIBOR	-	3 745	
	ABN Amro	1,5%+ 1M PRIBOR	16 206	-	
			17 515	13 130	
					
Interest bearing loans and borrowings – non-current	80 440	20 682	

(B) Current		Interest rate %	           2005	        2004	
Current portion of non-current loans and borrowings	17 515	     13 130	
					
Short term bank credit				
In Polish złoty	BPH-PBK	1,75%+ 1M WIBOR	226	206	
	Citibank	0,75%+ 1M EURIBOR	-	38 227	
					
In Czech crowns	Citibank	0,75%+ 1M PRIBOR	-	   67 318	
	Raiffeisenbank	1,00%+ 3M PRIBOR	-	       213	
	ABN Amro	1,00%+ 1M PRIBOR	580	       -	
			806	105 964	
			
Interest bearing loans and borrowings – current	18 321	119 094    	
			
According to the loan agreement with ABN Amro Bank N.V. (“ABN Amro”) dated 4 April 2005, the Company is required to maintain certain financial ratios as specified in the agreement. These include net debt index, (the ratio of net debt to EBITDA), interest coverage and the balance sheet structure (the ratio of tangible net worth defined as total consolidated equity less net intangible assets and the net goodwill to total assets). 

Pursuant to the terms of the loan agreement, the interest rate is based on WIBOR/PRIBOR plus margin and the margin is based on the net debt index and ranges from 0.95% for a net debt index  below 0.95 up to 1.8% for a net debt index in excess of 2.0. 
Please refer to Note 24 for details regarding security pledged for the above loans. 
20	Employee benefits 
Employee benefits consist of reserves allocated for bonuses and rewards for employees (described below) and the expenses relating to the performance participation plan and the employee stock option plan. Through 27 April 2005, the Group maintained a Performance Participation Plan.  In April 2005, the Group implemented an employee stock option plan.  Both plans are described below.
Long term service benefits
In accordance with the Company’s employment regulations, certain employees have the right to jubilee payments for long-term employment in accordance with the Group’s employment regulations. These employees receive a lump sum in local currency equivalent to USD 300 after the completion of 5 years of employment and a lump sum in local currency equivalent to USD 1 000 after the completion of 10 years of employment.  The Group has made an accrual of 791 TPLN for the jubilee obligation as of 31 December 2005 and 490 TPLN as of 31 December 2004. 
Performance Participation Plan
In 1999, the Company adopted a Performance Participation Plan (“the Plan”). Under the Plan, the Company was entitled to determine, among other matters, participating employees, the number of units to be awarded to each employee and the award and vesting date of all units.  The strike price of each unit awarded was established by the board of Directors at each award date based on an annual earnings multiple under which earnings represents net income in the respective fiscal year in which the units were granted adjusted for certain items as defined in the Plan.  Under the Plan, units vest over a five-year period (three-year period in limited cases) with one-fifth of a unit vesting on each anniversary of its award or one-third in the case of a three year vesting period.  Pursuant to the terms of the plan, upon completion of a public offering of equity securities of the Company on a qualifying exchange, the Company is required to pay to each participant the value of vested units at the date of the offering.  The value of the vested units is the difference between the strike price and the value at the date of the public offering.
On 27 April 2005, in conjunction with the listing of the Company’s shares on the WSE, units granted under the Plan were adjusted for the stock split in 2004 and the respective strike prices were converted from USD to PLN at the exchange rate of PLN to USD at that date. Holders of units which were vested on 27 April 2005, were entitled to request a cash payment on or before 15 August 2005 equal to the excess of the listing price of PLN 24 per share over the respective strike price of the unit. Total amounts paid by the Company for vested units on 15 August 2005 amounted to 697 TPLN.  Vested units for which cash payments were not requested by this date could be settled prior to their expiration date, which is 10 years from the grant date, with a choice of settlement in cash or in shares of the Company held by ARC.  Unvested units granted under the Plan to existing employees prior to the initial public offering will continue to vest over the original five-year vesting period (three-year period in limited cases). The employees can exercise the units once vested anytime prior to their expiration date.  The employees can opt to have the units settled by ARC either in cash at an amount equal to the difference between the publicly listed market price of a share on the date of settlement and the strike price of the unit or in shares of the Company held by ARC for consideration equal to the strike price of the unit.  Pursuant to an agreement with ARC, a shareholder of the Company, ARC assumed responsibility for the settlement of all units (vested and unvested) effective 27 April 2005 which remained unsettled on 15 August 2005.

As described in Note 1(b), in accordance with IFRS 2, the fair value of units or options granted under share-based payment plans is determined at the date of grant and expensed over the vesting period as described in the accounting policy. As IFRS 2 requires retrospective application for share-based payments plans existing at the date of adoption, the grant date fair value has been calculated for all grants and these amounts are being amortized over the respective vesting periods.  The Plan is considered a cash-settled plan and is remeasured at each balance sheet date.  Please refer to Note 1b for a summary of the impact of the adoption of IFRS 2. At 31 December 2004, the fair value of the liability under the Plan amounted to 2 714 TPLN.  At 31 December 2005, there was no unpaid liability relating to the Plan.

Certain of the vested units under the Plan were settled on 15 August 2005 as described above.  ARC assumed responsibility for the settlement of all units (vested and unvested) effective 27 April 2005 which remained unsettled on 15 August 2005.  The fair value of the liability relating to the outstanding units assumed by ARC during 2005 amounted to 1 944 TPLN and was recorded as a contribution to equity.

Employee stock option plan
In April 2005, the Group established an employee stock option plan for key employees. The total number of shares to which options are granted is determined by the Board but cannot exceed 3% of the total outstanding shares adjusted for any shares split or similar change that causes a change in the option value.  In addition, the number of shares acquired by employees from options exercised is limited to 200,000 annually.  Under the plan, the Company, upon prior Board approval, is entitled to determine among other matters, participating employees, number of options granted and the grant date. The option price and the vesting period will generally be the closing share price at the option grant date and carry either a 3 or 5 year vesting period. The stock option plan was approved by the Board of Directors. Additionally, the issuance of new shares related to the stock option plan requires shareholder approval.

The terms and conditions of the grants are as follows: 

Grant date	Number granted		
Vesting conditions	Contractual life of options	
					
Participation units:					
at 30 April 1999	75 250		5 years, graded, 20% per year	10 years	
at 30 April 2000	53 750		5 years, graded, 20% per year	10 years	
at 30 April 2001	76 300		5 years, graded, 20% per year	10 years	
at 30 April 2002	74 600		5 years, graded, 20% per year	10 years	
at 30 April 2003	55 100		5 years, graded, 20% per year	10 years	
at 30 April 2004	77 800		5 years, graded, 20% per year	10 years	
Total 	412 800				
					
Employee stock options					
at 30 April 2005 	79 300		5 years, graded, 20% per year	10 years	
Total 	79 300				
The number and weighted average exercise prices of share options and performance participation plan units for the years ended 31 December 2005 and 2004 are as follows:
	2005	2004	
	Weighted average exercise price 	Number of employee stock options	Number of participation units	Weighted average exercise price 	
Number of participation units	
Outstanding beginning of the period	PLN 18.9	-	342 210	PLN 18.4	289 110	
Exercised or forfeited during the period	PLN 18.5	-	(138 310)	PLN 17.9	(24 700)	
Granted during the period	PLN 24.2	79 300	-	PLN 20.7	77 800	
Outstanding, end of the period	PLN 20.6	79 300	203 900	PLN 18.9	342 210	
Exercisable at the end of the period 	PLN 19.5	-	146 773	PLN 17.7	177 370	
TH						
The options and performance participation units outstanding at 31 December 2005 have an exercise price in the range of PLN 6.4 to PLN 29.0 and a weighted average contractual life of 7 years.  

The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on a trinominal tree model. The contractual life of the option (10 years) is used as an input into this model. Expectations of early exercise are incorporated into the trinominal tree model.

Fair value of stock options and performance participation plan units and related assumptions are summarized below:
	2005	2004	
	Employee Stock Option Plan	Performance Participation Plan 	Performance Participation Plan 	
				
Fair value at measurement date	PLN 8.9	PLN 6.8	PLN 6.6	
Share price at measurement date 	PLN 25.7	n/a	n/a	
Exercise price	PLN 24	PLN 18.6	PLN 18.6	
Expected volatility (expressed as weighted average volatility used in the modeling under the trinomial tree model)	40.67%	40%	40%	
Option life (expressed as weighted average life used in the modeling under the trinomial tree model	9.9 years	7.0 years	7.5 years	
Expected dividends (commencing 2008) as a percentage of share price above	18.8%	19.4%	19.4%	
Interest rate (based on interbank interest rates) 	4.5%	4.5%	5.8%	
				
As the Company has no history as a public listed entity, the expected volatility is based on the historic volatility of comparable companies operating on the WSE (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information.

Share options are granted under a service condition. There are no market conditions associated with the share option grants.

Expenses/(income) recognized related to share-based payments plans in 2005 and 2004 can be summarized as follows:

		2005	2004	
				
Participation units granted in 2004 and earlier years		387	514	
Employee stock options granted in 2005		203	-	
Effect of changes in the fair value of the performance participation plan liability		(231)	590	
Total expense recognized		359	1 104	
			
Total carrying amount of cash-settled transaction liabilities	-	2 714	
				
Total intrinsic value of liability for vested benefits		-	1 290	

21	Provisions 
The tables below present a roll forward of provisions:
31 December 2005	At the beginning of period	Additions	Used	Released	At the end                    of period	
						
Onerous lease contracts	1 482	1 668	-	-	3 150	
Reserve for legal claims	1 540	-	-	-	1 540	
	3 022	1 668			4 690	
						
31 December 2004						
						
Restaurant closing costs	200	-	-	(200)	-	
Tax claims provision	238	-	(238)	-	-	
Reserve for legal claims	5 070	-	(1 682)	(1 848)	1 540	
Onerous lease contracts	-	1 482	-	-	1 482	
Other	110	-	(110)	-	-	
	5 618	1 482	(2 030)	(2 048)	3 022	

From time to time, the Group is involved in routine litigation and proceedings during the normal course of business. As of the balance sheet date, the Group has recorded the provision for legal claims detailed above, which represents the Group’s best estimate of the probable loss expected to result from such litigations or proceedings.
22	Trade and other accounts payable 
The trade and other accounts payable balance at 31 December 2005 and 2004 is summarized in the table below:
	2005	2004	
			
Trade payables 	31 502	26 723	
Accounts payable to related parties	1 851	3 634	
Payables to employees	3 911	3 177	
Deposit received	152	295	
Social Fund	532	573	
Advance payment received for sale of premises	1 000	-	
Accrual for holiday leave	939	1 170	
Accrual for unpaid interest on loans	45	192	
Accrued bonuses to employees	2 668	2 234	
Uninvoiced rent and deliveries for restaurants	5 133	4 157	
Social insurance liability	2 378	586	
Deferred revenue 	507	1 898	
Other taxes payable	2 265	3 026	
Accrual for professional services	1 015	882	
Other accruals	998	2 219	
	54 896	50 766	
23	Operating leases  
The Group has numerous operating leases, primarily for the rental of restaurant locations. Rental contracts for restaurant locations are typically concluded for a period of ten years, subject to certain minimum notice periods for cancellation.
Future minimum payments relating to non-cancelable operating leases at 31 December 2005 are as follows:
	Minimum lease payments	
Payable in less than 1 year	35 382	
Payable between 1 to 5 years	117 556	
Payable after 5 years	97 190	
Total minimum lease payments 	250 128	

For numerous restaurants (mainly for those located in shopping malls) the rental fees are composed of a fixed fee and a fee contingent on the revenues of the restaurant. The contingent fee typically represents 2.5% to 9% of restaurant sales. Rental expense related to contingent rent amounted to 8 710 TPLN and 8 665 TPLN in 2005 and 2004, respectively and are included in the amounts in the table below.
Rental expense for operating leases in 2005 and 2004 was as follows:
	2005	2004	
			
Czech	13 236	11 784	
Poland	27 729	27 007	
Total	40 965	38 791	
24	Loan security 
The proceeds from the loans detailed in Note 19 were used to finance the opening of restaurant locations as well as current operations. The loans are secured by various forms of collateral which primarily include certain real estate, fixed assets and transfers of insurance policy rights made by the subsidiaries, which are the direct recipients of the loans. 
In connection with the credit facility agreement of 4 April 2005 concluded with ABN Amro, on 25 April 2005, the Company secured the loan with a lien on machinery and equipment in its Polish restaurants and with a mortgage on real property on certain restaurants in Warsaw, Sopot and Kraków up to the amount of approximately PLN 143 000 000 to the benefit of ABN Amro to secure the loan.  
The acquisition of Kids Play S.A. in 2004 was financed by a bank loan obtained by the Company’s subsidiary, Grifex 1 Sp. z o.o. The loan is secured by a mortgage on the land and building owned by Grifex I Sp. z o.o. and by letters of guarantee from American Restaurants Sp. z o.o. and American Retail Systems Sp. z o.o. (“ARS”, 100% subsidiary of ARC).

25	Earnings per share 
Basic and diluted earnings per share are calculated as follows:
	2005	2004	
			
Net profit attributable to shareholders of the parent	22 212	11 734	
			
Ordinary shares at 1 January	10 000 000	10 000 000	
Effect of shares issued	2 387 671	-	
Effect of stock options granted	- 	- 	
			
Weighted average number of ordinary shares 
at 31 December 2005	12 387 671	10 000 000	
			
Basic and  diluted earnings per share in Polish zloty	1.79	1.17	
			
The effect of potential ordinary shares resulting from stock options granted is antidilutive.  Accordingly, diluted earnings per share do not assume the exercise of outstanding stock options.
26	Commitments and Contingencies 
The Franchise Agreements (See Note 1 (a)) have a term of ten years each, the earliest of which commenced in 2000, and are renewable at the Company’s option for a further ten years as described in the Franchise Agreements. The initial fees paid are approximately USD 39 600 per restaurant and renewal fees are 50% of the initial fees, adjusted to reflect changes in the US Consumer Price Index during the term of the relevant franchise. 
Under the Franchise Agreement, the Company, through its subsidiaries, must from time to time upgrade, modify, renovate or replace all or part of its restaurants or any of their fittings, fixtures or signage or any of the equipment, systems or inventory used in the restaurant in order to maintain compliance with the relevant franchisor’s then current standards.  During each of the initial term and the renewal term, if any, the franchisor may not, under the Master Franchise Agreement, require more than two comprehensive refurbishments of all fittings, fixtures, signage, equipment, systems and inventory in the “front-of-house” area of each AmRest restaurant to then current standards and more than one comprehensive refurbishment of all fittings, fixtures, signage, equipment, systems and inventory in the “back-of-house” area of each restaurant.  Individual franchise agreements signed after the Master Franchise Agreement do not contain this provision.  The Company estimates the cost of upgrades at 1.5 percent of annual restaurant sales in future periods.
27	Related parties 
As described in the note 1 (a), following the listing of the Company’s shares on the WSE on 27 April 2005, ARC’s (through its subsidiary IRI) ownership percentage decreased from 50% to 39.87% and YUM! is no longer a shareholder.

ARC
ARC was founded by Donald M. Kendall, Sr., Donald M. Kendall, Jr. and Christian R. Eisenbeiss, who serve as Supervisory Board members of the Company and Henry J. McGovern who is a Management Board member and the senior executive managing the operating businesses in Poland and the Czech Republic.
The current ownership structure of ARC is shown in the table below:

	Percent Ownership	
Donald M. Kendall, Sr.	                30.00%	
Donald M. Kendall, Jr.	         18.25%	
Christian R. Eisenbeiss	         28.36%	
Henry J. McGovern	         22.49%	
David A. Bobilya	          0.90%	

In addition to its ownership interest in the Company, ARC conducts real estate operations through its wholly-owned subsidiary, ARS.  The Company leases four restaurant properties from ARS at market rates consistent with the lease terms and conditions in its restaurant leases with third parties.

In the second half of 2005, three restaurant properties were sold by ARS to the Company for consideration of 1 026 TPLN. The Company’s executive offices in Wrocław are also located in a building owned by ARS. In 2004, the apartment and training center previously owned by ARS was sold to Metropolitan Properties International Sp z o.o., a company owned by Henry McGovern. The rent and other costs paid by the Company and its subsidiaries to ARS was 2 434 TPLN and 3 093 TPLN in 2005 and 2004, respectively.  The rent and other costs paid by the Company and its subsidiaries to the company owned by Henry McGovern was 237 TPLN and 136 TPLN in 2005 and 2004, respectively.

The Group also received management and consultancy services provided by ARC on a non-exclusive basis for the Company’s Czech and Polish operating entities under defined agreements with each entity.  The major obligation is for ARC to provide management services including paying the salaries and certain other expenses of certain members of the Company's management team.  These salaries and services are invoiced to the Company’s subsidiaries monthly. The profesional fees paid by the Company and its subsidiaries to ARC amounted to 4 627 TPLN and 4 759 TPLN in 2005 and 2004, respectively. 
As described in Note 20, on 27 April 2005, ARC assumed responsibility for the settlement of any future obligations under the Performance Participation Plan.
Spolpep
As detailed in Note 3, Spolpep Sp. z o.o. was acquired by the Company on 1 July 2005 from ARC. Until 12 March 2004, Spolpep was jointly owned by a subsidiary of YUM! and a third party, WSG “Centrum”. On 12 March 2004, ARC, through its wholly-owned subsidiary ARS, acquired shares from WSG “Centrum”. Subsequently, these shares were sold by ARS to ARC. In June 2005, ARC acquired also YUM!’s holding in Spolpep.

Spolpep owned and operated two Pizza Hut and two KFC restaurants in Poland. Through 30 June 2005, the Group provided marketing and management services to this company. The fees for these services amounted to 1,572 TPLN and 3,240 TPLN in 2005 and 2004, respectively.  The management fees were recorded as other income and the marketing fees received as a reduction in direct marketing expenses. 

As mentioned in Note 3, Spolpep was merged into American Restaurants Sp. z o.o. in September 2005 and Spolpep is no longer a separate legal entity at 31 December 2005.

The restaurant locations operated by Spolpep (currently American Restaurants Sp. z o.o.), are owned by a third party, WSG “Centrum”, and are leased at favourable rates until 15 October 2007. ARS obtained the right to leases those locations for an additional period of ten years commencing on 16 October 2007.  In July 2005, American Restaurants Sp.z o.o. concluded a sub-lease agreement with ARS based on which it would sub-lease the restaurant locations from ARS during this ten year period for a fixed fee per month plus an upfront rent prepayment. In August 2005, American Restaurants Sp. z o.o. paid ARS the prepayment of PLN 10 500 TPLN.

YUM!
YUM! ceased being a related party on 27 April 2005. Through 27 April 2005, the Group had significant related party transactions with YUM! Group companies including loans and related interest expense as well as initial franchise fees, continuing franchise fees, professional fees and franchise renewal fees. The table below presents the fees relating to YUM! Group companies including fees incurred during 2005 through 27 April 2005 and in 2004.

	2005	2004	
			
Initial fees (see Note 1 (f))	119	1 678	
Continuing franchise fees (see Note 1 (f))	8 705	27 609	
Interest expense	285	112	
Worldwide Communication Services LLC
Worldwide Communication Services LLC and its subsidiaries (“WCS”), an equity method investment of the Company as described in Note 1(a), provides marketing services to the Company. Amounts billed by WCS to the Company in 2005 amounted to 17 376 TPLN. No similar expenses were recorded in 2004 as WCS group was a subsidiary of the Company during 2004 and the amounts paid in 2004 were eliminated on consolidation.
Transactions with key management personnel
As noted above, certain members of key management are compensated directly by ARC with ARC rebilling the Company pursuant to definitive agreements as described above. Key management remuneration paid directly by the Company is as follows:
	
2005	2004	
			
Short-term employee benefits	988	608	

Key management also participated in the performance participation plan and the share option program (see Note 20).

28	Accounting estimates and judgments 

Key sources of estimation uncertainty

Note 10 contains information about the assumptions and their risk factors relating to goodwill impairment, Note 9 contains information relating to the determination of property, plant and equipment impairment, Note 8 contains information relating to the assessment of the realisability of deferred tax assets and Note 29 contains information about foreign exchange exposure of the Company and risks in relation to foreign exchange movements.

29	Financial Instruments 
The Group’s activities expose it to a variety of financial risks:  market risk (including currency and interest rate risk), credit risk and liquidity risk.  The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse affects on the Group’s financial performance.  
Risk management is carried out under policies approved by the Board of Directors.
Credit risk
Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents and receivables. The Group places its cash and cash equivalents in financial institutions with high credit ratings. There are no significant concentrations of credit risk with respect to trade and other receivables as sales are primarily made in cash or via major credit card. 
Interest rate risk
The Group’s interest-bearing borrowings typically bear floating interest rates (see Note 19). As at 31 December 2005, this exposure to interest rate cash flow risk is not hedged.
Foreign currency risk
The Group is exposed to foreign currency risk arising from various currency exposures, primarily with respect to the USD, Euro and Czech Crown. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations.  In addition, the rent due on a significant portion of the Company’s restaurant leases is indexed to US dollar or euro exchange rates. Although the Company seeks where possible to agree rents in local currency, many lessors still require rents to be indexed to euro or US dollar exchange rates.
In order to minimize exposure to foreign currency risk, among other things, the Group aims to reduce the impact of short-term fluctuations.  Over the long term, however, permanent changes in the foreign exchange and interest rates would have an impact on consolidated earnings.
The Group has certain investments in foreign operations, the Czech subsidiaries, whose net assets are exposed to foreign currency translation risk.

Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents and the availability of funding through an adequate amount of committed credit facilities.

Fair value of financial instruments

The following are details of the fair values of the financial instruments for which it is practicable to estimate such value: 
•	Cash and cash equivalents, short-term bank deposits and short-term bank credits. The carrying amounts approximate fair value because of the short maturity of these instruments. 
•	Trade accounts receivable, other accounts receivable, accounts payable and accrued liabilities.  The carrying amounts approximate fair value because of the short-term nature of these instruments. 
•	Non-current interest bearing loans and borrowings.  The carrying amounts approximate fair value due to the variable nature of the related interest rates.
30	Recently Issued Accounting Standards 
A number of new Standards, amendments to Standards and Interpretations are not yet effective and have not been applied in preparing these IFRS financial statements. Of these pronouncements, potentially the following may have an impact on the Company’s financial statements:
•	IFRS 7 Financial Instruments: Disclosure, which will require increased disclosure in respect of the Company’s financial instruments.  It is effective for annual periods beginning on or after 1 January 2007.  The Company considers that the significant additional disclosures required will relate to its financial risk management objectives, policies and processes.
•	Amendment to IAS 1 Presentation of Financial Statements – Capital Disclosures, which will require increased disclosure in respect of the Company’s capital.  It is effective for annual periods beginning on or after 1 January 2007.  This amendment will introduce new disclosure requirements  regarding the capital structure of the Company and the Group.

•	Amendment to IAS 19 Employee Benefits – Actuarial Gains and Losses, Group Plans and Disclosures, which includes an option for actuarial gains and losses to be recognised in full as they arise, outside of the income statement in a statement of recognised income and expense. It is effective for annual periods beginning on or after 1 January 2006. The amendment is not anticipated to have a significant impact on the Company’s financial statements.

•	Amendment to IAS 39 Financial Instruments: Recognition and Measurement – Cash Flow Hedge Accounting of Forecast Intragroup Transaction, which allows the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item if certain criteria are met. It is effective for annual periods beginning on or after 1 January 2006.  The amendment is not anticipated to have a significant impact on the Company’s financial statements.

•	Amendment to IAS 39 Financial Instruments: Recognition and Measurement – The Fair Value Option, which restricts the designation of financial instruments as “at fair value through profit or loss”.  It is effective for annual periods beginning on or after 1 January 2006. The amendment is not anticipated to have a significant impact on the Company’s financial statements.

•	Amendment to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 4 Insurance Contracts – Financial Guarantee, which requires guarantees that are not insurance contracts to be measured at fair value upon initial recognition. It is effective for annual periods beginning on or after 1 January 2006.  The amendment is not anticipated to have a significant impact on the Company’s financial statements.

•	Amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operation. The amendment clarifies in which circumstances a loan may form part of a reporting entity’s net investment in a foreign operation, and the currency in which such an item may be denominated. It is effective from 1 January 2006. The amendment is not anticipated to have a significant impact on the Company’s financial statements.

•	IFRIC 4 Determining whether an Arrangement contains a Lease, which requires certain arrangements to be accounted for as a lease even if they are not in the legal form of a lease. It is effective for annual periods beginning on or after 1 January 2006.  The interpretation is not anticipated to have a significant impact on the Company’s financial statements.

•	IFRIC 8 Scope of IFRS 2, which clarifies that the accounting standard IFRS 2 Share-based Payment applies to arrangements where an entity makes share‑based payments for apparently nil or inadequate consideration. This interpretation is awaiting endorsement for use in the European Union.  This is effective from 1 May 2006. The Company has not yet completed its analysis of the impact of the new interpretation.