Notes to the consolidated financial statements

General information and description of the business
TNT N.V. is a public limited liability company having its official seat in Amsterdam, the Netherlands. The consolidated financial statements include the financial statements of TNT N.V. and its consolidated subsidiaries (hereafter referred to as “TNT” or “the company”). The company’s name changed from TNT Post Group N.V. to TPG N.V. on 6 August 2001 and from TPG N.V. to TNT N.V. on 11 April 2005. TNT N.V. was incorporated under the laws of the Netherlands on 29 December 1997 and is listed on Euronext Amsterdam.

Since TNT delisted its American Depositary Receipts from the New York Stock Exchange on 18 June 2007, and its reporting obligations with the United States Securities and Exchange Commission terminated 90 days later on 16 September 2007, TNT is no longer required to file its annual report on Form 20-F.

On 30 October 2006, TNT announced the decision to divest its freight management business. On 16 November 2006, the company signed a Sale and Purchase Agreement to sell the freight management business to the French logistics service provider, Geodis SA. On 5 February 2007 TNT completed the sale, see note 8 for further information on the sale of freight management.

TNT’s freight management business was reported as discontinued operations/assets held for sale as at 31 December 2006. Consequently, in the statement of income for 2007 TNT has presented the net result of its discontinued freight management business on a separate line ‘profit/(loss) from discontinued operations’. In the 2006 balance sheet the assets and liabilities from freight management have been presented as respectively “assets held for sale” and “liabilities held for sale”.

TNT’s Logistics division was reported as a discontinued operation in 2005 and 2006. TNT completed the sale of the Logistics division on 4 November 2006. In the statement of income for 2006 TNT presented the net result of its discontinued logistic business on a separate line ‘Profit/(loss) from discontinued operations’.

The company manages the business through two divisions: Express and Mail and via the business entity Other networks. The Express division provides door-to-door express delivery services for customers sending documents, parcels and freight worldwide. The Mail division primarily provides services for collecting, sorting, transporting and distributing domestic and international mail. Other networks performs special services that require deliveries during the night to individually agreed delivery points.

The consolidated financial statements have been authorised for issue by TNT’s Board of Management and Supervisory Board on 18 February 2008 and are subject to adoption at the annual general meeting of shareholders on 11 April 2008.

Summary of significant accounting policies
The consolidated financial statements of TNT have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). IFRS includes the application of International Financial Reporting Standards including International Accounting Standards (IAS) and related Interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and Interpretations of the Standing Interpretations Committee (SIC).

The International Accounting Standards Board (IASB) has issued certain International Financial Reporting Standards or amendments thereon, and the IFRIC has issued certain interpretations, each of which, when adopted by the EU, could affect TNT’s consolidated financial statements. Where relevant for the company, TNT has stated the Standards and/or amendments and/or interpretations in ‘Recent IFRS pronouncements’ including the potential impact.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying TNT’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in ‘Critical accounting estimates and judgements in applying TNT’s accounting policies’.

The policies set out below have been consistently applied to all the years presented, except for the presentation of the pension position and TNT’s segment information. Certain reclassifications have been made to prior year financial statements to conform to the current’s year presentation.

As of 2007, TNT has revised the presentation of various pension plans. On the balance sheet the net pension assets or net pension liabilities of the respective plans have been presented separately instead of netting the total pension position as the plans have a different population of beneficiaries and risk profile. The net pension plan of the main plan in the Netherlands and the other pension plan show a pension asset, wheras the transitional pension plan in the Netherlands and the other post employment benefit plans show a pension liability. The company has adjusted its comparative numbers in the balance sheet as per 31 December 2006 accordingly. This revised presentation has no impact on TNT’s equity or net profit.

The segment information has been extended by the introduction of a segment named “Other Networks”. The related segment information was formerly reported as part of the Express division and prior to the sale of the Logistics division as part of Logistics. In 2007, the company decided to present the “Other networks” as a separate segment apart from the Express division due to the further optimisation of TNT’s network strategy. The Other networks operate a network which is different from the Express and/or Mail network and the services provided are supply chain related which differs from the Express services. The revised presentation has no impact on TNT’s equity or net profit. TNT early adopted IFRS 8 ‘Operating Segments’, see section “Recent IFRS pronouncements”.

All amounts included in the financial statements are presented in euros, unless indicated otherwise.

Consolidation
Consolidated financial information, including subsidiaries, associates and joint ventures, has been prepared using uniform accounting policies for like transactions and other events in similar circumstances. All significant intercompany transactions, balances and unrealised gains on transactions have been eliminated on consolidation. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred.

The consolidated financial statements include the financial statements of TNT N.V. and its group companies. A complete list of subsidiaries, associates and joint ventures included in TNT’s consolidated financial statements is filed for public review at the Chamber of Commerce in Amsterdam. This list has been prepared in accordance with the provisions of article 379 (1) and article 414 of Book 2 of the Dutch Civil Code.

As the financial statements of TNT N.V. are included in the consolidated financial statements, the corporate statements of income are presented in an abridged form (article 402 of Book 2 of the Dutch Civil Code).

Subsidiaries
A subsidiary is an entity controlled, directly or indirectly, by TNT N.V. Control is regarded as the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether TNT controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to TNT and are de-consolidated from the date on which control ceases.

TNT uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of TNT’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of TNT’s share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against TNT’s interests except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

TNT subsidiaries’ accounting policies have been changed where necessary to ensure consistency with TNT’s Group accounting policies.

Associates
An associate is an entity, including an unincorporated entity such as a partnership, that is neither a subsidiary nor an interest in a joint venture and over whose commercial and financial policy decisions TNT has the power to exert significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the entity but is not control or joint control over those policies.

TNT’s share in the results of all significant associates is included in the consolidated statements of income using the equity method. The carrying value of TNT’s share in associates includes goodwill on acquisition and includes changes to reflect TNT’s share in net earnings of the respective companies, reduced by dividends received. TNT’s share in non-distributed earnings of associates is included in other reserves within shareholders’ equity. When TNT’s share of any accumulated losses exceeds the acquisition value of the shares in the associates the book value is reduced to zero and the reporting of losses ceases, unless TNT is bound by guarantees or other undertakings in relation to the associate.

Joint ventures
A joint venture is a contractual arrangement whereby TNT and one or more parties undertake an economic activity that is subject to joint control. Joint ventures in which TNT participates with other party(ies) are proportionately consolidated. In applying the proportionate consolidation method, TNT’s percentage share of the balance sheet and income statement items are included in TNT’s consolidated financial statements.

Functional currency and presentation currency
Items included in the financial statements of each of the group’s entities are measured using the currency of the primary environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in euros, which is TNT’s functional and presentation currency.

Foreign currency transactions and balances
Foreign currency transactions are booked in the income statement and the balance sheet by translating the transactions and balances into the functional currency using the exchange rates prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and balances and from the translation at year-end exchange rates are recognised in the income statement except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.

Foreign operations
The results and financial position of all group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

• assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet,
• income and expenses for each income statement are translated at average exchange rates, and
• the resulting exchange differences based on the different ways of translation between the balance sheet and the income statement are recognised as a separate component of equity (cumulative translation adjustment).

Foreign exchange gains and losses resulting from the settlement of transactions, including foreign currency transactions, and from the translation at the year end exchange rate of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except where hedge accounting is applied. Foreign exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments are taken to the cumulative translation adjustment on consolidation. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on the sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Intangible assets

Goodwill
The excess of the cost of acquisition over the fair value of TNT’s share of the identifiable net assets acquired is recorded as goodwill. Goodwill on acquisitions of subsidiaries and joint ventures is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates and tested for impairment as part of the overall balance.

Separately recognised goodwill arising on acquisitions is capitalised and subject to impairment review, both annually and when there are indications that the carrying value may not be recoverable. Goodwill is impaired if the recoverable amount of the cash generating unit to which it is allocated is lower than its carrying value. The recoverable amount is defined as the higher of a cash generating unit’s fair value less costs to sell and its value in use using the discounted cash flow method. Impairments on goodwill recognised in prior periods can not be reversed.

For the purpose of assessing impairment, corporate assets are allocated to specific cash generating units before impairment testing. The basis for this allocation is to the extent in which those assets contribute to the future cash flows of the cash generating unit under review.

Other intangible assets
Costs related to the development and installation of software for internal use are capitalised at historical cost and amortised over the estimated useful life. Apart from software, other intangible assets mainly include customer lists, assets under development, licences and concessions.

An asset is transferred to its respective intangible asset category at the moment it is ready for use and is amortised on a straight-line method over its estimated useful life. Other intangible assets are valued at the lower of historical cost less amortisation and impairment.

An impairment review is performed whenever a triggering event occurs. An intangible asset is impaired if the recoverable amount is lower than the carrying value. The recoverable amount is defined as the higher of an asset’s fair value less costs to sell and its value in use. Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. A triggering event is an event or change in circumstances indicating that the carrying amount may not be recoverable. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows being the cash generating units. Impairments are reversed if and to the extent that the impairment no longer exists.

Property, plant and equipment
Property, plant and equipment is valued at historical cost using a component approach, less depreciation or at the recoverable amount whenever impairment has taken place. In addition to costs of acquisition, the company also includes costs of bringing the asset to working condition, handling and installation costs and the non-refundable purchase taxes. Depreciation is calculated using the straight-line method based on the estimated useful life, taking into account any residual value. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the company and the cost of the item can be measured reliably.

Land is not depreciated. System software is capitalised and amortised as a part of the tangible fixed asset for which it was acquired to operate, because the estimated useful life is inextricably linked to the estimated useful life of the associated asset.

An impairment review is performed whenever a triggering event occurs. Property, plant and equipment is impaired if the recoverable amount is lower than the carrying value. The recoverable amount is defined as the higher of an asset’s fair value less costs to sell and its value in use.

An impairment loss recognised in prior periods for an asset shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows being the cash generating units.

Leases of property, plant and equipment are classified as finance leases if the company has substantially all the risks and rewards of ownership. Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in long term debt. Property, plant and equipment acquired under finance leases is depreciated over the shorter of the asset’s useful life and the lease term.

Financial assets and liabilities
TNT classifies financial assets and liabilities into the following categories: financial assets and liabilities at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets and financial liabilities measured at amortised cost. The classification depends on the purpose for which the financial asset or liability were acquired. Management determines the classification of TNT’s financial assets and liabilities at initial recognition. Financial instruments are accounted for in accordance with IAS 32 and IAS 39.

Financial assets and financial liabilities at fair value through profit and loss include derivatives and other assets and liabilities that are designated as such upon initial recognition.

Financial assets and financial liabilities at fair value through profit are initially recorded at fair value net of transaction costs incurred and subsequently remeasured at fair value on the balance sheet. TNT designates certain derivatives as either: hedges of the fair value of recognised assets and liabilties of a firm commitment (fair value hedge), hedges of a particular risk associated with a recognised asset or liability or a highly probable forecasted transaction (cash flow hedge) or hedges of a net investment in a foreign operation (net investment hedge).

If a derivative is designated as a cash flow or net investment hedge, changes in its fair value are considered to be effective and recorded in a separate component in shareholders’ equity until the hedged item is recorded in income. Any portion of a change in a derivative’s fair value that is considered to be ineffective, or is excluded from the measurement of effectiveness, is immediately recorded in the income statement.

TNT documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The company also documents the assessment, both at hedge inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit and loss (for example, when the forecasted sale that is hedged takes place). However, when the forecasted transaction that is hedged results in the recognition of a non-financial asset, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the asset or liability.

When a hedging instrument expires or is sold, or when the hedge no longer meets the criteria for hedge accounting, any cumulative gains or losses existing in equity at that time, remain in equity until the forecasted transaction is ultimately recognised in the income statement. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

Loans granted and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and for which TNT has no intention of trading. Loans and receivables are included in trade and other receivables in the balance sheet, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets.
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities where TNT has the positive intention and ability to hold to maturity.

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories above. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Available-for-sale financial assets are carried at fair value.

Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Unrealised gains and losses arising from changes in the fair value of financial assets and liabilities classified as at fair value through profit and loss are directly recorded in the income statement. Unrealised gains and losses arising from changes in the fair value of financial assets classified as available-for-sale are recognised in equity. When financial assets classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the consolidated statements of income as gain or loss.

The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), TNT establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same and discounted cash flow analysis refined to reflect the issuer’s specific circumstances.

TNT assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in income statement is removed from equity and recognised in the income statement. Impairment losses on equity instruments recognised in the income statement are not reversed through equity.

Financial liabilities measured at amortised costs are recognised initially at fair value net of transaction costs incurred and subsequently stated at amortised costs; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the financial liability using the effective interest method.