Quality First Annual Report and Accounts 2010/11

Income and expenditure statement

The management of our recent financial challenges and the preparations put in place for the future are heavily reflected in the group result of a £483million surplus. An actuarial gain of £250million was made as a direct result of significant pension reform to reduce our ongoing pension costs; and a profit of £96million was made from the disposal of Animal Planet as we moved to concentrate our commercial activities on BBC branded channels and platforms. After excluding these two items, the underlying group surplus for the year was £137million (2.7% of our income), in line with our broad aim to match our income and costs over each licence fee period.

The licence fee is our single biggest source of income and through efficient and effective collection we have increased this by £66million this year. This income is augmented by the commercial exploitation of licence fee funded content through our commercial subsidiaries – primarily BBC Worldwide, but this year has also seen greater contributions from BBC World News and from BBC S&PP.

Despite the difficult wider trading environment, total commercial revenues have increased 13% year on year, with a 68% increase in profit before interest and tax – boosted by the disposal of Animal Planet for £96million as the BBC continues to focus on BBC branded channels and platforms.

BBC Worldwide has delivered record gross sales of £1,158million, up 8%. The continued diversity of its portfolio of businesses has allowed it to beat the trend in many markets and generate strong margins with operating profit before specific items up by 10%.

As a result of its activities in 2010/11, BBC Worldwide contributed £182million to the BBC from, in the main, dividends and investment in programming – an increase of 9% on last year. Looking forward, BBC Worldwide will continue to invest in great programming, international expansion, the growth of its channels businesses and new digital opportunities to fuel the UK creative economy.

During the year, BBC Worldwide wrote down the carrying value of its Lonely Planet investment by £34million. This is as a result of the continued strengthening of the Australian dollar – at a 27-year high against sterling – as well as the challenging market conditions facing the business.

BBC World News maintained the BBC's international reputation for high quality journalism and delivered an operating profit for the first time this year with sales increasing and reduced costs – advertising sales in particular recovered from the prior year recession and sales improved, although in part from the continued weakness of Sterling.

Despite tough market conditions BBC S&PP performed well, achieving an operating profit before restructuring of £6million. This is the highest operating profit margin achieved since incorporation. BBC S&PP also completed the closure of its Sport and Children's business as this activity transfers to Salford.

The Trust, on behalf of licence fee payer, scrutinises how we spend this revenue whilst also ensuring that our high profile role in the sector does not damage the industry. One of the tools that the Trust uses to monitor our performance is Service Licences – we agree a Baseline Budget for each one of our 28 major services and report against that baseline within a 10% tolerance either higher or lower.

The full outturn of our content spend by service shows that through our efficiency programme, we are delivering output for broadly the same cost as last year, and this includes funding the cost of covering the General Election and the FIFA World Cup in South Africa. We have been able to do this by managing our cost base tightly, for example with staff costs, where we have held pay increases to below the rate of inflation again.

We have seen a very marginal increase in headcount in the licence fee funded services (from 17,238 to 17,242 full time equivalent people) and a reduction in the staff paybill of 4% this year, reflecting the continued focus on reducing our permanent staffing levels.

Total operating expenditure on UK public services

* The methodology for setting the CBBC and CBeebies content spend changed in 2010/11, following the BBC Trust's 2009 review of children's services. All children's spend is now allocated to either CBBC or CBeebies, including that portion which was previously allocated to BBC One and BBC Two.

It is the 'more for less' strategy that is creating downward pressure on service licence baselines. One service licence finished the year below its 10% tolerance – BBC 1Xtra, where savings were delivered from leveraging greater synergies from its sister station, BBC Radio 1 and several others were close to the 10% mark as efficiencies and savings are delivered. We are careful, though, to ensure that these savings are not at the cost of quality and we carefully monitor the audience response to our output to ensure that we still deliver value.

The increasing costs of BBC Radio 1 and BBC Radio 2 reflect their success in attracting larger audiences which increases their allocation of music copyright costs with corresponding reductions across other services.

Management is committed to reducing the budget of BBC Online by 25% and has now agreed plans with the Trust to deliver this saving over the next three years.

Total BBC expenditure

* Infrastructure and support costs include spend on learning support and community events, marketing, press and publicity, the BBC Trust Unit (£14.0million (2010: £13.9million)) and other overheads excluding restructuring.