The accounting policies set out in this note have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities.          
             
 Certain comparatives amounts have been reclassified to conform with the current year's presentation.            
             
a. Basis of consolidation            
             
(i) Subsidiaries            
             
 Subsidiaries are entities controlled by the Group. Control exists when the Group 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.  The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group.             
             
(ii) Associates            
             
 Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies.  Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity.  Associates are accounted for using the equity method and are initially recognised at cost.  The Group´s investment includes goodwill identified on acquisition, net of any accumulated impairment losses.  The consolidated financial statements include the Group's share of the total recognised gains and losses and equity movements 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 its interest in an associate, the Group's carrying amount including any long-term investments is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has an obligations or made payments on behalf of the investee.  

           
(iii) Transactions eliminated on consolidation            
             
 Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated against the investment to the extent of the Group's interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.            
             
b. Foreign currency            
             
(i) Foreign currency transactions            
             
 Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Foreign currency differences arising on retranslation are recognised in the income statement.             
             
(ii) Foreign operations and Icelandic subsidiaries with foreign functional currency            
             
 The assets and liabilities of foreign operations and Icelandic subsidiaries with functional currency other than Icelandic krona, including goodwill and fair value adjustments arising on acquisitions, are translated to Icelandic kronas at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Icelandic kronas at exchange rates at the dates of the transactions.  Foreign currency differences arising on retranslation are recognised directly in a separate component of equity.            
             
             
(iii) Hedge of net investment in foreign operations            
             
 Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in foreign operations are recognised directly in equity, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged net investment is disposed of, the cumulative amount in equity is transferred to profit or loss as an adjustment to the profit or loss on disposal.            
             
c. Financial instruments            
             
(i) Non-derivative financial instruments            
             
 "Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables."            
             
 Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs.  Subsequent to initial recognition non-derivative financial instruments are measured as described below.             
             
 Cash and cash equivalents comprise cash balances and call deposits.              
             
 Accounting for finance income and expense is discussed in note 3(o).            
             
 Other non-derivative financial instruments            
             
 Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses.      
             
(ii) Derivative financial instruments            
             
 "The Group holds derivative financial instruments to hedge its foreign currency, fuel price and interest rate risk exposures.  Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below."            
             
 Cash flow hedges            
             
 "Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss."            
             
 If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to profit or loss in the same period that the hedged item affects profit or loss.            
             
 Economic hedges            
             
 "Hedge accounting is not applied to derivative instruments that economically hedge monetary assets and liabilities denominated in foreign currencies. Changes in the fair value of such derivatives are recognised in profit or loss as foreign currency gains and losses."            
             
(iii) Compound financial instruments            
             
 "Compound financial instruments issued by the Group comprise convertible notes that can be converted to share capital at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value."            
             
 The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.            
             
 Subsequent to initial recognition, the liability component of a compound financial instruments is measured at amortised cost using the effective interest method. The equity component of a compound financial instruments is not remeasured subsequent to initial recognition.            
             
(iv) Share capital            
             
 Ordinary shares            
             
 "Ordinary shares are classified as equity.  Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects."            
             
 Repurchase of share capital            
             
 "When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity.  When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to / from share premium."            
             
d. Operating assets            
             
(i) Recognition and measurement            
             
 Items of operating assets are measured at cost less accumulated depreciation and accumulated impairment losses.             
             
 Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Cost also may include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of operating assets.   Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.              
 When parts of an item of operating assets have different useful lives, they are accounted for as separate items (major components) of operating assets.            
             
 Gains and losses on disposal of an item of operating assets are determined by comparing the proceeds from disposal with the carrying amount of operating assets and are recognised net within "other operating revenue" in the income statement.              
             
(ii) Aircrafts and flight equipment            
             
 Aircrafts and flight equipment, e.g. aircraft engines and aircraft spare parts, are measured at cost less accumulated depreciation and accumulated impairment losses. When aircrafts are acquired the purchase price is divided between the aircraft itself and engines.  Aircrafts are depreciated over the estimated useful life of the relevant aircraft until a residual value is met.  Engines are depreciated according to flown hours. When an engine is overhauled the cost of the overhaul is capitalised and the remainder of the cost of the previous overhaul that has not already been depreciated, if there is any, is expensed in full.            
             
(iii) Subsequent costs            
             
 The cost of replacing part of an item of operating assets is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably.  The carrying amount of the replaced part is derecognised.  All other costs are recognised in the income statement as an expense as incurred.             
             
(iv) Depreciation            
             
 Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each item of operating assets. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term.  The estimated useful lives for the current and comparative periods are as follows:            

             
 Depreciation methods, useful lives and residual values are reviewed at each reporting date.            
             
e. Intangible assets            
             
(i) Goodwill and other intangible assets with indefinite useful lives             
             
 "All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries. In respect of business acquisitions goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment.

Negative goodwill arising on an acquisition is recognised directly in profit or loss."            
             
 Goodwill, trademarks and slots with indefinite useful lives are stated at cost less accumulated impairment losses.             
             
(ii) Other intangible assets            
             
 Other intangible assets are measured at cost less accumulated amortisation and accumulated impairment losses.  Amortisation is recognised in the income statement on a straight-line basis over the estimated useful lives as follows:            

             
(iii) Subsequent expenditure            
             
 Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.             
             
f. Prepaid aircraft acquisitions            
             
 Prepaid aircraft acquisitions consist of pre-payments on Boeing aircrafts that are still to be delivered.   Borrowing cost related to these pre-payments is capitalised based on the interest rate on the directly related financing.            
             
g. Leased assets            
             
 "All leases are operating leases and the leased assets are not recognised on the Group's balance sheet."            
             
h.  Inventories            
             
 "Goods for resale and supplies are measured at the lower of cost and net realisable value.  The cost of inventories is based on first-in first-out principle and includes expenditure incurred in acquiring the inventories in bringing them to their existing location and condition.  Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Aircraft equipment is capitalised at the foreign exchange rate ruling at the date of acquisition."            
             
i. Impairment            
             
(i) Financial assets            
             
 "A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired.  A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate.

Individually significant financial assets are tested for impairment on a individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

All impairment losses are recognised in profit or loss."            
             
 "An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost, the reversal is recognised in profit or loss."            
             
(ii) Non-financial assets            
             
 "The carrying amounts of the Group’s non-financial assets other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date."            
 "The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset."            
             
 An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount.  Impairment losses are recognised in profit or loss.  Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.            
             
 An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if 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 amortisation, if no impairment loss had been recognised.            
              
             
j. Employee benefits            
             
(i) Share-based payment transactions            
             
 The grant date fair value of options granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the options.  The amount recognised as an expense is adjusted to reflect the actual number of share options that vest.             
             
 The fair value of employee stock options is measured using a binomial lattice model.  Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility based on weighted average historic volatility adjusted for changes expected due to publicly available information, weighted average expected life of the instruments based on historical experience and general option holder behaviour, expected dividends, and the risk-free interest rate based on government bonds. Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.            
             
 "In January 2007 the Company granted options for 60.3 million shares at the exercise price ISK 27.5 per share.  The options vest in 12 to 36 months from the grant date."            
             
k. Provisions            
             
 A provision is recognised in the balance sheet when the Group has a present 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. 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 the risks specific to the liability.            

(i) Frequent flyer program            
             
 "Frequent flyer points earned or sold are accounted for as a liability on a fair value basis of the services that can be purchased for the points.  The points are recognized as revenue when they are utilized or when they expire."            
             
(ii) Overhaul commitments relating to aircrafts under operating lease            
             
 With respect to the Group´s operating lease agreements, where the Group has a commitment to maintain the aircraft, provision is made during the lease term for the obligation based on estimated future cost of major airframe and certain engine maintenance checks by making appropriate charges to the income statement calculated by reference to the number of hours or cycles operated during the year.              
             
l. Deferred income            
             
 Sold unused tickets and other prepayments are presented as deferred income in the balance sheet.            
             
m. Operating income            
             
(i) Transport revenue            
             
 Passenger ticket sales are not recognised as revenue until transportation has been provided. Sold documents not used within nine months from the month of sale are recognised as revenue. Revenue from mail and cargo transportation is recognised in the income statement after transportation has been provided.            
             
(ii) Aircraft and aircrew lease            
             
 Revenue from aircraft and aircrew lease is recognised in the income statement when the service has been provided at the end of each charter flight.               
             
(iii) Other operating revenue            
             
 Revenue from other services rendered is recognised in the income statement when the service has been provided.             
             
 Gain on sale of operating assets is recognised in the income statement after the risks and rewards of ownership have been transferred to the buyer.            
             
n. Lease payments            
             
(i) Operating lease payments            
             
 Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.              
             
o. Finance income and expenses            
             
 Finance income comprises interest income on funds invested, dividend income, foreign currency gains, and gains on hedging instruments that are recognised in profit or loss.  Interest income is recognised as it accrues in profit or loss, using the effective interest method.  Dividend income is recognised in profit or loss on the date that the Group´s right to receive payment is established.            
             
 Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, foreign currency losses, impairment losses recognised on financial assets, and losses on hedging instruments that are recognised in profit or loss.              
             
 Foreign currency gains and losses are reported on a net basis.             
             
p. Income tax            
             
 "Income tax on the profit or loss for the year comprises only deferred tax.  Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is expected tax payable on the taxable income for the period, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years."            
             
 Deferred tax is provided using the balance sheet  method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and 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 realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date.            
             
q. Earnings per share            
             
 The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year.  Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

            
r. Segment reporting            
             
 A segment is a distinguishable component of the Group that is engaged in providing products or services (business segments) and which is subject to risks and rewards that are different from those of other segments.  The Group´s primary format for segment reporting is based on business segments.  The business segments are determined based on the Group´s management and internal reporting structure.  The major revenue-earning assets of the Group are the aircraft fleet, the majority of which are registered in Iceland. Since the Group's aircraft fleet is employed flexibly across its route network, there is no suitable basis of allocating such assets and related liabilities to geographical segments.            
             
 Inter-segment pricing is determined on an arm's length basis.             
             
 Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.  Unallocated items comprise mainly investments and related revenue, loans and borrowings and related expenses, corporate assets and head office expenses, and income tax assets and liabilities.            
             
s. New standards and interpretations effective in 2007            
             
 IFRS 7 Financial Instruments: Disclosures and the Amendment to IAS 1 Presentation of Financial Statements: Capital Disclosures became mandatory for the Group’s 2007 financial statements. The adoption of IFRS 7 and the amendment to IAS 1 impacted the type and amount of disclosures made in these financial statements, but had no impact on the reported profits or financial position of the Group.  In accordance with the transitional requirements of the standards, the Group has provided full comparative information.            
 IFRIC 7 – 10 became mandatory for the Group’s 2007 financial statements but their adoption had no impact on the Group’s 2007 financial statements.            
             
t. New standards and interpretations not yet adopted            
             
 "A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2007, and have not been applied in preparing these consolidated financial statements:"            
             
IFRS 8 Operating Segments introduces the “management approach” to segment reporting. IFRS 8, which becomes mandatory for the Group’s 2009 financial statements, will require the disclosure of segment information based on the internal reports.  The Group has not yet determined the potential effect of IFRS 8 on the consolidated financial statements.            
             
IAS 1 Presentation of Financial Statements (revised in 2007) replaces IAS 1 Presentation of Financial Statements (revised in 2003) as amended in 2005.  IAS 1 (Revised 2007) sets the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. The main change in revised IAS 1 is a requirement to present all non-owner changes in equity (changes in equity not resulting from transactions with owners in their capacity as owners) in one or two statements: either in a single statement of comprehensive income, or in an income statement plus in a statement of comprehensive income. Unlike under current IAS 1, it is not permitted to present components of comprehensive income in the statement of changes in equity. IAS 1 (revised in 2007), which becomes mandatory for the Group’s 2009 financial statements if endorsed by the EU, is expected to impact the presentation of the Group’s income statement and statement of changes in equity.            
             
             
Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. If endorsed by the EU, the revised IAS 23 will become mandatory for the Group’s 2009 financial statements and will have no effect on the Group’s accounting policies.            
             
             
The amendments to IFRS 2 Share Based Payment – Vesting Conditions and Cancellations (January 2008) clarify the definition of vesting conditions and the accounting treatment of cancellations. If endorsed by the EU, the amendments become mandatory for the Group’s 2009 financial statements, with retrospective application required. The amendments are not expected to have any effect on the consolidated financial statements of the Group.            
             
             
"IFRS 3 Business Combinations (revised in 2008) and amended IAS 27 Consolidated and Separate Financial Statements introduce changes to the accounting for business combinations and for non-controlling (minority) interest. The most significant changes from IFRS 3 (2004) and IAS 27 (2003) are the following:
- IFRS 3 (2008) applies also to business combinations involving only mutual entities and to business combinations achieved by contract alone;
- The definition of a business combination has been revised to focus on control;
- The definition of a business has been amended;
- Transaction costs incurred by the acquirer in connection with the business combination do not form part of the business combination transaction;
- Acquisitions of additional non-controlling equity interests after the business combination are accounted for as equity transactions;
- Disposals of equity interests while retaining control are accounted for as equity transactions;
- New disclosures are required."            
             
             
IFRS 3 (revised in 2008) and amended IAS 27 will become mandatory for the Group’s 2010 Financial Statements, if endorsed by the EU. The carrying amounts of any assets and liabilities that arose under business combinations prior to the application of IFRS 3 (revised in 2008) are not adjusted while most of the amendments to IAS 27 must be applied retrospectively. The Group has not yet determined the potential effect of IFRS 3 (revised in 2008) and amended IAS 27 on the consolidated financial statements.            
             
             
IFRIC 11 IFRS 2 – Group and Treasury Share Transactions requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments are obtained. IFRIC 11 will become mandatory for the Group’s 2008 financial statements, with retrospective application required. IFRIC 11 is not expected to have any impact on the consolidated financial statements.            
             
IFRIC 12 Service Concession Arrangements provides guidance on certain recognition and measurement issues that arise in accounting for public to-private service concession arrangements. IFRIC 12, which becomes mandatory for the Group’s 2008 financial statements if endorsed by the EU, will have no effect on the consolidated financial statements.            
             
IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customer loyalty programmes for their customers. It relates to customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. IFRIC 13 becomes mandatory for the Group’s 2009 financial statements if endorsed by the EU.  The Group has not yet determined potential effect of IFRIC 13 on the consolidated financial statements.            
                         
IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction clarifies when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available and provides guidance on the impact of minimum funding requirements (MFR) on such assets. It also addresses when a MFR might give rise to a liability. IFRIC 14 will become mandatory for the Group’s 2008 financial statements if endorsed by the EU, with retrospective application required. The Group has not yet determined the potential effect of the interpretation on the consolidated financial statements.            

Grein