Basis of Preparation (cont’d)

B Communications Ltd.

Notes to the Consolidated Financial Statements

(All amounts are in millions except where otherwise stated)

Note 2 – Basis of Preparation (cont’d)

B. Definitions (cont’d)

(6) Bezeq Group: Bezeq The Israel Telecommunication Corporation Limited and its subsidiaries, as listed in Note 13 – Investees.

(7) Pelephone: Pelephone Communications Ltd.

(8) Subsidiaries: Companies including a partnership, whose financial statements are fully consolidated, directly or indirectly, with the financial statements of the Company.

(9) Jointly controlled companies: Companies owned by various entities that have a contractual agreement for common control, and whose financial statements are consolidated with those of the Company using the proportionate consolidation method.

(10) Associates: Companies, including a partnership, in which the Group’s investment is included, directly or indirectly, in the consolidated financial statements on an equity basis.

(11) Investees: Subsidiaries, Jointly-controlled companies or associates.

(12) Related party - As defined in IAS 24 (2009), Related Party Disclosures.

(13) Israeli CPI - The consumer price index as published by the Israeli Central Bureau of Statistics.

C. Functional currency and presentation currency

The consolidated financial statements are presented in NIS, which is the Group’s functional currency, and have been rounded to the nearest million. The NIS is the currency that represents the principal economic environment in which the Group operates.

D. Convenience translation into U.S. dollars (“dollars” or “$”)

For the convenience of the reader, the reported NIS figures as at December 31, 2011, have been presented in dollars, translated at the representative rate of exchange as at December 31, 2011 (NIS 3.821 = US$ 1.00). The dollar amounts presented in these financial statements are merely supplementary information and should not be construed as complying with IFRSs translation method or as representing amounts that are receivable or payable in dollars or convertible into dollars, unless otherwise indicated.

F - 14

B Communications Ltd.

Notes to the Consolidated Financial Statements

(All amounts are in millions except where otherwise stated)

Note 2 – Basis of Preparation (cont’d)

E. Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for the following items:

* Financial instruments, including financial derivatives, at fair value through profit or loss.

* Financial assets classified as available-for-sale at fair value.

* Inventory that is measured at the lower of cost or net realizable value.

* Equity accounted investments.

* Deferred tax assets and liabilities.

* Provisions.

* Liabilities for employee benefits.

* Liabilities for cash-settled share-based payment arrangements.

The methods used to measure fair value are specified in Note 4.

F. Operating cycle

The Group’s operating cycle is up to one year. As a result, the current assets and current liabilities include items the realization of which is intended and anticipated to take place within one year from the date of the financial statements.

G. Classification of expenses recognized in the statement of income

The classification of costs and expenses recognized in the statement of income is based on the nature of the expenses. Classification is compatible with the understanding of the Group’s businesses, which address a wide range of services using common infrastructure. All of the costs and expenses are used to provide services.

H. Use of estimates and judgment

The preparation of financial statements in conformity with IFRS requires management to make judgments and use estimates and assumptions that affect application of accounting policies and the reported amounts of assets, liabilities, income and expenses. It is clarified that actual results may differ from these estimates.

F - 15

B Communications Ltd.

Notes to the Consolidated Financial Statements

(All amounts are in millions except where otherwise stated)

Note 2 – Basis of Preparation (cont’d)

H. Use of estimates and judgment (cont’d)

The preparation of accounting estimates used in the preparation of the Group’s financial statements requires management to make assumptions regarding circumstances and events that involve considerable uncertainty. Management of the Company prepares the estimates on the basis of past experience. In exercising its judgment when making the estimates, management relies on past experience, various facts, external circumstances, and reasonable assumptions according to the pertinent circumstances of each estimate.

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

Information about critical estimates that were prepared while implementing accounting policies and which have a potentially significant effect on the financial statements is included in the following notes:

● Note 18- Provision for doubtful debts.

● Note 20- Use of losses for tax purposes and deferred tax assets and liabilities recognized.

● Note 10 & 11- Estimated useful life and residual value of items of property, plant and equipment and intangible assets.

● Note 11- Measurement of recoverable amounts of cash-generating units.

● Note 13- Investment in investees at fair value.

● Notes 16 & 21- Provisions and contingent liabilities.

● Note 19- Measurement of employee benefit liabilities.

● Note 30- Measurement of share-based payments.

I. Changes in accounting policies – Initial implementation of new accounting standards - Related party disclosures

As from January 1, 2011 the Group applies IAS 24 (2009) – Related Party Disclosures (“the Standard”). The Standard includes changes in the definition of a related party. The Standard was applied retrospectively.

For the purpose of applying the Standard for the first time, the Group mapped its related parties. According to the new definition and following the mapping, new related parties were identified. The Group had no transactions with these new related parties in the reporting period and in corresponding periods.

J. Certain insignificant comparative amounts were reclassified to the relevant line items in the financial statements for the current year.

B Communications Ltd.

Notes to the Consolidated Financial Statements

(All amounts are in millions except where otherwise stated)