United States Generally Accepted Accounting Principles reconciliations

The group’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the UK (UK GAAP), which differ in certain significant respects from those applicable in the US (US GAAP).

Differences between United Kingdom and United States generally accepted accounting principles
The following are the main differences between UK and US GAAP which are relevant to the group’s financial statements.

(a) Pension costs
Under UK GAAP, pension costs are accounted for in accordance with UK Statement of Standard Accounting Practice No. 24, costs being charged against profits over employees’ working lives. Under US GAAP, pension costs are determined in accordance with the requirements of US Statements of Financial Accounting Standards Nos. 87 and 88. Differences between the UK and US GAAP figures arise from the requirement to use different actuarial methods and assumptions and a different method of amortising surpluses or deficits.

(b) Early release schemes
Under UK GAAP, the group generally charges to profit and loss direct severance costs, primarily severance payments and payments in lieu of notice, in the period in which employees leave the group. The cost of providing incremental pension benefits in respect of workforce reductions are taken into account in determining current and future pension costs, unless the most recent actuarial valuation under UK actuarial conventions shows a deficit. In this case, the costs of providing incremental pension benefits are included in early release scheme expenses in the year in which the employees leave the group.

Under US GAAP, if employees are encouraged to leave voluntarily by the use of special termination benefits, then the termination benefits, primarily severance payments, payments in lieu of notice and the associated cost of providing incremental pension benefits, are charged against profits in the period in which the termination terms are agreed with the employees. If staff terminations are likely to be enforced, then the termination benefits are charged against profits at the time when the group is committed to the staff terminations and the associated costs can be reasonably estimated.

(c) Capitalisation of interest
Under UK GAAP, the group does not capitalise interest in its financial statements. To comply with US GAAP, the estimated amount of interest incurred whilst constructing major capital projects is included in fixed assets, and depreciated over the lives of the related assets. The amount of interest capitalised is determined by reference to the average interest rates on outstanding borrowings.

(d) Goodwill
Under UK GAAP, the group writes off goodwill arising from the purchase of subsidiary and associated undertakings on acquisition against retained earnings. The goodwill is reflected in the net income of the period of disposal, as part of the calculation of the gain or loss on divestment, or when recognising a permanent diminution in value. Under US GAAP, such goodwill is held as an intangible asset in the balance sheet and amortised over its useful life and only the unamortised portion is included in the gain or loss recognised at the time of divestment.

(e) Mobile cellular telephone and broadcasting licences
Under UK GAAP, the group adopted the policy of stating mobile cellular telephone and broadcasting licences, held in a former associated undertaking, at historical cost. No amortisation was provided on these assets. To comply with US GAAP, such intangible assets were amortised over a period of 40 years.

(f) Software capitalisation
Under UK GAAP software development expenditure is written off as incurred. Under US GAAP, development expenditure, subsequent to proving technical feasibility, and purchases are capitalised and amortised over their useful lives.

(g) Acquisition provisions
Under UK GAAP, in assessing the fair value of the net assets of subsidiary and associated undertakings, provisions were made on acquisition for commitments and developments in progress. To comply with US GAAP, the provisions established on acquisition were eliminated, the relevant costs being charged to income in the year in which they arose.

(h) Deferred taxation
Under UK GAAP, provision for deferred taxation is generally only made for timing differences which are expected to reverse. Under US GAAP, deferred taxation is provided on a full liability basis on all temporary differences, as defined in US Statement of Financial Accounting Standards No. 109.

(i) Dividends
Under UK GAAP, dividends are recorded in the year in respect of which they are declared (in the case of interim dividends) or proposed by the board of directors to the shareholders (in the case of final dividends). Under US GAAP, dividends are recorded in the period in which dividends are declared.


Net income and shareholders’ equity reconciliation statements
The following statements summarise the material estimated adjustments, gross of their tax effect, which reconcile net income and shareholders’ equity from that reported under UK GAAP to that which would have been reported had US GAAP been applied.

Net income YEAR ENDED 31 MARCH

1994
£m
1995
£m
1996
£m
1996
$m
(a)

Net income applicable to shareholders under UK GAAP 1,767 1,731 1,986 3,039
Adjustments for:
Pension costs (232) (392) 18 28
Early release schemes (119) 125 (152) (233)
Capitalisation of interest, net of related depreciation (16) (18) (22) (34)
Goodwill (10) 85 (b) (74) (113)
Mobile cellular telephone and broadcasting licences amortisation (28) 130 (b) - -
Software and other intangible asset capitalisation and amortisation, net (1) 21 38 58
Acquisition provisions (19) - - -
Deferred taxation 132 56 14 21
Other items 2 6 (2) (3)


Net income as adjusted for US GAAP 1,476 1,744 1,806 2,763


Earnings per American Depositary Share as adjusted for US GAAP (c) £2.38 £2.80 £2.87 $4.40



Shareholders’ equity AT 31 MARCH
1995
£m
1996
£m
1996
$m
(a)

Shareholders’ equity under UK GAAP 11,997 12,678 19,397
Adjustments for:
Pension costs (1,158) (1,140) (1,744)
Early release schemes (16) (168) (257)
Capitalisation of interest, net of related depreciation 387 366 560
Goodwill, net of accumulated amortisation 1,992 2,174 3,326
Software and other intangible asset capitalisation and amortisation 144 196 300
Deferred taxation (1,833) (1,802) (2,757)
Dividend declared after the financial year end 669 715 1,094
Other items 3 (9) (14)


Shareholders’ equity as adjusted for US GAAP 12,185 13,010 19,905


(a) Translated at US$1.53 to £1.00, the rate ruling on 31 March 1996.

(b) The disposal of the group’s interest in AT&T Corporation shares which had been exchanged for shares in McCaw Cellular Communications, Inc, during the year ended 31 March 1995 gave rise to adjustments, increasing net income, of £125m to goodwill and £137m to mobile cellular telephone and broadcasting licence amortisation.

(c) Each American Depositary Share is equivalent to 10 ordinary shares of 25p each.

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