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Basis of preparation of the financial statements
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The
financial statements are prepared under the historical
cost convention and in accordance with applicable accounting
standards and the provisions of the Companies Act 1985.
The group financial statements consolidate those of the
company and all of its subsidiary undertakings (with one
minor exception – see note 20). Where the financial
statements of subsidiary undertakings, associates and
joint ventures do not conform with the group’s accounting
policies, appropriate adjustments are made on consolidation
in order to present the group financial statements on
a consistent basis. The principal subsidiary undertakings’
financial years are all coterminous with those of the
company, with the exception of one newly acquired group
at 31 March 2001. References to the “company”
are to British Telecommunications public limited company,
and references to “BT” or the “group”
are to the company and its subsidiaries, or any of them
as the context may require.
The preparation of financial statements requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of income and expenditure during
the reporting period. Actual results could differ from
those estimates. Estimates are used principally when accounting
for income, provision for doubtful debts, payments to
telecommunication operators, depreciation, employee pension
schemes and taxes. Certain comparative figures have been
restated to conform with revised presentation and reclassification
of figures in the year ended 31 March 2001.
II Turnover
Group turnover, which excludes value added tax and other
sales taxes, comprises the value of services provided
and equipment sales by group undertakings, excluding those
between them.
Total turnover is group turnover together with the group’s
share of its associates’ and joint ventures’
turnover, excluding the group’s share of transactions
between the group and its principal joint venture, Concert
BV.
Turnover from calls is recognised in the group profit
and loss account at the time the call is made over the
group’s networks. Turnover from rentals is recognised
evenly over the period to which the charges relate. Turnover
from sales is recognised at the point of sale. Prepaid
call card sales are deferred until the customer uses the
stored value in the card to pay for the relevant calls.
Turnover from classified directories, mainly comprising
advertising revenue, is recognised in the group profit
and loss account upon completion of delivery. Turnover
arising from the provision of other services, including
maintenance contracts, is recognised evenly over the periods
in which the service is provided to the customer.
III Research and development
Expenditure on research and development is written off
as incurred.
IV Interest
Interest payable, including that related to financing
the construction of tangible fixed assets, is written
off as incurred. Discounts or premiums and expenses on
the issue of debt securities are amortised over the term
of the related security and included within interest payable.
Premiums payable on early redemptions of debt securities,
in lieu of future interest costs, are written off when
paid.
V Foreign currencies
On consolidation, assets and liabilities of foreign undertakings
are translated into sterling at year-end exchange rates.
The results of foreign undertakings are translated into
sterling at average rates of exchange for the year.
Exchange differences arising from the retranslation at
year-end exchange rates of the net investment in foreign
undertakings, less exchange differences on borrowings
which finance or provide a hedge against those undertakings,
are taken to reserves and are reported in the statement
of total recognised gains and losses.
All other exchange gains or losses are dealt with through
the profit and loss account.
Vl Intangibles
(a) Goodwill
Goodwill, arising from the purchase of subsidiary undertakings
and interests in associates and joint ventures, represents
the excess of the fair value of the purchase consideration
over the fair value of the net assets acquired.
For acquisitions completed on or after 1 April 1998, the
goodwill arising is capitalised as an intangible asset
or, if arising in respect of an associate or joint venture,
recorded as part of the related investment. In most cases,
the goodwill is amortised on a straight line basis from
the time of acquisition over its useful economic life.
Where special circumstances exist such that amortising
goodwill over a finite period would not give a true and
fair view, that goodwill is not amortised. The economic
life is normally presumed to be a maximum of 20 years.
For acquisitions on or before 31 March 1998, the goodwill
is written off on acquisition against group reserves.
If an undertaking is subsequently divested, the appropriate
unamortised goodwill or goodwill written off to reserves
is dealt with through the profit and loss account in the
period of disposal as part of the gain or loss on divestment.
(b) Other
intangibles
Licence fees paid to governments, which permit telecommunication
activities to be operated for defined periods, are amortised
from the later of the start of the licence period or launch
of service to the end of the licence period on a straight-line
basis.
Vll Tangible fixed assets
Tangible fixed assets are stated at historical cost less
depreciation.
(a) Cost
Cost in the case of network services includes contractors’
charges and payments on account, materials, direct labour
and directly attributable overheads.
(b) Depreciation
Depreciation is provided on tangible fixed assets on a
straight line basis from the time they are available for
use, so as to write off their costs over their estimated
useful lives taking into account any expected residual
values. No depreciation is provided on freehold land.
The lives assigned to other significant tangible fixed
assets are: |
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 |
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| Freehold
buildings – |
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40
years |
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| Leasehold
land and buildings – |
|
Unexpired
portion of lease or 40 years, whichever is the shorter
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| Transmission
equipment: |
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| duct
– |
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25
years |
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| cable
– |
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3
to 25 years |
|
| radio
and repeater equipment – |
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2
to 25 years |
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| Exchange
equipment – |
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2
to 13 years |
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| Computers
and office equipment – |
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2
to 6 years |
|
| Payphones,
other network equipment, motor vehicles and cableships
– |
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2
to 20 years |
|
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VIII
Fixed asset investments
Investments in subsidiary undertakings, associates and
joint ventures are stated in the balance sheet of the
company at cost less amounts written off. Amounts denominated
in foreign currency are translated into sterling at year-end
exchange rates.
Investments in associates and joint ventures are stated
in the group balance sheet at the group’s share
of their net assets, together with any attributable unamortised
goodwill on acquisitions arising on or after 1 April 1998.
The group’s share of profits less losses of associates
and joint ventures is included in the group profit and
loss account.
Investments in other participating interests and other
investments are stated at cost less amounts written off.
IX Asset impairment
Intangible and tangible fixed assets are tested for impairment
when an event that might affect asset values has occurred.
An impairment loss is recognised to the extent that the
carrying amount cannot be recovered either by selling
the asset or by the discounted future earnings from operating
the assets.
X Stocks
Stocks mainly comprise items of equipment, held for sale
or rental, consumable items and work in progress on long-term
contracts.
Equipment held and consumable items are stated at the
lower of cost and estimated net realisable value, after
provisions for obsolescence.
Work in progress on long-term contracts is stated at cost,
after deducting payments on account, less provisions for
any foreseeable losses.
XI Debtors
Debtors are stated in the balance sheet at estimated net
realisable value. Net realisable value is the invoiced
amount less provisions for bad and doubtful debtors. Provisions
are made specifically against debtors where there is evidence
of a dispute or an inability to pay. An additional provision
is made based on an analysis of balances by age, previous
losses experienced and general economic conditions.
XII Redundancy costs
Redundancy costs arising from periodic reviews of staff
levels are charged against profit in the year in which
employees agree to leave the group.
If the most recent actuarial valuation of the group’s
pension scheme shows a deficit, which exceeds the amount
of provision for pension liabilities in the balance sheet,
the estimated cost of providing incremental pension benefits
in respect of employees leaving the group is charged against
profit in the year in which the employees agree to leave
the group, within redundancy charges.
XIII Pension scheme
The group operates a funded defined benefit pension scheme,
which is independent of the group’s finances, for
the substantial majority of its employees. Actuarial valuations
of the scheme are carried out as determined by the trustees
at intervals of not more than three years, the rates of
contribution payable and the pension cost being determined
on the advice of the actuaries, having regard to the results
of these valuations. In any intervening years, the actuaries
review the continuing appropriateness of the contribution
rates.
The cost of providing pensions is charged against profits
over employees’ working lives with the group using
the projected unit method. Variations from this regular
cost are allocated on a straight-line basis over the average
remaining service lives of current employees to the extent
that these variations do not relate to the estimated cost
of providing incremental pension benefits in the circumstances
described in XII above.
Interest is accounted for on the provision in the balance
sheet which results from differences between amounts recognised
as pension costs and amounts funded. The regular pension
cost, variations from the regular pension cost, described
above, and interest are all charged within staff costs.
XIV Taxation
The charge for taxation is based on the profit for the
year and takes into account deferred taxation. Provision
is made for deferred taxation only to the extent that
timing differences are expected to reverse in the foreseeable
future, with the exception of timing differences arising
on pension costs where full provision is made irrespective
of whether they are expected to reverse in the foreseeable
future.
XV Financial instruments
(a)
Debt instruments
Debt instruments are stated at the amount of net proceeds
adjusted to amortise any discount evenly over the term
of the debt, and further adjusted for the effect of currency
swaps acting as hedges.
(b) Derivative
financial instruments
The group uses derivative financial instruments to reduce
exposure to foreign exchange risks and interest rate movements.
The group does not hold or issue derivative financial
instruments for financial trading purposes.
Criteria to qualify for hedge accounting
The group considers its derivative financial instruments
to be hedges when certain criteria are met. For foreign
currency derivatives, the instrument must be related to
actual foreign currency assets or liabilities or a probable
commitment and whose characteristics have been identified.
It must involve the same currency or similar currencies
as the hedged item and must also reduce the risk of foreign
currency exchange movements on the group’s operations.
For interest rate derivatives, the instrument must be
related to assets or liabilities or a probable commitment,
such as a future bond issue, and must also change the
interest rate or the nature of the interest rate by converting
a fixed rate to a variable rate or vice versa.
Accounting for derivative financial
instruments
Principal amounts underlying currency swaps are revalued
at exchange rates ruling at the date of the group balance
sheet and, to the extent that they are not related to
debt instruments, are included in debtors or creditors.
Interest differentials, under interest rate swap agreements
used to vary the amounts and periods for which interest
rates on borrowings are fixed, are recognised by adjustment
of interest payable.
The forward exchange contracts used to change the currency
mix of net debt are revalued to balance sheet rates with
net unrealised gains and losses being shown as part of
debtors, creditors, or as part of net debt. The difference
between spot and forward rate for these contracts is recognised
as part of net interest payable over the term of the contract.
The forward exchange contracts hedging transaction exposures
are revalued at the prevailing forward rate on the balance
sheet date with net unrealised gains and losses being
shown as debtors and creditors.
Instruments that form hedges against future fixed-rate
bond issues are marked to market. Gains or losses are
deferred until the bond is issued when they are recognised
evenly over the term of the bond. |
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