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The group’s consolidated financial
statements are prepared in accordance with accounting principles
generally accepted in the UK (UK GAAP), which differ in certain
respects from those applicable in the US (US GAAP).
I 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 (SFAS) 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) Accounting for redundancies
Under UK GAAP, the cost of providing incremental pension benefits
in respect of workforce reductions is taken into account when determining
current and future pension costs, unless the most recent actuarial
valuation, combined with the provision for pension costs in the
group balance sheet, under UK actuarial conventions shows a deficit.
In this case, the cost of providing incremental pension benefits
is included in redundancy charges in the year in which the employees
agree to leave the group.
Under US GAAP, the associated costs of providing incremental pension
benefits are charged against profits in the period in which the
termination terms are agreed with the employees.
(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.
This includes capitalisation of interest incurred on funding the
3G licences for the period up to the launch of the related services.
The amount of interest capitalised is determined by reference to
the average interest rates on outstanding borrowings. At 31 March
2001 under US GAAP, gross capitalised interest of £692 million (2000
– £349 million) with regard to the company and its subsidiary
companies was subject to depreciation generally over periods of
three to 25 years.
(d) Goodwill
Under UK GAAP, in respect of acquisitions completed prior to 1 April
1998, the group wrote off goodwill arising from the purchase of
subsidiary undertakings, associates and joint ventures 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. 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. Gross goodwill
under US GAAP at 31 March 2001 of £10,309 million (2000 –
£7,978 million) was subject to amortisation over periods of three
to 20 years. The value of goodwill is reviewed annually and the
net asset value is written down if a permanent diminution in value
has occurred. When impairment indicators exist, goodwill impairment
is measured by discounting future projected cashflows or using quoted
market prices if available.
(e) Mobile cellular telephone licences, software
and other intangible assets
Certain intangible fixed assets recognised under US GAAP purchase
accounting requirements are subsumed within goodwill under UK GAAP.
Under US GAAP these separately identified intangible assets are
valued and amortised over their useful lives.
(f) Financial instruments
Under UK GAAP, investments are held on the balance sheet at historical
cost, and own shares held in trust for share schemes are recorded
in fixed asset investments. Gains and losses on instruments used
for hedges are not recognised until the exposure being hedged is
recognised. Under US GAAP, trading securities and available-for-sale
securities are carried at market value with appropriate valuation
adjustments recorded in profit and loss and shareholders’
equity, respectively. Certain derivative financial instruments which
qualify as hedge accounting under UK GAAP do not qualify for hedge
accounting under US GAAP.
These financial instruments, under US GAAP, are carried at market
value with valuation adjustments recorded in profit and loss. Own
shares held in trust are treated as a reduction to shareholders’
equity until they are reissued to employees. The reassessment and
purchase of derivatives in the year ended 31 March 2001 gave rise
to an adjustment reducing net income by £93 million (2000 –
£95 million). The net unrealised holding gain on available-for-sale
securities for the year ended 31 March 2001 was £8 million (2000
– £311 million, 1999 – £76 million).
(g) Deferred gain
Under UK GAAP, assets contributed to a joint venture by the group’s
partners are measured at their net replacement cost. Any difference
between the group’s share of the joint venture’s resulting
net assets and the net book value of assets contributed by the group
to the joint venture, including certain accrued start up costs,
is immediately reflected by adjusting the group’s investment
in the joint venture and recording a deferred difference in shareholders’
equity. Under US GAAP, the assets contributed by all joint venture
partners are carried at their historical net book value and any
difference between the group’s share of the joint venture’s
resulting net assets and the net book value of assets contributed
by the group to the joint venture is amortised over the life of
the items giving rise to the difference.
(h) Employee share plans
Certain share options have been granted under BT save-as-you-earn
plans at a 20% discount. Under UK GAAP, the share issues are recorded
at their discounted price when the options are exercised. Under
US GAAP, a plan is considered compensatory when the discount to
market price is in excess of 15%. Compensation cost is recognised
for the difference between the exercise price of the share options
granted and the quoted market price of the shares at the date of
grant or measurement date and accrued over the vesting period of
the options.
(i) Directories in progress
Under UK GAAP, the cost of classified advertising directories in
progress deferred in stock represents direct fixed and variable
costs as well as directly attributable overhead costs. Under US
GAAP, the deferred costs associated with directories in progress
comprise only the incremental direct costs associated with selling
and creating the directories. Directories in progress acquired in
a business purchase are valued at replacement value under UK GAAP
and at retail value under US GAAP. Under UK GAAP, this difference
is included in goodwill.
(j) Revenue recognition
During the year ended 31 March 2001 the group adopted Securities
and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue
Recognition in Financial Statements”. The adoption did not
have a material impact on the results of operations or financial
condition.
(k) Investments in associates
Under UK GAAP, the group records the share of operating profit and
loss of ventures based upon the total interest in the venture based
upon the consolidation structure. The group records the equity in
the operations of the venture on the basis of its consolidated results
excluding the holdings of any of the group’s other ventures
for the purpose of determining the economic interest. The share
of the operations of the ventures is reduced to the economic interest
through an increase to minority interests at the group level. Under
US GAAP, the share of the operating results of the venture is recorded
at the amount of the group’s economic interest.
(l) 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 SFAS No. 109.
At 31 March 2001, the adjustment of £1,296 million (2000 –
£1,377 million) reconciling ordinary shareholders’ equity
under UK GAAP to the amount under US GAAP included the tax effect
of other US GAAP adjustments. This comprised an adjustment increasing
non-current assets by £26 million (2000 – £25 million increase);
an adjustment increasing current assets by £92 million (2000 –
£63 million increase); an adjustment decreasing minority interests
by £14 million (2000 – £35 million decrease) and an adjustment
increasing long-term liabilities by £1,428 million (2000 –
£1,500 million increase).
(m) Dividends
Under UK GAAP, dividends are recorded in the year in respect of
which they are declared (in the case of interim or any special 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.
II 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 |
|
|
 |
| Net income (loss) applicable to shareholders under UK GAAP |
|
(1,810 |
) |
2,055 |
|
2,983 |
|
| Adjustment for: |
|
|
|
|
|
|
|
| Pension costs |
|
(42 |
) |
(209 |
) |
(104 |
) |
| Redundancy charges |
|
(453 |
) |
(300 |
) |
(284 |
) |
| Capitalisation of interest,
net of related depreciation (a) |
|
348 |
|
(14 |
) |
(19 |
) |
| Goodwill amortisation
(a) |
|
(55 |
) |
(64 |
) |
85 |
|
Mobile licences, software and other intangible asset
capitalisation and amortisation, net
(a) |
|
(32 |
) |
(33 |
) |
(226 |
) |
| Financial instruments |
|
(133 |
) |
(129 |
) |
(6 |
) |
| Deferred gain |
|
(71 |
) |
(19 |
) |
– |
|
| Employee share plans |
|
(38 |
) |
– |
|
– |
|
| Deferred taxation
(a) |
|
11 |
|
106 |
|
220 |
|
| Directories in progress |
|
(82 |
) |
– |
|
– |
|
| Other items (a) |
|
– |
|
– |
|
(60 |
) |
|
| Net income (loss) as adjusted for US GAAP |
|
(2,357 |
) |
1,393 |
|
2,589 |
|
|
| Basic earnings (loss) per American Depositary
Share as adjusted for US GAAP (b) |
|
£(3.61 |
) |
£2.15 |
|
£4.02 |
|
| Diluted earnings (loss) per American Depositary
Share as adjusted for US GAAP (b) |
|
£(3.61 |
) |
£2.10 |
|
£3.93 |
|
|
|
|
|
|
| (a) |
|
The disposal of the group’s interest
in MCI shares during the year ended 31 March 1999 gave rise
to adjustments; increasing net income by £163 million relating
to goodwill and £95 million relating to deferred taxation
and decreasing net income by £197 million relating to software
and other intangible assets, £60 million relating to foreign
exchange translation differences and £5 million relating to
the capitalisation of interest. |
| (b) |
|
Each American Depositary Share is equivalent
to 10 ordinary shares of 25p each. |
|
|
|
|
Shareholders' Equity
|
|
| Shareholders’ equity under UK GAAP |
|
14,069 |
|
15,795 |
|
| Adjustment for: |
|
|
|
|
|
| Pension costs |
|
(2,755 |
) |
(2,202 |
) |
| Redundancy costs |
|
(25 |
) |
(83 |
) |
| Capitalisation of interest, net of related depreciation |
|
620 |
|
261 |
|
| Goodwill, net of accumulated amortisation |
|
122 |
|
175 |
|
Mobile licences, software and other intangible
asset capitalisation
and amortisation |
|
521 |
|
533 |
|
| Financial instruments |
|
(620 |
) |
(99 |
) |
| Deferred gain |
|
(323 |
) |
(230 |
) |
| Deferred taxation |
|
(1,296 |
) |
(1,377 |
) |
| Directories in progress |
|
(82 |
) |
– |
|
| Dividend declared after the financial year end |
|
– |
|
861 |
|
|
| Shareholders’ equity as adjusted for US GAAP |
|
10,231 |
|
13,634 |
|
|
|
|
III Minority interests
Under US GAAP, the loss to minority interests would have been reduced
by £122 million (2000 – loss increased by £10 million, 1999
– income reduced by £12 million) after adjusting for goodwill
amortisation and accounting for associates and joint ventures. Net
assets attributable to minority interests would have been £32 million
higher (2000 – £82 million higher) after adjusting for financial
instruments.
IV Accounting for share options
Under UK GAAP, the company does not recognise compensation expense
for the fair value, at the date of grant, of share options granted
under the employee share option schemes. Under US GAAP, the company
adopted the disclosure-only option in SFAS No. 123 “Accounting
for Stock-Based Compensation”. Accordingly, the company accounts
for share options in accordance with APB Opinion No. 25 “Accounting
for Stock Issued to Employees”, under which no compensation
expense is recognised. Had the group expensed compensation cost
for options granted in accordance with SFAS No. 123, the group’s
pro forma net income (loss), basic earnings (loss) per share and
diluted earnings (loss) per share under US GAAP would have been
£(2,419) million loss
(2000 – £1,347 million profit, 1999 – £2,560 million
profit), (37.1)p loss (2000 – 20.8p, 1999 – 39.7p) and
(37.1)p loss (2000 – 20.3p, 1999 – 38.8p), respectively.
The SFAS No. 123 method of accounting does not apply to share options
granted before 1 January 1995, and accordingly, the resulting pro
forma compensation costs may not be representative of that to be
expected in future years. See note 33 for the SFAS No. 123 disclosures
of the fair value of options granted under employee schemes at date
of grant.
V Consolidated statements of cash flows
Under UK GAAP, the Consolidated Statements of Cash Flows are presented
in accordance with UK Financial Reporting Standard No. 1 (FRS 1).
The statements prepared under FRS 1 present substantially the same
information as that required under SFAS No. 95.
Under SFAS No. 95 cash and cash equivalents include cash and short-term
investments with original maturities of three months or less. Under
FRS 1 cash comprises cash in hand and at bank and overnight deposits,
net of bank overdrafts.
Under FRS 1, cash flows are presented for operating activities;
returns on investments and servicing of finance; taxation; capital
expenditure and financial investments; acquisitions and disposals;
dividends paid to the company’s shareholders; management of
liquid resources and financing. SFAS No. 95 requires a classification
of cash flows as resulting from operating, investing and financing
activities.
Cash flows under FRS 1 in respect of interest received, interest
paid (net of that capitalised under US GAAP) and taxation would
be included within operating activities under SFAS No. 95. Cash
flows from purchases, sales and maturities of trading securities,
while not separately identified under UK GAAP, would be included
within operating activities under US GAAP. Capitalised interest,
while not recognised under UK GAAP, would be included in investing
activities under US GAAP. Dividends paid would be included within
financing activities under US GAAP.
The following statements summarise the statements of cash flows
as if they had been presented in accordance with US GAAP, and include
the adjustments which reconcile cash and cash equivalents under
US GAAP to cash at bank and in hand reported under UK GAAP.
|
|
|
|
| Net cash provided by operating activities |
|
5,515 |
|
4,003 |
|
3,876 |
|
| Net cash used in investing activities |
|
(22,785 |
) |
(9,104 |
) |
(950 |
) |
| Net cash provided by (used in) financing activities |
|
18,311 |
|
4,697 |
|
(1,665 |
) |
|
| Net increase (decrease) in cash and cash equivalents |
|
1,041 |
|
(404 |
) |
1,261 |
|
| Effect of exchange rate changes on cash |
|
(15 |
) |
(1 |
) |
33 |
|
| Cash and cash equivalents under US GAAP at beginning of year |
|
1,255 |
|
1,660 |
|
366 |
|
|
| Cash and cash equivalents under US GAAP at end of year |
|
2,281 |
|
1,255 |
|
1,660 |
|
Short-term investments with original maturities
of less than
three months |
|
(1,869 |
) |
(1,002 |
) |
(1,558 |
) |
|
| Cash at bank and in hand under UK GAAP at end of year |
|
412 |
|
253 |
|
102 |
|
|
|
|
VI Current asset investments
Under US GAAP, investments in debt securities would be classified
as either trading, available-for-sale or held-to-maturity. Trading
investments would be stated at fair values and the unrealised gains
and losses would be included in income. Securities classified as
available-for-sale would be stated at fair values, with unrealised
gains and losses, net of deferred taxes, reported in shareholders’
equity. Debt securities classified as held-to-maturity would be
stated at amortised cost. The following analyses do not include
securities with original maturities of less than three months.
At 31 March 2001, the group held trading investments (as defined
by US GAAP) at a carrying amount of £390 million (2000 – £866
million) with fair values totalling £394 million (2000 – £873
million). Held-to-maturity securities at 31 March 2000 and 2001
consisted of the following:
|
|
|
|
| UK Government securities and other UK
listed investments |
|
8 |
|
8 |
|
| Commercial paper, medium-term notes and
other investments |
|
30 |
|
30 |
|
|
| Total at 31 March 2001 |
|
38 |
|
38 |
|
|
| UK Government securities and other UK
listed investments |
|
15 |
|
15 |
|
| Commercial paper, medium-term notes and
other investments |
|
168 |
|
168 |
|
|
| Total at 31 March 2000 |
|
183 |
|
183 |
|
|
|
|
| The contractual maturities
of the held-to-maturity debt securities at 31 March 2001 were
as follows: |
|
| Maturing on or before 31 March 2002 |
|
38 |
|
38 |
|
| Maturing after 31 March 2002 |
|
– |
|
– |
|
|
| Total at 31 March 2001 |
|
38 |
|
38 |
|
|
|
|
VII Pension costs
The following position for the main pension scheme is computed in
accordance with US GAAP pension accounting rules under SFAS No.
87 and SFAS No. 88, the effect of which is shown in the above reconciliation
statements.
The pension cost determined under SFAS No. 87 was calculated by
reference to an expected long-term rate of return on scheme assets
of 6.25% (2000 – 6.5%, 1999 – 7.7%). The components
of the pension cost for the main pension scheme comprised:
|
|
|
|
| Service cost |
|
580 |
|
498 |
|
387 |
|
| Interest cost |
|
1,673 |
|
1,459 |
|
1,653 |
|
| Expected return on scheme assets |
|
(1,850 |
) |
(1,600 |
) |
(1,712 |
) |
| Amortisation of prior service costs |
|
24 |
|
24 |
|
24 |
|
| Amortisation of net obligation at date of limited application
of SFAS No. 87 |
|
52 |
|
52 |
|
52 |
|
| Recognised gains |
|
(133 |
) |
(65 |
) |
(137 |
) |
| Additional cost of termination benefits |
|
349 |
|
263 |
|
279 |
|
|
| Pension cost for the year under US GAAP |
|
695 |
|
631 |
|
546 |
|
|
|
|
|
The information required to be disclosed in accordance with SFAS
No. 132 concerning the funded status of the main scheme at 31 March
2000 and 31 March 2001, based on the valuations at 1 January 2000
and 1 January 2001, respectively, is given below.
|
|
|
|
| Changes in benefit obligation |
|
|
|
|
|
| Benefit obligation at the beginning of the year |
|
31,024 |
|
27,158 |
|
| Service cost |
|
580 |
|
498 |
|
| Interest cost |
|
1,673 |
|
1,459 |
|
| Employees’ contributions |
|
183 |
|
171 |
|
| Additional cost of termination benefits |
|
349 |
|
263 |
|
| Actuarial movement (a) |
|
(1,342 |
) |
2,992 |
|
| Other changes |
|
31 |
|
21 |
|
| Benefits paid or payable |
|
(1,314 |
) |
(1,538 |
) |
|
| Benefit obligation at the end of the year |
|
31,184 |
|
31,024 |
|
|
|
|
|
| Changes in scheme assets |
|
|
|
|
|
| Fair value of scheme assets at the beginning of the year |
|
29,876 |
|
25,120 |
|
| Actual return on scheme assets |
|
(350 |
) |
5,619 |
|
| Employers’ contributions (b) |
|
605 |
|
483 |
|
| Employees’ contributions |
|
183 |
|
171 |
|
| Other changes |
|
31 |
|
21 |
|
| Benefits paid or payable |
|
(1,314 |
) |
(1,538 |
) |
|
| Fair value of scheme assets at the end of the year |
|
29,031 |
|
29,876 |
|
|
|
|
|
| Funded status under US GAAP |
|
|
|
|
|
| Projected benefit obligation in excess of scheme assets |
|
(2,153 |
) |
(1,148 |
) |
Unrecognised net obligation at date of
initial application of SFAS
No. 87
(c) |
|
106 |
|
158 |
|
| Unrecognised prior service costs
(d) |
|
151 |
|
175 |
|
| Other unrecognised net actuarial gains |
|
(1,181 |
) |
(2,001 |
) |
|
| Accrued pension costs under US GAAP |
|
(3,077 |
) |
(2,816 |
) |
|
|
|
|
|
|
| (a) |
|
In the year ended 31 March 2000, the actuarial
movement is significant mainly due to revised mortality assumptions
being employed in the year. |
| (b) |
|
The employers’ contributions for
the year ended 31 March 2001 includes special contributions of £200 million paid on 21 December 2000 and £100 million
paid on 30 March 2001 (2000 – £230 million, paid 31
March 2000). |
| (c) |
|
The unrecognised net obligation at the
date of initial application is being amortised over 15 years
from 1 April 1988. |
| (d) |
|
Unrecognised prior service costs on scheme
benefit improvements, are being amortised over periods of
15 or 16 years commencing in the years of the introduction
of the improvements. |
|
|
|
|
The benefit obligation for the main
pension scheme was determined using the following assumptions at
1 January 2000 and 1 January 2001:
|
|
|
|
| Discount rate |
|
5.7 |
|
5.5 |
|
| Rate of future pay increases |
|
4.8 |
|
4.8 |
|
|
|
|
|
The determination also took into
account requirements in the scheme as to future pension increases.
|
|
|
|
|
|
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|
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