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Critical accounting policies
The group’s
principal accounting policies can be found in the Consolidated
financial statements and conform with UK Generally Accepted Accounting
Principles (UK GAAP). In accordance with the requirements of Financial
Reporting Standard No. 18, these policies and applicable estimation techniques
have been reviewed by the directors who have confirmed them to be the most
appropriate for the preparation of the 2004 financial statements.
We, in
common with virtually all other companies, need to use estimates in the
preparation of our financial statements. The most sensitive estimates affecting
our financial statements are in the areas of assessing the level of
interconnect income with and payments to other telecommunications operators,
providing for doubtful debts, establishing fixed asset lives for depreciation
purposes, assessing the stage of completion and likely outcome under long term
contracts, making appropriate long-term assumptions in calculating pension
liabilities and costs, making appropriate medium-term assumptions on asset
impairment reviews and calculating current tax liabilities on our profits.
We are
required to interconnect our networks with other telecommunications operators.
In certain instances we rely on other operators to measure the traffic flows
interconnecting with our networks. We use
estimates in these cases to determine the amount of income receivable from or
payments we need to make to these other operators. The prices at which these
services are charged are often regulated and are subject to retrospective
adjustment. We use estimates in assessing the likely effect of these
adjustments. We provide services to over 20 million individuals and businesses,
mainly on credit terms. We know that certain debts due to us will not be paid
through the default of a small number of our customers. We use estimates, based
on our historical experience, in determining the level of debts that we believe
will not be collected. These estimates include such factors as the current
state of the UK economy and particular industry issues.
The plant
and equipment used in our networks is long-lived with cables and switching
equipment operating for over ten years and underground ducts being used for
decades. The annual depreciation charge is sensitive to the estimated service
lives we allocate to each type of asset. We regularly review these asset lives
and change them when necessary to reflect current thinking on their remaining
lives in light of technological change, prospective economic utilisation and
physical condition of the assets concerned.
As part of
the property rationalisation programme we have identified a number of
properties that are surplus to requirements. Although efforts are being made to
sub-let this space it is recognised by management that this may not be possible
immediately in the current economic environment. Estimates have been made of
the cost of vacant possession and any shortfall arising from the sub lease
rental income being lower than the lease costs being borne by BT.
We enter
into long term customer contracts which can extend over a number of financial
years. During the contractual period, turnover, cost and profits may be
impacted by estimates of the ultimate profitability of each contract. If, at
any time, these estimates indicate the contract will be unprofitable, the
entire estimated loss for the contract is recognised immediately. The company
performs ongoing profitability analyses of its contracts in order to determine
whether the latest estimates require updating. Key factors reviewed include
future staff and third party costs and potential productivity efficiencies.
We have a
commitment, mainly through the BT Pension Scheme, to pay pension benefits to
approximately 362,000 people over more than 60 years. The cost of these
benefits and the present value of our pension liabilities depend on such
factors as the life expectancy of the members, the salary progression of our
current employees, the return that the pension fund assets will generate in the
time before they are used to fund the pension payments and the discount rate at
which the future pension payments are discounted. We use estimates for all
these factors in determining the pension costs and liabilities incorporated in
our financial statements.
In the 2002
financial year, we made charges for the impairment of the carrying value of
goodwill, investments and
tangible fixed assets in our balance sheet. The amount of the charges are in
most cases based on the discounted present value of the future cash flows that
we expected to be derived from these assets. We use estimates in determining
these future cash flows and the discount rate.
The actual
tax we pay on our profits is determined according to complex tax laws and
regulations. Where the effect of these laws and regulations is unclear, we use
estimates in determining the liability for the tax to be paid on our past
profits which we recognise in our financial statements.
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