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(a)
Reorganisation and demerger
On
19 November 2001, the legal separation of the mmO2 business
from the rest of the former British Telecommunications
plc group was completed and BT Group plc (BT Group)
became the ultimate parent company of British Telecommunications
plc (BT). The legal structure of the transaction was
such that BT transferred
the mmO2 business to mmO2 plc and BT Group Investments
Limited (BTGI) became the immediate parent
company of BT on 16 November 2001. On 19 November 2001,
mmO2 plc transferred the shares in BTGI to
BT Group, as consideration for the issue to former BT
shareholders of one ordinary share of 115 pence in the
company, credited as fully paid, for each ordinary share
in BT held on 16 November 2001.
On
21 November 2001, following the approval of the Court,
the nominal value of BT Group shares was reduced from
115 pence per ordinary share to 5 pence per ordinary
share by way of a reduction of capital under section
135 of the Companies Act 1985. The surplus of £9,537
million arising from this capital reduction has been
credited to the group profit and loss reserve.
The
transfer of BTGI to the company has been accounted for
as a group reconstruction in accordance with the principles
of merger accounting set out in Financial Reporting
Standard 6 (FRS 6) and Schedule 4A to the Companies
Act 1985. The consolidated financial statements are
therefore presented as if the company had been the parent
company of the group throughout the year ended 31 March
2001 and up to the date of the demerger.
The results of mmO2 have been included in discontinued
activities in all three years.
The
transfer of BT to BTGI on 16 November 2001 was a group
reorganisation effected for non-equity consideration.
This transaction has been accounted for in these financial
statements using the principles of merger accounting
as if BT had been owned and controlled by BTGI throughout
the year ended 31 March 2001 and up to 16 November 2001.
This is not in accordance with the Companies Act 1985
since the group reorganisation does not meet all the
conditions for merger accounting. If acquisition accounting
had been applied to account for the reorganisation whereby
BTGI became the parent company of BT, this would have
resulted in all the separable assets and liabilities
of the BT Group as at 16 November 2001 being recorded
at their fair values, substantial goodwill and goodwill
amortisation charges arising and only the post demerger
results being reflected within the BT Group consolidated
financial statements. The directors consider that to
have applied acquisition accounting in preparing these
financial statements would have failed to give a true
and fair view of the group’s state of affairs and
results. This is because, in substance, BT Group is
the successor to BT and its shareholders have had a
continuing interest in the BT business both before and
after the demerger. The directors consider that it is
not practicable to quantify the effects of this departure
from the requirements of the Companies Act 1985.
In
the company’s financial statements, its investment
in BTGI is stated at the nominal value of shares issued.
In accordance with sections 131 and 133 of the Companies
Act 1985, no premium was recorded on the ordinary shares
issued (see note 37).
On consolidation, the difference between the nominal
value of the shares issued and the aggregate share capital,
share premium and capital redemption reserve of BT at
the date of the demerger (the merger difference), has
been debited to the other reserves (see
note 28).
(b)
Changes in accounting policy and presentation
During
the year ended 31 March 2003, the group has made a number
of changes in the presentation of its financial statements.
Comparative figures have been restated accordingly.
These are explained in the notes where material. There
have been no changes to accounting policies in the 2003
financial year.
(c)
Discontinued activities
On
1 June 2001, BT disposed of its interests in Japan Telecom
and J-Phone Communications and, on 29 June 2001, its
interest in Airtel. On 22 June 2001, BT sold Yell, its
classified advertising directory businesses in the UK
and the USA. These activities, together with mmO2, are
shown as discontinued operations in the profit and loss
accounts. The eliminations are intra-group eliminations.
The interest charge allocated to mmO2 for all periods
presented
up to the date of the demerger has been calculated assuming
that mmO2’s net debt at the date of the
demerger of £500 million, had been in existence
for the whole of the period, and had been bearing an
interest charge of 8% per annum.
The
interest charge allocated to Yell for all periods presented
up to the date of disposal represents amounts payable
on intercompany loans charged at an arm’s length
rate of interest. The taxation charge allocated to discontinued
activities, for all periods presented up to the date
of demerger or disposal, represents amounts charged
to these entities before recognising credit for group
relief surrendered to entities within continuing activities.
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