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The
group’s principal accounting policies are set out
in the Accounting
Policies section of 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 2003 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, 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
have a commitment, mainly through the BT Pension Scheme,
to pay pension benefits to approximately 366,000 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 and 2001 financial years, 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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