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Differences between United Kingdom and United States generally accepted accounting principles
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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).
The following are the main differences between UK and
US GAAP which are relevant to the group’s financial statements.
(a) Sale and leaseback
of properties
Under UK GAAP, the sale of BT’s property portfolio is
treated as a fixed asset disposal and the subsequent leaseback
is an operating lease. Under US GAAP, the transaction
is regarded as financing and the land and buildings are
recorded on the balance sheet at their net book value,
an obligation equivalent to the cash proceeds is recognised
and the gain on disposal is deferred until the properties
are vacated by BT. Rental payments made by BT are reversed
and replaced by a finance lease interest charge and a
depreciation charge.
(b) 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.
(c) 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.
(d) 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
included capitalisation of interest incurred on funding
the 3G licences up to the date of the demerger. The amount
of interest capitalised is determined by reference to
the average interest rates on outstanding borrowings.
At 31 March 2003 under US GAAP, gross capitalised interest
of £461 million (2002 – £330 million) with regard to the
company and its subsidiary companies was subject to depreciation
generally over periods of 3 to 25 years.
(e) 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. All unamortised and pre-April 1998
goodwill will be brought back to the profit and loss account
on disposal. Following the implementation of UK Financial
Reporting Standard No. 10 (FRS 10), goodwill arising on
acquisitions completed after 1 April 1998 is capitalised
and amortised on a straight line basis over its useful
economic life.
Under US GAAP up to 31 March 2002, goodwill arising on
the acquisition of subsidiaries, associates and joint
ventures was capitalised as an intangible asset and amortised
over its useful life. With effect from 1 April 2002 BT
has adopted SFAS No. 142, and goodwill is no longer amortised
but tested annually for impairment.
In connection with the adoption of SFAS No. 142 transitional
and annual impairment reviews were performed. There was
no transitional impairment charge recorded. As a result
of the annual impairment review, a goodwill impairment
charge of £54 million has been recognised in the year
ended 31 March 2003. Goodwill of £20 million amortised
under UK GAAP is written back through the income statement.
(f) 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 of 20 years.
(g) 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
for hedge accounting under UK GAAP do not qualify for
hedge accounting under US GAAP. Under US GAAP, financial
instruments do not qualify for hedge accounting due to
the extensive documentation requirements. These financial
instruments, under US GAAP, are carried at market value
with valuation adjustments recorded in the profit and
loss account. The reassessment and purchase of derivatives
in the year ended 31 March 2003 gave rise to an adjustment
increasing net income by £610 million net of tax (2002
– reduction £20 million). The net unrealised holding gain
on available-for-sale securities for the year ended 31
March 2003 was £22 million (2002 – £271 million, 2001
– £8 million). SFAS 133 became effective for BT on 1 April
2001 and the unamortised transitional adjustment of £26
million net of tax remains in shareholders’ equity at
31 March 2003.
(h) 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.
(i) 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.
Under UK GAAP, shares held by employee share ownership
trusts are recorded as fixed asset investments at cost
less amounts written off. Under US GAAP, those shares
not fully vested are regarded as treasury stock and recorded
at cost as a deduction from shareholders’ equity.
(j) Investments in
associates
Under UK GAAP, the economic interest in the associates’
operating profits before minority interest is reported
as part of the total operating profit. For those associates
in whom a minority interest is recognised in their respective
statements of profit and loss, such minority interest
is reported as minority interest in the consolidated profit
and loss account. Under US GAAP, the minority interest
in the associates is reclassified from minority interest
and reported within the share of results of associates.
(k) Deferred taxation
Under UK GAAP, provision is made for deferred tax in so
far as a liability or asset arose as a result of transactions
that had occurred by the balance sheet date and give rise
to an obligation to pay more tax in the future, or a right
to pay less tax in the future. Under US GAAP, deferred
taxation is provided for on a full liability basis. Future
tax benefits are recognised as deferred tax assets to
the extent that their realisation is more likely than
not. As a result of changes in circumstances, previously
recognised deferred tax liabilities have been released
in the 2003 financial year. At 31 March 2003 total deferred
tax liabilities were £2,806 million primarily in respect
of accelerated capital allowances and total deferred tax
assets were £2,491 million, primarily in respect of pension
obligations.
(l) 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.
(m) Impairment
Under UK GAAP, if there is an indication of impairment
the assets should be tested for impairment and, if necessary
written down to the value in use, calculated based on
discounted future pre-tax cash flows related to the asset
or the income generating unit to which the asset belongs.
US GAAP requires that an entity assess whether impairment
has occurred based on the undiscounted future cash flows.
An impairment loss exists if the sum of these cash flows
is less than the carrying amount of the asset. The impairment
loss recognised in the income statement is based on the
asset’s fair value, being either market value or the sum
of discounted future cash flows.
(n) Discontinued operations
Under UK GAAP, the disposal of certain lines of business
and joint ventures and associates are shown as discontinued
activities. Under US GAAP, only the disposals of lines
of business under SFAS No. 144 would be reported as discontinued
operations.
(o) 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.
(p) Disposals of businesses
There are timing differences between UK GAAP and US GAAP
for recognition of gains on the sale of certain businesses.
Foreign exchange movements taken to reserves under UK
GAAP are reported in the income statement under US GAAP.
Historical GAAP differences on disposed businesses are
also shown under this line item.
(q) Property rationalisation provision
Under UK GAAP in the 2003 financial year, a provision
in connection with the rationalisation of the Group’s
London office property portfolio was recognised. Under
US GAAP, in accordance with SFAS No 146, these costs are
not recognised until the group fully exits and therefore
ceases to use the affected properties. |
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