Accounting policies

I Basis of preparation of the financial statements
The financial statements are prepared under the historical cost convention and in accordance with applicable accounting standards. The group financial statements consolidate those of the company and all of its subsidiary undertakings. Where the financial statements of subsidiary and associated undertakings do not conform with the groupís accounting policies, appropriate adjustments are made on consolidation in order to present the group financial statements on a consistent basis. The principal subsidiary undertakingsí financial years are all coterminous with those of the company.

II Turnover
Turnover, which excludes value added tax and other sales taxes, comprises the value of services provided and equipment sales excluding those between group undertakings.

III Research and development
Expenditure on research and development is written off as incurred.

IV Interest
Interest payable, including that related to financing the construction of tangible fixed assets, is written off as incurred. Discounts or premiums and expenses on the issue of debt securities are amortised over the term of the related security and included within interest payable. Premiums payable on early redemptions of debt securities, in lieu of future interest costs, are written off when paid.

V Foreign currencies
On consolidation, assets and liabilities of foreign undertakings are translated into sterling at year-end exchange rates. The results of foreign undertakings are translated into sterling at average rates of exchange for the year.

Exchange differences arising from the retranslation at year-end exchange rates of the net investment in foreign undertakings, less exchange differences on borrowings which finance or provide a hedge against those undertakings, are taken to reserves and are reported in the statement of total recognised gains and losses.

All other exchange gains or losses are dealt with through the profit and loss account.

VI Goodwill
Goodwill, arising from the purchase of subsidiary and associated undertakings, representing the excess of the fair value of the purchase consideration over the fair value of the net assets acquired, is written off on acquisition against group reserves. If an undertaking is subsequently divested, or if there has been a permanent diminution in value, the appropriate goodwill is dealt with through the profit and loss account in the period of disposal as part of the calculation of gain or loss on divestment or in the period of permanent diminution.

VII Intangible assets
Mobile cellular telephone and broadcasting licences, which were held in an associated undertaking until divestment in the year ended 31 March 1995, were stated at historical cost. No amortisation was provided on these assets, but their value was reviewed annually by the directors and the cost would have been written down if permanent diminution in value had occurred.

VIII Tangible fixed assets
Tangible fixed assets are stated at historical cost less depreciation.

(a) Cost
Cost in the case of network services comprises expenditure up to and including the last distribution point and includes contractorsí charges and payments on account, materials, direct labour and related overheads.

(b) Depreciation
Depreciation is provided on tangible fixed assets on a straight line basis from the time they are available for use, so as to write off their costs over their estimated useful lives taking into account any expected residual values. No depreciation is provided on freehold land.

Semi-electronic telephone exchange equipment is in the course of being replaced by digital equipment and will be substantially written off by 2000.

The lives assigned to other significant tangible fixed assets are:

Freehold buildings - 40 years
Leasehold land and buildings - Unexpired portion of lease or 40 years, whichever is the shorter
Transmission equipment:
duct - 25 years
cable - 10 to 37 years
radio and repeater equipment - 4 to 25 years
Digital telephone exchange equipment - 11 to 13 years
Computers and office equipment - 2 to 7 years
Payphones, other network equipment, motor vehicles and cableships - 3 to 20 years

(c) Engineering stores
Most engineering stores items are used in the construction of new plant and the remainder for maintenance. When issued, these stores are charged to the cost of specific plant or to the profit and loss account, as appropriate. They are stated at cost, less a provision for excess and obsolete items.

IX Fixed asset investments Investments in subsidiary and associated undertakings are stated in the balance sheet of the company at cost less amounts written off. Amounts denominated in foreign currency are translated into sterling at year-end exchange rates.

Investments in associated undertakings are stated in the group balance sheet at the groupís share of their net assets.

The groupís share of profits less losses of associated undertakings is included in the group profit and loss account.

Investments in other participating interests and other investments are stated at cost less amounts written off.

X Stocks
Stocks mainly comprise items of equipment, held for sale or rental, consumable items and work in progress on long-term contracts.

Equipment held and consumable items are stated at the lower of cost and estimated net realisable value, after provisions for obsolescence.

Work in progress on long-term contracts is stated at cost, after deducting payments on account, less provisions for any foreseeable losses.

XI Redundancy costs
Redundancy costs arising from periodic reviews of staff levels are charged against profit in the year in which employees leave the group.

If the most recent actuarial valuation of the groupís pension scheme shows a deficit, the estimated cost of providing incremental pension benefits in respect of employees leaving the group is charged against profit in the year in which the employees leave the group, within redundancy charges.

XII Pension schemes
The group operates a defined benefit pension scheme, which is independent of the groupís finances, for the substantial majority of its employees. Actuarial valuations of the scheme are carried out as determined by the trustees at intervals of not more than three years, the rates of contribution payable and the pension cost being determined on the advice of the actuaries, having regard to the results of these valuations. In any intervening years, the actuaries review the continuing appropriateness of the contribution rates.

The cost of providing pensions is charged against profits over employeesí working lives with the group using the projected unit method. Variations from this regular cost are allocated over the average remaining service lives of current employees to the extent that these variations do not relate to the estimated cost of providing incremental pension benefits in the circumstances described in XI above.

Interest is accounted for on the provision in the balance sheet which results from differences between amounts recognised as pension costs and amounts funded. The regular pension cost, variations from the regular pension cost, described above, and interest are all charged within staff costs.

XIII Taxation
The charge for taxation is based on the profit for the year and takes into account deferred taxation. Provision is made for deferred taxation only to the extent that timing differences are expected to reverse in the foreseeable future, with the exception of timing differences arising on pension costs where full provision is made irrespective of whether they are expected to reverse in the foreseeable future.

XIV Financial instruments
Interest differentials, under swap agreements used to vary the amounts and periods for which interest rates on borrowings are fixed, are recognised by adjustment of interest payable.

Currency swap agreements and forward exchange contracts, used to reduce the impact of changes in currency rates on certain of the groupís long-term borrowings denominated in foreign currency, are valued at year-end exchange rates. The resulting gains or losses are offset against foreign exchange gains or losses on the related borrowings.

Premiums or discounts on financial instruments designated as hedges are reflected as adjustments to interest payable.

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