BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS
financial statements have been prepared in accordance
with applicable law and IFRSs as adopted by the EU.
For BT there are no differences between IFRSs as adopted
for use in the EU and full IFRS as published by the
IASB. The financial statements have been prepared under
the historical cost convention, modified for the revaluation
of certain financial assets and liabilities at fair
there are significant differences to US GAAP, these
have been described in the United States generally accepted accounting principles.
policies set out below have been consistently applied
to all years presented with the exception of those relating
to financial instruments under IAS 32, Financial
Instruments: Disclosure and Presentation and IAS
39, Financial Instruments: Recognition and Measurement,
which have been applied with effect from 1 April 2005.
comparative balance sheet amounts for the 2006 financial
year have been reclassified to conform with the presentation
adopted in the 2007 financial year. These include £305
million which has been reclassified from prepayments
to non current assets at 31 March 2006 in respect of
costs relating to the initial set up, transition or
transformation phase of long term networked IT services
contracts. In addition, £267 million has been
reclassified from property, plant and equipment to intangible
assets at 31 March 2006 in respect of IT software application
preparation of financial statements in conformity with
IFRSs requires the use of accounting estimates. It also
requires management to exercise its judgement in the
process of applying the groups accounting policies.
The areas involving a higher degree of judgement or
complexity, or areas where assumptions and estimates
are significant to the consolidated financial statements,
are disclosed below in Critical accounting estimates
and key judgements.
groups income statement and segmental analysis
separately identifies trading results before significant
one-off or unusual items (termed specific items),
a non GAAP measure. This is consistent with the way
that financial performance is measured by management
and assists in providing a meaningful analysis of the
trading results of the group. The directors believe
that presentation of the groups results in this
way is relevant to an understanding of the groups
financial performance as specific items are significant
one-off or unusual in nature and have little predictive
value. Furthermore, the group consider a columnar presentation
to be appropriate as it improves the clarity of the
presentation and is consistent with the way that financial
performance is measured and reported to the board of
directors. Specific items may not be comparable to similarly
titled measures used by other companies. Items which
have been considered significant one-off or unusual
in nature include disposals of businesses and investments,
business restructuring, asset impairment charges and
property rationalisation programmes. The directors intend
to follow such a presentation on a consistent basis
in the future. Specific items for the current and prior
years are disclosed in Specific items.
policies in respect of the parent company, BT Group
plc, are set out in the
Financial Statements of BT Group plc. These are in accordance
with UK GAAP.
BASIS OF CONSOLIDATION
financial statements consolidate the financial statements
of BT Group plc (the company) and entities
controlled by the company (its subsidiaries) and incorporate
its share of the results of jointly controlled entities
(joint ventures) and associates using the equity method
results of subsidiaries acquired or disposed of during
the year are consolidated from the effective date of
acquisition or up to the effective date of disposal,
as appropriate. Where necessary, adjustments are made
to the financial statements of subsidiaries, associates
and joint ventures to bring the accounting policies
used in line with those used by the group. All intra-group
transactions, balances, income and expenses are eliminated
in associates and joint ventures are initially recognised
at cost. Subsequent to acquisition the carrying value
of the groups investment in associates and joint
ventures includes the groups share of post acquisition
reserves, less any impairment in the value of individual
assets. The income statement reflects the groups
share of the results of operations after tax of the
associate or joint venture.
groups principal operating subsidiaries and associate
are detailed in
Subsidiary undertakings and associate.
the fair value of the consideration received or receivable
for communication services and equipment sales, net
of discounts and sales taxes. Revenue from the rendering
of services and sale of equipment is recognised when
it is probable that the economic benefits associated
with a transaction will flow to the group and the amount
of revenue and the associated costs can be measured
reliably. Where the group acts as agent in a transaction
it recognises revenue net of directly attributable costs.
arising from separable installation and connection services
is recognised when it is earned, upon activation. Revenue
from the rental of analogue and digital lines and private
circuits is recognised evenly over the period to which
the charges relate. Revenue from calls is recognised
at the time the call is made over the groups network.
fees, consisting primarily of monthly charges for access
to broadband and other internet access or voice services,
are recognised as revenue as the service is provided.
Revenue arising from the interconnection of voice and
data traffic between other telecommunications operators
is recognised at the time of transit across the groups
from the sale of peripheral and other equipment is recognised
when all the significant risks and rewards of ownership
are transferred to the buyer, which is normally the
date the equipment is delivered and accepted by the
from long term contractual arrangements is recognised
based on the percentage of completion method. The stage
of completion is estimated using an appropriate measure
according to the nature of the contract. For long term
services contracts revenue is recognised on a straight
line basis over the term of the contract. However, if
the performance pattern is other than straight line,
revenue is recognised as services are provided, usually
on an output or consumption basis. For fixed price contracts,
including contracts to design and build software
revenue is recognised by reference to the stage of completion,
as determined by the proportion of costs incurred relative
to the estimated total contract costs, or other measures
of completion such as contract milestone customer acceptance.
In the case of time and materials contracts, revenue
is recognised as the service is rendered.
related to delivering services under long term contractual
arrangements are expensed as incurred. An element of
costs incurred in the initial set up, transition or
transformation phase of the contract are deferred and
recorded within non current assets. These costs are
then recognised in the income statement on a straight
line basis over the remaining contractual term, unless
the pattern of service delivery indicates a different
profile is appropriate. These costs are directly attributable
to specific contracts, relate to future activity, will
generate future economic benefits and are assessed for
recoverability on a regular basis.
percentage of completion method relies on estimates
of total expected contract revenues and costs, as well
as reliable measurement of the progress made towards
completion. Unless the financial outcome of a contract
can be estimated with reasonable certainty, no attributable
profit is recognised. In such circumstances, revenue
is recognised equal to the costs incurred to date, to
the extent that such revenue is expected to be recoverable.
Recognised revenue and profits are subject to revisions
during the contract if the assumptions regarding the
overall contract outcome are changed. The cumulative
impact of a revision in estimates is recorded in the
period in which such revisions become likely and can
be estimated. Where the actual and estimated costs to
completion exceed the estimated revenue for a contract,
the full contract life loss is immediately recognised.
a contractual arrangement consists of two or more separate
elements that have value to a customer on a standalone
basis, revenue is recognised for each element as if
it were an individual contract. The total contract consideration
is allocated between the separate elements on the basis
of relative fair value and the appropriate revenue recognition
criteria applied to each element as described above.
of whether an arrangement is, or contains, a lease,
is based on the substance of the arrangement and requires
an assessment of whether the fulfilment of the arrangement
is dependent on the use of a specific asset or assets
and whether the arrangement conveys the right to use
of property, plant and equipment where the group holds
substantially all the risks and rewards of ownership
are classified as finance leases.
lease assets are capitalised at the commencement of
the lease term at the lower of the present value of
the minimum lease payments or the fair value of the
leased asset. The obligations relating to finance leases,
net of finance charges in respect of future periods,
are recognised as liabilities. Leases are subsequently
measured at amortised cost using the effective interest
method. If a sale and leaseback transaction results
in a finance lease, any excess of sale proceeds over
the carrying amount is deferred and recognised in the
income statement over the lease term.
where a significant portion of the risks and rewards
are held by the lessor are classified as operating leases.
Rentals are charged to the income statement on a straight
line basis over the period of the lease. If a sale and
leaseback transaction results in an operating lease,
any profit or loss is recognised in the income statement
in the financial statements of each of the groups
subsidiaries are measured using the currency of the
primary economic environment in which the entity operates
(the functional currency). The consolidated
financial statements are presented in sterling, the
presentation currency of the group.
currency transactions are translated into the functional
currency using the exchange rates prevailing at the
date of the transaction. Foreign exchange gains and
losses resulting from the settlement of such transactions
and from the translation of monetary assets and liabilities
denominated in foreign currencies at period end exchange
rates are recognised in the income statement in the
line which most appropriately reflects the nature of
the item or transaction. Where monetary items form part
of the net investment in a foreign operation and are
designated as hedges of a net investment or as cash
flow hedges, such exchange differences are initially
recognised in equity.
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 (unless
this average is not a reasonable approximation of the
cumulative effects of the rates prevailing on the transaction
dates, in which case income and expenses are translated
at the dates of the transactions). Foreign exchange
differences arising on retranslation are recognised
directly in a separate component of equity, the translation
the event of the disposal of an undertaking with assets
and liabilities denominated in foreign currency, the
cumulative translation difference associated with the
undertaking in the translation reserve is charged or
credited to the gain or loss on disposal.
method of accounting is used for the acquisition of
subsidiaries, in accordance with IFRS 3, Business
Combinations. On transition to IFRSs, the group
elected not to apply IFRS 3 retrospectively to acquisitions
that occurred before 1 April 2004. Goodwill arising
on the acquisition of subsidiaries which occurred between
1 January 1998 and 1 April 2004 is therefore included
in the balance sheet at original cost, less accumulated
amortisation to the date of transition and any provisions
for impairment. Goodwill arising on the acquisition
of a subsidiary which occurred prior to 1 January 1998
was written off directly to retained earnings.
acquisition of a subsidiary, fair values are attributed
to the identifiable net assets acquired. The excess
of the cost of the acquisition over the fair value of
the groups share of the identifiable net assets
acquired is recorded as goodwill. If the cost of the
acquisition is less than the fair value of the groups
share of the identifiable net assets acquired, the difference
is recognised directly in the income statement. On disposal
of a subsidiary, the gain or loss on disposal includes
the carrying amount of goodwill relating to the subsidiary
sold. Goodwill previously written off to retained earnings
is not recycled to the income statement on disposal
of the related subsidiary.
intangible assets are recognised when the group controls
the asset, it is probable that future economic benefits
attributable to the asset will flow to the group and
the cost of the
asset can be reliably measured. All intangible assets,
other than goodwill and indefinite lived assets, are
amortised over their useful economic life. The method
of amortisation reflects the pattern in which the assets
are expected to be consumed. If the pattern cannot be
determined reliably, the straight line method is used.
the excess of the cost of an acquisition over the fair
value of the groups share of the identifiable
net assets (including intangible assets) of the acquired
subsidiary. Goodwill is tested annually for impairment
and carried at cost less accumulated impairment losses.
paid to governments, which permit telecommunication
activities to be operated for defined periods, are initially
recorded at cost and amortised from the time the network
is available for use to the end of the licence period.
customer lists and customer relationships
assets acquired through business combinations are recorded
at fair value at the date of acquisition. Assumptions
are used in estimating the fair values of acquired intangible
assets and include managements estimates of revenue
and profits to be generated by the acquired businesses.
comprises computer software purchased from third parties,
and also the cost of internally developed software.
Computer software purchased from third parties is initially
recorded at cost.
acquisition costs are expensed as incurred, unless they
meet the criteria for capitalisation, in which case
they are capitalised and amortised over the shorter
of the customer life or contractual period.
useful economic lives
useful economic lives assigned to the principal categories
of intangible assets are as follows:
||1 to 5 years
Brands, customer lists and customer relationships
||3 to 15 years
||2 to 5 years
(VIII) RESEARCH AND DEVELOPMENT
Research expenditure is recognised in the income statement in the period in which it is incurred.
Development expenditure, including the cost of internally developed software, is recognised in the income statement in the period in which it is incurred unless it is probable that economic benefits will flow to the group from the asset being developed, the cost of the asset can be reliably measured and technical
feasibility can be demonstrated. Capitalisation ceases when the asset being developed is ready for use.
Research and development costs include direct labour, contractors charges, materials and directly attributable overheads.
(IX) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is included in the balance sheet at historical cost, less accumulated depreciation and any provisions for impairment.
On disposal of property, plant and equipment, the difference between the sale proceeds and the net book value at the date of disposal is recorded in the income statement.
Included within the cost for network infrastructure and equipment are direct labour, contractors charges, materials, payments on account and directly attributable overheads.
Depreciation is provided on property, plant and equipment on a straight line basis from the time the asset is available for use, so as to write off the assets cost over the estimated useful life taking into account any expected residual value. Freehold land is not subject to depreciation.
The lives assigned to principal categories of assets are as follows:
land and buildings
of lease or 40 years, whichever is the shorter
infrastructure and equipment
||3 to 25 years
and repeater equipment
||2 to 25 years
||2 to 13 years
other network equipment
||2 to 20 years
||2 to 9 years
and office equipment
||3 to 6 years
under finance leases are depreciated over the shorter
of the lease term or their useful economic life. Residual
values and useful lives are re-assessed annually and
if necessary changes are recognised prospectively.
ASSET IMPAIRMENT (NON FINANCIAL ASSETS)
assets with finite useful lives and property, plant
and equipment are tested for impairment if events or
changes in circumstances (assessed at each reporting
date) indicate that the carrying amount may not be recoverable.
When an impairment test is performed, the recoverable
amount is assessed by reference to the higher of the
net present value of expected future cash flows (value
in use) of the relevant cash generating unit and the
fair value less cost to sell.
and intangible assets with indefinite useful lives are
tested for impairment at least annually.
a cash generating unit is impaired, provision is made
to reduce the carrying amount of the related assets
to their estimated recoverable amount, normally as a
specific item. Impairment losses are allocated firstly
against goodwill, and secondly on a pro rata basis against
intangible and other assets.
an impairment loss is recognised against an asset it
may be reversed in future periods where there has been
in the estimates used to determine the recoverable amount
since the last impairment loss was recognised, except
in respect of impairment of goodwill which may not be
reversed in any circumstances.
mainly comprises items of equipment held for sale or
rental and consumable items.
held and consumable items are stated at the lower of
cost and estimated net realisable value, after provisions
for obsolescence. Cost is calculated on a first-in-first-out
benefits (leaver costs) are payable when employment
is terminated before the normal retirement date, or
when an employee accepts voluntary redundancy in exchange
for these benefits. The group recognises termination
benefits when it is demonstrably committed to the affected
employees leaving the group.
POST RETIREMENT BENEFITS
operates a funded defined benefit pension plan, which
is administered by an independent trustee, for the majority
of its employees.
groups net obligation in respect of defined benefit
pension plans is calculated separately for each scheme
by estimating the amount of future benefit that employees
have earned in return for their service to date. That
benefit is discounted to determine its present value,
and the fair value of any plan assets is deducted. The
discount rate used is the yield at the balance sheet
date on AA credit rated bonds that have maturity dates
approximating the terms of the groups obligations.
The calculation is performed by a qualified actuary
using the projected unit credit method. The net obligation
recognised in the balance sheet is the present value
of the defined benefit obligation less the fair value
of the plan assets.
income statement charge is allocated between an operating
charge and a net finance charge. The operating charge
reflects the service cost which is spread systematically
over the working lives of the employees. The net finance
charge reflects the unwinding of the discount applied
to the liabilities of the plan, offset by the expected
return on the assets of the plan, based on conditions
prevailing at the start of the year.
gains and losses are recognised in full in the period
in which they occur and are presented in the statement
of recognised income and expense.
valuations of the main defined benefit plan are carried
out by an independent actuary as determined by the trustees
at intervals of not more than three years, to determine
the rates of contribution payable. The pension cost
is determined on the advice of the groups actuary,
having regard to the results of these trustee valuations.
In any intervening years, the actuaries review the continuing
appropriateness of the contribution rates.
group also operates defined contribution pension schemes
and the income statement is charged with the contributions
SHARE BASED PAYMENTS
has a number of employee share schemes and share option
and award plans under which it makes equity settled
share based payments to certain employees. The fair
value of options and awards granted is recognised as
an employee expense after taking into account the groups
best estimate of the number of awards expected to vest
allowing for non market and service conditions. Fair
value is measured at the date of grant and is spread
over the vesting period of the award. The fair value
of options and awards granted is measured using either
the Binomial or Monte Carlo model, whichever is most
appropriate to the award. Any proceeds received are
credited to share capital and share premium when the
options are exercised. The group has applied IFRS 2
Share based payment retrospectively to all
options and awards granted after 7 November 2002
and not fully vested at 1 January 2005.
including UK corporation tax and foreign tax, is provided
at amounts expected to be paid (or recovered) using
the tax rates and laws that have been enacted or substantially
enacted by the balance sheet date.
tax is recognised, using the liability method, in respect
of temporary differences between the carrying amount
of the groups assets and liabilities and their
tax liabilities are offset against deferred tax assets
within the same taxable entity or qualifying local tax
group. Any remaining deferred tax asset is recognised
only when, on the basis of all available evidence, it
can be regarded as probable that there will be suitable
taxable profits, within the same jurisdiction, in the
foreseeable future against which the deductible temporary
difference can be utilised.
tax is determined using tax rates that are expected
to apply in the periods in which the asset is realised
or liability settled, based on tax rates and laws that
have been enacted or substantially enacted by the balance
tax is provided on temporary differences arising on
investments in subsidiaries, associates and joint ventures,
except where the timing of the reversal of the temporary
difference can be controlled and it is probable that
the temporary difference will not reverse in the foreseeable
and deferred tax are recognised in the income statement,
except when the tax relates to items charged or credited
directly in equity, in which case the tax is also recognised
ADVERTISING AND MARKETING
associated with the groups advertising and marketing
activities are expensed within other operating costs
are recognised as a liability in the year in which they
are declared and approved by the companys shareholders
in general meeting. Interim dividends are recognised
when they are paid.
are recognised when the group has a present legal or
constructive obligation as a result of past events,
it is more likely than not that an outflow of resources
will be required to settle the obligation and the amount
can be reliably estimated. Provisions are discounted
to present value where the effect is material.
FINANCIAL INSTRUMENTS (FROM 1 APRIL 2005)
are the key accounting policies used from 1 April 2005
onwards to reflect the adoption of IAS 32, Financial
Instruments: Disclosure and Presentation and IAS 39,
Financial Instruments: Recognition and Measurement.
and derecognition of financial assets and financial
assets and financial liabilities are recognised when
the group becomes party to the contractual provisions
of the instrument. Financial assets are derecognised
when the group no longer has rights to cash flows, the
risks and rewards of ownership or control of the asset.
Financial liabilities are derecognised when the obligation
under the liability is discharged, cancelled or expires.
In particular, for all regular way purchases and sales
of financial assets, the group recognises the financial
assets on the settlement date, which is the date on
which the asset is delivered to or by the group.
assets at fair value through income statement
asset is classified in this category if acquired principally
for the purpose of selling in the short term (held for
trading) or if so designated by management. Financial
assets held in this category are initially recognised
and subsequently measured at fair value, with changes
in value recognised in the income statement in the line
which most appropriately reflects the nature of the
item or transaction.
receivables are non derivative financial assets with
fixed or determinable payments that are not quoted in
an active market other than:
those that the group intends to sell immediately or in the short term, which are classified as held for trading;
||those for which the group may
not recover substantially all of its initial investment, other than because
of credit deterioration, which are classified as available-for-sale.
and receivables are initially recognised at fair value
plus transaction costs and subsequently carried at amortised
cost using the effective interest method, with changes
in carrying value recognised in the income statement
in the line which most appropriately reflects the nature
of the item or transaction.
financial assets classified as available-for-sale are
either specifically designated in this category or not
classified in any of the other categories. Available-for-sale
financial assets are carried at fair value, with unrealised
gains and losses (except for changes in exchange rates
for monetary items, interest, dividends and impairment
losses which are recognised in the income statement)
are recognised in equity until the financial asset is
derecognised, at which time the cumulative gain or loss
previously recognised in equity is taken to the income
statement, in the line that most appropriately reflects
the nature of the item or transaction.
and other receivables
assets within trade and other receivables are initially
recognised at fair value, which is usually the original
invoiced amount and subsequently carried at amortised
cost using the effective interest method less provisions
made for doubtful receivables.
are made specifically where there is objective evidence
of a dispute or an inability to pay. An additional provision
is made based on an analysis of balances by age, previous
losses experienced and general economic conditions.
and cash equivalents
Cash and cash
equivalents comprise cash in hand and current balances
with banks and similar institutions, which are readily
convertible to known amounts of cash and which are subject
to insignificant risk of changes in value and have an
original maturity of three months or less.
the purpose of the consolidated cash flow statement,
cash and cash equivalents consist of cash and cash equivalents
as defined above, net of outstanding bank overdrafts.
Bank overdrafts are included within loans and other
borrowings in current liabilities on the balance sheet.
of financial assets
assesses at each balance sheet date whether a financial
asset or group of financial assets are impaired.
there is objective evidence that an impairment loss
has arisen on assets carried at amortised cost, the
carrying amount is reduced with the loss being recognised
in the income statement. The impairment loss is measured
as the difference between that assets carrying
amount and the present value of estimated future cash
flows discounted at the financial assets original
effective interest rate. The impairment loss is only
reversed if it can be related objectively to an event
after the impairment was recognised and is reversed
to the extent the carrying value of the asset does not
exceed its amortised cost at the date of reversal.
an available-for-sale asset is impaired, an amount comprising
the difference between its cost (net of any principal
payment and amortisation) and its fair value is transferred
from equity to the income statement. Reversals of impairment
losses on debt instruments are taken through the income
statement if the increase in fair value of the instrument
can be objectively related to an event occurring after
the impairment loss was recognised in the income statement.
Reversals in respect of equity instruments classified
as available-for-sale are not recognised in the income
there is objective evidence of an impairment loss on
an unquoted equity instrument that is not carried at
fair value because its fair value cannot be objectively
measured, or on a derivative asset that is linked to
and must be settled by delivery of such an unquoted
equity instrument, has been incurred, the amount of
loss is measured as the difference between the assets
carrying amount and the present value of estimated future
cash flows discounted at the current market rate of
return for a similar financial asset.
and other payables
liabilities within trade and other payables are initially
recognised at fair value, which is usually the original
invoiced amount, and subsequently carried at amortised
cost using the effective interest method.
and other borrowings
other borrowings are initially recognised at fair value
plus directly attributable transaction costs. Where
loans and other borrowings contain a separable embedded
derivative, the fair value of the embedded derivative
is the difference between the fair value of the hybrid
instrument and the fair value of the loan or borrowing.
The fair value of the embedded derivative and the loan
or borrowing is recorded separately on initial recognition.
Loans and other borrowings are subsequently measured
at amortised cost using the effective interest method
and if included in a fair value hedge relationship are
revalued to reflect the fair value movements on the
hedged risk associated with
the loans and other borrowings. The resultant amortisation
of fair value movements are recognised in the income
guarantees are recognised initially at fair value plus
transaction costs and subsequently measured at the higher
of the amount determined in accordance with the accounting
policy relating to provisions and the amount initially
determined less, when appropriate, cumulative amortisation.
uses derivative financial instruments mainly to reduce
exposure to foreign exchange risks and interest rate
movements. The group does not hold or issue derivative
financial instruments for financial trading purposes.
However, derivatives that do not qualify for hedge accounting
are accounted for as trading instruments.
financial instruments are classified as held for trading
and initially recognised at cost. Subsequent to initial
recognition, derivative financial instruments are stated
at fair value. The gain or loss on re-measurement to
fair value is recognised immediately in the income statement
in net finance expense. However, where derivatives qualify
for hedge accounting, recognition of any resultant gain
or loss depends on the nature of the hedge. Derivative
financial instruments are classified as current assets
or current liabilities where they are not designated
in a hedging relationship or have a maturity period
within 12 months. Where derivative financial instruments
have a maturity period greater than 12 months and are
designated in a hedge relationship, they are classified
within either non current assets or non current liabilities.
embedded in other financial instruments or other host
contracts are treated as separate derivatives when their
risk and characteristics are not closely related to
those of host contracts and host contracts are not carried
at fair value. Changes in the fair value of embedded
derivatives are recognised in the income statement in
the line which most appropriately reflects the nature
of the item or transaction.
When a financial
instrument is designated as a hedge of the variability
in cash flows of a recognised asset or liability, or
a highly probable transaction, the effective part of
any gain or loss on the derivative financial instrument
is recognised directly in equity.
cash flow hedges of recognised assets or liabilities,
the associated cumulative gain or loss is removed from
equity and recognised in the same line in the income
statement in the same period or periods during which
the hedged transaction affects the income statement.
highly probable transactions, when the transaction subsequently
results in the recognition of a non-financial asset
or non-financial liability the associated cumulative
gain or loss is removed from equity and included in
the initial cost or carrying amount of the non-financial
asset or liability.
a hedge of a highly probable transaction subsequently
results in the recognition of a financial asset or a
financial liability, then the associated gains and losses
that were recognised directly in equity are reclassified
into the income statement in the same period or periods
during which the asset acquired or liability assumed
affects the income statement.
ineffectiveness arising on a cash flow hedge of a recognised
asset or liability is recognised immediately in the
same income statement line as the hedged item. Where
ineffectiveness arises on highly probable transactions,
it is recognised in the line which most appropriately
reflects the nature of the item or transaction.
When a derivative
financial instrument is designated as a hedge of the
variability in fair value of a recognised asset or liability,
or unrecognised firm commitment, the change in fair
value of the derivatives that are designated as fair
value hedges are recorded in the same line in the income
statement, together with any changes in fair value of
the hedged asset or liability that is attributable to
the hedged risk.
net investment in a foreign operation
arising from the retranslation of currency instruments
designated as hedges of net investments in a foreign
operation are taken to shareholders equity on
consolidation to the extent the hedges are deemed effective.
ineffectiveness arising on a hedge of a net investment
in a foreign operation is recognised in net finance
of hedge accounting
of hedge accounting may occur when a hedging instrument
expires or is sold, terminated or exercised, the hedge
no longer qualifies for hedge accounting or the group
revokes designation of the hedge relationship but the
hedged financial asset or liability remains or highly
probable transaction is still expected to occur. Under
a cash flow hedge the cumulative gain or loss at that
point remains in equity and is recognised in accordance
with the above policy when the transaction occurs. If
the hedged transaction is no longer expected to take
place or the underlying hedged financial asset or liability
no longer exists, the cumulative unrealised gain or
loss recognised in equity is recognised immediately
in the income statement. Under a hedge of a net investment
the cumulative gain or loss remains in equity when the
hedging instrument expires or is sold, terminated or
exercised, the hedge no longer qualifies for hedge accounting
or the group revokes designation of the hedge relationship.
The cumulative gain or loss is recognised in the income
statement as part of the profit on disposal when the
net investment in the foreign operation is disposed.
Under a fair value hedge the cumulative gain or loss
adjustment associated with the hedged risk is amortised
to the income statement using the effective interest
method over the remaining term of the hedged item.
are classified as equity. Incremental costs directly
attributable to the issue of new shares are shown in
equity as a deduction from the proceeds received. Shares
in the parent company, BT Group plc, held by employee
share ownership trusts and repurchased shares are recorded
in the balance sheet as a deduction from shareholders
equity at cost.
FINANCIAL INSTRUMENTS (TO 31 MARCH 2005)
policies adopted in respect of financial instruments
in periods up to, and including 31 March 2005, are set
assets were held at the lower of cost and net realisable
value in accordance with UK GAAP. Debt instruments are
stated at the amount of net proceeds adjusted to amortise
any discount over the term of the debt.
to qualify for hedge accounting
considers its derivative financial instruments to be
hedges when certain criteria are met. For foreign currency
derivatives, the instrument must be related to actual
foreign currency assets or liabilities or a probable
commitment whose characteristics have been identified.
It must involve the same currency or similar currencies
as the hedged item and must also reduce the risk of
foreign currency exchange movements on the groups
operations. For interest rate derivatives, the instrument
must be related to assets or liabilities or a probable
commitment, such as a future bond issue, and must also
change the interest rate or the nature of the interest
rate by converting a fixed rate to a variable rate or
for derivative financial instruments
under interest rate swap agreements used to vary the
amounts and periods for which interest rates on borrowings
are fixed, are recognised by adjustment of net finance
forward exchange contracts used to change the currency
mix of net debt are revalued to balance sheet rates
with net unrealised gains and losses included in current
and non current derivative financial instruments. The
difference between spot and forward rate for these contracts
is recognised as part of net finance expense over the
term of the contract.
forward exchange contracts hedging transaction exposures
are revalued at the prevailing forward rate on the balance
sheet date with net unrealised gains and losses being
shown as current and non-current derivative financial
ACCOUNTING ESTIMATES AND KEY JUDGEMENTS
of financial statements in conformity with IFRSs requires
the use of accounting estimates and assumptions. It
also requires management to exercise its judgement in
the process of applying the groups accounting
policies. We continually evaluate our estimates, assumptions
and judgements based on available information and experience.
As the use of estimates is inherent in financial reporting,
actual results could differ from these estimates. The
areas involving a higher degree of judgement or complexity
are described below.
income and payments to other telecommunications operators
instances, BT relies on other operators to measure the
traffic flows interconnecting with our networks. Estimates
are used 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 and estimates are used in assessing the likely
effect of these adjustments.
for doubtful debts
services to around 18 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. Estimates, based on our historical
experience are used in determining the level of debts
that we believe will not be collected. These estimates
include such factors as the current state of the economy
and particular industry issues.
amount of cash generating units has been determined
based on value in use calculations. These calculations
require the use of estimates, including managements
expectations of future revenue growth, operating costs
and profit margins for each cash generating unit.
lives for property, plant and equipment
and equipment in BTs 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 allocated to each type of asset. Asset
lives are assessed annually and changed when necessary
to reflect current thinking on their remaining lives
in light of technological change, network investment
plans (including the groups 21CN transformation
programme) prospective economic utilisation and physical
condition of the assets concerned. Changes to service
lives of assets implemented from 1 April 2006 in aggregate
had no significant impact on the results for the year
ended 31 March 2007.
As part of
the property rationalisation programme we have identified
a number of surplus properties. Although efforts are
being made to sub-let this space, it is recognised 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. Any such cost or shortfall
has been recognised as a provision.
customer contracts can extend over a number of financial
years. During the contractual period, revenue, costs
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 group performs ongoing profitability
reviews of its contracts in order to determine whether
the latest estimates are appropriate. Key factors reviewed
include transaction volumes, or other inputs for which
we get paid, future staff and third party costs and
anticipated cost productivity, savings and efficiencies.
BT has a commitment,
mainly through the BT Pension Scheme, to pay pension
benefits to approximately 350,000 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 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.
The assumptions reflect historical experience and our
judgement regarding future expectations.
assets and liabilities require management judgement
in determining the amounts to be recognised. In particular,
judgement is used when assessing the extent to which
deferred tax assets should be recognised with consideration
given to the timing and level of future taxable income.
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. We believe the estimates, assumptions and
judgements are reasonable but this can involve complex
issues which may take a number of years to resolve.
The final determination of prior year tax liabilities
could be different from the estimates reflected in the
of fair values
instruments such as investments, derivative financial
instruments and certain elements of loans and borrowings,
are carried on the balance sheet at fair value, with
changes in fair value reflected in the income statement.
Fair values are estimated by reference in part to published
price quotations and in part by using valuation techniques.
STANDARDS, INTERPRETATIONS AND AMENDMENTS TO PUBLISHED
STANDARDS ADOPTED IN THE YEAR ENDED 31 MARCH 2007
year the following standards which are relevant to the
groups operations became effective and were adopted:
Amendment to IAS 21, Net Investment in a Foreign Operation
||Amendment to IAS 39 and IFRS
4, Financial Guarantee Contracts
||Amendment to IAS 39, Cash
Flow Hedge Accounting of Forecast Intragroup Transactions
||Amendment to IAS 39, The
Fair Value Option
||IFRIC 4, Determining
whether an arrangement contains a lease
||IFRIC 6, Liabilities
arising from Participating in a Specific Market Waste Electrical
and Electronic Equipment
adoption of these standards has not had a significant impact on the groups
financial statements in the year.
ACCOUNTING STANDARDS, INTERPRETATION AND AMENDMENTS TO PUBLISHED STANDARDS NOT YET EFFECTIVE
Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the groups accounting periods beginning on or after 1 April 2007 or later periods, but which the group has not early adopted. The new standards which are relevant to the groups operations
are as follows:
IFRS 7, Financial Instruments: Disclosures (effective from 1 April 2007) and amendment to IAS 1 Presentation of Financial Statements Capital
Disclosures (effective from 1 April 2007)
IFRS 7 introduces new disclosures of qualitative and quantitative information about exposure to risks arising from financial instruments including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. The amendment to IAS 1 introduces disclosures
about the level of an entitys capital and how it manages capital. Management is currently assessing the disclosure impact of IFRS 7 and the amendment to IAS 1 on the groups financial statements.
IFRS 8, Operating Segments (effective from 1 April 2009)
IFRS 8 requires the identification of operating segments based on internal reporting to the chief operating decision maker and extends the scope and disclosure requirements of IAS 14 Segmental Reporting. The group is currently assessing the impact of IFRS 8 on its segmental analysis disclosure.
Amendment to IAS 23, Borrowing Costs (effective from 1 April 2009)
The amendment to IAS 23 eliminates the option to expense borrowing costs attributable to the acquisition, construction or production of a qualifying asset as incurred. As a result, the group will be required to capitalise such borrowing costs as part of the cost of that asset. The group is currently assessing the impact
of the amendment upon the results and net assets of the group.
IFRIC 8, Scope of IFRS 2 (effective from 1 April 2007)
IFRIC 8 clarifies that transactions within the scope of IFRS 2 Share Based Payment include those in which the entity cannot specifically identify some or all of the goods and services received. The group has assessed the impact of this interpretation and has concluded it is not likely to have a significant impact on
the groups financial statements.
IFRIC 9, Reassessment of embedded derivatives (effective from 1 April 2007)
IFRIC 9 clarifies that an entity should assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the contract terms, in which
case it is required. The group has assessed the impact of this interpretation and has concluded it is not likely to have a significant impact on the groups financial statements.
IFRIC 10, Financial Reporting and Impairment (effective from 1 April 2007)
IFRIC 10 states that impairment losses recognised in interim financial statements should not be reversed in subsequent interim or full year financial statements. The group has assessed the impact of this interpretation and has concluded it is not likely to have a significant impact on the groups financial statements.
IFRIC 11, IFRS 2 Group and Treasury Share Transactions (effective from 1 April 2007)
IFRIC 11 provides guidance on whether share based payment arrangements involving group entities should be accounted for as cash settled or equity settled. The group has assessed the impact of this interpretation and has concluded it is not likely to have a significant impact on the groups financial statements.
IFRIC 12, Service Concession Arrangements (effective from 1 April 2008)
IFRIC 12 addresses
the accounting by operators of public-private service
concession arrangements. The group has assessed the impact
of this interpretation and has concluded it is not likely
to have a significant impact on the groups financial