Basis of preparation of the financial statements
financial statements are prepared under the historical
cost convention and in accordance with applicable accounting
standards and the provisions of the Companies Act 1985.
The group financial statements consolidate those of
the company and all of its subsidiary undertakings.
Where the financial statements of subsidiary undertakings,
associates and joint ventures do not conform with the
group's accounting policies, appropriate adjustments
are made on consolidation in order to present the group
financial statements on a consistent basis. The principal
subsidiary undertakings' financial years are all coterminous
with those of the company.
preparation of financial statements requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of income
and expenditure during the reporting period. Actual
results could differ from those estimates. Estimates
are used principally when accounting for interconnect
income, provision for doubtful debts, payments to telecommunication
operators, depreciation, goodwill amortisation and impairment,
employee pension schemes, provisions for liabilities
and charges and taxes.
turnover net of discounts, which excludes value added
tax and other sales taxes, comprises the value of services
provided and equipment sales by group undertakings,
excluding those between them.
turnover is group turnover together with the group's
share of its associates' and joint ventures' turnover,
excluding the group's share of transactions between
the group and its principal joint venture, Concert BV.
from calls is recognised in the group profit and loss
account at the time the call is made over the group's
networks. Turnover from rentals is recognised evenly
over the period to which the charges relate. Turnover
from equipment sales is recognised at the point of sale.
Prepaid call card sales are deferred until the customer
uses the stored value in the card to pay for the relevant
calls. Turnover arising from the provision of other
services, including maintenance contracts, is recognised
evenly over the periods in which the service is provided
to the customer. Turnover from installation and connection
activities is recognised in the same period as the related
costs. Turnover from classified directories, mainly
comprising advertising revenue, is recognised in the
group profit and loss account upon completion of delivery.
Research and development
on research and development is written off as incurred.
lease rentals are charged against the profit and loss
account on a straight-line basis over the lease period
except where the contractual payment terms
are considered to be a more systematic and appropriate
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
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.
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.
other exchange gains or losses are dealt with through
the profit and loss account.
arising from the purchase of subsidiary undertakings
and interests in associates and joint ventures, represents
the excess of the fair value of the purchase consideration
over the fair value of the net assets acquired.
acquisitions completed on or after 1 April 1998, the
goodwill arising is capitalised as an intangible asset
or, if arising in respect of an associate or joint venture,
recorded as part of the related investment. Goodwill
is amortised on a straight line basis from the time
of acquisition over its useful economic life. The economic
life is normally presumed to be a maximum of 20 years.
acquisitions on or before 31 March 1998, the goodwill
is written off on acquisition against group reserves.
an undertaking is subsequently divested, the appropriate
unamortised goodwill or goodwill written off to reserves
is dealt with through the profit and loss account in
the period of disposal as part of the gain or loss on
fees paid to governments, which permit telecommunication
activities to be operated for defined periods, are amortised
from the later of the start of the licence period or
launch of service to the end of the licence period on
a straight-line basis.
Tangible fixed assets
fixed assets are stated at historical cost less depreciation.
in the case of network services includes contractors'
charges and payments on account, materials, direct labour
and directly attributable overheads.
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.
lives assigned to other significant tangible fixed assets
land and buildings -
portion of lease or 40 years, whichever is the shorter
to 25 years
and repeater equipment -
to 25 years
to 13 years
and office equipment -
to 6 years
other network equipment, motor vehicles and cableships
to 20 years
to 5 years
Fixed asset investments
in subsidiary undertakings, associates and joint ventures
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
in associates and joint ventures are stated in the group
balance sheet at the group's share of their net assets,
together with any attributable unamortised goodwill
on acquisitions arising on or after 1 April
group's share of profits less losses of associates and
joint ventures is included in the group profit and loss
in other participating interests and other investments
are stated at cost less amounts written off.
and tangible fixed assets are tested for impairment
when an event that might affect asset values has occurred.
Goodwill is also reviewed for impairment at the end
of the first financial year after acquisition.
impairment loss is recognised to the extent that the
carrying amount cannot be recovered either by selling
the asset or by the discounted future cash flows from
operating the assets.
mainly comprise items of equipment, held for sale or
rental, consumable items and work in progress on long-term
held and consumable items are stated at the lower of
cost and estimated net realisable value, after provisions
in progress on long-term contracts is stated at cost,
after deducting payments on account, less provisions
for any foreseeable losses.
are stated in the balance sheet at estimated net realisable
value. Net realisable value is the invoiced amount less
provisions for bad and doubtful debtors. Provisions
are made specifically against debtors where there is
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
or leaver costs arising from periodic reviews of staff
levels are charged against profit in the year in which
the group is demonstrably committed to the employees
leaving the group.
the estimated cost of providing incremental pension
benefits in respect of employees leaving the group exceeds
the total accounting surplus based on the latest actuarial
valuation of the group's pension scheme and the amount
of the provision for pension liabilities on the balance
sheet, then the excess estimated costs are charged against
profit in the year in which the employees agree to leave
the group, within redundancy or leaver costs.
group operates a funded defined benefit pension scheme,
which is independent of the group's finances, for the
substantial majority of its employees. Actuarial valuations
of the main scheme 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 company's actuary, having regard
to the results of these valuations. In any intervening
years, the actuaries review the continuing appropriateness
of the contribution rates.
cost of providing pensions is charged against profits
over employees' working lives with the group using the
projected unit method. Variations from this regular
cost are allocated on a straight-line basis 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 XIII above.
is accounted for on the provision or prepayment 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.
group also operates defined contribution pension schemes
and the profit and loss account is charged with the
provision is made for deferred taxation on all timing
differences which have arisen but have not reversed
at the balance sheet date. Deferred tax assets are recognised
to the extent that it is regarded as more likely than
not that there will be taxable profits from which the
underlying timing differences can be deducted. No deferred
tax is provided in respect of any future remittance
of earnings of foreign subsidiaries or associates where
no commitment has been made to remit such earnings.
The deferred tax balances are not discounted.
(a) Debt instruments
instruments are stated at the amount of net proceeds
adjusted to amortise any discount evenly over the term
of the debt, and further adjusted for the effect of
currency swaps acting as hedges.
Derivative financial instruments
group uses derivative financial instruments 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.
to qualify for hedge accounting
group 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 and 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 group's 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 vice versa.
for derivative financial instruments
amounts underlying currency swaps are revalued at exchange
rates ruling at the date of the group balance sheet
and, to the extent that they are not related to debt
instruments, are included in debtors or creditors.
differentials, 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 interest payable.
forward exchange contracts used to change the currency
mix of net debt are revalued to balance sheet rates
with net unrealised gains and losses being shown as
part of debtors, creditors, or as part of net debt.
The difference between spot and forward rate for these
contracts is recognised as part of net interest payable
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 debtors and creditors.
that form hedges against future fixed-rate bond issues
are marked to market. Gains or losses are deferred until
the bond is issued when they are recognised evenly over
the term of the bond.