BT 2003 Annual Report Download - page 86

1. Accounting for the reorganisation and demerger, changes in accounting policy and presentation
and discontinued activities
(a) Reorganisation and demerger
On 19 November 2001, the legal separation of the mmO
2
business from the rest of the former British
Telecommunications plc group was completed and BT Group plc (BT Group) became the ultimate parent
company of British Telecommunications plc (BT). The legal structure of the transaction was such that BT
transferred the mmO
2
business to mmO
2
plc and BT Group Investments Limited (BTGI) became the immediate
parent company of BT on 16 November 2001. On 19 November 2001, mmO
2
plc transferred the shares in BTGI
to BT Group, as consideration for the issue to former BT shareholders of one ordinary share of 115 pence in
the company, credited as fully paid, for each ordinary share in BT held on 16 November 2001.
On 21 November 2001, following the approval of the Court, the nominal value of BT Group shares was
reduced from 115 pence per ordinary share to 5 pence per ordinary share by way of a reduction of capital under
section 135 of the Companies Act 1985. The surplus of £9,537 million arising from this capital reduction has
been credited to the group profit and loss reserve.
The transfer of BTGI to the company has been accounted for as a group reconstruction in accordance with
the principles of merger accounting set out in Financial Reporting Standard 6 (FRS 6) and Schedule 4A to
the Companies Act 1985. The consolidated financial statements are therefore presented as if the company had
been the parent company of the group throughout the year ended 31 March 2001 and up to the date of the
demerger. The results of mmO
2
have been included in discontinued activities in all three years.
The transfer of BT to BTGI on 16 November 2001 was a group reorganisation effected for non-equity
consideration. This transaction has been accounted for in these financial statements using the principles of
merger accounting as if BT had been owned and controlled by BTGI throughout the year ended 31 March 2001
and up to 16 November 2001. This is not in accordance with the Companies Act 1985 since the group
reorganisation does not meet all the conditions for merger accounting. If acquisition accounting had been applied
to account for the reorganisation whereby BTGI became the parent company of BT, this would have resulted in all
the separable assets and liabilities of the BT Group as at 16 November 2001 being recorded at their fair values,
substantial goodwill and goodwill amortisation charges arising and only the post demerger results being reflected
within the BT Group consolidated financial statements. The directors consider that to have applied acquisition
accounting in preparing these financial statements would have failed to give a true and fair view of the group’s
state of affairs and results. This is because, in substance, BT Group is the successor to BT and its shareholders
have had a continuing interest in the BT business both before and after the demerger. The directors consider that
it is not practicable to quantify the effects of this departure from the requirements of the Companies Act 1985.
In the company’s financial statements, its investment in BTGI is stated at the nominal value of shares issued.
In accordance with sections 131 and 133 of the Companies Act 1985, no premium was recorded on the ordinary
shares issued (see note 37). On consolidation, the difference between the nominal value of the shares issued and
the aggregate share capital, share premium and capital redemption reserve of BT at the date of the demerger
(the merger difference), has been debited to the other reserves (see note 28).
(b) Changes in accounting policy and presentation
During the year ended 31 March 2003, the group has made a number of changes in the presentation of its
financial statements. Comparative figures have been restated accordingly. These are explained in the notes
where material. There have been no changes to accounting policies in the 2003 financial year.
(c) Discontinued activities
On 1 June 2001, BT disposed of its interests in Japan Telecom and J-Phone Communications and, on 29 June
2001, its interest in Airtel. On 22 June 2001, BT sold Yell, its classified advertising directory businesses in the UK
and the USA. These activities, together with mmO
2
, are shown as discontinued operations in the profit and loss
accounts. The eliminations are intra-group eliminations. The interest charge allocated to mmO
2
for all periods
presented up to the date of the demerger has been calculated assuming that mmO
2
’s net debt at the date of
the demerger of £500 million, had been in existence for the whole of the period, and had been bearing an interest
charge of 8% per annum.
The interest charge allocated to Yell for all periods presented up to the date of disposal represents
amounts payable on intercompany loans charged at an arm’s length rate of interest. The taxation charge
allocated to discontinued activities, for all periods presented up to the date of demerger or disposal, represents
amounts charged to these entities before recognising credit for group relief surrendered to entities within
continuing activities.
Notes to the financial statements
BT Annual Report and Form 20-F 2003 85