BT 2006 Annual Report Download - page 115

34. EXPLANATION OF TRANSITION TO IFRS continued
(c) Goodwill and other intangible assets
UK GAAP required goodwill to be amortised over its expected useful economic life. Under IFRS 3, ‘Business Combinations’,
goodwill is no longer amortised but held at its carrying value on the balance sheet and tested annually for impairment. In addition,
IAS 38, ‘Intangible Assets’ requires other intangible assets arising on acquisitions after the transition date to be separately
identified and amortised over their useful economic life, often a shorter period than previously used for goodwill. As a result,
intangible assets such as customer relationships and trademarks, need to be separately valued and recognised on business
combinations, and then amortised over their useful economic lives.
The UK GAAP goodwill amortisation charge in the year to 31 March 2005 of £16 million has been reversed. The other intangible
assets arising from acquisitions since 1 April, 2004 are being amortised over their estimated useful economic lives.
Computer software that is not an integral part of the associated hardware is classified as an intangible asset under IAS 38.
Under UK GAAP, the group’s policy was to categorise all capitalised software as tangible fixed assets. This has resulted in a
balance sheet reclassification of £615 million as at 31 March 2005, but has had no impact on profit or equity.
(d) Dividends
Under UK GAAP, the dividend charge was recognised in the profit and loss account in the period to which it related. Under IAS 10,
‘Events After The Balance Sheet Date’, dividends are not recognised in the income statement but directly in reserves. In addition,
the final dividend is recognised only when it has been declared and approved by the company in a general meeting.
The final dividend liabilities for the 2005 and 2004 financial years of £551 million and £454 million, respectively have been
reversed at 31 March 2005 and 1 April 2004 as the associated dividends had not been approved at those dates.
(e) Leases
Under IAS 17 ‘Leases’ there is a requirement to view leases of land separately from leases of buildings. Furthermore, there is a
requirement to recognise operating lease charges as an expense on a straight line basis. As a result, the building elements of a
small number of properties have been reclassified from operating leases under UK GAAP to finance leases under IFRS, and lease
rentals under the group’s 2001 sale and operating leaseback transaction are recognised on a straight line basis under IFRS.
For those properties reclassified as finance leases, profit before tax for the year ended 31 March 2005 has been reduced by
approximately £3 million as a result of the recognition of depreciation and finance lease interest charges, and the removal of the
UK GAAP operating lease charges. Recognising the operating lease charges, on a straight line basis has further reduced the profit
before tax for the year ended 31 March, by £101 million. A deferred tax benefit of £31 million has also been recognised, with the
net effect being a £73 million reduction in profit.
Those properties reclassified as finance leases have been capitalised and are included within property, plant and equipment at
the lower of the present value of the minimum lease payments or the fair value of the lease asset, which was £93 million at
1 April 2004 and £90 million at 31 March 2005, respectively. The associated finance lease obligation has also been recognised,
being £105 million and £107 million at 1 April 2004 and 31 March 2005, respectively. The excess of the sales proceeds over the
previous carrying value has deferred, and is being recognised in the income statement over the lease term. The deferred gain
included in deferred income at 1 April 2004 and 31 March 2005 was £44 million and £42 million respectively. Where the operating
lease rentals are recognised on a straight line basis, the difference between the amounts recognised in the income statement and
the lease payments is included in other creditors, and amounted to £251 million and £352 million at 1 April 2004 and
31 March 2005, respectively. A deferred tax liability of £100 million and £123 million at 1 April 2004 and 31 March 2005 has been
recognised. The net effect of the above has been a reduction in equity of £215 million and £288 million at 1 April 2004 and
31 March 2005, respectively.
(f) Financial instruments
Under UK GAAP, the group previously measured financial assets and liabilities in accordance with the principles of FRS 4, ‘Capital
Instruments’, FRS 5, ‘Reporting the Substance of Transactions’ and SSAP 20, ‘Foreign Currency Translation’. Current asset
investments were recognised at the lower of cost and net realisable value. Debt instruments were stated at the amount of the net
proceeds adjusted to amortise any discount over the term of the debt. Debt and current asset investments were further adjusted
for the effect of the currency element of swaps and forward contracts used as a hedge against these instruments. The group also
provided disclosures in accordance with FRS 13, ‘Derivatives and Other Financial Instruments: Disclosures’ setting out the
objectives, policies and strategies for holding or issuing financial instruments, and the fair value of financial instruments held at the
balance sheet date.
IAS 39 requires all derivative financial instruments to be recorded at fair value on the balance sheet. The fair value of derivative
financial instruments recognised on the balance sheet on transition at 1 April, 2005 was a net liability of £1.5 billion. This fair value
included a net liability of £0.7 billion which was previously recognised under UK GAAP, reflecting the currency element of financial
instruments and accrued interest associated with derivatives. The additional net liability of £0.8 billion arising on transition
resulted in a corresponding net decrease to equity. Future market interest rate and currency movements will give rise to
adjustments to these fair values. Where hedge accounting cannot be applied under the prescriptive rules of IAS 39, changes in fair
values of derivative financial instruments will impact the income statement.
In addition, the majority of the gains and losses associated with terminated derivative financial instruments that were deferred
under UK GAAP have been reclassified to reserves in accordance with the transitional rules of IFRS 1, resulting in an additional net
increase to equity of £0.3 billion.
Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006 113