BT 2006 Annual Report Download - page 117

35. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES continued
(c) Capitalisation of interest
Under IFRS, the group has chosen not to capitalise interest. Under US GAAP, the estimated amount of interest incurred whilst
constructing major capital projects is included in property, plant and equipment, and depreciated over the lives of the related
assets. The amount of interest capitalised is determined by reference to the average interest rates on outstanding borrowings.
At 31 March 2006 under US GAAP, gross capitalised interest of £350 million (2005 – £349 million) was subject to depreciation
over periods of 3 to 25 years determined by the nature of the related asset.
(d) Financial instruments
The group exercised the exemption available under IFRS 1 to adopt IAS 32, ‘Financial Instruments: Disclosure and Presentation’
and IAS 39, ‘Financial Instruments: Recognition and Measurement’ from 1 April 2005. The comparative periods are therefore
presented in accordance with UK GAAP.
Under UK GAAP, investments are held on the balance sheet at historical cost. Gains and losses on instruments used for hedges
are not recognised until the exposure being hedged is recognised. Certain derivative financial instruments which qualify for hedge
accounting under UK GAAP do not qualify or were not designated as hedges under US GAAP.
From 1 April 2005 the group adopted IAS 32 and IAS 39 which gave rise to differences in accounting treatments applied under
US GAAP SFAS No. 133 ‘Accounting for Derivative Instruments and Hedging Activities’. On adoption of IAS 39, all derivative
financial instruments and the fair value of the hedged risks, where a hedged item is in a fair value hedge, were recognised as a one
time transition adjustment to equity and resulted in a transitional difference between US GAAP and IFRS.
Under IFRS, certain cash flow hedges result in a hedged non-financial asset or liability being adjusted from the equity reserve for
the applicable hedged amount. US GAAP does not allow the amounts taken to equity to be transferred to the initial carrying
amount of the non-financial asset or liability. The amounts remain in equity and are recognised in earnings as the non-financial
asset is depreciated or disposed.
The group did not claim hedge accounting under US GAAP for certain items designated as hedges under IFRS. As a result,
certain gains or losses on derivatives held in the cash flow reserve or translation reserve are credited or charged to the income
statement under US GAAP. In addition, under IFRS, the hedged risk associated with a hedged item is fair valued where the item
has been designated in a fair value hedge. As hedge accounting has not been claimed for those items under US GAAP, this fair
value adjustment will not be reflected. These differences will reverse out as the derivatives or hedged items mature, are sold or
expire.
The fair value and book value of derivative instruments as at 31 March 2006 and 31 March 2005 is disclosed in note 33.
IFRS prescribes four investment categories, namely held for trading, available-for-sale, loans and receivables and held to
maturity. US GAAP prescribes only three categories, namely held for trading, available-for-sale and held to maturity. Whilst the
held for trading and available for sale categories are similar under both GAAPs, items held in loans and receivables under IFRS are
generally classified as held to maturity under US GAAP.
(e) Foreign exchange
Under US GAAP, on the sale of a foreign enterprise, foreign exchange differences within the cumulative translation
adjustment (CTA) are included in net income in arriving at a gain or loss on disposal. Although IFRS also requires inclusion of the
cumulative translation differences held in reserves as part of the calculation of gains or losses on disposal, they were reset to zero
on transition to IFRS on 1 April 2004.
(f) Deferred taxation
Under both IFRS and US GAAP, provision for deferred income tax is required on a full provision basis in accordance with IAS 12
‘Income taxes’ and SFAS No. 109 ‘Accounting for Income Taxes’.
Under IFRS, deferred tax is recorded for temporary differences and deferred tax assets are recognised only to the extent that it
is probable that taxable profits will be available against which the deductible temporary difference can be utilised. Deferred tax
assets not recognised are disclosed in note 22.
Under US GAAP deferred taxes are recorded on all temporary differences and a valuation allowance is established in respect of
those deferred tax assets where it is more likely than not that some portion will remain unrealised. Additionally, assets and
liabilities are presented separately where the timing of further recognition does not match and deferred tax balances are split where
applicable between current and non current.
Deferred tax adjustments in the IFRS to US GAAP reconciliation are primarily the result of the deferred tax impact of the other
US GAAP adjustments made in the reconciliation. However, tax adjustments also arise in respect of the timing of recognition of
deferred tax on share options and current tax benefits.
At 31 March 2006, total deferred tax liabilities were £1,767 million primarily in respect of accelerated capital allowances and
total deferred tax assets were £1,454 million, primarily in respect of pension obligations.
The total valuation allowance recognised for deferred tax assets was as follows:
2006 2005 Movement in year
£m £m £m
Capital losses 5,493 4,436 1,057
Operating losses not utilised 775 860 (85)
Other 271 705 (434)
Total 6,539 6,001 538
Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006 115