BT 2006 Annual Report Download - page 41

regulatory financial statements do not necessarily correspond
with any businesses separately managed, funded or operated
within the group.
REGULATION, COMPETITION AND PRICES
See pages 13 to 16 in the Business review.
COMPETITION AND THE UK ECONOMY
See page 15 in the Business review.
ENVIRONMENT
See pages 19 to 20 in the Business review.
CRITICAL ACCOUNTING POLICIES
The group’s principal accounting policies are set out on pages
65 to 72 of the consolidated financial statements and conform
with IFRS. These policies, and applicable estimation techniques,
have been reviewed by the directors who have confirmed them
to be the most appropriate for the preparation of the 2006
financial statements.
We, in common with virtually all other companies, need to
use estimates in the preparation of our financial statements.
The most sensitive estimates affecting our financial statements
are in the areas of assessing the level of interconnect income
with and payments to other telecommunications operators,
providing for doubtful debts, establishing asset lives of
property, plant and equipment for depreciation purposes,
assessing the stage of completion and likely outcome under
long term contracts, making appropriate long-term assumptions
in calculating pension liabilities and costs, making appropriate
medium-term assumptions on asset impairment reviews and
calculating current and deferred tax liabilities. Details of critical
accounting estimates and key judgements are provided in the
accounting policies on page 70 to 71.
US GAAP
The group’s net income and earnings per share for the two
years ended 31 March 2006 and 31 March 2005 and
shareholders’ equity at 31 March 2006 and 2005 under US
Generally Accepted Accounting Principles (US GAAP) are shown
in the United States Generally Accepted Accounting Principles
in note 35. Differences between IFRS and US GAAP include the
treatment of leasing transactions, pension costs, redundancy
costs, deferred taxation, capitalisation of interest and financial
instruments.
US GAAP DEVELOPMENTS
In November 2005, the FASB issued Financial Staff Position
(‘FSP’) FAS 115-1 and FAS 124-1, ‘The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain
Investments’, which nullifies certain requirements of Emerging
Issues Task Force (‘EITF’) Issue No. 03-1, ‘The Meaning of
Other-Than-Temporary Impairment and Its Application to
Certain Investments’ and supersedes EITF Abstracts Topic No.
D-44, ‘Recognition of Other-Than-Temporary Impairment Upon
the Planned Sale of a Security whose Cost Exceeds Fair Value’.
The guidance in this FSP is applied to reporting periods
beginning after 15 December 2005. BT does not expect that
the adoption of this guidance will have a material effect on its
financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154 ‘Accounting
Changes and Error Corrections – a replacement of APB Opinion
No. 20 and FASB Statement No. 3’. SFAS No. 154 requires
retrospective application of prior periods’financial statements
for changes in accounting principles. SFAS No. 154 applies to
accounting periods beginning after 15 December 2005. The
adoption of SFAS No. 154 is not expected to have a material
effect on the results or net assets of the Group.
In February 2006, the FASB issued FASB Staff Position No.
FAS 123(R)-4, ‘Classification of Options and Similar Instruments
Issued as Employee Compensation That Allow for Cash
Settlement upon the Occurrence of a Contingent Event’ (‘FSP
FAS 123(R)-4’). FSP FAS 123(R)-4 addresses the classification of
options and similar instruments issued as employee
compensation that allow for cash settlement upon the
occurrence of a contingent event. An option or similar
instrument that is classified as equity, but subsequently
becomes a liability because the contingent cash settlement
event is probable of occurring, shall be accounted for similar to
a modification from an equity to liability award. The application
of this FSP did not have a material impact on the results or net
assets of the group.
In February 2006, the FASB issued SFAS No. 155,
‘Accounting for Certain Hybrid Financial Instruments – an
amendment of FASB Statements No. 133 and 140’, that
amends SFAS No. 133, ‘Accounting for Derivative Instruments
and Hedging Activities’, and No. 140, ‘Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities’. This Statement resolves issues addressed in SFAS
No. 133 Implementation Issue No. D1, ‘Application of
Statement 133 to Beneficial Interests in Securitised Financial
Assets’. The Statement permits fair value remeasurement for
any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. Additionally
it clarifies which interest-only strips and principal-only strips are
not subject to the requirements of SFAS No. 133. SFAS No.
155 also establishes a requirement to evaluate interests in
securitised financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments
that contain an embedded derivative requiring bifurcation. It
clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives. Also SFAS No.
155 amends SFAS No. 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other
than another derivative financial instrument. SFAS No. 155 is
effective for BT for all financial instruments acquired or issued
after 31 March 2007. BT is currently evaluating the impact of
this statement.
In March 2006 the FASB issued SFAS No. 156, ‘Accounting
for Servicing of Financial Assets: an amendment of FASB
Statement No. 140’ that amends SFAS No. 140, ‘Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities’, with respect to the accounting
for separately recognised servicing assets and servicing
liabilities. SFAS No. 156 is effective for BT on 1 April 2007. BT
does not anticipate that the adoption of this new statement at
the required effective date will have a significant effect on its
results of operations, financial position or cash flows.
Operating and financial review BT Group plc Annual Report and Form 20-F 2006 39