BT 2006 Annual Report Download - page 68

were an individual contract. The total contract consideration is
allocated between the separate elements on the basis of fair
value and the appropriate revenue recognition criteria applied
to each element as described above.
(IV) LEASES
Leases of property, plant and equipment where the group holds
substantially all the risks and rewards of ownership are classified
as finance leases.
Finance lease assets are capitalised at the commencement of
the lease at the lower of the present value of the minimum
lease payments or the fair value of the leased asset. The
obligations relating to finance leases, net of finance charges in
respect of future periods, are recognised as liabilities. Leases
are subsequently measured at amortised cost using the
effective interest method. If a sale and leaseback transaction
results in a finance lease, any excess of sale proceeds over the
carrying amount is deferred and recognised in the income
statement over the lease term.
Leases where a significant portion of the risks and rewards
are held by the lessor are classified as operating leases. Rentals
are charged to the income statement on a straight line basis
over the period of the lease. If a sale and leaseback transaction
results in an operating lease, any profit or loss is recognised in
the income statement immediately.
(V) FOREIGN CURRENCIES
Items included in the financial statements of each of the
group’s entities are measured using the currency of the primary
economic environment in which the entity operates (the
‘functional currency’). The consolidated financial statements are
presented in sterling, the functional and presentation currency
of the group.
Foreign currency transactions are translated into the
functional currency using the exchange rates prevailing at the
date of the transaction. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the
translation at year end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognised in
the income statement in the line which most appropriately
reflects the nature of the item or transaction. However, where
monetary items form part of the net investment in a foreign
operation or are designated as hedges of a net investment, or
from 1 April 2005, as cash flow hedges, such exchange
differences are initially recognised in equity.
On 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 (unless this
average is not a reasonable approximation of the cumulative
effects of the rates prevailing on the transaction dates, in which
case income and expenses are translated at the dates of the
transactions). Foreign exchange differences arising on
retranslation are recognised directly in a separate component of
equity, the translation reserve. At the date of transition to IFRS,
the cumulative translation differences for foreign operations
have been set to zero.
In the event of the disposal of an undertaking with assets
and liabilities denominated in foreign currency, the cumulative
translation difference associated with the undertaking in the
translation reserve is charged or credited to the gain or loss on
disposal.
(VI) BUSINESS COMBINATIONS AND GOODWILL
The purchase method of accounting is used to account for the
acquisition of subsidiaries. On transition to IFRS, the group has
elected not to apply IFRS 3, ‘Business Combinations’
retrospectively to acquisitions that occurred before 1 April
2004. Goodwill arising on the acquisition of a business which
occurred between 1 January 1998 and 1 April 2004 is included
in the balance sheet at original cost, less accumulated
amortisation to the date of transition and any provisions for
impairment. Goodwill arising on the acquisition of a business
which occurred prior to 1 January 1998 was written off directly
to retained earnings. From the date of transition, goodwill is not
amortised but is tested for impairment annually, or more
frequently if events and circumstances indicate that goodwill
might be impaired.
On the acquisition of a subsidiary undertaking, joint venture
or associate, from the transition date, fair values are attributed
to the acquired identifiable tangible and intangible assets,
liabilities and contingent liabilities. Goodwill, which is
capitalised, represents the difference between the fair value of
purchase consideration and the acquired interest in the fair
values of those net assets. Any negative goodwill is credited to
the income statement in the year of acquisition. Gains and
losses on disposal of an entity include the carrying amount of
goodwill relating to the entity or investment sold. Goodwill
previously written off to retained earnings is not recycled to the
income statement on disposal of an undertaking.
(VII) OTHER INTANGIBLE ASSETS
Other intangible assets include licence fees, trademarks,
brands, customer relationships, licences, development costs
and computer software.
When intangible assets are acquired in a business
combination, their cost is generally based on fair market values.
Costs directly associated with the development of computer
software for internal use are capitalised where technical
feasibility can be demonstrated, the group is satisfied that
future economic benefits will flow to the group and the cost can
be separately identified and reliably measured.
Intangible assets are amortised on a straight line basis at
rates sufficient to write off the cost, less any estimated residual
value, over their estimated useful lives.
Licence fees paid to governments, which permit
telecommunication activities to be operated for defined
periods, are amortised from the time the network is available
for use to the end of the licence period on a straight line basis.
Subscriber acquisition costs are expensed as incurred, unless
they meet the criteria for capitalisation, in which case the costs
are capitalised and amortised over the shorter of the estimated
customer life or contractual period.
The estimated useful lives assigned to the principal
categories of intangible assets are as follows:
Telecommunication licences 1 to 5 years
Brands, customer lists and customer relationships 3 to 15 years
Computer software 2 to 5 years
(VIII) RESEARCH AND DEVELOPMENT
Research expenditure is recognised in the income statement in
the year in which it is incurred.
Development expenditure, including internally developed
software, is recognised in the income statement in the year in
which it is incurred unless it is probable that economic benefits
will flow to the group from the asset being developed, the cost
of the asset can be reliably measured and technical feasibility
BT Group plc Annual Report and Form 20-F 2006 Accounting policies66