BT 2006 Annual Report Download - page 73

Download and view the complete annual report

Please find page 73 of the 2006 BT annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 150

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150

Long term customer contracts
Long term customer contracts can extend over a number of
financial years. During the contractual period, revenue, costs
and profits may be impacted by estimates of the ultimate
profitability of each contract. If, at any time, these estimates
indicate the contract will be unprofitable, the entire estimated
loss for the contract is recognised immediately. The company
performs ongoing profitability reviews of its contracts in order
to determine whether the latest estimates require updating.
Key factors reviewed include transaction volumes, or other
inputs, for which we get paid, future staff and third party costs
and anticipated cost productivity, savings and efficiencies.
Pension obligations
BT has a commitment, mainly through the BT Pension Scheme,
to pay pension benefits to approximately 354,000 people over
more than 60 years. The cost of these benefits and the present
value of our pension liabilities depend on such factors as the life
expectancy of the members, the salary progression of our
current employees, the return that the pension fund assets will
generate in the time before they are used to fund the pension
payments and the discount rate at which the future pension
payments are discounted. We use estimates for all these factors
in determining the pension costs and liabilities incorporated in
our financial statements. The assumptions reflect historical
experience and our judgement regarding future expectations.
Deferred tax
Deferred tax assets and liabilities require management
judgement in determining the amounts to be recognised. In
particular, judgement is used when assessing the extent to
which deferred tax assets should be recognised with
consideration given to the timing and level of future taxable
income.
Income tax
The actual tax we pay on our profits is determined according to
complex tax laws and regulations. Where the effect of these
laws and regulations is unclear, we use estimates in determining
the liability for the tax to be paid on our past profits which we
recognise in our financial statements. We believe the estimates,
assumptions and judgements are reasonable but this can
involve complex issues which may take a number of years to
resolve. The final determination of prior year tax liabilities could
be different from the estimates reflected in the financial
statements.
Determination of fair values
Certain financial instruments are carried on the balance sheet at
fair value, with changes in fair value reflected in the income
statement. Fair values are estimated by reference in part to
published price quotations and in part by using valuation
techniques.
ACCOUNTING STANDARDS, INTERPRETATIONS AND
AMENDMENTS TO PUBLISHED STANDARDS NOT YET EFFECTIVE
Certain new standards, amendments and interpretations to
existing standards have been published that are mandatory for
the group’s accounting periods beginning on or after 1 April
2006 or later periods, but which the group has not early
adopted. The new standards which are expected to be relevant
to the group’s operations are as follows:
Amendment to IAS 39 and IFRS 4 ‘Financial Guarantee
Contracts’ (effective from 1 April 2006)
This amendment requires issued financial guarantees, other
than those previously asserted by the entity to be insurance
contracts, to be initially recognised at their fair value and
subsequently measured at the higher of: (a) the unamortised
balance of the related fees received and determined; and (b) the
expenditure required to settle the commitment at the balance
sheet date. Management is currently assessing the impact of
this amendment on the group’s financial statements.
Amendment to IAS 39 ‘Cash Flow Hedge Accounting of
Forecast Intragroup Transactions’ (effective from
1 April 2006)
This amendment allows the foreign currency risk of a highly
probable forecast intragroup transaction to qualify as a hedged
item in the consolidated financial statements, provided that: (a)
the transaction is denominated in a currency other than the
functional currency of the entity entering into that transaction;
and (b) the foreign currency risk will affect consolidated profitor
loss. Management does not expect adoption of this amendment
to have a significant impact on the group’s financial
statements.
Amendment to IAS 39 ‘The Fair Value Option’ (effective
from 1 April 2006)
This amendment changes the definition of the financial
instruments classified at fair value through the income
statement and restricts the ability to designate financial
instruments as part of this category. Management does not
expect adoption of this amendment to have a significant impact
on the group’s financial statements.
IFRIC 4 ‘Determining whether an arrangement contains a
lease’ (effective from 1 April 2006)
IFRIC 4 requires the determination of whether an arrangement
is or contains a lease to be based on the substance of the
arrangement. Management does not expect adoption of this
interpretation to have a significant impact on the group’s
financial statements.
IFRS 7 ‘Financial Instruments: Disclosures’ (effective from
1 April 2007) and amendment to IAS 1 ‘Presentation of
Financial Statements – Capital Disclosures’ (effective from
1 April 2007)
IFRS 7 introduces new disclosures of qualitative and
quantitative information about exposure to risks arising from
financial instruments including specified minimum disclosures
about credit risk, liquidity risk and market risk, including
sensitivity analysis to market risk. The amendment to IAS 1
introduces disclosures about the level of an entity’s capital and
how it manages capital. Management is currently assessing the
impact of IFRS 7 and the amendment to IAS 1 on the group’s
financial statements.
Amendment to IAS 21 ‘Net Investment in a Foreign
Operation’ (effective from 1 April 2006)
This amendment relaxes the requirement for a monetary item
that forms part of a reporting entity’s net investment in a
foreign operation to be denominated in the functional currency
of either the reporting entity or the foreign operation. It also
clarifies the treatment of so called ‘sister company loans’. The
group has assessed the impact of the amendment and
concluded it is not likely to have a significant impact on the
group’s financial statements.
Accounting policies BT Group plc Annual Report and Form 20-F 2006 71