BT 2009 Annual Report Download - page 49

ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS BUSINESS AND FINANCIAL REVIEWS OVERVIEW
BUSINESS AND FINANCIAL REVIEWS
47BT GROUP PLC ANNUAL REPORT & FORM 20-F
Refinancing risk is managed by limiting the amount of borrowing
that matures within any specific period and having appropriate
strategies in place to manage refinancing needs as they arise. The
group has no significant debt maturities until December 2010.
Price risk management
The group has limited exposure to price risk.
Further information on financial instruments is disclosed in
notes 5, 9, 10, 15, 16, 17 and 33 to the Consolidated financial
statements.
Critical accounting policies
Our principal accounting policies are set out on pages 79 to 87 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 appropriate for the
preparation of the 2009 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; calculating current and deferred tax liabilities;
and determining the fair values of certain financial instruments.
Details of critical accounting estimates and key judgements are
provided in the accounting policies on page 85.
Alternative performance measures
We assess the performance of the group using a variety of
measures, some of which are not explicitly defined under IFRS, and
are therefore termed ‘non-GAAP measures’. These measures are in
addition to, and supplement, those prepared in accordance with
IFRS. The alternative performance measures we use include
earnings before interest, tax, depreciation and amortisation
(EBITDA); adjusted EBITDA; adjusted operating profit; underlying
revenue; underlying operating costs; adjusted profit before
taxation; adjusted earnings per share; free cash flow; and net debt.
Free cash flow and adjusted basic earnings per share are also the
group’s key financial performance indicators.
Why we use each of these alternative performance measures is
explained below. Reconciliations to the nearest measure prepared
in accordance with IFRS are included within the body of the
Financial review and in the financial statements. The alternative
performance measures we use may not be directly comparable to
similarly titled measures used by other companies.
EBITDA
In addition to measuring financial performance of the lines of
business based on operating profit, we also measure performance
based on EBITDA. EBITDA is defined as the group profit or loss
before depreciation, amortisation, finance expense and taxation.
Since this is a non-GAAP measure, it may not be directly
comparable to the EBITDA of other companies, as they may define
it differently. EBITDA is a common measure used by investors and
analysts to evaluate the operating financial performance of
companies, particularly in the telecommunications sector.
We consider EBITDA to be a useful measure of our operating
performance because it reflects the underlying operating cash
costs, by eliminating depreciation and amortisation. EBITDA is not a
direct measure of our liquidity, which is shown by our cash flow
statement, and it needs to be considered in the context of our
financial commitments.
Results before specific items
In our income statement and segmental analysis we separately
identify specific items and present our results both before and after
these items. This is consistent with the way that financial
performance is measured by management and assists in providing a
meaningful analysis of the trading results of the group. The
directors believe that presentation of the group’s results in this way
is relevant to an understanding of the group’s financial
performance as specific items are significant one-off or unusual in
nature and have little predictive value. Items that we consider to be
significant one-off or unusual in nature include disposals of
businesses and investments, business restructuring costs, asset
impairment charges and property rationalisation programmes. An
analysis of specific items recorded in all years presented is included
on pages 37 and 38.
Underlying revenue and operating costs
Underlying revenue and operating costs refers to the amounts
excluding 1) the contribution in the current year from acquisitions
that are not reflected in the comparable period in the prior year due
to the date the acquisition was completed, and 2) the impact of
rebasing the current year to be on a constant currency basis
compared with the prior year. No adjustment is made to the prior
year reported revenue or operating costs in determining the year
on year movement in underlying revenue and operating costs. The
directors believe that presentation of the group’s revenue and
operating costs in this way is relevant to an understanding of the
group’s financial performance. Both acquisitions and foreign
exchange rate movements can have significant impacts on the
group’s reported revenue and operating costs and therefore can
impact year on year comparisons. Presentation of the group’s
revenue and operating costs excluding the year on year impact of
acquisitions and on a constant currency basis allows the group’s
revenue and operating costs to be presented on a consistent basis
for the purpose of year on year comparisons. A reconciliation of
underlying revenue to reported revenue is included on page 33. A
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