BT 2009 Annual Report Download - page 87

ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS BUSINESS AND FINANCIAL REVIEWS OVERVIEW
FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
85BT GROUP PLC ANNUAL REPORT & FORM 20-F
FINANCIAL STATEMENTS
Critical accounting estimates and key judgements
The preparation of financial statements in conformity with IFRSs
requires the use of accounting estimates and assumptions. It also
requires management to exercise its judgement in the process of
applying the group’s accounting policies. We continually evaluate
our estimates, assumptions and judgements based on available
information and experience. As the use of estimates is inherent in
financial reporting, actual results could differ from these estimates.
The areas involving a higher degree of judgement or complexity are
described below.
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 group performs ongoing profitability
reviews of its contracts in order to determine whether the latest
estimates are appropriate. 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.
Interconnect income and payments to other
telecommunications operators
In certain instances, BT relies on other operators to measure the
traffic flows interconnecting with our networks. Estimates are used
in these cases to determine the amount of income receivable from,
or payments we need to make to, these other operators. The prices
at which these services are charged are often regulated and are
subject to retrospective adjustment, and estimates are used in
assessing the likely effect of these adjustments.
Pension obligations
BT has a commitment, mainly through the BT Pension Scheme, to
pay pension benefits to approximately 350,000 people over
approximately 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 rate at which the future pension payments are discounted. We
use estimates for all of 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.
Useful lives for property, plant and equipment
The plant and equipment in BT’s networks is long lived with
cables and switching equipment operating for over ten years
and underground ducts being used for decades. The annual
depreciation charge is sensitive to the estimated service lives
allocated to each type of asset. Asset lives are assessed annually
and changed when necessary to reflect current thinking on their
remaining lives in light of technological change, network
investment plans (including the group’s 21CN programme),
prospective economic utilisation and physical condition of the
assets concerned. Changes to the service lives of assets
implemented from 1 April 2008 had no significant impact in
aggregate on the results for the year ended 31 March 2009.
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.
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.
Goodwill
The recoverable amount of cash generating units has been
determined based on value in use calculations. These calculations
require the use of estimates, including management’s expectations
of future revenue growth, operating costs and profit margins for
each cash generating unit.
Determination of fair values
Certain financial instruments such as investments, derivative
financial instruments and certain elements of loans and
borrowings, 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.
Providing for doubtful debts
BT provides services to around 15 million individuals and
businesses, mainly on credit terms. We know that certain debts due
to us will not be paid through the default of a small number of our
customers. Estimates, based on our historical experience, are used
in determining the level of debts that we believe will not be
collected. These estimates include such factors as the current state
of the economy and particular industry issues.
Property arrangements
As part of a property rationalisation programme, we have identified
a number of surplus properties. Although efforts are being made to
sub-let this space, it is recognised that this may not be possible
immediately in the current economic environment. Estimates have
been made of the cost of vacant possession and of any shortfall
arising from the sub lease rental income being lower than the lease
costs being borne by BT. Any such cost or shortfall has been
recognised as a provision.
Accounting standards, interpretations and
amendments to published standards
adopted in the year ended 31 March 2009
IFRIC 14, ‘Defined benefit assets and minimum funding
requirements’, became effective and was adopted during the year.
The adoption of this standard has had no impact on the group’s
financial position or results of operations.
Accounting standards, interpretations and
amendments to published standards not
yet effective
Certain new standards, interpretations and amendments to existing
standards have been published that are mandatory for the group’s
accounting periods beginning on or after 1 April 2009 or later