BT 2014 Annual Report Download - page 132

129
Financial statements
Financial statements
In respect of claims, litigation and regulatory risks, the group provides
for anticipated costs where an outow of resources is considered
probable and a reasonable estimate can be made of the likely outcome.
The prices at which certain services are charged are regulated and may
be subject to retrospective adjustment by regulators. Estimates are
used in assessing the likely value of the regulatory risk. For all risks,
the ultimate liability may vary from the amounts provided and will be
dependent upon the eventual outcome of any settlement.
Management exercise judgement in measuring the exposures to
contingent liabilities (see note 29) through assessing the likelihood that
a potential claim or liability will arise and in quantifying the possible
range of nancial outcomes.
Current and deferred income tax
The actual tax we pay on our prots is determined according to complex
tax laws and regulations. Where the eect of these laws and regulations
is unclear, we use estimates in determining the liability for the tax to be
paid on our past prots which we recognise in our nancial 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 nal determination of prior year tax liabilities could be
dierent from the estimates reected in the nancial statements and
may result in the recognition of an additional tax expense or tax credit
in the income statement.
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, taking into account the expected timing and level of future
taxable income.
The value of the group’s income tax assets and liabilities is disclosed
on the balance sheet on page 124. The carrying value of the group’s
deferred tax assets and liabilities is disclosed in note 9.
Goodwill
The recoverable amount of cash generating units (CGUs) 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, prot margins and operating
cash ows for each CGU.
As a result of the split of BT Retail into two separate businesses,
BTBusiness and BT Consumer, as set out on page 127, the BT Retail CGU
has been reected as two separate CGUs, BT Business and BT Consumer.
Goodwill previously within BT Retail was reallocated accordingly.
The carrying value of goodwill and the key assumptions used in
performing the annual impairment assessment are disclosed in note 12.
Providing for doubtful debts
BT provides services to consumer and business customers, 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.
The value of the provision for doubtful debts is disclosed in note 16.
3. SigniƬcant accounting policies
The signicant accounting policies applied in preparation of these
consolidated nancial statements are set out below. These policies
have been consistently applied to all the years presented, unless
otherwise stated.
Revenue
Revenue represents the fair value of the consideration received or
receivable for communication services and equipment sales, net of
discounts and sales taxes. Revenue is recognised when it is probable
that the economic benets associated with a transaction will ow
to the group and the amount of revenue and associated costs can be
measured reliably. Where the group acts as an agent in a transaction,
it recognises revenue net of directly attributable costs.
Services
Revenue arising from separable installation and connection services is
recognised when it is earned, upon activation. Revenue from the rental
of analogue and digital lines and private circuits is recognised evenly
over the period to which it relates. Revenue from calls is recognised at
the time the call is made over the group’s network. Subscription fees,
consisting primarily of monthly charges for access to broadband and
other internet access or voice services, are recognised as revenue as the
service is provided. Revenue from the interconnection of voice and data
trac between other telecommunications operators is recognised at the
time of transit across the group’s network.
Equipment sales
Revenue from the sale of equipment is recognised when all the
signicant risks and rewards of ownership are transferred to the buyer,
which is normally the date the equipment is delivered and accepted by
the customer.
Long-term contractual arrangements
Revenue from long-term contractual arrangements including xed price
contracts to design and build software solutions, is recognised based
on the percentage of completion method. The stage of completion is
estimated using an appropriate measure according to the nature of
the contract such as the proportion of costs incurred relative to the
estimated total contract costs, or other measures of completion such
as the achievement of contract milestones and customer acceptance.
In the case of time and materials contracts, revenue is recognised as the
service is rendered.
Costs related to delivering services under long-term contractual
arrangements are expensed as incurred except for an element of
costs incurred in the initial contract set up, transition or transformation
phase, which is deferred and recorded within non-current assets. These
costs are then recognised in the income statement on a straight line
basis over the remaining contract term, unless the pattern of service
delivery indicates a dierent prole is appropriate. These costs are
directly attributable to specic contracts, relate to future activity,
will generate future economic benets and are assessed for
recoverability on a regular basis.
2. Critical accounting estimates and key judgements
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