BT 2001 Annual Report Download - page 48

Financial review
standard has no e¡ect on the actual corporation tax we shall
pay or on our cash £ows. The standard allows companies to
discount their deferred tax liabilities. We do not intend to adopt
this discounting approach since it is not in line with US GAAP
and it might introduce unnecessary volatility into the pro¢t
and loss account.
Under a new UK accounting standard FRS 17 ^
Accounting for retirement bene¢ts, the method of accounting
for de¢ned bene¢t pensions will be substantially changed. We
are required to adopt fully this new standard by our 2004
¢nancial year. We expect this standard will have the e¡ect of
increasing the pension costs to be included in operating costs,
thus reducing our operating pro¢t, but this will be o¡set in
part by our stated ¢nancing costs being reduced. Pension fund
actuarial gains and losses, including investment returns
varying from the assumed returns, will be recorded in full in
our statement of recognised gains and losses annually. Pension
fund de¢cits, calculated in accordance with prescribed rules in
the standard, will be shown in our balance sheet as will any
surpluses to the extent we expect to obtain value from them in
the foreseeable future.
Economic and Monetary Union (EMU)
On 1 January 1999, a new currency, the euro, was introduced
into the European Union as part of EMU. Twelve member
states have established ¢xed conversion rates between their
existing currencies and the euro. The currencies of these
participating member states now exist only as subdivisions of
the euro. It is expected that these national currencies will be
withdrawn on 31 December 2001 and that all notes and coins in
these currencies will cease to be valid tender by 1 June 2002.
Most of the group’s business in Europe is conducted in the
UK, which is not one of the 12 participating member states.
Government policy on UK membership of the single currency
was set out by the Chancellor of the Exchequer in a statement
to the House of Commons in October 1997, as restated by the
PrimeMinisterinFebruary1999onthelaunchofthe¢rst
Outline National Changeover Plan. The determining factor
underpinning any Government decision on membership of the
single currency is whether the economic case for the UK joining
is clear and unambiguous. Because of the magnitude of the
decision, HM Government believes that, whenever the decision
to enter is taken, it should be put to a referendum of the British
people. The Government has said that it will produce an
assessment of ¢ve relevant economic tests early in the next
parliament, which commences in June 2001, and that both
Government and business should make active preparations to
give the UK the genuine option to decide to join.
BT has established a steering group, with representatives
from across each of the lines of business and supporting group
functions, to review the impact of the introduction of EMU. A
project team acts as a co-ordination point to ensure consistency
of approach across the group and that plans are in place to
meet agreed business strategy on EMU.
The group carries on business in certain of the
participating member states and is continuing to take
appropriate steps to adapt its operations to use the euro.
BT is considering the impact of EMU on the UK business
and the associated costs.
US GAAP
The group’s net income (loss) and earnings (loss) per share for
the three ¢nancial years ended 31 March 2001 and shareholders’
equity at 31 March 2001 and 2000 under US Generally Accepted
Accounting Principles (US GAAP) are shown further in the
United States Generally Accepted Accounting Principles Section
(see Consolidated ¢nancial statements). Di¡erences between
UK GAAP and US GAAP include results of the di¡ering
accounting treatment of pension costs, redundancy costs,
intangible assets, goodwill, deferred taxation, capitalisation of
interest, ¢nancial instruments, contributing assets to joint
ventures, stock compensation, directories in progress and
dividends. Cash £ow information under the US GAAP
presentation is also shown further in this document.
SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities as amended by SFAS No. 137 and
SFAS No. 138, became e¡ective for BT on 1 April 2001.
SFAS No. 133, which requires the group to record all
derivatives on the balance sheet at fair value, introduces new
rules in respect of hedge accounting and the recognition of
movements in fair value through the income statement. BT
expects that it will not designate any of its derivative
instruments as qualifying hedge instruments under
SFAS No. 133 and, accordingly, the group expects to record
changes in the fair value of its derivative instruments in
current earnings each period. The group expects that the one-
time pre-tax charge for the initial adoption of SFAS No. 133 to
be recorded against US GAAP income will not be material. The
group expects to record an unrealised pre-tax loss of
approximately »143 million in shareholders’ equity for the
quarter ending 30 June 2001. These transition adjustments will
be calculated using the assumption that none of the hedging
relationships that existed prior to the adoption of SFAS No. 133
will qualify for hedge accounting after the adoption of
SFAS No. 133. At this time, the group plans no signi¢cant
change to its risk management strategies due to the adoption of
SFAS No. 133.
48 BT Annual report and Form 20-F