BT 2002 Annual Report Download - page 46

reduction in residential exchange line connections as a result
of increasing competition from these cable operators in
certain geographic areas. As the cable operators are currently
concentrating on increasing penetration in current markets
rather than expanding their geographic coverage this is not
expected to continue in the short-term.
The group has seen some diversion of demand from
its ®xed network as a result of the growth in mobile voice
calls and other licensed operators' activities. This diversion
may intensify now that BT's ®xed line customers are able
to pre-select their carrier.
Additionally, BT's Licence was amended in April 2000
to require BT to provide other operators with use of the lines
connecting BT's local exchanges to its customers and allow
operators to install equipment in BT's exchanges (local loop
unbundling). As a result of an EU Regulation this
amendment took effect from 30 December 2000.
For its operations as a whole, BT expects the
competitive pressure to persist and it will continue to defend
its market share vigorously and fairly.
The strength of the UK economy is an important
determinant of BT's business volumes and the gross
domestic product grew by 1.0% in the 2002 ®nancial year,
compared with 2.9% and 3.0% in the 2001 and 2000
®nancial years, respectively.
Environment
When removing old analogue exchange equipment from
buildings, BT recycles the metal content and takes special
care to properly dispose of any hazardous materials.
Although BT receives proceeds from the sale of recovered
materials, this is more than offset by the cost of dealing with
hazardous materials, contracting and planning their removal
and preparing the released site for further development. BT
believes that the total cost of dealing with these hazardous
materials will not be signi®cant.
Geographical information
In the 2002 ®nancial year, approximately 89% of the group's
turnover, including discontinued activities, was generated by
operations in the UK, compared with 91% in the 2001 and
95% in the 2000 ®nancial years. Of its continuing activities,
approximately 92% of the group's turnover was generated
by operations in the UK in the 2002 ®nancial year,
compared with 95% in the 2001, and 91% in the 2000,
®nancial years. BT's operating pro®ts have been derived
from its UK operations with losses being incurred outside
the UK in each of the last three ®nancial years.
Regulatory ®nancial information
BT is required under its main licence to publish
disaggregated ®nancial information for various activities of
the group, which have been used as the basis of charges
paid by other telecommunication operators in the UK for the
use of BT's network. The activities presented separately in
the regulatory ®nancial statements do not necessarily
correspond with any businesses separately managed,
funded or operated within the group. The results set out in
these statements for the 2001 and 2000 ®nancial years
showed that the group's operating pro®t is derived
predominantly from ®xed-network calls.
Critical accounting policies
The group's principal accounting policies are set out on
pages 72 to 74 of the consolidated ®nancial statements and
conform with UK Generally Accepted Accounting Principles
(UK GAAP).
We, in common with virtually all other companies, need
to use estimates in the preparation of our ®nancial
statements. The most sensitive estimates affecting our
®nancial statements are in the areas of assessing the level
of interconnect income with and payments to other
telecommunications operators, providing for doubtful debts,
establishing ®xed asset lives for depreciation purposes,
making appropriate long-term assumptions in calculating
pension liabilities and costs, making appropriate
medium-term assumptions on asset impairment reviews
and calculating current tax liabilities on our pro®ts.
We are required to interconnect our networks with
other telecommunications operators. In certain instances
we rely on other operators to measure the traf®c ¯ows
interconnecting with our networks. We use estimates 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. We use estimates in assessing the likely effect
of these adjustments.
We provide services to over 21 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. We use estimates, based
on our historical experience, in determining the level of
debts that we believe will not be collected. These estimates
include such factors as the current state of the UK economy
and particular industry issues.
The plant and equipment used in our networks is
long-lived with cables and switching equipment operating
for over 10 years and underground ducts being used for
decades. The annual depreciation charge is sensitive to the
estimated service lives we allocate to each type of asset.
We regularly review these asset lives and change them
when necessary to re¯ect current thinking on their
remaining lives in light of technological change, prospective
economic utilisation and physical condition of the assets
concerned.
We have a commitment, mainly through the BT Pension
Scheme, to pay pension bene®ts to approximately 376,000
people over the next several decades. The cost of these
bene®ts 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
Financial review
BT Group Annual Report and Form 20-F 2002 45