BT 2002 Annual Report Download - page 82

1. Accounting for the reorganisation and demerger, changes in accounting policy and presentation and
discontinued activities
(a) Reorganisation and demerger
On 19 November 2001, the legal separation of the mmO2 business from the rest of the former British Telecommunications
plc group was completed and BT Group plc (BT Group) became the ultimate parent company of British
Telecommunications plc (BT). The legal structure of the transaction was such that BT transferred the mmO2 business to
mmO2 plc and BT Group Investments Limited (BTGI) became the immediate parent company of BT on 16 November
2001. On 19 November 2001, mmO2 plc transferred the shares in BTGI to BT Group, as consideration for the issue to
former BT shareholders of one ordinary share of 115 pence in the company, credited as fully paid, for each ordinary share
in BT held on 16 November 2001.
On 21 November 2001, following the approval of the Court, the nominal value of BT Group shares was reduced from
115 pence per ordinary share to 5 pence per ordinary share by way of a reduction of capital under section 135 of the
Companies Act 1985. The surplus of £9,537 million arising from this capital reduction has been credited to the group pro®t
and loss reserve.
The transfer of BTGI to the company has been accounted for as a group reconstruction in accordance with the
principles of merger accounting set out in Financial Reporting Standard 6 (FRS 6) and Schedule 4A to the Companies Act
1985. The consolidated ®nancial statements are therefore presented as if the company had been the parent company of
the group throughout the years ended 31 March 2000 and 2001 and up to the date of the demerger. The results of mmO2
have been included in discontinued activities in all three years.
The transfer of BT to BTGI on 16 November 2001 was a group reorganisation effected for non-equity consideration.
This transaction has been accounted for in these ®nancial statements using the principles of merger accounting as if BT
had been owned and controlled by BTGI throughout the years ended 31 March 2000 and 2001 and up to 16 November
2001. This is not in accordance with the Companies Act 1985 since the group reorganisation does not meet all the
conditions for merger accounting. If acquisition accounting had been applied to account for the reorganisation whereby
BTGI became the parent company of BT, this would have resulted in all the separable assets and liabilities of the BT Group
as at 16 November 2001 being recorded at their fair values, substantial goodwill and goodwill amortisation charges arising
and only the post demerger results being re¯ected within the BT Group consolidated ®nancial statements. The directors
consider that to have applied acquisition accounting in preparing these ®nancial statements would have failed to give a true
and fair view of the group's state of affairs and results. This is because, in substance, BT Group is the successor to BT and
its shareholders have had a continuing interest in the BT business both before and after the demerger. The directors
consider that it is not practicable to quantify the effects of this departure from the requirements of the Companies Act
1985.
In the company's ®nancial statements, its investment in BTGI is stated at the nominal value of shares issued. In
accordance with sections 131 and 133 of the Companies Act 1985, no premium was recorded on the ordinary shares
issued (see note 37). On consolidation, the difference between the nominal value of the shares issued and the aggregate
share capital, share premium and capital redemption reserve of BT at the date of the demerger (the merger difference), has
been debited to the other reserves (see note 28).
(b) Changes in accounting policy and presentation
During the year ended 31 March 2002, the company has changed its accounting policy on deferred taxation on
implementing FRS 19 ``Deferred taxation''. As explained in accounting policies (page 74), deferred taxation is now
accounted for on a full liability basis whereas it was previously accounted for on a partial provisioning basis. The effect of
the change is explained in notes 12 and 27. The comparative ®gures have been restated for the effect of this change in
policy.
The new disclosures required by FRS 17 ``Retirement bene®ts'' for the year ended 31 March 2002 are contained in
note 31. The company is required to implement this new accounting standard in its primary ®nancial statements in the year
ending 31 March 2004, at the latest.
The company complies with FRS 18 ``Accounting policies'' which is mandatory for the ®rst time for the year ended
31 March 2002 and there have been no changes in accounting policy as a result of implementing this standard.
During the year ended 31 March 2002, the group has made a number of changes in the presentation of its ®nancial
statements. Comparative ®gures have been restated accordingly. These are explained in the notes where material.
(c) Discontinued activities
On 1 June 2001, BT disposed of its interests in Japan Telecom and J-Phone Communications and, on 29 June 2001, its
interest in Airtel. On 22 June 2001, BT sold Yell, its classi®ed advertising directory businesses in the UK and the USA.
These activities, together with mmO2, are shown as discontinued operations in the pro®t and loss accounts. The
eliminations are intra-group eliminations. The interest charge allocated to mmO2 for all periods presented up to the date of
Notes to the financial statements
BT Group Annual Report and Form 20-F 2002 81