BT 2003 Annual Report Download - page 129

The group’s consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the UK (UK GAAP), which differ in certain respects from those applicable in the US (US GAAP).
I Differences between United Kingdom and United States generally accepted accounting principles
The following are the main differences between UK and US GAAP which are relevant to the group’s
financial statements.
(a) Sale and leaseback of properties
Under UK GAAP, the sale of BT’s property portfolio is treated as a fixed asset disposal and the subsequent
leaseback is an operating lease. Under US GAAP, the transaction is regarded as financing and the land and
buildings are recorded on the balance sheet at their net book value, an obligation equivalent to the cash proceeds
is recognised and the gain on disposal is deferred until the properties are vacated by BT. Rental payments made
by BT are reversed and replaced by a finance lease interest charge and a depreciation charge.
(b) Pension costs
Under UK GAAP, pension costs are accounted for in accordance with UK Statement of Standard Accounting
Practice No. 24, costs being charged against profits over employees’ working lives. Under US GAAP, pension
costs are determined in accordance with the requirements of US Statements of Financial Accounting Standards
(SFAS) Nos. 87 and 88. Differences between the UK and US GAAP figures arise from the requirement to use
different actuarial methods and assumptions and a different method of amortising surpluses or deficits.
(c) Accounting for redundancies
Under UK GAAP, the cost of providing incremental pension benefits in respect of workforce reductions is taken
into account when determining current and future pension costs, unless the most recent actuarial valuation,
combined with the provision for pension costs in the group balance sheet, under UK actuarial conventions, shows
a deficit. In this case, the cost of providing incremental pension benefits is included in redundancy charges in
the year in which the employees agree to leave the group.
Under US GAAP, the associated costs of providing incremental pension benefits are charged against profits
in the period in which the termination terms are agreed with the employees.
(d) Capitalisation of interest
Under UK GAAP, the group does not capitalise interest in its financial statements. To comply with US GAAP,
the estimated amount of interest incurred whilst constructing major capital projects is included in fixed assets,
and depreciated over the lives of the related assets. This included capitalisation of interest incurred on funding
the 3G licences up to the date of the demerger. The amount of interest capitalised is determined by reference
to the average interest rates on outstanding borrowings. At 31 March 2003 under US GAAP, gross capitalised
interest of £461 million (2002 – £330 million) with regard to the company and its subsidiary companies was
subject to depreciation generally over periods of 3 to 25 years.
(e) Goodwill
Under UK GAAP, in respect of acquisitions completed prior to 1 April 1998, the group wrote off goodwill arising
from the purchase of subsidiary undertakings, associates and joint ventures on acquisition against retained
earnings. The goodwill is reflected in the net income of the period of disposal, as part of the calculation of the gain
or loss on divestment. All unamortised and pre-April 1998 goodwill will be brought back to the profit and loss
account on disposal. Following the implementation of UK Financial Reporting Standard No. 10 (FRS 10), goodwill
arising on acquisitions completed after 1 April 1998 is capitalised and amortised on a straight line basis over its
useful economic life.
Under US GAAP up to 31 March 2002, goodwill arising on the acquisition of subsidiaries, associates and joint
ventures was capitalised as an intangible asset and amortised over its useful life. With effect from 1 April 2002
BT has adopted SFAS No. 142, and goodwill is no longer amortised but tested annually for impairment.
In connection with the adoption of SFAS No. 142 transitional and annual impairment reviews were performed.
There was no transitional impairment charge recorded. As a result of the annual impairment review, a goodwill
impairment charge of £54 million has been recognised in the year ended 31 March 2003. Goodwill of £20 million
amortised under UK GAAP is written back through the income statement.
(f) Mobile cellular telephone licences, software and other intangible assets
Certain intangible fixed assets recognised under US GAAP purchase accounting requirements are subsumed
within goodwill under UK GAAP. Under US GAAP these separately identified intangible assets are valued and
amortised over their useful lives of 20 years.
(g) Financial instruments
Under UK GAAP, investments are held on the balance sheet at historical cost, and own shares held in trust for
share schemes are recorded in fixed asset investments. Gains and losses on instruments used for hedges are not
128 BT Annual Report and Form 20-F 2003
United States Generally Accepted Accounting Principles