BT 2004 Annual Report Download - page 107

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28. Reconciliation of movement in shareholders’ funds continued
Reorganisation and demerger
On 19 November 2001, the legal separation of the mmO
2
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 mmO
2
business to mmO
2
plc and BT Group Investments Limited (BTGI) became the immediate
parent company of BT on 16 November 2001. On 19 November 2001, mmO
2
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 profit 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 financial statements are therefore presented as if the company had
been the parent company of the group throughout the year ended 31 March 2001 and up to the date of the
demerger. The results of mmO
2
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 financial statements using the principles of
merger accounting as if BT had been owned and controlled by BTGI throughout the year ended 31 March 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 reflected within the BT Group consolidated financial statements. The directors consider that to have
applied acquisition accounting in preparing these financial 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 financial 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.
29. Related party transactions
In the year ended 31 March 2004, the group’s turnover with its associates and joint ventures amounted to
£1 million (2003 – £3 million, 2002 – £15 million) and the group purchased £60 million (2003 – £69 million,
2002 – £99 million) in services and products from these undertakings. Interest for the year of £nil (2003 – £nil,
2002 – £1 million) was receivable on debt due from these undertakings. The amount of debt outstanding with
these undertakings, at 31 March 2004, was £28 million (2003 – £20 million). The maximum debt outstanding
during the year was £43 million (2003 – £92 million). As at the latest practicable date, 14 May 2004, the
amount of debt outstanding was £28 million.
There were a number of transactions during the year between the company and its subsidiary undertakings,
which are eliminated on consolidation and therefore not disclosed.
BT Annual Report and Form 20-F 2004106 Notes to the financial statements