BT 2004 Annual Report Download - page 126

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, with 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. The fair value of termination
benefits for employees who are to be retained beyond their minimum contractual retention period is recognised
on a straight line basis over the future service period.
(d) Capitalisation of interest
Under UK GAAP, the group does not capitalise interest. 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 mmO
2
demerger. The amount of interest capitalised is determined by reference to the
average interest rates on outstanding borrowings. At 31 March 2004 under US GAAP, gross capitalised interest
of £358 million (2003 – £461 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, no goodwill
impairment charge was recognised in the year ended 31 March 2004 (2003 – £54 million). Goodwill of
£12 million (2003 – £20 million) amortised under UK GAAP is written back through the income statement.
BT Annual Report and Form 20-F 2004125 United States Generally Accepted Accounting Principles