BT 2004 Annual Report Download - page 46

Parliament and then to a referendum. BT has
completed outline planning, participated in by
representatives from across each of the BT lines of
business and supporting group functions, for adoption
of the euro. BT policy will ensure consistency of
approach across the group and will be in line with
Government plans for a phased transition.
Regulatory financial information
BT is required under the continuation notice issued by
Oftel on 25 July 2003, which extends the applicability
of certain conditions previously included in its main
licence, to publish disaggregated financial 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 financial statements do not necessarily
correspond with any businesses separately managed,
funded or operated within the group. The results set
out in regulatory financial statements for the 2003 and
2002 financial years showed that the group’s
operating profit is derived predominantly from fixed-
network calls.
Regulation, competition and prices
See pages 17 to 23 in the ‘‘Business review’’ section.
Competition and the UK economy
See page 20 in the ‘‘Business review’’ section.
Environment
See pages 47 to 48 in the ‘‘Our commitment to
society’’ section.
Critical accounting policies
The group’s principal accounting policies are set out
on pages 75 to 77 of the Consolidated financial
statements and conform with UK Generally Accepted
Accounting Principles (UK GAAP). In accordance with
the requirements of Financial Reporting Standard
No. 18, these policies and applicable estimation
techniques have been reviewed by the directors who
have confirmed them to be the most appropriate for
the preparation of the 2004 financial statements.
We, in common with virtually all other companies,
need to use estimates in the preparation of our
financial statements. The most sensitive estimates
affecting our financial statements are in the areas of
assessing the level of interconnect income with and
payments to other telecommunications operators,
providing for doubtful debts, establishing fixed asset
lives for depreciation purposes, assessing the stage of
completion and likely outcome under long term
contracts, 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 profits.
We are required to interconnect our networks with
other telecommunications operators. In certain
instances we rely on other operators to measure the
traffic flows 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 20 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 ten 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
reflect current thinking on their remaining lives in light
of technological change, prospective economic
utilisation and physical condition of the assets
concerned.
As part of the property rationalisation programme
we have identified a number of properties that are
surplus to requirements. Although efforts are being
made to sub-let this space it is recognised by
management that this may not be possible
immediately in the current economic environment.
Estimates have been made of the cost of vacant
possession and any shortfall arising from the sub lease
rental income being lower than the lease costs being
borne by BT.
We enter into long term customer contracts which
can extend over a number of financial years. During
the contractual period, turnover, cost and profits may
be impacted by estimates of the ultimate profitability
of each contract. If, at any time, these estimates
indicate the contract will be unprofitable, the entire
estimated loss for the contract is recognised
immediately. The company performs ongoing
profitability analyses of its contracts in order to
determine whether the latest estimates require
updating. Key factors reviewed include future staff and
third party costs and potential productivity efficiencies.
We have a commitment, mainly through the BT
Pension Scheme, to pay pension benefits to
approximately 362,000 people over more than
60 years. The cost of these benefits 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 determining the pension costs and
liabilities incorporated in our financial statements.
In the 2002 financial year, we made charges for
the impairment of the carrying value of goodwill,
BT Annual Report and Form 20-F 200445 Operating and financial review