BT 2005 Annual Report Download - page 114

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. The amount of interest capitalised is determined by reference to the average interest rates on
outstanding borrowings. At 31 March 2005 under US GAAP, gross capitalised interest of £349 million (2004 –
£358 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. 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. All unamortised and pre-April 1998 goodwill will be brought back to the profit and loss account on disposal.
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. BT adopted SFAS No. 142 on
1 April 2002 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 2005 (2004 – nil, 2003 – £54 million). Goodwill of £16 million (2004 – £12 million, 2003 –
£20 million) amortised under UK GAAP is written back through the income statement.
(f) Intangible assets
Certain intangible fixed assets recognised under US GAAP purchase accounting requirements are subsumed within
goodwill under UK GAAP. The intangible assets acquired in the 2005 financial year comprise customer relationships
and brand relating to Infonet – see note 15. Under US GAAP these separately identified intangible assets are valued
and amortised over their useful lives which range from 5 to 15 years.
(g) Financial instruments
Under UK GAAP, investments are held on the balance sheet at historical cost. Gains and losses on instruments used for
hedges are not recognised until the exposure being hedged is recognised. Under US GAAP, trading securities and
available-for-sale securities are carried at market value with appropriate valuation adjustments recorded in profit and
loss and shareholders’ equity, respectively.
United States Generally Accepted Accounting Principles BT Group plc Annual Report and Form 20-F 2005 113