BT 2005 Annual Report Download - page 41

regular pension cost is charged at 11.3% of pensionable
salaries compared to the 11.6% rate applied in the 2003
financial year.
The full FRS 17 disclosures are provided in the notes to
the financial statements. At 31 March 2005 the FRS 17
deficit was £3.3 billion, net of tax, being a £0.3 billion
reduction from £3.6 billion at 31 March 2004.
The number of retired members and other current
beneficiaries in the pension fund has been increasing in
recent years and, at 31 December 2004, was
approximately 122% higher than the number of active
members. Consequently, BT’s future pension costs and
contributions will depend on the investment returns of the
pension fund and could fluctuate in the medium term.
The BTPS was closed to new entrants on 31 March
2001 and we launched a new defined contribution
pension scheme for people joining BT after that date
which is to provide benefits based on the employees’ and
the employing company’s contributions. This change is in
line with the practice increasingly adopted by major UK
groups and is designed to be more flexible for employees
and enable the group to determine its pension costs more
precisely than is the case for defined benefit schemes.
The financial impact of this change was not significant in
the financial years under review and is not expected to be
significant in the next few years but it should reduce
pension costs in the longer term.
Geographical information
In the 2005 financial year, approximately 91% of the
group’s turnover was generated by operations in the UK,
compared with 93% in the 2004 and 94% in the 2003
financial years. BT’s operating profits have been derived
from its UK operations with losses being incurred outside
the UK in each of the last three financial years.
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 cover the 2004 financial year, 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. New SMP conditions (see ‘Regulation,
competition and prices’ – ‘Conditions applying to BT
only’) apply for the 2005 financial year onwards. 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 2004 and 2003 financial
years showed that the group’s operating profit is derived
predominantly from fixed-network calls.
Regulation, competition and prices
See pages 15 to 22 in the ‘‘Business review’’ section.
Competition and the UK economy
See page 17 in the ‘‘Business review’’ section.
Environment
See pages 44 to 45 in the ‘‘Our commitment to society’’
section.
Critical accounting policies
The group’s principal accounting policies are set out on
pages 72 to 74 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
2005 financial statements. Additionally, during the 2005
financial year, the group adopted UITF Abstract 38
‘Accounting for ESOP trusts’ and the related amendments
to UITF Abstract 17 (revised 2003) ‘Employee Share
Schemes’. See note 1 on page 81 for details.
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
40 BT Group plc Annual Report and Form 20-F 2005 Operating and financial review