BT 2005 Annual Report Download - page 42

contractual period, turnover, costs 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 357,000 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.
The actual tax we pay on our profits is determined
according to complex tax laws and regulations. Where the
effect of these laws and regulations is unclear, we use
estimates in determining the liability for the tax to be paid
on our past profits which we recognise in our financial
statements.
Adoption of International Financial Reporting
Standards (IFRS)
In compliance with European Union regulations BT will be
adopting IFRS as the basis of accounting for the 2006
financial year. This will lead to a number of changes in
future reported financial information.
The group started its IFRS transition project in 2003.
The project team is overseen by the Group Finance
Director and regular updates have been provided to the
Audit Committee. The project has involved a detailed
assessment of the impact of IFRS on BT’s accounting
policies and reported results; system changes to capture
additional data; training of staff and communications. As
part of the transition to IFRS, in March 2005, we
presented on our investor relations website our view of
the pro forma financial impact of adopting IFRS for the
2004 financial year.
BT continues to report under UK Generally Accepted
Accounting Principles (UK GAAP) for the 2005 financial
year, but will be presenting financial information in
accordance with IFRS for each quarter and the year
ending 31 March 2006.
The following provides additional information on the
unaudited pro forma impact of IFRS in advance of the
publication of the first IFRS results, and the material
changes to BT’s accounting policies used to prepare the
financial results for 2005 financial year.
Whilst some of the changes required by IFRS will
impact BT’s reported profits and net assets this has no
impact on the cash flows generated by the business or the
cash resources available for investment or distribution to
shareholders. Furthermore the adoption of IFRS does not
affect BT’s strategy or underlying business performance.
It is important to note that the IFRS position as stated
is BT’s current view based on the financial reporting
standards currently in issue and changes may arise as new
accounting pronouncements are developed and issued.
Due to a number of new and revised Standards included
within the body of Standards that comprise IFRS, there is
not yet a significant body of established practice on which
to draw in forming opinions regarding interpretation and
application. Accordingly, practice is continuing to evolve.
At this stage, therefore, the full financial effect of
reporting under IFRS, as it will be applied and reported in
the group’s first IFRS financial statements, may be subject
to change.
We estimate that the pro forma impact of adopting
IFRS on the reported UK GAAP results for the 2005
financial year would have been negligible on the
underlying earnings, being the profit before goodwill
amortisation, exceptional items and tax and the earnings
per share before goodwill amortisation and exceptional
items. However, due to the inherent volatilities introduced
by IFRS, no such statement can be made in respect of
future years. These estimates exclude the mark to market
effects of IAS 39 ‘Financial Instruments: Recognition and
Measurement’ which we are not required to apply until
1 April 2005.
Pensions
Under UK GAAP, the group measures pension
commitments and other related post-retirement benefits
in accordance with SSAP 24 ‘Accounting for Pension
Costs’ with additional disclosures provided in accordance
with FRS 17 ‘Retirement Benefits’. Under IFRS, the group
will measure pension commitments and other related
post-retirement benefits in accordance with IAS 19
‘Employee Benefits’, which takes a similar approach to
FRS 17.
On adoption of IAS 19 the deficit/surplus of defined
benefit pension schemes will be recognised on balance
sheet. The amended version of IAS 19, which is subject to
EU approval, allows companies to choose to recognise
actuarial gains and losses immediately in reserves or
alternatively to be held on the balance sheet and released
to the income statement over a period of time. BT has
elected to early adopt the amended version of IAS 19 and
reflect the impact of actuarial gains and losses
immediately in reserves.
The income statement charge is split between an
operating charge and a net finance charge. The net
finance charge relates to the unwinding of the discount
applied to the liabilities of the scheme offset by the
expected return on the assets of the scheme, based on
conditions prevailing at the start of the year.
Under SSAP 24, the asset on the balance sheet
represents the timing differences between the pension
charge to the profit and loss account and the payments
made to the pension scheme. Under IFRS, the liability/
asset on the balance sheet represents the deficit/surplus
in the pension scheme. The scheme assets are valued at
market value and the liabilities are discounted using a
high quality corporate bond rate.
Under SSAP 24, a pension charge for the 2005
financial year of £465 million, including a charge for the
amortisation of the SSAP 24 deficit in the BT Pension
Scheme, and an interest credit relating to the balance
sheet prepayment was recognised. Under IFRS the
estimated total charge of £342 million is split between an
operating charge of £540 million and a net finance
interest income of £198 million. Accordingly there is an
additional £75 million charge to operating profit and a
net finance income of £198 million under IFRS.
Operating and financial review BT Group plc Annual Report and Form 20-F 2005 41