BT 2005 Annual Report Download - page 43

A pension liability of £4,781 million (£3,347 million net of
tax) would be recognised at 31 March 2005, offset by the
reversal of provisions and other creditors of £44 million,
and the pension prepayment on the UK GAAP balance
sheet of £1,118 million. The tax effect of this reversal is
£329 million. The net effect is a reduction in
shareholders’ funds of £4,092 million at 31 March 2005.
Share-based payment
Under UK GAAP an expense is recognised for the award of
share options and shares based on their intrinsic value
(the difference between the exercise price and the market
value at date of the award). The majority of BT’s
share-based payments are made under all employee Save
As You Earn plans which are exempt under UK GAAP and
the intrinsic value of many of the senior management
schemes is nil.
Under IFRS 2 ‘Share-based payment’, an expense is
recognised in the income statement for all share-based
payments (both awards of options and awards of shares).
This expense is based on the fair value at the date of
grant of the award, using option pricing models, and is
charged over the related vesting period.
The accounting rules of IFRS 2 will result in an
estimated operating charge for the 2005 financial year of
£39 million, which is offset by the reversal of the UK GAAP
charge of £11 million. The majority of this IFRS charge
relates to the group’s all employee Save As You Earn
schemes. There is a related tax credit of £9 million, offset
by the reversal of the UK GAAP tax credit of £3 million. The
credit for the share based payments is recognised directly
in reserves as the awards are equity settled.
Goodwill and other intangible assets
UK GAAP requires goodwill to be amortised over its
expected useful economic life. Under IFRS 3 ‘Business
Combinations’, goodwill is no longer amortised but held at
carrying value on the balance sheet and tested annually for
impairment. BT has elected to adopt the IFRS 1 exemption,
which allows existing UK GAAP goodwill at the transition
date not to be restated but to be tested for impairment.
IAS 38 ‘Intangible assets’ requires other intangible
assets arising on acquisitions after the transition date to
be separately identified and amortised over their useful
economic life, often a shorter period than for goodwill. As
a result, intangible assets such as customer relationships
and trademarks, need to be separately valued and
recognised on business combinations, and then amortised
over their useful economic lives.
The goodwill amortisation charged in 2005 financial
year of £16 million under UK GAAP will be reversed.
During the year BT has undertaken a number of
acquisitions, detailed in note 15 to the accounts.
Events after the balance sheet date
Under UK GAAP, the dividend charge is recognised in the
profit and loss account in the period to which it relates.
Under IAS 10 ‘Events after the Balance Sheet Date’, the
dividend charge is not recognised in the income
statement but is recognised directly in reserves. In
addition the dividend is required to be recognised in the
period in which it is declared.
The final dividend creditor of £551 million for the
2005 financial year will be reversed as it was not declared
at 31 March 2005.
Foreign exchange
Under UK GAAP, exchange differences arising from the
translation of inter-company loans, which provide finance
or provide a hedge against foreign undertakings, are
taken to reserves on consolidation. These exchange
differences are reported in the statement of total
recognised gains and losses. Under IAS 21 ‘The Effects of
Changes in Foreign Exchange Rates’, foreign exchange
gains and losses arising on certain inter-company loans
are excluded from the amount taken to reserve on
consolidation. Foreign exchange gains and losses on these
balances are recognised in the profit and loss account
under IFRS.
In the 2005 financial year a consolidated foreign
exchange gain of £4 million, which was taken directly to
the profit and loss reserve under UK GAAP, is reversed
into operating profit.
Lease accounting
There is a requirement under IAS 17 ‘Leases’ to view
leases of land separately from leases of buildings.
Furthermore, there is a requirement to recognise
operating lease charges as an expense on a straight line
basis. As a result the building elements of a small number
of properties have been reclassified from operating leases
under UK GAAP to finance leases under IFRS, and lease
rentals under BT’s 2001 sale and leaseback transaction
are recognised on a straight line basis.
The profit before tax for the 2005 financial year will be
reduced by approximately £3 million, as a result of the
recognition of depreciation and finance lease interest
charges and the removal of the UK GAAP operating lease
charges for the properties reclassified as finance leases.
The charge for the 2005 financial year will also reduce by
approximately £101 million due to operating lease
charges being recognised on a straight line basis.
Other adjustments
There are a number of other minor adjustments and
reclassification under IFRS, including;
(i) Computer software that is not an integral part of
hardware is treated as an intangible asset. Under UK
GAAP, the group’s policy was to categorise all
capitalised software as tangible fixed assets. This will
result in a balance sheet reclassification.
(ii) Deferred tax assets and deferred tax liabilities are
required to be shown separately on the face of the
balance sheet. Under UK GAAP the net deferred tax
liability was shown within provisions. This will result in
£1,660 million being reclassified to deferred tax assets
leaving £1,941 million as deferred tax liabilities.
(iii)Liquid investments with maturities of less than three
months at acquisition are included within cash and
cash equivalents rather than current asset investments
resulting in a reclassification.
(iv)Cash flow statements under IFRS have a different
presentational format although the underlying cash
flows remain unchanged.
Financial instruments
BT has taken the IFRS 1 exemption not to restate
comparatives for the adoption of IAS 32 ‘Financial
Instruments: Disclosure and Presentation’, and IAS 39
‘Financial Instruments: Recognition and Measurement’.
These standards set out the accounting rules surrounding
the recognition, measurement, disclosure and
42 BT Group plc Annual Report and Form 20-F 2005 Operating and financial review