BT 2005 Annual Report Download - page 44

presentation of financial instruments. These standards will
be adopted by BT with effect from 1 April 2005.
The fair value of derivative financial instruments,
existing at 1 April 2005, will be included on the balance
sheet at fair value. Future market interest rate and
currency movements will give rise to adjustments to these
fair values. Where hedge accounting cannot be applied
under the prescriptive rules of IAS 39, changes in market
values of financial instruments will impact the profit and
loss account. We expect group reserves at 1 April 2005 to
be approximately £500 million lower under IFRS, than
under UK GAAP, as a result of adopting IAS 39.
The group will present a reconciliation between the
closing 31 March 2005 UK GAAP equity and opening
1 April 2005 IFRS equity when the first IFRS results are
announced for the first quarter to 30 June 2005.
US GAAP
The group’s net income and earnings per share for the
three financial years ended 31 March 2005 and
shareholders’ equity at 31 March 2005 and 2004 under
US Generally Accepted Accounting Principles (US GAAP)
are shown in the United States Generally Accepted
Accounting Principles Section. Differences between UK
GAAP and US GAAP include results of the differing
accounting treatment of leasing transactions, pension
costs, redundancy costs, intangible assets, goodwill,
deferred taxation, capitalisation of interest, financial
instruments, share based payment and dividends. Cash
flow information under the US GAAP presentation is also
shown further in this document.
In December 2004, the FASB issued Statement of
Financial Accounting Standards No. 123R (SFAS 123R)
‘Share-Based Payment’ which revises SFAS 123 and
supersedes APB 25. SFAS 123R requires that the cost of
all share-based payment transactions be recognised in the
financial statements. SFAS 123R also establishes fair
value as the measurement method in accounting for
share-based payments to employees. BT adopted SFAS
123R on 1 April 2005 using the modified prospective
transition method. BT estimates the application of the
expensing provisions of SFAS 123R will result in a pre-tax
expense of approximately £45 million in the 2006
financial year subject to additional grants and awards.
In December 2004, the FASB issued Statement of
Financial Accounting Standards No. 153 (SFAS 153)
‘Exchanges of Non-monetary Assets – an amendment of
APB Opinion No. 29’. SFAS 153 addresses the
measurement of exchanges of non-monetary assets. It
eliminates the exception from fair value measurement for
non-monetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29 ‘Accounting for
Non-monetary Transactions’ and replaces it with an
exception for exchanges that do not have commercial
substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are
expected to change significantly as a result of the
exchange. As required by SFAS 153, we will adopt this
new accounting standard effective July 1, 2005. The
adoption of SFAS 153 is not expected to have a material
impact on our financial position, results of operations or
cash flows.
In November 2004, the FASB issued Statement of
Financial Accounting Standards No. 151 (SFAS 151),
‘Inventory Costs – an amendment of ARB No. 43, Chapter
4’, which clarifies that abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage) should be recognised as a current period
expense. In addition, SFAS 151 requires that allocation of
fixed production overhead to the costs of conversion be
based on the normal capacity of the production facilities.
SFAS 151 is effective for fiscal years beginning after June
15, 2005. BT does not believe that the implementation of
this standard will have a material impact on its financial
position, results of operations or cash flows.
In September 2004, the EITF reached a consensus on
EITF Issue No. 02-14 ‘Whether an Investor Should Apply
the Equity Method of Accounting to Investments Other
Than Common Stock’, in which the Task Force reached
the consensus that an investor that has the ability to
exercise significant influence over the operating and
financial policies of the investee should apply the equity
method of accounting when it has an investment in
common stock and/or an investment that is in-substance
common stock. The consensus of this EITF is to be applied
in reporting periods beginning after September 15, 2004.
We do not believe the adoption of this standard will have
a material impact on our financial position, results of
operations or cash flows.
In October 2004, the EITF reached a consensus on
Issue No. 04-1 ‘Accounting for Pre-existing Relationships
between the Parties to a Business Combination’
(EITF 04-1). EITF 04-1 addresses the accounting
treatment of pre-existing relationships between the
parties of a business combination. The consensus of EITF
04-1 should be applied to business combinations
consummated and goodwill impairment tests performed
in reporting periods beginning after the FASB ratified the
consensus at its October 13, 2004 meeting. The group
will adopt the provisions of EITF 04-1 as of April 1, 2005.
If it is determined that assets of an acquired entity are
related to a pre-existing contractual relationship, thus
requiring accounting separate from the business
combination, BT will evaluate whether the acquiring
entity of the group should recognise contractual
relationships as assets separate from goodwill in that
business combination.
In March 2004, the EITF reached a consensus on EITF
Issue No. 03-1, ‘The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments’
(EITF 03-1). The guidance prescribed a three-step model
for determining whether an investment is other-than-
temporarily impaired and requires disclosure for
unrealized losses on investments. In September 2004, the
FASB issued FASB Staff Position EITF 03-1-1 ‘Effective
Date of Paragraphs 10-20 of EITF Issue No. 03-1’ (FSP
EITF 03-1-1). FSP EITF 03-1-1 delays the effective date
for the measurement and recognition guidance contained
in paragraphs 10-20 of EITF 03-1. The disclosure
requirements of EITF 03-1 remain effective for fiscal years
ending after June 15, 2004. No effective date for the
measurement and recognition guidance has been
established in FSP EITF 03-1-1. During the period of
delay, FSP EITF 03-1-1 states that companies should
continue to apply current guidance to determine if an
impairment is other-than-temporary. The adoption of EITF
03-1, excluding paragraphs 10-20, did not impact the
group’s consolidated financial position, results of
operations or cash flows. The group will assess the impact
of paragraphs 10-20 of EITF 03-1 once the guidance has
been finalised.
Operating and financial review BT Group plc Annual Report and Form 20-F 2005 43