BT 2005 Annual Report Download - page 73

i Basis of preparation of the financial statements
The financial statements are prepared under the historical
cost convention and in accordance with applicable
accounting standards and the provisions of the
Companies Act 1985. The group financial statements
consolidate those of the company and all of its subsidiary
undertakings. Where the financial statements of
subsidiary undertakings, associates and joint ventures do
not conform with the group’s accounting policies,
appropriate adjustments are made on consolidation in
order to present the group financial statements on a
consistent basis. The principal subsidiary undertakings’
financial years are all coterminous with those of the
company. The results of undertakings acquired during the
year are consolidated from the date of effective
acquisition.
The preparation of financial statements requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
income and expenditure during the reporting period.
Actual results could differ from those estimates. Estimates
are used principally when accounting for interconnect
income, provision for doubtful debts, payments to
telecommunication operators, long-term contracts,
depreciation, goodwill amortisation and impairment,
employee pension schemes, provisions for liabilities and
charges and taxes.
ii Turnover
Group turnover net of discounts, which excludes value
added tax and other sales taxes, comprises the value of
services provided and equipment sales by group
undertakings, excluding those between them.
Total turnover is group turnover together with the
group’s share of its associates’ and joint ventures’
turnover.
Turnover from calls is recognised in the group profit
and loss account at the time the call is made over the
group’s networks. Turnover from rentals is recognised
evenly over the period to which the charges relate.
Turnover from equipment sales is recognised at the point
of sale. Prepaid call card sales are deferred until the
customer uses the stored value in the card to pay for the
relevant calls. Turnover arising from the provision of other
services, including maintenance contracts, is recognised
evenly over the periods in which the service is provided to
the customer. Turnover from installation and connection
activities is recognised in the period in which it is earned.
Turnover from long term contracts is recognised
throughout the duration of the contract, to the extent
that the outcome of the contract can be assessed with
reasonable certainty and in accordance with the stage of
completion of contractual obligations. Turnover from
classified directories, mainly comprising advertising
revenue, is recognised in the group profit and loss
account upon completion of delivery.
iii Research and development
Expenditure on research and development is written off as
incurred.
iv Leases
Assets held under finance leases are capitalised and
depreciated over their useful lives. The capital element of
future obligations under finance leases are recognised as
liabilities. The interest element of rental obligations are
charged over the period of the finance lease and represent
a constant proportion of the balance of capital
repayments outstanding.
Operating lease rentals are charged against the profit
and loss account on a straight-line basis over the lease
period except where the contractual payment terms are
considered to be a more systematic and appropriate
basis.
v Interest
Interest payable, including that related to financing the
construction of tangible fixed assets, is written off as
incurred. Discounts or premiums and expenses on the
issue of debt securities are amortised over the term of the
related security and included within interest payable.
Premiums payable on early redemptions of debt
securities, in lieu of future interest costs, are written off
when paid.
vi Foreign currencies
On consolidation, assets and liabilities of foreign
undertakings are translated into sterling at year end
exchange rates. The results of foreign undertakings are
translated into sterling at average rates of exchange for
the year.
Exchange differences arising from the retranslation at
year end exchange rates of the net investment in foreign
undertakings, less exchange differences on borrowings
which finance or provide a hedge against those
undertakings, are taken to reserves and are reported in
the statement of total recognised gains and losses.
All other exchange gains or losses are dealt with
through the profit and loss account.
vii Intangibles
(a) Goodwill
Goodwill, arising from the purchase of subsidiary
undertakings and interests in associates and joint
ventures, represents the excess of the fair value of the
purchase consideration over the fair value of the
identifiable net assets acquired.
Prior to becoming a subsidiary undertaking, Albacom
SpA was accounted for as a joint venture. In accordance
with FRS 2 ‘Accounting for subsidiary undertakings’, and
in order to give a true and fair view, purchased goodwill
has been calculated as the sum of goodwill arising on
each purchase of shares in Albacom and represents a
departure from the statutory method. See note 15 for
further information.
For acquisitions completed on or after 1 April 1998,
the goodwill arising is capitalised as an intangible asset
or, if arising in respect of an associate or joint venture,
recorded as part of the related investment. Goodwill is
amortised on a straight line basis from the time of
acquisition over its useful economic life. The economic life
is normally presumed to be a maximum of 20 years.
For acquisitions on or before 31 March 1998, the
goodwill is written off on acquisition against group
reserves.
If an undertaking is subsequently divested, the
appropriate unamortised goodwill or goodwill written off
to reserves is dealt with through the profit and loss
account in the period of disposal as part of the gain or
loss on divestment.
72 BT Group plc Annual Report and Form 20-F 2005
Accounting policies