BT 2006 Annual Report Download - page 114

34. EXPLANATION OF TRANSITION TO IFRS continued
First Time adoption exemptions applied
IFRS 1, ‘First-time Adoption of International Financial Reporting Standards’ sets out the transitional rules which must be applied
when IFRS is applied for the first time. The group is required to select accounting policies in accordance with IFRS valid at its first
IFRS reporting date and apply those policies retrospectively. The standard sets out certain mandatory exceptions to retrospective
application and certain optional exemptions. The exemptions adopted by the group are as set out below.
Business combinations: the group has elected not to apply IFRS 3, ‘Business Combinations’ retrospectively to business
combinations that occurred before the date of transition (1 April 2004).
Employee benefits: the group has elected to recognise all cumulative actuarial gains and losses from employee benefits schemes
at the date of transition. All subsequent actuarial gains and losses have been recognised in full in the period in which they occur in
the statement of recognised income and expense in accordance with IAS 19, ‘Employee Benefits’ (as amended on
16 December 2004).
Share based payments: the group has elected to apply IFRS 2, ‘Share Based Payment’ retrospectively to all equity instruments
granted after 7 November 2002 and which were not fully vested as at 1 January 2005.
Cumulative translation differences: the group has elected to reset the foreign currency translation reserve to zero at the
transition date. Any gains and losses on subsequent disposals of foreign operations will exclude any translation differences arising
prior to the date.
Financial instruments: the group has chosen to utilise the exemption from the requirements to restate comparative information
for IAS 32, ‘Financial Instruments: Disclosure and Presentation’ and IAS 39, ‘Financial Instruments: Recognition and
Measurement’, and hence these standards have been applied prospectively as of 1 April 2005.
NOTES TO EXPLAIN THE EFFECTS OF IFRS IN THE FINANCIAL STATEMENTS
(a) Employee benefits
Under UK GAAP, the group previously measured 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 measures pension commitments and other related post-retirement benefits in accordance with
IAS 19, ‘Employee Benefits’.
Under IAS 19 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. Actuarial gains and losses are recognised immediately in
reserves.
Under SSAP 24, the asset on the balance sheet represented the timing differences between the pension charge recognised in
the profit and loss account and the payments made to the pension scheme. Under IAS 19, the liability on the balance sheet
represents the deficit 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, pension charges for the year ended 31 March 2005 were £465 million, including a charge for the amortisation
of the SSAP 24 deficit in the BTPS, and an interest credit relating to the balance sheet prepayment. Under IAS 19 the total charges
for the year ended 31 March 2005 were £342 million, split between an operating charge and net finance income. Accordingly, for
the year ended 31 March 2005 there is an additional £75 million charge to operating profit and £198 million of net finance income
has been recognised under IAS 19. A related deferred tax charge of £37 million has also been recognised. The net effect has been
an increase in profit of £86 million.
A pension liability has been recognised at 31 March 2005 of £4,807 million and a deferred tax asset of £1,434 million, offset by
the reversal of provisions of £44 million for 31 March 2005. The pension prepayment on the UK GAAP balance sheet of
£1,118 million has also been reversed, including the associated deferred tax liability. The net effect has been a reduction in equity
at 31 March 2005 of £4,092 million.
A pension liability has been recognised at 1 April 2004 of £5,136 million and a deferred tax asset of £1,541 million, offset by
the reversal of provisions of £36 million. The pension prepayment of £1,172 million has also been reversed, including the
associated deferred tax liability. The net effect has been a reduction in equity at 1 April 2004 of £4,390 million.
(b) Share based payment
Under UK GAAP an expense was 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 the date of the award). The majority of BT’s share based payments are made
under all employee ‘Save As You Earn’ plans which were 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 an option
pricing model, and is charged to the income statement over the related performance period.
The adoption of IFRS 2 has resulted in an increased operating charge for the year ended 31 March 2005 of £28 million. A
related deferred tax benefit of £7 million, has also been recognised, with the net effect being a decrease in profit of £21 million.
The credit entry for the share based payments is recognised directly in reserves as the awards are equity settled. The net effect
has been an increase in equity of £7 million at 31 March 2005.
BT Group plc Annual Report and Form 20-F 2006 Notes to the consolidated financial statements112