BT 2007 Annual Report Download - page 135

35. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The group’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards as
adopted by the European Union (IFRS), which differ in certain respects from those applicable in the United States. For BT there are
no differences between IFRS as adopted for use in the EU and IFRS as published by the IASB.
(I) DIFFERENCES BETWEEN IFRS AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(US GAAP)
The following are the main differences between IFRS and US GAAP which are relevant to the group’s consolidated
financial statements.
(a) Sale and leaseback of properties
Under IFRS, the sale of BT’s property portfolio in 2001 is treated as a disposal and the vast majority of the subsequent leaseback is
an operating lease. Under US GAAP as BT has a continuing interest in the properties, these properties are recorded on the balance
sheet at their net book value, a leasing obligation is recognised and the gain on disposal is deferred until the properties are sold and
vacated by BT and the corresponding lease obligation is terminated. Rental payments made by BT are reversed and replaced by a
finance lease interest and a depreciation charge.
(b) Pensions
Under IFRS, the group accounts for its pension benefit plans according to IAS 19 ‘Employee Benefits’. Surpluses and deficits of
pension and other post-retirement benefit plans are included in the group balance sheet at their fair values and all movements in
these balances are reflected in the income statement, except for those actuarial gains and losses which are reflected in the
statement of recognised income and expense. The over or underfunded status of the defined benefit plan is recorded as an asset or
liability on the balance sheet.
Prior to the adoption of FAS 158 ‘Employers Accounting for Defined Benefit Pension and Other Post-Retirement Plans, an
amendment of FASB Statements No 87, 88, 106 and 132 (R)’ (‘‘FAS 158’’), when a pension plan had an accumulated benefit
obligation which exceeded the fair value of the plan assets, FAS 87 required the unfunded amount to be recognised as a minimum
liability in the balance sheet under US GAAP. The offset to the liability was recorded as an intangible asset up to the amount of any
unrecognised prior service cost, and thereafter directly in other comprehensive income. The actuarial gains or losses recognised in
other comprehensive income were transferred to net income over the average remaining service period if certain thresholds were
met.
FAS 158 requires an employer to recognise the over or underfunded status of a defined benefit post-retirement plan as an asset
or liability and to recognise changes in that funded status in other comprehensive income in the year in which the changes occur.
Because the funded status of benefit plans are now fully recognised, a minimum liability is no longer recognised. Retrospective
application of FAS 158 is not permitted and upon adoption of FAS 158, the recognition of the over or underfunded status of the
group’s defined benefit pension plans is generally consistent with IAS 19. Differences in recognition rules for actuarial gains and
losses will continue to give rise to differences in periodic pension expense as measured under IFRS and US GAAP. The group has
adopted FAS 158 in full with effect from 31 March 2007.
(c) Capitalisation of interest
Under IFRS, the group has chosen not to capitalise interest. Under US GAAP, the estimated amount of interest incurred whilst
constructing major capital projects is included in property, plant and equipment, and depreciated over the lives of the related assets.
The amount of interest capitalised is determined by reference to the average interest rates on outstanding borrowings. The
capitalised interest is depreciated over a period of 5 to 27 years determined by the nature of the related asset.
(d) Financial instruments
The group exercised the exemption available under IFRS 1 to adopt IAS 32, ‘Financial Instruments: Disclosure and Presentation’ and
IAS 39, ‘Financial Instruments: Recognition and Measurement’ from 1 April 2005. The 2005 comparative period is therefore
presented in accordance with UK GAAP.
Under UK GAAP, investments are held on the balance sheet at historical cost. Gains and losses on instruments used for hedges are
not recognised until the exposure being hedged is recognised. Certain derivative financial instruments which qualify for hedge
accounting under UK GAAP do not qualify or were not designated as hedges under US GAAP.
From 1 April 2005 the group adopted IAS 32 and IAS 39 which gave rise to differences in accounting treatments applied under
US GAAP SFAS No. 133 ‘Accounting for Derivative Instruments and Hedging Activities’. On adoption of IAS 39, all derivative
financial instruments and the fair value of the hedged risks, where a hedged item is in a fair value hedge, were recognised as a one
time transition adjustment to equity and resulted in a transitional difference between US GAAP and IFRS.
Under IFRS, certain cash flow hedges result in a hedged non-financial asset or liability being adjusted from the equity reserve for
the applicable hedged amount. US GAAP does not allow the amounts taken to equity to be transferred to the initial carrying amount
of the non-financial asset or liability. The amounts remain in equity and are recognised in earnings as the non-financial asset is
depreciated or disposed.
The group did not apply hedge accounting under US GAAP for certain items designated as hedges under IFRS. As a result, certain
gains or losses on derivatives held in the cash flow reserve or translation reserve are credited or charged to the income statement
under US GAAP. In addition, under IFRS, the hedged risk associated with a hedged item is fair valued where the item has been
designated in a fair value hedge. As hedge accounting has not been claimed for those items under US GAAP, this fair value
adjustment will not be reflected. These differences will reverse as the derivatives or hedged items mature, are sold or expire.
The fair value and book value of derivative instruments as at 31 March 2007 and 2006 is disclosed in note 33.
Consolidated financial statements Notes to the consolidated financial statements
134 BT Group plc Annual Report & Form 20-F