BT 2007 Annual Report Download - page 136

35. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES continued
IFRS prescribes four investment categories, namely held for trading, available-for-sale, loans and receivables and held to maturity.
US GAAP prescribes only three categories, namely held for trading, available-for-sale and held to maturity. Whilst the held for
trading and available-for-sale categories are similar under both GAAPs, items held in loans and receivables under IFRS are generally
classified as held to maturity under US GAAP.
(e) Foreign exchange
Under US GAAP, on the sale of a foreign enterprise, foreign exchange differences within the cumulative translation adjustment (CTA)
are included in net income in arriving at a gain or loss on disposal. Although IFRS also requires inclusion of the cumulative
translation differences held in reserves as part of the calculation of gains or losses on disposal, they were reset to zero on transition
to IFRS on 1 April 2004.
(f) Deferred taxation
Under both IFRS and US GAAP, provision for deferred income tax is required on a full provision basis in accordance with IAS 12
‘Income taxes’ and SFAS No. 109 ‘Accounting for Income Taxes’.
Under IFRS, deferred tax is recorded for temporary differences and deferred tax assets are recognised only to the extent that it is
probable that taxable profits will be available against which the deductible temporary difference can be utilised. Deferred tax assets
not recognised are disclosed in note 21.
Under US GAAP deferred taxes are recorded on all temporary differences and a valuation allowance is established in respect of
those deferred tax assets where it is more likely than not that some portion will remain unrealised.
Deferred tax adjustments in the IFRS to US GAAP reconciliation are primarily the result of the deferred tax impact of the other US
GAAP adjustments made in the reconciliation. In addition, IFRS and US GAAP adopt different methods for recognising deferred tax
on share based payments. Under FAS 123 (R), deferred tax assets are recognised over the service period based on the compensation
charge. Any realised tax deductions which exceed the related compensation expense is recognised in additional paid in capital
(APIC). These benefits are pooled and can be used to offset shortfalls in deductions related to other share awards.
At 31 March 2007, total deferred tax liabilities were £1,447 million (2006: £1,291 milliona) primarily in respect of accelerated
capital allowances and total deferred tax assets were £117 million (2006: £1,132 million), primarily in respect of pension
obligations.
The total valuation allowance recognised for deferred tax assets was as follows:
2007 2006
Movement in
year
£m £m £m
Capital losses 5,279 5,493 (214)
Operating losses not utilised 741 775 (34)
Other 313 271 42
Total 6,333 6,539 (206)
aOpening retained earnings and shareholders’ equity have been restated to correct a deferred tax valuation allowance of £320 million related to the group’s property sale and leaseback transaction in
2001. The adjustment has the effect of increasing US GAAP deferred tax assets and retained earnings by £320 million. The adjustment did not have a material impact on US GAAP net income or
earnings per share for any of the years presented.
(g) Impairment of property, plant and equipment
Certain network assets previously impaired did not meet the US GAAP criteria for impairment under SFAS No. 144 ‘Accounting for
the Impairment or Disposal of Long-Lived Assets’.
US GAAP requires that an entity assess whether impairment has occurred based on the undiscounted future cash flows. An
impairment exists if the sum of these cash flows is less than the carrying amount of the asset. The impairment loss recognised in the
income statement is based on the asset’s fair value, being either market value or the sum of discounted future cash flows. The assets
that were not impaired under US GAAP are continuing to be depreciated over their remaining useful lives.
(h) Revenue
Under IFRS, long-term contracts to design, build and operate software solutions are accounted for under IAS 18 ‘Revenue’ and
IAS 11 ‘Construction Contracts’ under which revenue is recognised as earned over the contract period.
Under US GAAP certain of these contracts are accounted for as multiple element arrangements under EITF 00-21 and SOP 97-2,
‘Software Revenue Recognition’. As vendor specific objective evidence to support the fair value of the separate elements to be
delivered is unavailable, revenue of £214 million under certain contracts is deferred in the 2007 financial year (2006: £109 million,
2005: £162 million). There was no impact on net income due to the deferral of costs on these contracts. Total deferred revenue and
costs recorded under US GAAP at 31 March 2007 was £562 million (2006: £348 million).
Under IFRS, IAS 18 ‘Revenue’ connection and installation services revenue is recognised when it is earned, upon activation. Under
US GAAP, SAB 104 ‘Revenue Recognition’ such revenues are recognised over the estimated customer life and the costs directly
associated with the revenue are deferred. Accordingly, an adjustment has been recognised for the first time in the 2007 financial
year in respect of Openreach products which have a significant connection and installation service charge.
BT Group plc Annual Report & Form 20-F 135
Financial statements