BT 2007 Annual Report Download - page 80

solutions, revenue is recognised by reference to the stage of
completion, as determined by the proportion of costs incurred
relative to the estimated total contract costs, or other measures
of completion such as contract milestone customer acceptance.
In the case of time and materials contracts, revenue is
recognised as the service is rendered.
Costs related to delivering services under long term
contractual arrangements are expensed as incurred. An element
of costs incurred in the initial set up, transition or
transformation phase of the contract are deferred and recorded
within non current assets. These costs are then recognised in the
income statement on a straight line basis over the remaining
contractual term, unless the pattern of service delivery indicates
a different profile is appropriate. These costs are directly
attributable to specific contracts, relate to future activity, will
generate future economic benefits and are assessed for
recoverability on a regular basis.
The percentage of completion method relies on estimates of
total expected contract revenues and costs, as well as reliable
measurement of the progress made towards completion. Unless
the financial outcome of a contract can be estimated with
reasonable certainty, no attributable profit is recognised. In such
circumstances, revenue is recognised equal to the costs incurred
to date, to the extent that such revenue is expected to be
recoverable. Recognised revenue and profits are subject to
revisions during the contract if the assumptions regarding the
overall contract outcome are changed. The cumulative impact of
a revision in estimates is recorded in the period in which such
revisions become likely and can be estimated. Where the actual
and estimated costs to completion exceed the estimated revenue
for a contract, the full contract life loss is immediately
recognised.
Where a contractual arrangement consists of two or more
separate elements that have value to a customer on a
standalone basis, revenue is recognised for each element as if it
were an individual contract. The total contract consideration is
allocated between the separate elements on the basis of relative
fair value and the appropriate revenue recognition criteria
applied to each element as described above.
(IV) LEASES
The determination of whether an arrangement is, or contains, a
lease, is based on the substance of the arrangement and
requires an assessment of whether the fulfilment of the
arrangement is dependent on the use of a specific asset or
assets and whether the arrangement conveys the right to use
the asset.
Leases of property, plant and equipment where the group
holds substantially all the risks and rewards of ownership are
classified as finance leases.
Finance lease assets are capitalised at the commencement of
the lease term at the lower of the present value of the minimum
lease payments or the fair value of the leased asset. The
obligations relating to finance leases, net of finance charges in
respect of future periods, are recognised as liabilities. Leases are
subsequently measured at amortised cost using the effective
interest method. If a sale and leaseback transaction results in a
finance lease, any excess of sale proceeds over the carrying
amount is deferred and recognised in the income statement over
the lease term.
Leases where a significant portion of the risks and rewards are
held by the lessor are classified as operating leases. Rentals are
charged to the income statement on a straight line basis over
the period of the lease. If a sale and leaseback transaction
results in an operating lease, any profit or loss is recognised in
the income statement immediately.
(V) FOREIGN CURRENCIES
Items included in the financial statements of each of the group’s
subsidiaries are measured using the currency of the primary
economic environment in which the entity operates (the
‘functional currency’). The consolidated financial statements are
presented in sterling, the presentation currency of the group.
Foreign currency transactions are translated into the
functional currency using the exchange rates prevailing at the
date of the transaction. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the
translation of monetary assets and liabilities denominated in
foreign currencies at period end exchange rates are recognised
in the income statement in the line which most appropriately
reflects the nature of the item or transaction. Where monetary
items form part of the net investment in a foreign operation and
are designated as hedges of a net investment or as cash flow
hedges, such exchange differences are initially recognised in
equity.
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 (unless this average is
not a reasonable approximation of the cumulative effects of the
rates prevailing on the transaction dates, in which case income
and expenses are translated at the dates of the transactions).
Foreign exchange differences arising on retranslation are
recognised directly in a separate component of equity, the
translation reserve.
In the event of the disposal of an undertaking with assets and
liabilities denominated in foreign currency, the cumulative
translation difference associated with the undertaking in the
translation reserve is charged or credited to the gain or loss on
disposal.
(VI) BUSINESS COMBINATIONS
The purchase method of accounting is used for the acquisition
of subsidiaries, in accordance with IFRS 3, ‘Business
Combinations’. On transition to IFRSs, the group elected not to
apply IFRS 3 retrospectively to acquisitions that occurred before
1 April 2004. Goodwill arising on the acquisition of subsidiaries
which occurred between 1 January 1998 and 1 April 2004 is
therefore included in the balance sheet at original cost, less
accumulated amortisation to the date of transition and any
provisions for impairment. Goodwill arising on the acquisition of
a subsidiary which occurred prior to 1 January 1998 was written
off directly to retained earnings.
On acquisition of a subsidiary, fair values are attributed to the
identifiable net assets acquired. The excess of the cost of the
acquisition over the fair value of the group’s share of the
identifiable net assets acquired is recorded as goodwill. If the
cost of the acquisition is less than the fair value of the group’s
share of the identifiable net assets acquired, the difference is
recognised directly in the income statement. On disposal of a
subsidiary, the gain or loss on disposal includes the carrying
amount of goodwill relating to the subsidiary sold. Goodwill
previously written off to retained earnings is not recycled to the
income statement on disposal of the related subsidiary.
(VII) INTANGIBLE ASSETS
Identifiable intangible assets are recognised when the group
controls the asset, it is probable that future economic benefits
attributable to the asset will flow to the group and the cost of
BT Group plc Annual Report & Form 20-F 79
Financial statements