BT 2007 Annual Report Download - page 91

1. SEGMENTAL ANALYSIS
Primary reporting format – business segments
The group provides communication services which include networked IT services, local and international telecommunications services
and broadband and internet products and services. The group is organised into four primary business segments; BT Global Services,
BT Retail, BT Wholesale and Openreach.
Each of these four lines of businesses have differing risks, rewards and customer profiles and hence are the group’s primary
reporting segments. The revenue of each business segment is derived as follows:
BT Global Services mainly generates its revenue from the provision of networked IT services, outsourcing and system integration
work and traditional fixed line services to multi-site organisations which include the public sector and major corporates and from the
fixed network operations of the group’s worldwide subsidiaries.
BT Retail derives its revenue from the supply of exchange lines and from the calls made over these lines, the leasing of private
circuits and other private services. It also generates revenue from broadband, mobility, data, internet and multimedia services and
from providing managed and packaged communications solutions to consumers and small and medium sized business customers in
the UK.
BT Wholesale derives its revenue from providing network services and solutions to communication companies, including fixed and
mobile network operators and other service providers, and from carrying transit traffic between telecommunications operators.
Openreach derives its revenue from providing equivalent access to the local access network in the UK. Its primary products are
Local Loop Unbundling (LLU), Wholesale Line Rental (WLR), Wholesale Extension Services (WES) and Backhaul Extension Services
(BES). These ‘equivalent’ products are sold to BT lines of business and other communication providers at the same arm’s length
prices, with the BT lines of business being treated no differently than any other customer with regard to terms and conditions or
access to systems and data.
There is extensive trading between BT’s lines of business and the line of business profitability is dependent on the transfer price
levels. For regulated products and services those transfer prices are market based whilst for other products and services the transfer
prices are agreed between the relevant lines of business on an arm’s length basis. These intra-group trading arrangements are
subject to periodic review.
Impact of Openreach on segmental disclosure
Prior to the 2007 financial year, the group was organised into three primary segments; BT Global Services, BT Retail and BT
Wholesale. On 22 September 2005, BT entered into the Undertakings with Ofcom as a result of which BT was required to establish a
new line of business and primary segment called Openreach. Openreach was launched operationally on 21 January 2006 and is
separately reported within BT’s results for the first time in the 2007 financial year.
In accordance with the timetable set out in the Undertakings, the group was required to facilitate the reporting of Openreach as
a separate line of business by the end of July 2006. This was achieved and discrete financial information has been presented to
senior management on the new business structure with respect to periods from 1 April 2006 onwards.
Both IFRSs and US GAAP require segmental information to be presented on a consistent basis for all years reported. In the event
of a restructuring of business segments, comparative information is therefore required to be restated, unless this is impracticable.
The results for the 2006 financial year have been restated to reflect the separate reporting of Openreach as a new business
segment. These restatements also reflect the impact of the new internal trading arrangements which have been implemented due to
the creation of Openreach. The results for the 2005 financial year, however, have not been restated as it is impracticable to do so.
Some of the products and services that Openreach now sell were previously provided by BT Wholesale, but in a different form. As
a result of the Undertakings, new ‘equivalent products’ which did not previously exist had to be created for both internal and
external customers. The changes required to capture the separate reporting of these new products and services were introduced
during the 2006 financial year and therefore actual data was available to support the estimates and assumptions required to restate
the results for that year. The equivalent products and services did not exist in the 2005 financial year, and therefore the level of
estimation and extrapolation required to restate the results for that year would have been too significant to provide sufficiently
objective and reliable information.
Furthermore, the fundamental level of reorganisation and restructuring which occurred, combined with the fact that the products
previously sold by BT Wholesale no longer exist, mean it is also impracticable to report the results for the current financial year on
the old business segment structure.
In order to assist the reader’s understanding of the year on year performance, additional disclosures have been presented showing
the previously reported segmental data for the 2006 and 2005 financial years on the old business segment basis, prior to the
creation of Openreach.
Consolidated financial statementsConsolidated financial statements
Notes to the consolidated financial statements
90 BT Group plc Annual Report & Form 20-F