BT 2010 Annual Report Download - page 103

FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
101BT GROUP PLC ANNUAL REPORT & FORM 20-F
ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS REVIEW OF THE YEAR OVERVIEW
1. Segment information
The group has implemented IFRS 8 ‘Operating segments’ with effect from 1 April 2009. IFRS 8 requires operating segments to be
identified on the basis of internal reports about components of the group which are regularly reviewed by the ‘chief operating decision
maker’ in order to allocate resources to the segments and to assess their performance. As a result of the adoption of IFRS 8, the group’s
reportable segments have not changed. The group’s operating segments are reported based on financial information provided to the
Operating Committee, as detailed on page 61, which is the key management committee and represents the ‘chief operating decision
maker’. The
Operating Committee is chaired by the Group Chief Executive and the other members are the Group Finance Director and the
Chief Executives of BT Retail, BT Wholesale, BT Global Services, BT Innovate & Design and BT Operate. The Chief Executive of Openreach
also normally attends all meetings.
The group’s organisational structure reflects the different customer groups to which it provides communications products and services
via its four customer-facing lines of business, supported by two internal functional units. The four customer-facing lines of business are
the group’s reportable segments and generate substantially all the group’s revenue. Their operations are summarised as follows:
BT Global Services serves multinational corporations, domestic businesses, government departments and other communications
providers across the world, providing networked IT services.
BT Retail serves consumer customers and small and medium enterprises (SMEs) in the UK, providing a range of innovative
communications products and services. BT Retail also includes BT Ireland, which operates across the major corporate, SME, consumer and
wholesale markets throughout the Republic of Ireland and Northern Ireland, and BT Enterprises, which comprises a number of individual
businesses including BT Conferencing, BT Directories, BT Expedite, BT Redcare and BT Payphones.
BT Wholesale provides services to UK communications providers through a diverse portfolio ranging from nationally available
broadband, voice and data connectivity services and interconnect to bespoke, fully managed network outsourcing and value-added
solutions.
Openreach is responsible for the crucial ‘first mile’ connecting communications providers’ customers to their local telephone
exchange, giving them equal, open and economic access to the UK network. Openreach products are sold on an equivalent basis to BT
lines of business and other communications 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.
BT Innovate & Design and BT Operate are internal service units which support the four customer-facing lines of business. BT Innovate
& Design is responsible for the design and build of the platforms, systems and processes which support the provision of the group’s
products and services, and BT Operate is responsible for their operation. BT Innovate & Design and BT Operate operate on a full cost
recovery basis. The costs incurred by BT Innovate & Design and BT Operate are allocated to the customer-facing lines of business in line
with the services they provide. The depreciation and amortisation incurred by BT Operate in relation to the networks and systems they
manage and operate on behalf of the customer-facing lines of business are allocated to the lines of business based on their respective
utilisation. Capital expenditure incurred by BT Innovate & Design for specific projects undertaken on behalf of the customer-facing lines
of business is allocated based on the value of the directly attributable expenditure incurred. Where projects are not directly attributable
to a particular line of business, capital expenditure is allocated based on the proportion of estimated future economic benefits. Capital
expenditure incurred by BT Operate is allocated to the customer-facing lines of business in line with the proportion of operating cost
recoveries. BT Innovate & Design and BT Operate and the group’s centralised functions are not reportable segments as they do not meet
the quantitative thresholds as set out in IFRS 8 for any of the years presented.
Intra group revenue generated from the sale of regulated products and services is based on market price. Intra group revenue from the
sale of other products and services is agreed between the relevant lines of business and thus line of business profitability can be impacted
by transfer pricing levels.
In addition to the four customer-facing lines of business, the remaining operations of the group are aggregated and included within
the ‘Other’ category to reconcile to the consolidated results of the group. The ‘Other’ category includes costs associated with the group’s
centralised functions including procurement and supply chain, fleet and property management. Provisions for the settlement of
significant legal, commercial and regulatory disputes, which are negotiated at a group level, are initially recorded in the ‘Other’ segment.
On resolution of the dispute, the full impact is recognised in the relevant lines of business results, offset in the group results by the
utilisation of the provision previously charged to the ‘Other’ segment. Settlements which are particularly significant or cover more than
one financial year may fall within the definition of specific items as detailed on page 87.
Information regarding the results of each reportable segment is provided below. Performance is measured based on EBITDA before
specific items and contract and financial review charges recognised in BT Global Services in 2009 (defined as ‘adjusted EBITDA’), as
included in the internal financial reports reviewed by the
Operating Committee . EBITDA is defined as the operating profit or loss before
depreciation, amortisation, net finance expense and taxation. Adjusted EBITDA is considered to be a useful measure of the operating
performance of the lines of business because it reflects the underlying cash by eliminating depreciation and amortisation and also
provides a meaningful analysis of trading performance by excluding specific items which are significant, one-off or unusual in nature and
have little predictive value. Specific items are detailed in note 5 and are not allocated to the reportable segments as this reflects how they
are reported to the
Operating Committee . Finance expense and income is not allocated to the reportable segments as this activity is
managed by the treasury function which manages the overall net debt position of the group.
Restatements
Comparatives have been restated for the adoption of the amendment to IFRS 2, which has been dealt with in the ‘Other’ category and
detailed on page 94. Comparatives have also been restated for the impact of customer account moves between BT Global Services and
BT Retail and other internal trading model changes effective from 1 April 2009 and has had no impact on the total results of the group.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS