BT 2010 Annual Report Download - page 48

REVIEW OF THE YEAR FINANCIAL REVIEW
46 BT GROUP PLC ANNUAL REPORT & FORM 20-F
Where appropriate, the specific items recognised in 2010, 2009
and 2008 are explained in more detail below.
A charge of £52m was recognised in 2010 reflecting an Ofcom
determination in relation to 2Mb/s partial private circuit prices.
In 2010 and 2009, respectively, the group recognised BT Global
Services restructuring charges of £301m and £280m. The main
components of the charges are set out below.
– Networks, products and procurement channels rationalisation
charges of £142m (2009: £183m). In 2010 this included a
payment of £127m made to Tech Mahindra for the renegotiation
of certain supply contracts as part of the rationalisation of
procurement channels. There was an associated credit of £29m
in connection with BT’s share of its associate, Tech Mahindra.
– People and property charges of £132m (2009: £51m)
principally comprising leaver costs and property exit costs.
– Intangible asset impairments and other charges of £27m (2009:
£46m) reflecting the costs associated with rationalising the
services that are offered to customers and the brands under which
customers are served.
In 2010 £121m of property rationalisation charges were
recognised in relation to the rationalisation of the group’s UK
property portfolio as detailed on page 21. The charge relates to
properties which have been vacated and as a result of which, the
associated leases have become onerous, reflecting future
commitments to meet rental obligations which exceed future
economic benefits. This rationalisation programme is expected to
continue over the next two years. Including the charge
recognised in 2010, the total cost of the rationalisation
programme is expected to be around £300m.
In 2010 the group agreed substantially all outstanding tax matters
with HM Revenue & Customs (HMRC) relating to the 2006, 2007
and 2008 tax years. Specific items include a tax credit of £230m,
associated interest of £11m and costs of £5m in connection with
reaching the agreement. In 2008, the group agreed an
outstanding tax matter relating to a business disposed of in 2001,
the impact of which was a tax credit of £40m.
In 2009 and 2008, respectively, the group incurred costs of
£65m and £402m in respect of the group’s transformation and
reorganisation activities. The costs mainly comprised leaver costs,
property exit and transformation programme costs.
In 2009 a £50m charge was recognised comprising £31m of
asset impairments and £19m of associated costs, following the
group’s review of its 21CN programme and associated voice
strategy in the light of the move to a customer-led roll out
strategy and focus on next generation voice service
developments of fibre-based products.
In 2008 a charge of £53m was recognised in relation to further
estimated costs to create Openreach and deliver the
Undertakings agreed with Ofcom.
In 2008 a charge of £74m was recognised as a result of the
completion of a review of circuit inventory and other working
capital balances.
In 2009 a credit of £36m was recognised in respect of a
reassessment of the value of the group’s share of the net assets
of an associate.
In 2008 a tax credit of £154m was recognised for the
re-measurement of deferred tax balances as a result of the
change in the UK statutory corporation tax rate from 30% to
28% effective in 2009.
Net finance expense
2010 2009 2008
£m £m £m
Interest on borrowings 886 935 822
Loss arising on derivatives
not in a designated
hedge relationship 19 29 41
Interest on pension
scheme liabilities 2,211 2,308 2,028
Finance expense 3,116 3,272 2,891
Less: interest on
qualifying assets (3) – –
Total finance expense 3,113 3,272 2,891
Other interest and
similar income (12) (31) (65)
Expected return on pension
scheme assets (1,932) (2,621) (2,448)
Total finance income (1,944) (2,652) (2,513)
Analysed as:
Adjusted net finance expense 890 933 798
Net interest on pensions 279 (313) (420)
Net finance expense before
specific items 1,169 620 378
Specific items (11) – –
Net finance expense 1,158 620 378
Finance expense
Interest on borrowings in 2010 was £886m, a decrease of £49m.
This reflects a reduction in average gross debt principally through
repayment of short-term borrowings. The increase of £113m in
2009 reflects higher net debt mainly due to the lower free cash
flow being exceeded by dividend and share buy back payments.
The loss arising on derivatives not in a designated hedge
relationship was £19m in 2010 (2009: £29m, 2008: £41m). This
loss includes a charge of £9m arising from the negotiation of swap
break dates on certain derivatives. In 2008 losses on derivatives not
in a designated hedge relationship of £41m included a charge of
£26m on a low cost borrowing transaction which was marginally
earnings positive after tax in the year.
Interest capitalised on qualifying assets was £3m, reflecting the
impact of the adoption of IAS 23 (Revised) ‘Borrowing Costs’ as
detailed on page 95.