BT 2010 Annual Report Download - page 90

FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
88 BT GROUP PLC ANNUAL REPORT & FORM 20-F
Equipment sales
Revenue from the sale of peripheral and other equipment is
recognised when all the significant risks and rewards of ownership
are transferred to the buyer, which is normally the date the
equipment is delivered and accepted by the customer.
Long-term contractual arrangements
Revenue from long-term contractual arrangements is recognised
based on the percentage of completion method. The stage of
completion is estimated using an appropriate measure according
to the nature of the contract. For long-term services contracts,
revenue is recognised on a straight line basis over the term of the
contract. However, if the performance pattern is other than straight
line, revenue is recognised as services are provided, usually on an
output or consumption basis. For fixed price contracts, including
contracts to design and build software 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 the
achievement of contract milestones and 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 recognised immediately.
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 are applied to each
element as described above.
(iv) Other operating income
Other operating income is income generated by the group that
arises from activities outside of the provision of communication
services and equipment sales. Items reported as other operating
income include income from repayment works, proceeds from scrap
and cable recovery, income generated by our fleet operations,
income from government grants, profits and losses on the disposal
of business operations and property, plant and equipment and
income generated from the exploitation of our intellectual property.
(v) Government grants
Government grants are recognised initially as deferred income at
their fair value where there is a reasonable assurance that the grant
will be received and the group will comply with the conditions
associated with the grant. Grants that compensate the group for
expenses incurred are recognised in the income statement within
other operating income in the same periods in which the associated
expenditure is recognised. Grants that compensate the group for
the cost of an asset are recognised in the income statement on a
straight line basis over the useful life of the asset.
(vi) 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, except where a proportion of the profit or
loss is deferred or amortised because the sale price was not equal to
fair value.
(vii) 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 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.