BT 2010 Annual Report Download - page 95

FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
93BT GROUP PLC ANNUAL REPORT & FORM 20-F
ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS REVIEW OF THE YEAR OVERVIEW
derivatives that are designated as fair value hedges are recorded in
the same line in the income statement, together with any changes
in fair value of the hedged asset or liability that is attributable to
the hedged risk.
Hedge of net investment in a foreign operation
Exchange differences arising from the retranslation of currency
instruments designated as hedges of net investments in a foreign
operation are taken to shareholders’ equity on consolidation to
the extent that the hedges are deemed effective.
Any ineffectiveness arising on a hedge of a net investment in a
foreign operation is recognised in net finance expense.
Discontinuance of hedge accounting
Discontinuance of hedge accounting may occur when a hedging
instrument expires or is sold, terminated or exercised, or when the
hedge no longer qualifies for hedge accounting or the group
revokes designation of the hedge relationship but the hedged
financial asset or liability remains or a highly probable transaction is
still expected to occur. Under a cash flow hedge, the cumulative
gain or loss at that point remains in equity and is recognised in
accordance with the above policy when the transaction occurs. If
the hedged transaction is no longer expected to take place or the
underlying hedged financial asset or liability no longer exists, the
cumulative unrealised gain or loss recognised in equity is
recognised immediately in the income statement. Under a hedge of
a net investment, the cumulative gain or loss remains in equity
when the hedging instrument expires or is sold, terminated or
exercised, or when the hedge no longer qualifies for hedge
accounting or the group revokes designation of the hedge
relationship. The cumulative gain or loss is recognised in the income
statement as part of the profit on disposal when the net investment
in the foreign operation is disposed. Under a fair value hedge, the
cumulative gain or loss adjustment associated with the hedged risk
is amortised to the income statement using the effective interest
method over the remaining term of the hedged item.
Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares are shown in equity as a
deduction from the proceeds received. Shares in the parent
company, BT Group plc, held by employee share ownership trusts
and repurchased treasury shares are recorded in the balance sheet
as a deduction from shareholders’ equity at cost.
Critical accounting estimates and key judgements
The preparation of financial statements in conformity with IFRSs
requires the use of accounting estimates and assumptions. It also
requires management to exercise its judgement in the process of
applying the group’s accounting policies. We continually evaluate
our estimates, assumptions and judgements based on available
information and experience. As the use of estimates is inherent in
financial reporting, actual results could differ from these estimates.
The areas involving a higher degree of judgement or complexity are
described below.
Long-term customer contracts
Long-term customer contracts can extend over a number of financial
years. During the contractual period recognition of costs and profits
may be impacted by estimates of the ultimate profitability of each
contract. If, at any time, these estimates indicate that any contract
will be unprofitable, the entire estimated loss for the contract is
recognised immediately. If these estimates indicate that any contract
will be less profitable than previously forecast, contract assets may
have to be written down to the extent they are no longer considered
to be fully recoverable. The group performs ongoing profitability
reviews of its contracts in order to determine whether the latest
estimates are appropriate. Key factors reviewed include:
Transaction volumes or other inputs affecting future revenues
which can vary depending on customer requirements, plans and
market position and other factors such as general economic
conditions;
Our ability to achieve key contract milestones connected with the
transition, development, transformation and deployment phases
for customer contracts;
The status of commercial relations with customers and the
implication for future revenue and cost projections; and
Our estimates of future staff and third party costs and the degree
to which cost savings and efficiencies are deliverable.
The carrying value of assets comprising the costs of the initial set
up, transition or transformation phase of long-term networked IT
services contracts are disclosed in note 17.
Interconnect income and payments to other
telecommunications operators
In certain instances, BT relies on other operators to measure the
traffic flows interconnecting with our networks. Estimates are used
in these cases to determine the amount of income receivable from,
or payments we need to make to, these other operators. The prices
at which these services are charged are often regulated and may be
subject to retrospective adjustment by regulators, and estimates
are used in assessing the likely effect of these adjustments.
Pension obligations
BT has a commitment, mainly through the BT Pension Scheme, to
pay pension benefits to approximately 333,000 people over
approximately 60 years. The cost of these benefits and the present
value of our pension liabilities depend on such factors as the life
expectancy of the members, the salary progression of our current
employees, the return that the pension fund assets will generate in
the time before they are used to fund the pension payments and
the rate at which the future pension payments are discounted. We
use estimates for all of these factors in determining the pension
costs and liabilities incorporated in our financial statements. The
assumptions reflect historical experience and our judgement
regarding future expectations.
The value of the net pension obligation at 31 March 2010 and
the key financial assumptions used to measure the obligation are
disclosed in note 29.
Useful lives for property, plant and equipment and software
The plant and equipment in BT’s networks is long lived with
cables and switching equipment operating for over 10 years
and underground ducts being used for decades. BT also develops
software for use in IT systems and platforms that supports the
products and services provided to our customers and that is also
used within the group. The annual depreciation and amortisation
charge is sensitive to the estimated service lives allocated to each
type of asset. Asset lives are assessed annually and changed when
necessary to reflect current thinking on their remaining lives in light
of technological change, network investment plans (including the
group’s fibre roll out programme), prospective economic utilisation
and physical condition of the assets concerned. Changes to the
service lives of assets implemented from 1 April 2009 had no
significant impact in aggregate on the results for the year ended
31 March 2010.
The carrying values of software, property, plant and equipment are
disclosed in notes 12 and 13, respectively. The useful lives applied to
the principal categories of assets are disclosed on pages 89 and 90.