BT 2011 Annual Report Download - page 101

98
FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
•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 19.
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 BTPS, to pay pension
benefits to approximately 327,500 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, price inflation and the discount
rate used to calculate the net present value of the future pension
payments. 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 2011 and the
key financial assumptions used to measure the obligation are
disclosed in note 23.
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 2010 had no significant impact in
aggregate on the results for the year ended 31 March 2011.
The carrying values of software, property, plant and equipment are
disclosed in notes 13 and 14, respectively. The useful lives applied
to the principal categories of assets are disclosed on page 94.
Income tax
The actual tax we pay on our profits is determined according to
complex tax laws and regulations. Where the effect of these laws
and regulations is unclear, we use estimates in determining the
liability for the tax to be paid on our past profits which we
recognise in our financial statements. We believe the estimates,
assumptions and judgements are reasonable but this can involve
complex issues which may take a number of years to resolve. The
final determination of prior year tax liabilities could be different
from the estimates reflected in the financial statements and may
result in the recognition of an additional tax expense or tax credit in
the income statement.
The value of the group’s income tax liability is disclosed on the
balance sheet on page 104.
Deferred tax
Deferred tax assets and liabilities require management judgement
in determining the amounts to be recognised. In particular,
judgement is used when assessing the extent to which deferred tax
assets should be recognised with consideration given to the timing
and level of future taxable income.
The carrying value of the group’s deferred tax assets and liabilities
are disclosed in note 24.
Goodwill
The recoverable amount of cash generating units has been
determined based on value in use calculations. These calculations
require the use of estimates, including management’s expectations
of future revenue growth, operating costs and profit margins for
each cash generating unit.
The carrying value of goodwill and the key assumptions used in
performing the annual impairment assessment are disclosed in
note 13.
Determination of fair values
Certain financial instruments such as investments, derivative
financial instruments and certain elements of loans and
borrowings, are carried on the balance sheet at fair value, with
changes in fair value reflected in the income statement. Fair values
are estimated by reference in part to published price quotations
and in part by using valuation techniques.
The fair values of financial instruments are disclosed in note 29.
Providing for doubtful debts
BT provides services to consumer and business customers, mainly
on credit terms. We know that certain debts due to us will not be
paid through the default of a small number of our customers.
Estimates, based on our historical experience, are used in
determining the level of debts that we believe will not be collected.
These estimates include such factors as the current state of the
economy and particular industry issues.
The value of the provision for doubtful debts is disclosed in
note 19.
Provisions
As disclosed in note 25, the group’s provisions principally relate to
obligations arising from property rationalisation programmes,
restructuring programmes, claims and litigation, and regulatory
risks.
Under our property rationalisation programmes we have identified
a number of surplus properties. Although efforts are being made to
sub-let this space, this is not always possible. Estimates have been
made of the cost of vacant possession and of any shortfall arising
from any sub-lease income being lower than the lease costs. Any
such shortfall is recognised as a provision.
In respect of claims, litigation and regulatory risks, the group
provides for anticipated costs where an outflow of resources is
considered probable and a reasonable estimate can be made of the
likely outcome. The ultimate liability may vary from the amounts
provided and will be dependent upon the eventual outcome of any
settlement.
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