BT 2011 Annual Report Download - page 98

FINANCIAL STATEMENTS
95BT GROUP PLC ANNUAL REPORT & FORM 20-F 2011
FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
yield at the balance sheet date on AA credit rated bonds that have
maturity dates approximating the terms of the group’s obligations.
The calculation is performed by a qualified actuary using the
projected unit credit method. The net obligation or asset
recognised in the balance sheet is the present value of the defined
benefit obligation less the fair value of the plan assets.
The income statement charge is allocated between an operating
charge and net finance expense or income. The operating charge
reflects the service cost which is spread systematically over the
working lives of the employees. The net finance charge reflects the
unwinding of the discount applied to the liabilities of the plan,
offset by the expected return on the assets of the plan, based on
conditions prevailing at the start of the year.
Actuarial gains and losses are recognised in full in the period in
which they occur and are presented in the statement of
comprehensive income. During 2011 this includes the impact of
the change from RPI to CPI as detailed in note 23 on page 131.
Actuarial valuations of the main defined benefit plan are carried out
by an independent actuary as determined by the Trustee at
intervals of not more than three years, to determine the rates of
contribution payable. The pension cost is determined on the advice
of the group’s actuary, having regard to the results of these Trustee
valuations. In any intervening years, the actuaries review the
continuing appropriateness of the contribution rates.
The group also operates defined contribution pension schemes and
the income statement is charged with the contributions payable.
(xvii) Share-based payment
The group operates a number of equity settled share-based
payment arrangements, under which the group receives services
from employees as consideration for equity instruments (share
options and shares) of the group. Equity settled share-based
payments are measured at fair value (excluding the effect of non
market-based vesting conditions) at the date of grant, but including
any market-based performance criteria and the impact of non-
vesting conditions (for example the requirement for employees to
save). The fair value determined at the grant date is recognised on a
straight-line basis over the vesting period, based on the group’s
estimate of the options or shares that will eventually vest and
adjusted for the effect of non market-based vesting conditions.
Fair value is measured using either the Binomial options pricing
model or Monte Carlo simulations, whichever is most appropriate to
the award.
Service and performance conditions are vesting conditions. Any
other conditions are non-vesting conditions which have to be taken
into account to determine the fair value of equity instruments
granted. In the case that an award or option does not vest as a
result of a failure to meet a non-vesting condition that is within the
control of either counterparty, this is accounted for as a
cancellation. Cancellations must be treated as accelerated vesting
and all remaining future charges are immediately recognised. As
the requirement to save under an employee sharesave arrangement
is a non-vesting condition, employee cancellations must be treated
as an accelerated vesting.
(xviii) Taxation
Current income tax is calculated on the basis of the tax laws enacted
or substantively enacted at the balance sheet date in the countries
where the company’s subsidiaries, associates and joint ventures
operate and generate taxable income. The group periodically
evaluates positions taken in tax returns with respect to situations in
which applicable tax regulation is subject to interpretation, and the
group establishes provisions where appropriate on the basis of the
amounts expected to be paid to tax authorities.
Deferred tax is recognised, using the liability method, in respect of
temporary differences between the carrying amount of the group’s
assets and liabilities and their tax base, except to the extent that
the deferred tax asset or liability arises from the initial recognition
of goodwill or from the initial recognition of an asset or liability in a
transaction which is not a business combination and affects neither
accounting profit nor taxable profit.
Deferred tax liabilities are, where permitted, offset against deferred
tax assets within the same taxable entity or qualifying local tax
group. Any remaining deferred tax asset is recognised only when,
on the basis of all available evidence, it can be regarded as probable
that there will be suitable taxable profits, within the same
jurisdiction, in the foreseeable future against which the deductible
temporary difference can be utilised.
Deferred tax is determined using tax rates that are expected to
apply in the periods in which the asset is realised or liability settled,
based on tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
Deferred tax is provided on temporary differences arising on
investments in subsidiaries, associates and joint ventures, except
where the timing of the reversal of the temporary difference can be
controlled and it is probable that the temporary difference will not
reverse in the foreseeable future.
Current and deferred tax are recognised in the income statement,
except when the tax relates to items charged or credited directly in
equity, in which case the tax is also recognised in equity.
(xix) Dividends
Final dividends are recognised as a liability in the year in which
they are declared and approved by the company’s shareholders
in the annual general meeting. Interim dividends are recognised
when they are paid.
(xx) Provisions
Provisions are recognised when the group has a present legal or
constructive obligation as a result of past events, it is probable that
an outflow of resources will be required to settle the obligation and
the amount can be reliably estimated. Provisions are determined by
discounting the expected future cash flows at a pre-tax rate that
reflects current market assessments of the time value of money and
the risks specific to the liability. Financial liabilities within provisions
are initially recognised at fair value and subsequently carried at
amortised cost using the effective interest method. Onerous lease
provisions have been measured at the lower of the cost to fulfil the
contract or the cost to exit it.
(xxi) Financial instruments
Recognition and derecognition of financial assets and
financial liabilities
Financial assets and financial liabilities are recognised when the
group becomes party to the contractual provisions of the
instrument. Financial assets are derecognised when the group no
longer has rights to cash flows, the risks and rewards of ownership or
control of the asset. Financial liabilities are derecognised when the
obligation under the liability is discharged, cancelled or expires. In
particular, for all regular way purchases and sales of financial assets,
the group recognises the financial assets on the settlement date,
which is the date on which the asset is delivered to or by the group.
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