BT 2012 Annual Report Download - page 106

Financial statements
Notes to the consolidated financial statements
1. Basis of preparation
Preparation of the financial statements
These consolidated financial statements have been prepared in
accordance with the Companies Act 2006, Article 4 of the IAS
Regulation and International Accounting Standards (IAS) and
International Financial Reporting Standards (IFRS) and related
interpretations, as adopted by the European Union. The consolidated
financial statements are also in compliance with IFRS as issued by the
International Accounting Standards Board.
The consolidated financial statements are prepared on the historical
cost basis, except for certain financial and equity instruments that have
been measured at fair value. The consolidated financial statements are
presented in Sterling, the presentation currency of the group.
Presentation of specific items
The group’s income statement and segmental analysis separately
identify trading results before specific items. Specific items are those
that in management’s judgment need to be disclosed by virtue of their
size, nature or incidence. In determining whether an event or
transaction is specific, management considers quantitative as well as
qualitative factors such as the frequency or predictability of
occurrence. This is consistent with the way that financial performance
is measured by management and reported to the Board and the
Operating Committee and assists in providing a meaningful analysis of
the trading results of the group. The directors believe that presentation
of the group’s results in this way is relevant to an understanding of the
group’s financial performance as specific items are identified by virtue
of their size, nature or incidence. Furthermore, the group considers a
columnar presentation to be appropriate, as it improves the clarity of
the presentation and is consistent with the way that financial
performance is measured by management and reported to the Board
and the
Operating Committee . Specific items may not be comparable
to similarly titled measures used by other companies.
Items which have been considered to be specific items by virtue of their
size, nature or incidence include disposals of businesses and
investments, regulatory settlements, business restructuring
programmes, asset impairment charges, property rationalisation
programmes, net interest on pensions and the settlement of multiple
tax years in a single payment. In 2009 BT Global Services contract and
financial review charges were disclosed as a specific item by virtue of
their size and nature. The impact of subsequent changes to the
contract and financial review charges from revisions in estimates and
assumptions are included within trading results before specific items,
and are separately disclosed if considered significant.
Specific items for the current and prior years are disclosed in note 9.
2. Critical accounting estimates and key judgements
The preparation of financial statements in conformity with IFRS 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. Management has
discussed its critical accounting estimates and associated disclosures
with the
Audit & Risk Committee . 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.
Pension obligations
BT has a commitment, mainly through the BTPS, to pay pension
benefits to approximately 325,000 people over a period of more than
80 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 2012 and the key
financial assumptions used to measure the obligation are disclosed in
note 20.
Useful lives for property, plant and equipment and software
The plant and equipment in our networks is long lived with cables and
switching equipment operating for over 10 years and underground
ducts being used for decades. We also develop 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
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