BT 2016 Annual Report Download - page 153

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Overview The Strategic Report Governance Financial statements Additional information
Area of focus How our audit addressed the area of focus
Acquisition accounting for EE Limited under IFRS 3 ‘Business
Combinations’
EE Limited was acquired on 29 January 2016 for £11.0bn. We focused
on this because the acquisition is material and requires the use of significant
management judgement regarding the identification of intangible assets
acquired and the valuation of the assets and liabilities acquired. The valuation
of certain of the assets involves the use of estimates regarding future cash
flows.
A purchase price allocation exercise has been performed by management,
assisted by an external expert. The primary element of the valuation exercise
assessed the fair value of identifiable intangible assets in the form of software
licences (£415m), telecommunications licences (£2,524m), customer
relationships (£2,610m) and brand (£402m). The allocation also considered
the fair values of property, plant and equipment, current assets and current
and non current liabilities.
We evaluated the design and tested the operating effectiveness of controls
around the acquisition accounting.
In testing the valuation of the intangible assets (customer relationships,
telecommunications licences and the brand) acquired we:
• assessed the methodology adopted by management and its appointed
expert for calculating the fair values;
• assessed the discount rates applicable to the transaction;
• assessed the key valuation assumptions; and
• validated and challenged key inputs and data used in valuation models
such as customer numbers, ARPU and churn assumptions by reference to
historical data and our expectations based on our experience of comparable
businesses.
For the property, plant and equipment and software licences we assessed the
methodology adopted by management and its expert for calculating the fair
values.
Where applicable we used our valuation experts to independently reperform
the valuations prepared by management and the expert.
We found the methodologies and the assumptions applied to be within a
reasonable range.
Using our knowledge of the mobile and wider telecoms industry we assessed
the completeness of the identification of the assets acquired and assessed the
appropriateness of the assets’ useful economic lives. The assets identified and
the lives assigned are consistent with our expectations.
We read relevant contracts, agreements and board minutes which supported
our final conclusions in respect of the acquisition accounting.
Major contracts in BT Global Services and BT Wholesale
We focused on this area as it involves significant judgements in respect of:
• the determination and timing of recognition of contract profits and the
assumptions underpinning the lifetime profitability forecasts for the
contracts;
• completeness and adequacy of provisions against contracts projected to be
loss making; and
• the recoverability of contract-specific assets, including deferred costs and
property, plant and equipment.
We tested a sample of major contracts through the year, focusing our work on
those which were material by size or which we otherwise regarded as higher risk
because of the nature of the contract or its stage of delivery. In performing this
testing we assessed the appropriateness of the assumptions and judgements
underpinning the accounting for these major contracts as follows:
• We evaluated the design and tested the operating effectiveness of controls
in respect of the accounting for major contracts.
• We obtained and read the relevant sections of the contracts agreed between
BT and the customer, tested a sample of revenue and cost transactions by
tracing them to supporting evidence of delivery and acceptance and assessed
the revenue recognised in the period by comparing it with the contractual
terms and actual pattern of delivery of services.
• We compared the forecast results of each contract to the actual results
to assess the performance of the contract and the historical accuracy of
forecasting.
We challenged the recoverability of contract-specific assets dedicated to the
sampled contracts by examining contractual cover and the associated deferred
revenue or assessing recoverability against the forecast profitability of the relevant
contract.
We assessed the reasonableness of lifetime profitability forecasts by analysing
historical contract performance relative to overall contractual commitments. We
challenged the directors’ assumptions on the future costs including any forecast
savings by assessing the actions required to achieve these forecasts. In determining
whether the provisions for loss making contracts are adequate, we considered the
results of the above procedures.
Based on the results of each of the procedures as set out above we considered the
related financial statement amounts to be appropriate and in line with the group’s
accounting policies as set out in note 3.
Accuracy of revenue due to complex billing systems
The accuracy of revenue amounts recorded is an inherent industry risk. This
is because telecom billing systems are complex and process large volumes of
data with a combination of different products sold and price changes in the
year, through a number of different systems.
We evaluated the relevant IT systems and the design of controls, and tested
the operating effectiveness of controls over the:
• capture and recording of revenue transactions;
• authorisation of rate changes and the input of this information to the billing
systems; and
• calculation of amounts billed to customers.
We determined that the operation of the controls provided us with evidence
over the accuracy of revenue recorded.
We also tested a sample of customer bills and checked these to cash received
from customers. Our testing included customer bills for consumers, corporate
and wholesale customers.
Based on our work, we noted no significant issues in the accuracy of revenue
recorded in the year.