BT 2016 Annual Report Download - page 154

160 BT Group plc
Annual Report 2016
Area of focus How our audit addressed the area of focus
Pension scheme obligations and unquoted investments in the BT Pension
Scheme and the EE Pension Scheme
We focused on the BT Pension Scheme (BTPS) because the valuation of the BT
Pension Scheme obligations (£49.1bn) and unquoted investments (£15.8bn)
require the use of estimates and significant judgement, and a small change in
the assumptions can have a material impact on the financial statements.
The EE Pension Scheme (EEPS) has significantly lower obligations (£710m)
and unquoted investments (£99m). We focused on the EE Pension Scheme
because the valuation of the obligations and unquoted investments also
requires the use of estimates and significant judgement.
We evaluated the design and tested the operating effectiveness of controls in
respect of the determination of the pension scheme obligations in the BTPS. We
determined these controls to be operating and this provided us with evidence over
the obligations.
We used our actuarial experts to assess the reasonableness of actuarial
assumptions used in valuing pension scheme obligations. The assumptions used
were consistent with our internally developed benchmarks.
The pension assets include significant unquoted pension asset investments. We
tested the existence of the unquoted investments and the valuation of these
investments on a sample basis. Specifically:
• For property assets in BTPS, we tested internal controls at the property fund
manager and obtained valuation reports prepared by third party specialist
valuers. We assessed the methods and assumptions used by the valuers.
• For direct investments held by the BTPS, the valuations of the investments
are derived from discounted cash flow models. We assessed the
assumptions used in the valuations by checking that the assumptions used
were consistent with our internally developed range of discount rates, by
comparing the cash flows to historical results and considering the impact
of other external information. We tested the accuracy of the calculations
and assessed whether the assumptions used were in line with other
market participants and reflected the particular status of the investment
shareholding.
• For other unquoted investments in both schemes we obtained
confirmations from the custodians and the investment managers.
We considered the estimates and judgements used by the directors for the
obligations and the unquoted investments to be within an acceptable range.
Regulatory and other provisions
The group has total provisions of £723m relating to restructuring (£20m),
property (£296m), asset retirement obligations (£78m), network share
(£60m) and other of £269m (comprising litigation, regulatory risks and
insurance claims).
Provisions are based on judgements and estimates made by the directors. In
particular, the current telecom regulatory environment has seen an increased
frequency and magnitude of matters brought to Ofcom and the Competition
Appeal Tribunal in the UK.
For regulatory provisions, we read correspondence and pronouncements
from Ofcom and the Competition Appeal Tribunal. We held discussions with
management to understand the risk associated with historical transactions
where there is not yet a formal dispute but there is a known risk of dispute.
For property provisions we tested the underlying cash flows on a sample basis
to third party data and assessed the discount rate applied by the directors.
For legal provisions, we held discussions with the group’s general counsel
and head of litigation, read the summary of litigation matters provided by
management and discussed each of the material cases noted in the report
to determine the group’ s assessment of the likelihood and magnitude of
any liability that may arise. Where appropriate and relevant, we examined
correspondence connected with the cases, including external legal advice.
For all provisions, including asset retirement obligations and network share, we
tested the calculation of the provisions, assessed the assumptions including
with third party data where available, and assessed the judgements against
historical trends.
We considered the directors’ judgements on the level of provisioning to be
appropriate.
Capitalisation practices and asset lives for property, plant and equipment
and software intangible assets
Capitalisation of costs and the useful lives assigned to assets are areas of
significant judgement by the directors.
There are two main risks that we addressed in our audit:
• the risk that amounts being capitalised do not meet capitalisation criteria;
and
• the risk that the useful economic lives assigned to assets are inappropriate.
Our work also focused on the capitalisation of costs for broadband
deployment under the BDUK programme and the recognition of the
associated capital grants.
We evaluated the design and tested the operating effectiveness of controls
around the property, plant and equipment cycle and software intangible assets
cycle, including the controls over whether engineering (labour) activity is capital
or operating in nature. We determined that the operation of the controls
provided us with audit evidence in respect of the capitalisation practices.
We assessed the nature of costs incurred in capital projects through testing of
amounts recorded and assessing whether the description of the expenditure
met capitalisation criteria. We found no material misstatements from our
testing.
We tested the controls over the annual review of asset lives. In addition,
we tested whether the directors’ decisions on asset lives are appropriate
by considering our knowledge of the business and practice in the wider
telecoms industry. We also tested whether approved asset life changes were
appropriately applied prospectively to the fixed asset register. We found that
the asset lives were consistent with those commonly used in the industry and
appropriately reflected technological developments.
We assessed the key assumptions (primarily the forecast level of end users)
applied by the directors to calculate the level of capital grants attributable to
superfast broadband deployment in rural areas and we tested the calculation
of the accrual and deferral based on these assumptions and the current level
of capital investment. We considered the level of grant recognition to be
appropriate.