BT 2016 Annual Report Download - page 167

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Overview The Strategic Report Governance Financial statements Additional information
Goodwill
Goodwill recognised in a business combination does not
generate cash flows independently of other assets or groups
of assets. As a result, the recoverable amount, being the value
in use, is determined at a cash generating unit (CGU) level.
The determination of the CGU is judgemental and for goodwill
impairment purposes represents the lowest level within the entity
at which the goodwill is monitored for internal management
purposes, and cannot be larger than an operating segment.
The relevant CGUs are deemed to be BT Global Services, BT Business,
BT Consumer and EE which are the same units we report in our
segmental reporting.
The value in use calculations require judgement in relation to
uncertain items, including management’s expectations of future
revenue growth, operating costs, profit margins, operating cash
flows, and discount rate for each CGU.
The future cash flows used in the value in use calculations are
based on the latest Board approved three-year financial plans
and are adjusted for risks specific to the CGU. Expectations about
future growth reflect the expectations of growth in the markets
in which the CGU operates. The discount rate is derived from the
group’s post-tax weighted average cost of capital which is assessed
each year. Where relevant, the discount rate used in each CGU is
adjusted for the risk specific to the asset for which the future cash
flow estimates have not been adjusted.
Irrespective of whether there is any indication of impairment,
the group is required to test annually for impairment of goodwill
acquired in a business combination. The carrying value of
goodwill and the key assumptions used in performing the annual
impairment assessment are disclosed in note 12.
Business combinations
The acquisition method of accounting is used to account for all
business combinations regardless of whether equity instruments or
other assets are acquired.
For the EE acquisition, BT provisionally paid £3,464m of cash
and issued 1,595m of new shares valued at £7,507m using the
opening share price of 470.7p per share on 29 January 2016,
being the date of acquisition of EE and the date when the shares
were admitted to trading.
Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are, with limited exceptions,
measured initially at their fair values at the acquisition date. The
fair value of an asset or liability represents the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. We used independent
valuers to assist in the valuation for EE.
In determining the fair value of the intangible assets acquired with
EE we generally used risk‑adjusted future cash ows discounted
using discount rates specific to the asset. In determining cash
ows we have used a combination of historical data and estimates
regarding revenue growth, profit margins and operating cash
ows.
• We valued the spectrum licences using prices paid on comparable
licences in a range of jurisdictions and assumptions on future
cash ows.
• Customer relationships require judgement on future cash
ows, churn, and the expected remaining life of the customer
relationship.
• The EE brand was measured by estimating the savings realised
by owning or holding the right to use the brand name (as opposed
to paying a royalty fee to a third party). This includes an estimate
of the projected revenues generated and the estimated life of
the brand to a third party.
• Tangible assets were valued by estimating the current cost
to purchase or replace the assets.
The excess of the consideration transferred over the fair value
of the net identifiable assets acquired is recorded as goodwill.
No resulting gains or loss were recognised on settlement of pre-
existing relationships between BT and EE. The group has one year
from the acquisition date to re-measure the fair values of the
acquired assets and liabilities and the resulting goodwill if new
information is obtained relating to conditions that existed at the
acquisition date.
Acquisition related costs are expensed as incurred.
The business combinations entered into during the period are
disclosed in note 14.
Government grants relating to Broadband Delivery
UK (BDUK) contracts
The group receives government grants in relation to the BDUK
programme and other rural superfast broadband contracts. Where
we have achieved certain service levels, or delivered the network
more efficiently than anticipated, we have a potential obligation
to either re-invest or repay grant funding. Where this is the case,
management assesses and defers the income with a corresponding
increase in capital expenditure. The value of the government
grants is disclosed in note 13.
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.
Judgements are required in assessing the recoverability of overdue
trade receivables and whether a provision for doubtful debts may
be required.
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17.
2. Critical accounting estimates
and key judgements continued