SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
28 July, 2005
BT Group plc
(Translation of registrant's name into English)
BT Centre
81 Newgate Street
London
EC1A 7AJ
England
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F..X... Form 40-F.....
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934.
Yes ..... No ..X..
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- ________
Enclosures: 1. 1st Quarter Results announcement made on 28 July, 2005
FIRST QUARTER RESULTS TO JUNE 30, 2005 July 28, 2005
HIGHLIGHTS
Revenue of GBP4,783 million, up 5 per cent
New wave revenue of GBP1,385 million, up 48 per cent
Group operating profit before specific items(1) of GBP648 million, up 10 per
cent
Profit before taxation and specific items(1) of GBP511 million, up 20 per cent
Earnings per share before specific items(1) of 4.5 pence, up 25 per cent
Net debt(2) of GBP8,121 million, 4 per cent lower than previous year, including
additional finance lease liabilities recognised under IFRS
Broadband end users of 5.6 million at June 30, 2005
The results presented today represent the first time adoption of International
Financial Reporting Standards (IFRS) as described in note 1 on page 17.
Accordingly 2004/05 comparatives have been restated. Details of the impact of
the transition to IFRS can be found in Appendix A. The income statement, cash
flow statement and balance sheet, drawn up in accordance with IFRS, from which
this information is extracted are set out on pages 12 to 16.
Chief Executive's statement
Ben Verwaayen, Chief Executive, commenting on the first quarter results, said:
"This has been a great first quarter and builds on the momentum we have seen
gathering for more than a year.
"Revenue grew by 5 per cent in the quarter and earnings per share grew by 25(1)
per cent. We have achieved real international success. We won global networked
IT services orders of GBP2.4 billion in the quarter which takes orders for the
last twelve months to a record level of more than GBP8 billion - a terrific
achievement. In the UK, in a highly competitive market, we have launched a
number of innovative services such as BT Fusion, a world first that delivers all
the benefits of a fixed line from a mobile phone.
"The transformation of the business is delivering real value to our customers
and shareholders."
(1)Before specific items which are material one off or unusual items as defined
in note 4 on page 21.
(2)Net debt is defined in note 8 on page 23.
2
RESULTS FOR THE FIRST QUARTER ENDED JUNE 30, 2005
First quarter
----------------------------- Year ended
2005 2004 Better (worse) March 31
GBPm GBPm % 2005
GBPm
Revenue 4,783 4,567 5 18,623
EBITDA
- before specific items and leaver
costs 1,363 1,389 (2) 5,703
- before specific items 1,357 1,287 5 5,537
Profit before taxation
- before specific items and leaver
costs 517 527 (2) 2,246
- before specific items 511 425 20 2,080
- after specific items 499 411 21 2,354
Earnings per share
- before specific items and leaver
costs 4.6p 4.5p 2 19.4p
- before specific items 4.5p 3.6p 25 18.1p
- after specific items 4.4p 3.5p 26 21.5p
Capital expenditure 716 694 (3) 3,011
Free cash flow (126) 159 n/m 2,290
Net debt 8,121 8,422 4 7,893
The commentary focuses on the results before specific items and leaver costs.
This is consistent with the way that financial performance is measured by
management and we believe allows a meaningful analysis to be made of the trading
results of the group. Specific items are defined in note 4 on page 21.
The comparative results have been restated to reflect the requirements of IFRS
which the group has adopted (see note 1).
The income statement, cash flow statement and balance sheet are provided on
pages 12 to 16. A reconciliation of EBITDA to group operating profit is provided
on page 25. A reconciliation of net debt is provided on page 24.
3
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
IFRS will apply for the first time to the group's annual report for the year
ending March 31, 2006. Consequently, the group's results for each of the
quarters of this year will be prepared under IFRS.
Details of the impact of adopting IFRS are set out in Appendix A. The principal
differences between IFRS and UK GAAP were set out in a press release issued on
March 21, 2005 and were disclosed in the Financial Review of the Annual Report
and Form 20-F published on June 1, 2005. There are no additional significant
reconciling differences.
In the first quarter ended June 30, 2005 earnings per share as reported under
IFRS were 4.4 pence compared to 4.3 pence under the previous UK GAAP.
In the comparative period ended June 30, 2004 earnings per share under IFRS were
3.5 pence compared to the 3.6 pence previously reported under UK GAAP.
Net debt at June 30, 2005 of GBP8,121 million includes the recognition of
finance lease liabilities of GBP107 million in relation to a small number of
properties previously classified as operating leases under UK GAAP.
GROUP RESULTS
Revenue was 5 per cent higher at GBP4,783 million in the quarter with strong
growth of new wave revenue more than offsetting the decline in traditional
revenue. Underlying revenue, adjusted for the impact of Albacom, Infonet and the
mobile termination rate reductions, was 3 per cent higher than last year.
Earnings per share before specific items increased by 25 per cent to 4.5 pence.
The strong growth in new wave revenue continued and at GBP1,385 million was 48
per cent higher than last year. New wave revenue accounted for 29 per cent of
the group's revenue compared to 20 per cent in the first quarter of last year.
Excluding Albacom and Infonet, the organic growth in new wave revenue was 31 per
cent. New wave revenue is mainly generated from networked IT services, broadband
and mobility. Networked IT services revenue grew by 43 per cent to GBP904
million, broadband revenue increased by 69 per cent to GBP314 million and
mobility revenue at GBP61 million achieved growth of 42 per cent.
4
Networked IT services contract wins were GBP2.4 billion in the first quarter,
including a contract with the Ministry of Defence expected to be worth up to
GBP1.5 billion over seven years. Total orders achieved over the last twelve
months were a record GBP8.2 billion. BT had 5.6 million wholesale broadband
connections at June 30, 2005, more than doubling in the year. BT Mobile had
370,000 contract mobile connections at June 30, 2005, an increase of 72 per cent
in the customer base from last year.
Revenue from the group's traditional businesses declined by 6 per cent (4 per
cent excluding the impact of reductions to mobile termination rates and
Albacom). This was a reduction in the rate of decline compared to last year but
continues to reflect regulatory intervention, competition, price reductions and
also technological changes that we are using to drive customers from traditional
services to new wave services, such as broadband and Internet Protocol Virtual
Private Networks (IPVPN).
Consumer revenue in the first quarter was 6 per cent lower (5 per cent lower
excluding the impact of reductions to mobile termination rates). New wave
consumer revenue increased by 67 per cent, driven by the continuing growth of
broadband and mobility.
Traditional consumer revenue declined by 11 per cent year on year (9 per cent
lower excluding the impact of reductions to mobile termination rates) reflecting
the continued impact of Carrier Pre-Selection (CPS), wholesale line rental (WLR)
and broadband substitution.
The underlying 12 month rolling average revenue per consumer household (net of
mobile termination charges) of GBP254 declined by GBP2 compared to last quarter,
with increased broadband volumes more than offset by lower call revenues.
Contracted revenues increased by 2 percentage points to 65 per cent compared to
last quarter, 6 percentage points higher than last year.
Revenue from smaller and medium sized (SME) UK businesses declined by 5 per cent
(3 per cent excluding the impact of reductions to mobile termination rates). New
wave revenue grew by 26 per cent driven by continued growth in broadband and
networked IT services. The number of BT Business Plan locations increased by 66
per cent against last year to 489,000 by June 30, 2005, an increase of 10 per
cent in the quarter. BT Business Plan continues to grow successfully covering
over 50 per cent of BT's SME call revenue.
Major corporate (UK and international) revenue showed strong growth of 14 per
cent compared to the first quarter of last year, with strong growth in new wave
revenue (43 per cent) more than offsetting the decline in traditional services.
Excluding the impact of Albacom and Infonet, new wave revenue grew by 18 per
cent. There is a continued migration from traditional voice only services to
networked IT services and an increase in mobility and broadband revenue. New
wave revenue now represents 55 per cent of all major corporate revenue.
5
Wholesale (UK and Global Carrier) revenue increased by 12 per cent (17 per cent
excluding the impact of reductions to mobile termination rates and Albacom). UK
Wholesale new wave revenue increased by 77 per cent to GBP230 million, mainly
driven by broadband and managed services.
Our estimate of market share by volume of fixed to fixed voice minutes is based
on our actual minutes, market data provided by Ofcom and an extrapolation of the
historical trends. BT's estimated UK consumer market share declined by 1.4
percentage points compared to last quarter to around 61 per cent whilst the
estimated business market share declined by 0.3 percentage points to around 41
per cent.
Group operating costs before specific items increased by 4 per cent year on year
at GBP4,177 million, including the costs from Albacom and Infonet. Net staff
costs before leaver costs increased by GBP67 million to GBP965 million due
mainly to the acquisitions of Albacom and Infonet. Leaver costs were GBP6
million in the quarter (GBP102 million last year). Payments to other
telecommunication operators declined by 2 per cent year on year at GBP971
million with the reduction in mobile termination rates partially offset by the
impact of Albacom and Infonet. Other operating costs before specific items
increased by GBP193 million mainly due to increased costs of sales from both
organic and inorganic growth in networked IT services. These were partly offset
by cost savings from our efficiency programmes. Depreciation and amortisation
increased by 1 per cent year on year to GBP709 million.
Group operating profit before specific items increased by 10 per cent to GBP648
million. Operating profit margins increased by 0.6 percentage points to 13.5 per
cent due to the reduction in leaver costs year on year.
Net finance costs were GBP142 million, an improvement of GBP13 million against
last year, reflecting the higher net finance income associated with the group's
defined benefit pension scheme which was GBP63 million in the first quarter
compared to GBP50 million last year. Net finance costs included a GBP12 million
charge arising from the mark to market of financial instruments which are not in
hedging relationships.
Profit before taxation and specific items of GBP511 million increased by
20 per cent compared to last year.
The effective tax rate on the profit before specific items was 25.2 per cent
(26.6 per cent last year). The effective tax rate reflects tax efficient
investment of surplus cash and continued improvements in the tax efficiency
within the group.
Earnings per share before specific items increased by 25 per cent to 4.5 pence.
6
Specific items
There was a net charge before taxation of GBP12 million in the quarter (GBP17
million last year) arising from further rationalisation of the group's
provincial office portfolio. This rationalisation programme is expected to
continue throughout the year giving rise to additional rationalisation costs.
Specific items are defined in note 4 on page 21.
Earnings per share after specific items were 4.4 pence in the quarter (3.5 pence
last year).
Cash flow and net debt
Net cash from operating activities in the first quarter amounted to GBP841
million compared to GBP1,167 million last year. This reduction was a result of
higher working capital outflows and tax payments in the first quarter of this
year.
Cash flows from investing activities were a net cash outflow of GBP887 million
in the first quarter compared to GBP690 million last year. This reflects the
cash consideration on acquisitions of GBP87 million, which relates mainly to
Radianz. Cash flows from financing activities were a net outflow of GBP353
million in the first quarter compared to GBP562 million last year. This
reduction is due to the timing of the maturity of borrowings in the prior year.
Free cash flow was a net outflow of GBP126 million in the first quarter compared
to a net inflow of GBP159 million last year mainly reflecting the working
capital outflow and higher tax payments. The share buyback programme continued
with the repurchase of 10 million shares for GBP21 million. Net debt was
GBP8,121 million at June 30, 2005, GBP301 million below the level at June 30,
2004. Free cash flow and net debt are defined in notes 7 and 8 on pages 22 to
24.
21st Century Network
BT's plans for its 21st Century Network progressed during the quarter. In April
2005 BT announced the eight preferred suppliers that will help build a 21st
Century converged core network, and is currently concluding contractual
discussions with these vendors.
7
Line of business results
We have reviewed our internal trading arrangements and with effect from April 1,
2005 have made changes to simplify our internal trading and drive synergies. We
have restated the comparative line of business results to assist readers in
understanding the year on year performance. There is no change to the overall
group reported results.
The main changes are firstly, the transfer of BT's UK Major Business operations
into BT Global Services from BT Retail. Secondly, Field Services have moved from
BT Retail to BT Wholesale, in anticipation of the creation of Access Services.
BT's final dividend of 6.5 pence per share will be paid on September 5, 2005 to
shareholders on the register on August 5, 2005.
The second quarter and half year's results are expected to be announced on
November 10, 2005.
8
BT Retail
First quarter ended June 30
------------------------------ Year ended
2005 2004* Better (worse) March 31
2005*
GBPm GBPm GBPm % GBPm
Revenue 2,119 2,199 (80) (4) 8,758
------ ----- ------
Gross margin 563 582 (19) (3) 2,354
Sales, general and
administration costs 390 399 9 2 1,600
------ ----- ------
EBITDA 173 183 (10) (5) 754
Depreciation and amortisation 34 38 4 11 147
------ ----- ------
Operating profit 139 145 (6) (4) 607
------ ----- ------
Operating profit before leaver
costs 142 151 (9) (6) 631
====== ===== ======
Capital expenditure 35 31 (4) (13) 170
====== ===== ======
*Restated to reflect changes in intra-group trading arrangements.
New wave revenue grew by 52 per cent but was more than offset by the traditional
revenue decline of 9 per cent. Overall revenue declined by 4 per cent (2 per
cent excluding the impact of reductions to mobile termination rates).
Revenue from traditional services was 9 per cent lower than last year (7 per
cent excluding the impact of reductions to mobile termination rates). The
reduction includes the effects of continued high levels of migration to new wave
services such as broadband and IPVPN, which is reflected in a fall of over 35
per cent in dial up internet minutes and a reduction in ISDN lines. In addition,
there has been a 2 per cent decline in the overall fixed to fixed calls market
and a reduction in market share from competitive pressure.
BT Retail's new wave revenue increased by 52 per cent compared to last year and
accounted for 14 per cent of BT Retail's total revenue in the quarter, up from 9
per cent last year.
Broadband revenue grew by 55 per cent to GBP161 million. The growth of broadband
continues with 1,940,000 BT Retail connections at June 30, 2005, an increase of
11 per cent in the quarter. Net additions of 188,000 resulted in a 28 per cent
share of the broadband DSL additions in the quarter. Our programme to upgrade
customers to high speed services at no extra cost continues with a further
355,000 BT Business and consumer customers upgraded to speeds up to 2Mbit/s in
the quarter.
9
BT Retail has recently announced its intention to use the Microsoft TV, IPTV
Edition software platform to deliver TV over Broadband in the UK. Trials of TV
over broadband begin in early 2006 with plans to deliver a commercial service
later in the same year. The combination of BT's 21st Century Network with
Microsoft's best-in-class technology will result in an exciting set of next
generation entertainment and communication services available to consumers
across the UK.
Revenue from mobility services increased by 112 per cent to GBP36 million. In
June we announced the launch of BT Fusion, the world's first combined fixed and
mobile phone service, enabling customers to use a single device that can switch
seamlessly between fixed and mobile networks. The service starts with
approximately 400 early adopter customers, and already 15,000 have registered an
interest, with the service being widely available for delivery in September.
Networked IT services revenue increased by 38 per cent compared to the first
quarter of last year as a result of new contracts achieved in the UK SME market,
and the acquisition of BIC Systems in Ireland last year.
The gross margin percentage improved by 0.1 percentage points compared to last
year with improvements in both new wave and traditional margins.
Cost transformation programmes contributed to SG&A savings of GBP10 million in
the traditional business. However, this was partly offset by a GBP4 million
increase of investment in new wave activities (including new entertainment
products and mobility convergence products). A further GBP3 million of leaver
costs were incurred in the quarter, compared to GBP6 million last year.
Overall these results led to an operating profit in the quarter of GBP139
million which is 4 per cent lower than last year.
10
BT Wholesale
First quarter ended June 30
------------------------------ Year ended
2005 2004* Better (worse) March 31
2005*
GBPm GBPm GBPm % GBPm
External revenue 1,021 941 80 9 3,820
Internal revenue 1,283 1,332 (49) (4) 5,275
----- ----- -----
Revenue 2,304 2,273 31 1 9,095
Variable cost of sales 556 553 (3) (1) 2,162
----- ----- -----
Gross variable profit 1,748 1,720 28 2 6,933
Network and SG&A costs 755 789 34 4 3,069
----- ----- -----
EBITDA 993 931 62 7 3,864
Depreciation and amortisation 457 479 22 5 1,914
----- ----- -----
Operating profit 536 452 84 19 1,950
===== ===== =====
Operating profit before leaver
costs 536 510 26 5 2,012
===== ===== =====
Capital expenditure 487 477 (10) (2) 1,981
===== ===== =====
*Restated to reflect changes in intra-group trading arrangements.
BT Wholesale revenue of GBP2,304 million increased by 1 per cent driven by
external revenue growth of 9 per cent (underlying growth is 18 per cent
excluding the impact of regulatory reductions to mobile termination rates). The
growth continues to be driven by new wave services, mainly broadband and managed
services, increasing by 77 per cent to GBP230 million. Revenue from new wave
services now accounts for 23 per cent of external revenue compared to 14 per
cent in the first quarter of last year.
Internal revenue has declined by 4 per cent to GBP1,283 million due to the
impact of lower volumes of calls and lines and lower regulatory prices being
reflected in internal charges, which is partially offset by strong growth from
internal broadband revenue.
Gross variable profit of GBP1,748 million is 2 per cent higher than the first
quarter last year reflecting volume increases and a favourable change in sales
mix with broadband growth more than offsetting the decline in traditional
products.
A combination of cost reductions, lower leaver costs and higher revenue in the
quarter has resulted in the EBITDA increase of 7 per cent and operating profit
increase of 19 per cent. Cost savings for the quarter have been partly offset by
increased levels of activity in the network mainly due to growth in broadband
and local loop unbundling.
Capital expenditure in the quarter is 2 per cent higher than last year as a
result of expenditure to support the continuing growth in broadband and the
transformation of the group's network that has more than offset a reduction in
investment in legacy network technologies.
11
BT Global Services
First quarter ended June 30
------------------------------- Year ended
2005 2004* Better (worse) March 31
2005*
GBPm GBPm GBPm % GBPm
Revenue 2,072 1,760 312 18 7,622
EBITDA 233 193 40 21 961
Operating profit 81 62 19 31 411
Operating profit before leaver
costs 83 95 (12) (13) 470
Capital expenditure 142 144 2 1 604
*Restated to reflect changes in intra-group trading arrangements.
BT Global Services revenue for the quarter rose by 18 per cent to GBP2,072
million, with growth from the acquisitions of Albacom and Infonet in addition to
the continuing trend for above market organic growth that has been consistently
seen in previous quarters. Underlying growth, excluding Albacom and Infonet, was
6 per cent. Corporate revenues grew by 16 per cent supported by Multi Protocol
Label Switching (MPLS) with a year on year increase of 20 per cent. Carrier
revenue grew by 32 per cent as a result of higher international voice traffic
and terminations in Europe together with additional revenues from Albacom. Order
intake remained strong with networked IT services contract orders of GBP2.4
billion taken in the quarter resulting in record orders of GBP8.2 billion over
the last twelve months.
EBITDA before leaver costs increased by GBP9 million giving growth of 4 per cent
which would have been 5 per cent on the previous UK GAAP basis. Operating profit
for the quarter rose by GBP19 million from the previous year to GBP81 million.
We expect the underlying cost efficiency in BT Global Services to continue to
improve.
Capital expenditure in the quarter at GBP142 million decreased by GBP2 million
despite increased spend from the acquisitions. Operating free cash flow (EBITDA
less capital expenditure) at GBP91 million is almost double last year's level.
12
GROUP INCOME STATEMENT
for the three months ended June 30, 2005
-------------------- ------ ---------- ----------- ---------
Before specific Specific items Total
items (note 4)
(unaudited) Notes GBPm GBPm GBPm
-------------------- ------ ---------- ----------- ---------
Revenue 2 4,783 - 4,783
Other operating income 42 - 42
Operating costs 3 (4,177) (12) (4,189)
---------- ----------- ---------
Operating profit (loss) 2 648 (12) 636
Net finance costs 5 (142) - (142)
Share of post tax
profits of associates
and joint ventures 5 - 5
---------- ----------- ---------
Profit (loss) before
taxation 511 (12) 499
Taxation (129) 4 (125)
---------- ----------- ---------
Profit (loss) after
taxation and
attributable
to shareholders 382 (8) 374
========= ========== =========
Earnings per share 6
- basic 4.5p 4.4p
========= ========== =========
- diluted 4.5p 4.4p
========= ========== =========
-------------------- ------ ---------- ----------- ---------
13
GROUP INCOME STATEMENT
for the three months ended June 30, 2004
------------------------ ------ ---------- ----------- --------
Before specific Specific items Total
items (note 4)
(unaudited) Notes GBPm GBPm GBPm
------------------------ ------ ---------- ----------- --------
Revenue 2 4,567 - 4,567
Other operating income 41 - 41
Operating costs 3 (4,021) (17) (4,038)
Profit on sale of non
current asset
investments - 3 3
---------- ----------- --------
Operating profit (loss) 2 587 (14) 573
Net finance costs 5 (155) - (155)
Share of post tax losses
of associates and joint
ventures (7) - (7)
---------- ----------- ---------
Profit (loss) before
taxation 425 (14) 411
Taxation (113) 4 (109)
---------- ----------- ---------
Profit (loss) after
taxation and
attributable
to shareholders 312 (10) 302
========= =========== =========
Earnings per share 6
- basic 3.6p 3.5p
========= =========== ========
- diluted 3.6p 3.5p
========= =========== ========
------------------------ ------ ---------- ----------- --------
14
GROUP INCOME STATEMENT
for the year ended March, 31, 2005
------------------------ ------ ---------- ----------- --------
Before specific Specific items Total
items (note 4)
(unaudited) Notes GBPm GBPm GBPm
------------------------ ------ ---------- ----------- --------
Revenue 2 18,623 - 18,623
Other operating income 193 - 193
Operating costs 3 (16,123) (59) (16,182)
Profit on sale of non
current asset
investments - 358 358
---------- ----------- --------
Operating profit 2 2,693 299 2,992
Net finance costs 5 (599) - (599)
Share of post tax losses
of associates and joint
ventures (14) (25) (39)
---------- ----------- --------
Profit before taxation 2,080 274 2,354
Taxation (541) 16 (525)
---------- ----------- --------
Profit for the period 1,539 290 1,829
========== =========== ========
Attributable to:
Equity shareholders 1,540 290 1,830
Minority interest (1) - (1)
========== =========== ========
Earnings per share 6
- basic 18.1p 21.5p
========== =========== ========
- diluted 17.9p 21.3p
========== =========== ========
------------------------ ------ ---------- ----------- --------
15
GROUP CASH FLOW STATEMENT
for the three months ended June 30, 2005
----------------------------- -------- --------- ---------
First quarter ended June 30 Year
ended
March 31
2005 2004 2005
(unaudited) GBPm GBPm GBPm
----------------------------- -------- --------- ---------
Cash flows from operating activities
Cash generated from operations
(note 7 (a)) 972 1,208 5,906
Income taxes paid (131) (41) (332)
-------- --------- ---------
Net cash inflow from operating
activities 841 1,167 5,574
Cash flows from investing activities
Acquisition of subsidiaries (net
of cash acquired) (87) (2) (426)
Net (acquisition) sales of
associates and joint ventures (1) - 8
Net purchase of property, plant,
equipment and software (686) (729) (2,945)
Interest received 37 55 374
Receipt of dividends from
associates and joint ventures - - 2
Net sale of non current asset
investments - 23 537
Net (purchase) sale of short
term investments (150) (37) 710
-------- --------- ---------
Net cash used in investing
activities (887) (690) (1,740)
Cash flows from financing activities
Repurchase of ordinary share
capital (21) (31) (193)
Net repayments of borrowings (14) (174) (1,300)
Interest paid (318) (357) (1,252)
Equity dividends paid - - (784)
-------- --------- ---------
Net cash used in financing
activities (353) (562) (3,529)
Effects of exchange rate changes 29 (26) -
-------- --------- ---------
Net (decrease) increase in cash
and cash equivalents (370) (111) 305
======== ========= =========
Cash and cash equivalents at
beginning of period 1,310 1,005 1,005
Cash and cash equivalents, net
of bank overdrafts, at end 940 894 1,310
of period (note 7 (c))
======== ========= =========
----------------------------- -------- --------- --- --------
Free cash flow (note 7 (b)) (126) 159 2,290
----------------------------- -------- --------- --- --------
----------------------------- -------- --------- --- --------
Increase (decrease) in net debt
from cash flows (note 8) 235 (126) (895)
----------------------------- -------- --------- --- --------
16
GROUP BALANCE SHEET
at June 30, 2005
------------------------- --------- --------- ---------
June 30 June 30 March 31
2005 2004 2005
(unaudited) GBPm GBPm GBPm
------------------------- --------- --------- ---------
Non current assets
Goodwill and other intangible assets 1,343 607 1,259
Property, plant and equipment 15,431 15,159 15,386
Other non current assets 184 462 133
Deferred tax assets 1,460 1,541 1,434
--------- --------- ---------
18,418 17,769 18,212
--------- --------- ---------
Current assets
Inventories 124 111 106
Trade and other receivables 4,210 4,135 4,269
Other financial assets 3,866 4,316 3,634
Cash and cash equivalents 1,177 899 1,312
--------- --------- ---------
9,377 9,461 9,321
--------- --------- ---------
Total assets 27,795 27,230 27,533
Current liabilities
Loans and other borrowings 4,626 1,066 4,261
Trade and other payables 5,722 6,200 6,772
Other current liabilities 1,284 552 1,020
--------- --------- ---------
11,632 7,818 12,053
--------- --------- ---------
Total assets less current liabilities 16,163 19,412 15,480
======== ========= =========
Non current liabilities
Loans and other borrowings 8,094 11,868 7,744
Deferred tax liabilities 1,586 1,755 1,715
Retirement benefit obligations 4,867 5,136 4,781
Other non current liabilities 1,489 1,406 1,145
--------- --------- ---------
16,036 20,165 15,385
--------- --------- ---------
Capital and reserves
------------------------------------
Called up share capital 432 432 432
Reserves (354) (1,231) (387)
------------------------------------
Total equity shareholders' funds (deficit) 78 (799) 45
Minority interest 49 46 50
--------- --------- ---------
Total equity 127 (753) 95
--------- --------- ---------
16,163 19,412 15,480
======== ========= =========
------------------------- --------- --------- ---------
17
NOTES (unaudited)
1 Basis of preparation and accounting policies
These primary statements and selected notes comprise the unaudited interim
consolidated financial results of BT Group plc for the quarters ended June 30,
2005 and 2004, together with the unaudited results for the year ended March 31,
2005. These interim financial results do not comprise statutory accounts within
the meaning of Section 240 of the Companies Act 1985. Statutory accounts for the
year ended March 31, 2005 were approved by the Board of Directors on May 18,
2005 and published on June 1, 2005. The auditor's report on those accounts was
unqualified and did not contain any statement under Section 237 of the Companies
Act 1985.
Previously the group prepared its audited annual financial statements and
unaudited quarterly results under UK Generally Accepted Accounting Principles
(UK GAAP). From April 1, 2005 the group is required to present its annual
consolidated financial statements in accordance with International Financial
Reporting Standards (IFRS) as adopted for use in the European Union (EU).
The rules for the first time adoption of IFRS are set out in IFRS 1 "First Time
Adoption of International Financial Reporting Standards". In preparing these
interim consolidated financial results, the group has applied the mandatory
exemptions and certain of the optional exemptions from full retrospective
application of IFRS. These are detailed in Appendix A.
These unaudited group results for the three months to June 30, 2005 have been
prepared on a basis consistent with the accounting policies set out in Appendix
B based on the IFRS which are expected to be applicable as at March 31, 2006.
These IFRS are subject to ongoing review and possible amendment or
interpretative guidance and therefore are still subject to change. These
policies also assume that the amendments to IAS 19 "Employee Benefits" published
by the International Accounting Standards Board, allowing actuarial gains and
losses to be recognised in full through reserves, will be endorsed by the EU. In
addition, the accounting policies applicable to IAS 39 "Financial Instruments:
Recognition and Measurement" will not be impacted by the elements carved out of
the EU endorsement, and hence the group will comply with the full version of IAS
39. These interim financial results have been prepared under the historical cost
convention, except in respect of certain financial assets and liabilities.
As permitted, the group has chosen not to adopt IAS 34 "Interim Financial
Statements", and therefore these interim financial results are not in full
compliance with IFRS.
18
1 Basis of preparation and accounting policies continued
An explanation of how the transition from UK GAAP to IFRS has affected the
group's financial position and reported performance is set out in Appendix A.
2 Results of businesses
(a) Operating results
External Internal Group Group EBITDA
revenue revenue revenue operating (ii)
profit (loss)
(ii)
GBPm GBPm GBPm GBPm GBPm
First quarter ended
June 30, 2005
BT Retail 2,040 79 2,119 139 173
BT Wholesale 1,021 1,283 2,304 536 993
BT Global Services 1,716 356 2,072 81 233
Other 6 - 6 (108) (42)
Intra-group items (i) - (1,718) (1,718) - -
----- ------ ------ ------ -----
Total 4,783 - 4,783 648 1,357
===== ====== ====== ====== =====
First quarter ended
June 30, 2004
(restated - see below)
BT Retail 2,146 53 2,199 145 183
BT Wholesale 941 1,332 2,273 452 931
BT Global Services 1,473 287 1,760 62 193
Other 7 - 7 (72) (20)
Intra-group items (i) - (1,672) (1,672) - -
----- ------ ------ ------ -----
Total 4,567 - 4,567 587 1,287
===== ====== ====== ====== =====
Year ended March 31, 2005
(restated - see below)
BT Retail 8,490 268 8,758 607 754
BT Wholesale 3,820 5,275 9,095 1,950 3,864
BT Global Services 6,288 1,334 7,622 411 961
Other 25 - 25 (275) (42)
Intra-group items (i) - (6,877) (6,877) - -
----- ------ ------ ------ -----
Total 18,623 - 18,623 2,693 5,537
===== ====== ====== ====== =====
(i) Elimination of intra-group revenue between businesses, which is included in
the total revenue of the originating business. (ii) Before specific items.
We have reviewed our internal trading arrangements and with effect from April 1,
2005 have made changes to simplify our internal trading and drive synergies. We
have restated the comparative line of business results to assist readers in
understanding the year on year performance. There is no change to the overall
group reported results.
19
2 Results of businesses continued
(b) Revenue analysis
First quarter ended June 30
---------------------------------- Year ended
March 31
2005 2004 Better (worse) 2005
GBPm GBPm GBPm % GBPm
Traditional 3,398 3,631 (233) (6) 14,073
New wave 1,385 936 449 48 4,550
----- ----- ------
4,783 4,567 216 5 18,623
===== ===== ======
Consumer 1,334 1,425 (91) (6) 5,637
Business 591 623 (32) (5) 2,464
Major Corporate 1,630 1,424 206 14 6,069
Wholesale/Carrier 1,222 1,088 134 12 4,428
Other 6 7 (1) (14) 25
----- ----- ------
4,783 4,567 216 5 18,623
----- ----- ------
(c) New wave revenue analysis
First quarter ended June 30
------------------------------- Year ended
March 31
2005 2004 Better (worse) 2005
GBPm GBPm GBPm % GBPm
Networked IT services 904 634 270 43 3,066
Broadband 314 186 128 69 930
Mobility 61 43 18 42 205
Other 106 73 33 45 349
----- ----- -----
1,385 936 449 48 4,550
----- ----- -----
20
2 Results of businesses continued
(d) Capital expenditure on property, plant, equipment, software
and motor vehicles:
Year ended
First quarter ended June 30 March 31
2005 2004 2005
GBPm GBPm GBPm
BT Retail 35 31 170
BT Wholesale
Access 257 269 1,037
Switch 10 30 100
Transmission 46 45 230
Products/systems support 174 133 614
--- ---- ------
487 477 1,981
BT Global Services 142 144 604
Other (including fleet vehicles
and property) 52 42 256
--- ---- ------
Total 716 694 3,011
--- ---- ------
3 Operating costs
Year ended
First quarter ended June 30 March 31
2005 2004 2005
GBPm GBPm GBPm
Net staff costs before leaver
costs 965 898 3,666
Leaver costs 6 102 166
Net staff costs 971 1,000 3,832
--- ---- ------
Depreciation and amortisation 706 700 2,844
Amortisation of acquired
intangibles 3 - -
Payments to telecommunication
operators 971 988 3,725
Other operating costs 1,526 1,333 5,722
--- ---- ------
Total before specific items 4,177 4,021 16,123
Specific items (note 4) 12 17 59
--- ---- ------
Total 4,189 4,038 16,182
--- ---- ------
21
4 Specific items
BT will continue to separately identify and disclose any material one off or
unusual items (termed "specific items"). This is consistent with the way that
financial performance is measured by management and we believe assists in
providing a meaningful analysis of the trading results of the group. "Specific
items" may not be comparable to similarly titled measures used by other
companies. In the comparative period the specific items were previously referred
to as exceptional items under UK GAAP.
Year ended
First quarter ended June 30 March 31
2005 2004 2005
GBPm GBPm GBPm
Operating costs
Property rationalisation costs 12 17 59
Profit on sale of non current
asset investments - (3) (358)
--- ---- ------
Specific operating costs 12 14 (299)
Impairment of assets in joint
ventures - - 25
--- ---- ------
Total specific items before
taxation 12 14 (274)
=== ==== ======
5 Net finance costs
Year ended
First quarter ended June 30 March 31
2005 2004 2005
GBPm GBPm GBPm
Finance costs(1) 262 262 1,053
Finance income (57) (57) (256)
--- ---- ------
Net finance costs before pension
finance income 205 205 797
Pension finance income (63) (50) (198)
--- ---- ------
Net finance costs 142 155 599
=== ==== ======
(1) Finance costs in the quarter ended June 30, 2005 include a GBP12 million
charge arising from the re-measurement of financial instruments, which are not
in hedging relationships, on a fair value basis.
22
6 Earnings per share
The basic earnings per share are calculated by dividing the profit attributable
to shareholders by the average number of shares in issue after deducting the
company's shares held by employee share ownership trusts and treasury shares. In
calculating the diluted earnings per share, share options outstanding and other
potential ordinary shares have been taken into account.
The average number of shares in the periods were:
Year ended
First quarter ended June 30 March 31
2005 2004 2005
millions of shares
Basic 8,471 8,557 8,524
Diluted 8,556 8,597 8,581
7 (a) Reconciliation of profit to cash generated from operations
Year ended
First quarter ended June 30 March 31
2005 2004 2005
GBPm GBPm GBPm
Profit before tax 499 411 2,354
Depreciation and amortisation 709 700 2,844
Net finance costs 142 155 599
Profit on disposal of non current
asset investments - (3) (358)
Changes in working capital (453) (139) 253
Provision movements, pensions
and other 75 84 214
---- ----- ------
Cash generated from operations 972 1,208 5,906
---- ----- ------
(b) Free cash flow
Year
ended
First quarter ended June March 31
30
2005 2004 2005
GBPm GBPm GBPm
Cash generated from operations 972 1,208 5,906
Income taxes paid (131) (41) (332)
---- ----- ------
Net cash inflow from operating
activities 841 1,167 5,574
Included in cash flows from investing
activities
Net purchase of property, plant,
equipment and software (686) (729) (2,945)
Net sale of non current asset
investments - 23 537
Dividends received from associates - - 2
Interest received 37 55 374
Included in cash flows from financing
activities
Interest paid (318) (357) (1,252)
---- ----- ------
Free cash flow (126) 159 2,290
---- ----- ------
23
7 (b) Free cash flow continued
Free cash flow is defined as the net increase in cash and cash equivalents less
cash flows from financing activities (except interest paid) and less the
acquisition or disposal of group undertakings. It is not a measure recognised
under IFRS but is a key indicator used by management in order to assess
operational performance.
(c) Cash and cash equivalents
At June 30 At March 31
2005 2004 2005
GBPm GBPm GBPm
Cash at bank and in hand 438 144 206
Short term deposits 739 755 1,106
---- ----- ------
Cash and cash equivalents 1,177 899 1,312
Bank overdrafts (237) (5) (2)
---- ----- ------
940 894 1,310
8 Net debt
Net debt at June 30, 2005 was GBP8,121 million (June 30, 2004 - GBP8,422
million, March 31, 2005 - GBP7,893 million).
Net debt consists of borrowings less financial assets and cash and cash
equivalents. Borrowings are measured at the net proceeds raised, adjusted to
amortise any discount over the term of the debt. Financial assets and cash and
cash equivalents are measured at the lower of cost and net realisable value.
Currency denominated balances within net debt are translated to sterling at
swapped rates where hedged.
This definition of net debt reflects the future cash flows due to arise on
maturity of financial instruments and removes the balance sheet volatility
arising from the re-measurement of hedged risks under fair value hedges and the
use of the amortised cost method that is required by IAS 39. It is not a measure
recognised under IFRS but is used by management to measure and monitor
performance.
24
8 Net debt continued
(a) Analysis
At June 30 At March 31
2005 2004 2005
GBPm GBPm GBPm
Loans and other borrowings 12,720 12,934 12,005
Cash and cash equivalents (1,177) (899) (1,312)
Other current financial assets 1 (3,704) (4,290) (3,491)
------ ------ --------
7,839 7,745 7,202
Adjustments:
To retranslate currency denominated balances at
swapped rates where hedged 486 677 691
To recognise borrowings at net proceeds and
unamortised discount (212) - -
Other 8 - -
------ ------ --------
Net debt 8,121 8,422 7,893
------ ------ --------
After allocating the element of the adjustments which impact loans and other
borrowings, gross debt at June 30, 2005 was GBP12,686 million (June 30, 2004 -
GBP13,637 million, March 31, 2005 - GBP12,696 million).
1 Excluding derivative financial instruments of GBP162 million, GBP26 million
and GBP143 million at June 30, 2005 and 2004 and March 31, 2005, respectively.
(b) Reconciliation of net cash flow to movement in net debt
Year ended
First quarter ended June 30 March 31
2005 2004 2005
GBPm GBPm GBPm
Net debt at beginning of period 7,893 8,530 8,530
Increase (decrease) in net debt
resulting from cash flows 235 (126) (895)
Net debt assumed or issued on
acquisitions 1 - 159
Currency and other movements (14) 26 2
Other non-cash movements 6 (8) 97
------ ------ --------
Net debt at end of period 8,121 8,422 7,893
------ ------ --------
25
9 Statement of changes in equity
Year ended
First quarter ended June 30 March 31
2005 2004 2005
GBPm GBPm GBPm
Shareholders' funds (deficit) 45 (1,085) (1,085)
Minority interest 50 46 46
---- ------ ------
95 (1,039) (1,039)
Effect of adoption of IAS 32 and 39
(see Appendix A) (337) - -
---- ------ ------
Deficit at beginning of period (242) (1,039) (1,039)
Profit for the financial period 374 302 1,830
Actuarial (losses) gains on pension
obligations (80) - 294
Valuation gains and losses 64 - -
Employee share schemes 2 11 31
Tax on items taken directly to equity 10 - (82)
Issues of shares 2 - 1
Net movement in treasury shares (12) (31) (176)
Dividends on ordinary shares - - (786)
Currency translation adjustments 10 4 15
Minority interest (1) - 4
Other - - 3
---- ------ ------
Net changes in equity for the
financial period 369 286 1,134
Equity at end of period
Shareholders' funds (deficit) 78 (799) 45
Minority interest 49 46 50
---- ------ ------
127 (753) 95
---- ------ ------
10 Earnings before interest, taxation, depreciation and amortisation (EBITDA)
Year ended
First quarter ended June 30 March 31
2005 2004 2005
GBPm GBPm GBPm
Operating profit 636 573 2,992
Specific items (note 4) 12 14 (299)
Depreciation and amortisation
(note 3) 709 700 2,844
---- ------ ------
EBITDA before specific items 1,357 1,287 5,537
---- ------ ------
Earnings before interest, taxation, depreciation and amortisation (EBITDA)
before specific items is not a measure recognised under IFRS, but it is a key
indicator used by management in order to
assess operational performance.
26
11 United States Generally Accepted Accounting Principles (US GAAP)
The results set out above have been prepared in accordance with the basis of
preparation as set out in note 1. The table below sets out the results
calculated in accordance with US GAAP.
Year ended
First quarter ended June 30 March 31
2005 2004 2005
Net income attributable to 393 73 1,297
Shareholders (GBPm)
Earnings per ADS (GBP)
- basic 0.46 0.09 1.52
- diluted 0.46 0.08 1.51
Each American Depositary Share (ADS) represents 10 ordinary shares of BT Group
plc.
Shareholders' equity, calculated in accordance with US GAAP, is a GBP231 million
deficit at June 30, 2005 (June 30, 2004 - GBP1,395 million, March 31, 2005 -
GBP584 million).
27
Forward-looking statements - caution advised
Certain statements in this results release are forward-looking and are made in
reliance on the safe harbour provisions of the US Private Securities Litigation
Reform Act of 1995. These statements include, without limitation, those
concerning: continued growth in new wave revenue, mainly from broadband,
networked IT services and mobility growth; implementation, development and the
benefits of BT's 21st Century Network; expectations regarding revenue growth,
cost efficiency and savings; and transformation delivering real value. Although
BT believes that the expectations reflected in these forward-looking statements
are reasonable, it can give no assurance that these expectations will prove to
have been correct. Because these statements involve risks and uncertainties,
actual results may differ materially from those expressed or implied by these
forward-looking statements.
Factors that could cause differences between actual results and those implied by
the forward-looking statements include, but are not limited to: material adverse
changes in economic conditions in the markets served by BT; future regulatory
actions and conditions in BT's operating areas, including competition from
others; selection by BT and its lines of business of the appropriate trading and
marketing models for its products and services; fluctuations in foreign currency
exchange rates and interest rates; technological innovations, including the cost
of developing new products, networks and solutions and the need to increase
expenditures for improving the quality of service; prolonged adverse weather
conditions resulting in a material increase in overtime, staff or other costs;
developments in the convergence of technologies; the anticipated benefits and
advantages of new technologies, products and services, including broadband and
other new wave initiatives, not being realised; and general financial market
conditions affecting BT's performance. BT undertakes no obligation to update any
forward-looking statements whether as a result of new information, future events
or otherwise.
The IFRS position as stated is BT's current view, based on the Standards
currently in issue, and changes may arise as new accounting pronouncements are
developed and issued. Due to a number of new and revised Standards, included
within the body of Standards that comprise IFRS, there is not yet a significant
body of established best practice on which to draw in forming opinions regarding
interpretation and application. Accordingly, practice is continuing to evolve.
At this stage, therefore, the full financial effect of reporting under IFRS, as
it will be applied and reported in the group's first full IFRS financial
statements, cannot be determined with certainty and may be subject to change.
FIRST QUARTER RESULTS TO JUNE 30, 2005 July 28, 2005
Appendix A - Explanation of the transition to IFRS
(a) Basis of preparation and accounting policies
Previously the group prepared its audited annual financial statements and
unaudited quarterly results under UK Generally Accepted Accounting Principles
(UK GAAP). From April 1, 2005 the group is required to present its annual
consolidated financial statements in accordance with International Financial
Reporting Standards (IFRS) as adopted for use in the European Union (EU).
The rules for the first time adoption of IFRS are set out in IFRS 1 "First Time
Adoption of International Financial Reporting Standards". IFRS 1 allows
exemptions from the application of certain IFRS to assist companies with the
transition process and the group has elected to take the following exemptions:
- Financial instruments: the group has chosen to utilise the exemption
from the requirement to restate comparative information for IAS 32
"Financial Instruments: Disclosure and presentation" and IAS 39 "Financial
Instruments: Recognition and Measurement", and hence these standards have
been applied prospectively as of April 1, 2005.
- Business combinations: the group has elected not to restate business
combinations prior to the date of transition (April 1, 2004).
- Employee benefits: all cumulative actuarial gains and losses have been
recognised in reserves at the transition date.
- Share based payments: the group has applied IFRS 2 "Share Based Payment"
to all grants of equity instruments after November 7, 2002 which were
unvested as at January 1, 2005.
- Cumulative translation differences: the group has elected to reset the
foreign currency translation reserve to zero at the transition date, April
1, 2004. Any gains and losses on subsequent disposals of foreign operations
will exclude translation differences arising prior to that date.
These unaudited group results for the three months to June 30, 2005 have been
prepared on a basis consistent with the accounting policies set out in Appendix
B ("BT's IFRS accounting policies"). IFRS are subject to ongoing review and
possible amendment or interpretative guidance and therefore are still subject to
change. These policies also assume that the amendments to IAS 19 "Employee
Benefits" published by the International Accounting Standards Board, allowing
actuarial gains and losses to be recognised in full through reserves, will be
endorsed by the EU. In addition, the accounting policies applicable to IAS 39
"Financial Instruments: Recognition and Measurement" will not be impacted by the
elements carved out of the EU endorsement, and hence the group will comply with
the full version of IAS 39. These interim financial results have been prepared
under the historical cost convention, except in respect of certain financial
assets and liabilities. As permitted, the group has chosen not to adopt IAS 34
"Interim Financial Statements", and therefore the interim financial results are
not in full compliance with IFRS.
An explanation of how the transition from UK GAAP to IFRS has affected the
group's financial position and reported performance is set out in the following
notes and the tables at the end of this appendix.
2
(b) Explanation of adjustments between UK GAAP and IFRS
1. Pensions
Under UK GAAP, the group previously measured pension commitments and other
related post-retirement benefits in accordance with SSAP 24 "Accounting for
Pension Costs" with additional disclosures provided in accordance with FRS 17
"Retirement Benefits". Under BT's IFRS accounting policies, the group measures
pension commitments and other related post-retirement benefits in accordance
with IAS 19 "Employee Benefits", which takes a similar approach to FRS 17.
On adoption of IAS 19 the deficit in defined benefit pension schemes was
recognised on the group's balance sheet. The amended version of IAS 19, which is
subject to EU approval, allows companies to choose to recognise actuarial gains
and losses immediately in reserves, or alternatively to be held on the balance
sheet and released to the income statement over a period of time. The group has
elected to early adopt the amended version of IAS 19 and reflect the impact of
actuarial gains and losses immediately in reserves.
The income statement charge is split between an operating charge and a net
finance charge. The net finance charge relates to the unwinding of the discount
applied to the liabilities of the scheme offset by the expected return on the
assets of the scheme, based on conditions prevailing at the start of the year.
Under SSAP 24, the asset on the balance sheet represented the timing differences
between the pension charge recognised in the profit and loss account and the
payments made to the pension scheme. Under IAS 19, the liability on the balance
sheet represents the deficit in the pension scheme. The scheme assets are valued
at market value and the liabilities are discounted using a high quality
corporate bond rate in calculating the deficit.
Under SSAP 24, pension charges for the year ended March 31, 2005 were GBP465
million and for the 3 month period to June 30, 2004 were GBP101 million,
including a charge for the amortisation of the SSAP 24 deficit in the BT Pension
Scheme, and an interest credit relating to the balance sheet prepayment. Under
IAS 19 the total charges for the year ended March 31, 2005 were GBP342 million
and for the 3 month period to June 30, 2004 were GBP70 million, split between an
operating charge and net finance income. Accordingly, for the year ended March
31, 2005 and the 3 months ended June 30, 2004 there is an additional GBP75
million and GBP19 million charge to operating profit and GBP198 million and
GBP50 million of net finance income has been recognised under IAS 19.
A pension liability has been recognised at March 31, 2005 of GBP4,781 million
(GBP3,347 million net of a deferred tax asset of GBP1,434 million) and at June
30, 2004 of GBP5,136 million (GBP3,595 million net of a deferred tax asset of
GBP1,541 million), offset by the reversal of provisions and other creditors of
GBP44 million for March 31, 2005 and GBP36 million at June 30, 2004. The pension
prepayment on the UK GAAP balance sheet of GBP1,118 million and GBP1,126 million
has also been reversed, including the associated deferred tax liability. The net
effect has been a reduction in shareholders' funds at March 31, 2005 of GBP4,092
million and at June 30, 2004 of GBP4,368 million.
3
2. Share based payments
Under UK GAAP an expense was recognised for the award of share options and
shares based on their intrinsic value (the difference between the exercise price
and the market value at the date of the award). The majority of BT's share based
payments are made under all employee 'Save As You Earn' plans which were exempt
under UK GAAP and the intrinsic value of many of the senior management schemes
is nil.
Under IFRS 2 "Share Based Payment", an expense is recognised in the income
statement for all share based payments (both awards of options and awards of
shares). This expense is based on the fair value at the date of grant of the
award, using an option pricing model, and is charged to the income statement
over the related performance period.
The accounting rules of IFRS 2 have resulted in an increased operating charge
for the year ended March 31, 2005 and the 3 months ended June 30, 2004 of GBP28
million and GBP4 million, respectively. A related tax benefit of GBP7 million
and GBP1 million, respectively, has also been recognised. The credit entry for
the share based payments is recognised directly in reserves as the awards are
equity settled.
3. Goodwill and other intangible assets
UK GAAP required goodwill to be amortised over its expected useful economic
life. Under IFRS 3 "Business Combinations", goodwill is no longer amortised but
held at its carrying value on the balance sheet and tested annually for
impairment. In addition, IAS 38 "Intangible Assets" requires other intangible
assets arising on acquisitions after the transition date to be separately
identified and amortised over their useful economic life, often a shorter period
than previously used for goodwill. As a result, intangible assets such as
customer relationships and trademarks, need to be separately valued and
recognised on business combinations, and then amortised over their useful
economic lives.
The UK GAAP goodwill amortisation charge in the year to March 31, 2005 and 3
months to June 30, 2004 of GBP16 million and GBP4 million, respectively, has
been reversed. The other intangible assets arising from acquisitions since April
1, 2004 are being amortised over their estimated useful economic lives.
Computer software that is not an integral part of the associated hardware is
classified as an intangible asset under IAS 38. Under UK GAAP, the group's
policy was to categorise all capitalised software as tangible fixed assets. This
has resulted in a balance sheet reclassification of GBP620 million and GBP399
million as at March 31, 2005 and June 30, 2004 respectively.
4. Dividends
Under UK GAAP, the dividend charge was recognised in the profit and loss account
in the period to which it related. Under IAS 10 "Events After The Balance Sheet
Date", dividends are not recognised in the income statement but directly in
reserves. In addition, the final dividend is recognised only when it has been
declared and approved by the company in general meeting.
The final dividend liabilities for the 2005 and 2004 financial years of GBP551
million and GBP454 million, respectively have been reversed at March 31, 2005,
June 30, 2004 and April 1, 2004 as the associated dividends had not been
approved at those dates.
4
5. Leases
Under IAS 17 "Leases" there is a requirement to view leases of land separately
from leases of buildings. Furthermore, there is a requirement to recognise
operating lease charges as an expense on a straight line basis. As a result, the
building elements of a small number of properties have been reclassified from
operating leases under UK GAAP to finance leases under IFRS, and lease rentals
under BT's 2001 sale and leaseback transaction are recognised on a straight line
basis under IFRS.
For those properties reclassified as finance leases, profit before tax for the
year ended March 31, 2005 and the 3 months to June 30, 2004, has been reduced by
approximately GBP3 million and GBP1 million, respectively, as a result of the
recognition of depreciation and finance lease interest charges, and the removal
of the UK GAAP operating lease charges. Recognising the operating lease charges,
on a straight line basis has further reduced the profit before tax for the year
ended March 31, 2005 and the 3 months to June 30, 2004 by GBP101 million and
GBP26 million, respectively.
6. Financial instruments
Under UK GAAP, the group previously measured financial assets and liabilities in
accordance with the principles of FRS 4 "Capital Instruments", FRS 5 "Reporting
the Substance of Transactions" and SSAP 20 "Foreign Currency Translation".
Current asset investments were recognised at the lower of cost and net
realisable value. Debt instruments were stated at the amount of the net proceeds
adjusted to amortise any discount over the term of the debt. Debt and current
asset investments were further adjusted for the effect of the currency element
of swaps and forward contracts used as a hedge against these instruments. The
group also provided disclosures in accordance with FRS 13 "Derivatives and Other
Financial Instruments: Disclosures" setting out the objectives, policies and
strategies for holding or issuing financial instruments, and the fair value of
financial instruments held at the balance sheet date.
The group has taken the IFRS 1 exemption not to restate comparatives for the
adoption of IAS 32 "Financial Instruments: Disclosure and Presentation" and IAS
39 "Financial Instruments: Recognition and Measurement". These standards set out
the accounting rules surrounding the recognition, measurement, disclosure and
presentation of financial instruments.
IAS 39 requires all derivative financial instruments to be recorded at fair
value on the balance sheet. The fair value of derivative financial instruments
recognised on the balance sheet on transition at April 1, 2005 was a net
liability of GBP1.5 billion. This fair value included a net liability of GBP0.7
billion which was previously recognised under UK GAAP, reflecting the currency
element of financial instruments and accrued interest associated with
derivatives. The additional net liability of GBP0.8 billion arising on
transition resulted in a corresponding net decrease to equity. Future market
interest rate and currency movements will give rise to adjustments to these fair
values. Where hedge accounting cannot be applied under the prescriptive rules of
IAS 39, changes in fair values of derivative financial instruments will impact
the income statement.
In addition, the majority of the gains and losses associated with terminated
derivative financial instruments that were deferred under UK GAAP have been
reclassified to reserves in accordance with the transitional rules of IFRS 1,
resulting in an additional net increase to equity of GBP0.3 billion.
Certain financial assets and financial liabilities are required to be recorded
at amortised cost under IAS 39. Under UK GAAP, the majority of this amortised
cost value was reflected on the balance
5
6. Financial Instruments continued
sheet but elements were separately recorded in current assets and current
liabilities. These amounts have been reclassified on transition to either
financial assets or loans and borrowings to recognise the respective instruments
at amortised cost.
The adjustments described above, on adoption of IAS 32 and IAS 39, have resulted
in an overall reduction in total equity as at April 1, 2005 of GBP481 million
(GBP337 million net of deferred taxation), as shown in table (7) of this
appendix. BT's revised IFRS accounting policies which have been adopted for
financial instruments and derivative financial instruments are detailed in
Appendix B.
7. Other adjustments
There are a number of other minor adjustments and reclassifications under BT's
IFRS accounting policies which include:
- Presenting the results of associates and joint ventures net of tax and
finance costs on the face of the income statement. Previously under UK GAAP
interest and tax was included in the relevant interest and tax line of the
income statement.
- Liquid investments with maturities of less than three months at acquisition
are classified within cash and cash equivalents under IAS 7 "Cash Flow
Statements" rather than as current asset investments under UK GAAP.
- Cash flow statements prepared in accordance with IAS 7 "Cash Flow
Statements" have a different presentational format. Although the underlying
cash flows remain the same as previously reported, the cash flow statement
reflects movements in cash and cash equivalents. In addition, certain leases
are now classified as finance leases which had previously been treated as
operating leases.
- Under UK GAAP, loans and borrowings and current asset investments were held
at foreign currency rates prescribed in the hedging instrument where
hedging had been applied in accordance with the group's accounting
policies. Under IAS 21 "The Effects of Changes in Foreign Exchanges Rates",
such forward rate adjustments are required to be disclosed separately and
have therefore been reclassified. On adoption of IAS 39 from April 1, 2005,
such forward rate adjustments form part of the overall fair value of
derivative financial instruments.
- Recognition of foreign exchange gains or losses on certain intercompany
loans in the income statement, under IAS 21, whereas previously under UK
GAAP these amounts had been recognised in reserves.
- Profits on the sale of property fixed assets are classified within other
operating income on the face of the income statement. Under UK GAAP, these
amounts had previously been disclosed after operating profit.
6
(1) Summary income statement reconciliation (unaudited)
3 months 3 months Year
ended ended ended
30 June 30 June 31 March
2005 2004 2005
GBPm GBPm GBPm
Operating profit - UK GAAP* as
reported 686 622 2,789
Reclassification of items previously
reported below operating profit 2 3 380
--------- --------- ----------
Operating profit - UK GAAP* 688 625 3,169
Adjustments to operating profit
Employee benefits (23) (19) (75)
Share based payments (9) (4) (28)
Amortisation of acquired intangible
assets (3) - -
Reversal of goodwill amortisation 8 4 16
Leases (21) (24) (94)
Foreign exchange (4) (9) 4
--------- --------- ----------
Net impact of adjustments to
operating profit (52) (52) (177)
Operating profit - IFRS* 636 573 2,992
Specific items
Property rationalisation costs 12 17 59
Profit on sale of non current asset
investments - (3) (358)
--------- --------- ----------
Operating profit before specific
items - IFRS* 648 587 2,693
--------- --------- ----------
Profit before tax - UK GAAP* 496 416 2,343
Operating profit adjustments shown
above (50) (49) 203
Reversal of operating profit
reclassification above (2) (3) (380)
Adjustments to net finance costs
Employee benefits 63 50 198
Non cash re-measurement of financial
instruments (4) - -
Leases (3) (3) (10)
Adjustments to joint ventures and
associates
Reclassification of tax charge (1) - -
--------- --------- ----------
Profit before tax - IFRS* 499 411 2,354
Specific items
Property rationalisation costs 12 17 59
Profit on sale of non current asset
investments - (3) (358)
Impairment of assets in joint
ventures - - 25
--------- --------- ----------
Profit before tax and specific items
- IFRS* 511 425 2,080
--------- --------- ----------
* In accordance with BT's accounting policies
7
(2) Reconciliation of profit for the year ended March 31, 2005 (unaudited)
UK GAAP* Employee Share Goodwill Leases Other IFRS*
benefits based
payments
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 18,623 - - - - - 18,623
Other operating
income 193 - - - - - 193
Operating
costs (16,005) (75) (28) 16 (94) 4 (16,182)
Profit on
sale of non
current asset
investments 358 - - - - - 358
-------- -------- -------- -------- ------- ------- --------
Operating
profit 3,169 (75) (28) 16 (94) 4 2,992
Net finance
costs (801) 198 - - (10) 14 (599)
Share of
losses of
associates
and joint
ventures (25) - - - - (14) (39)
-------- -------- -------- -------- ------- ------- --------
Profit before
tax 2,343 123 (28) 16 (104) 4 2,354
Income tax
expense (523) (37) 7 - 31 (3) (525)
-------- -------- -------- -------- ------- ------- --------
Profit for
the period 1,820 86 (21) 16 (73) 1 1,829
======== ======== ======== ======== ======= ======= ========
Attributable
to:
Equity
shareholders 1,821 86 (21) 16 (73) 1 1,830
Minority
interest (1) - - - - - (1)
======== ======== ======== ======== ======= ======= ========
Basic
earnings
per share 21.4p 21.5p
Diluted
earnings per
share 21.2p 21.3p
Adjusted
earnings per
share** 18.1p 18.1p
* In accordance with BT's accounting policies
** Before specific items
8
(3) Reconciliation of profit for the three months ended June 30, 2004
(unaudited)
UK GAAP* Employee Share Goodwill Leases Other IFRS*
benefits based
payments
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 4,567 - - - - - 4,567
Other operating
income 41 - - - - - 41
Operating
costs (3,986) (19) (4) 4 (24) (9) (4,038)
Profit on sale
of non current
asset investments 3 - - - - - 3
-------- -------- -------- -------- ------- ------- --------
Operating
profit 625 (19) (4) 4 (24) (9) 573
Net finance
costs (204) 50 - - (3) 2 (155)
Share of
losses of
associates and (5) - - - - (2) (7)
joint ventures
-------- -------- -------- -------- ------- ------- --------
Profit before
tax 416 31 (4) 4 (27) (9) 411
Income tax
expense (111) (9) 1 - 8 2 (109)
-------- -------- -------- -------- ------- ------- --------
Profit for the
period 305 22 (3) 4 (19) (7) 302
======== ======== ======== ======== ======= ======= ========
Attributable to:
Equity
shareholders 305 22 (3) 4 (19) (7) 302
Minority - - - - - - -
interest
======== ======== ======== ======== ======= ======= ========
Basic earnings
per share 3.6p 3.5p
Diluted
earnings per
share 3.5p 3.5p
Adjusted
earnings per
share** 3.7p 3.6p
-------- -------- -------- -------- ------- ------- --------
* In accordance with BT's accounting policies
** Before specific items
9
(4) Reconciliation of balance sheet and equity at April 1, 2004
(date of transition to IFRS - unaudited)
UK* Employee Dividends Leases Re-class IFRS*
GAAP benefits
GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Intangible
assets 204 - - - 368 572
Property,
plant and
equipment 15,487 - - 93 (368) 15,212
Derivative
financial
instruments - - - - 156 156
Investments
and other
assets 324 - - - - 324
Deferred tax
assets - 1,541 - - - 1,541
-------- -------- -------- -------- -------- --------
Total
non-current
assets 16,015 1,541 - 93 156 17,805
Inventories 89 - - - - 89
Trade and
other
receivables 5,189 (1,172) - - - 4,017
Derivative
financial
instruments - - - - 46 46
Other
financial
assets 5,163 - - - (944) 4,219
Cash and cash
equivalents 109 - - - 898 1,007
-------- -------- -------- -------- -------- --------
Total current
assets 10,550 (1,172) - - - 9,378
Liabilities
Trade and
other payables 6,848 (6) (454) - (1,365) 5,023
Derivative
financial
instruments - - - - 1,418 1,418
Loans and
other
borrowings 1,271 - - - (53) 1,218
Current tax
payable 404 - - - - 404
-------- -------- -------- -------- -------- --------
Total current
liabilities 8,523 (6) (454) - - 8,063
-------- -------- -------- -------- -------- --------
Total assets
less current 18,042 375 454 93 156 19,120
liabilities
======== ======== ======== ======== ======== ========
Loans and
other
borrowings 12,426 - - 105 (740) 11,791
Deferred tax
liabilities 2,191 (335) - (92) - 1,764
Derivative
financial
instruments - - - - 896 896
Other
financial
liabilities - - - 295 - 295
Retirement
benefit
obligations - 5,136 - - - 5,136
Provisions 313 (36) - - - 277
-------- -------- -------- -------- -------- --------
Total
non-current
liabilities 14,930 4,765 - 308 156 20,159
Equity
Issued capital 432 - - - - 432
Reserves 2,634 (4,390) 454 (215) - (1,517)
-------- -------- -------- -------- -------- --------
Total equity
shareholders'
funds (deficit) 3,066 (4,390) 454 (215) - (1,085)
Minority
interest 46 - - - - 46
-------- -------- -------- -------- -------- --------
Total equity 3,112 (4,390) 454 (215) - (1,039)
-------- -------- -------- -------- -------- --------
18,042 375 454 93 156 19,120
======== ======== ======== ======== ======== ========
* In accordance with BT's accounting policies
10
(5) Reconciliation of balance sheet and equity at June 30, 2004 (unaudited)
UK* Employee Dividends Leases Share Goodwill Re-class IFRS*
GAAP benefits based
payments
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Intangible
assets 204 - - - - 4 399 607
Property,
plant and
equipment 15,466 - - 92 - - (399) 15,159
Derivative
financial
instruments - - - - - - 165 165
Investments
and other
assets 297 - - - - - - 297
Deferred tax
assets - 1,541 - - - - - 1,541
-------- -------- -------- -------- -------- -------- -------- -------
Total
non-current
assets 15,967 1,541 - 92 - 4 165 17,769
Inventories 111 - - - - - - 111
Trade and
other
receivables 5,261 (1,126) - - - - - 4,135
Derivative
financial
instruments - - - - - - 26 26
Other
financial
assets 5,071 - - - - - (781) 4,290
Cash and cash
equivalents 144 - - - - - 755 899
-------- -------- -------- -------- -------- -------- -------- -------
Total current
assets 10,587 (1,126) - - - - - 9,461
Liabilities
Trade and
other payables 6,636 18 (454) - - - - 6,200
Derivative
financial
instruments - - - - - - 46 46
Loans and
other
borrowings 1,112 - - - - - (46) 1,066
Current tax
payable 506 - - - - - - 506
-------- -------- -------- -------- -------- -------- -------- -------
Total current
liabilities 8,254 18 (454) - - - - 7,818
-------- -------- -------- -------- -------- -------- -------- -------
Total assets
less current 18,300 397 454 92 - 4 165 19,412
liabilities
======== ======== ======== ======== ======== ======== ======== =======
Loans and
other
borrowings 12,420 - - 105 - - (657) 11,868
Deferred tax
liabilities 2,191 (335) - (100) (1) - - 1,755
Derivative
financial
instruments - - - - - - 822 822
Other
financial
liabilities - - - 320 - - - 320
Retirement
benefit
obligations - 5,136 - - - - - 5,136
Provisions 300 (36) - - - - - 264
-------- -------- -------- -------- -------- -------- -------- -------
Total
non-current
liabilities 14,911 4,765 - 325 (1) - 165 20,165
Equity
Issued capital 432 - - - - - - 432
Reserves 2,911 (4,368) 454 (233) 1 4 - (1,231)
-------- -------- -------- -------- -------- -------- -------- -------
Total equity
shareholders' 3,343 (4,368) 454 (233) 1 4 - (799)
funds (deficit)
Minority
interest 46 - - - - - - 46
-------- -------- -------- -------- -------- -------- -------- -------
Total equity 3,389 (4,368) 454 (233) 1 4 - (753)
-------- -------- -------- -------- -------- -------- -------- -------
18,300 397 454 92 - 4 165 19,412
======== ======== ======== ======== ======== ======== ======== =======
*In accordance with BT's accounting policies
11
(6) Reconciliation of balance sheet and equity at 31 March 2005 (unaudited)
UK GAAP* Employee Dividends Leases Share based Goodwill Re-class IFRS*
benefits payments
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Intangible
assets 623 - - - - 16 620 1,259
Property,
plant and
equipment 15,916 - - 90 - - (620) 15,386
Derivative
financial
instruments - - - - - - 18 18
Investments
and other
assets 115 - - - - - - 115
Deferred tax
assets - 1,434 - - - - - 1,434
-------- -------- -------- -------- -------- -------- -------- -------
Total
non-current
assets 16,654 1,434 - 90 - 16 18 18,212
Inventories 106 - - - - - - 106
Trade and
other
receivables 5,387 (1,118) - - - - - 4,269
Derivative
financial
instruments - - - - - - 143 143
Other
financial
assets 4,597 - - - - - (1,106) 3,491
Cash and cash
equivalents 206 - - - - - 1,106 1,312
-------- -------- -------- -------- -------- -------- -------- -------
Total current
assets 10,296 (1,118) - - - - 143 9,321
Liabilities
Trade and
other
payables 7,318 - (551) - - - 5 6,772
Derivative
financial
instruments - - - - - - 375 375
Loans and
other
borrowings 4,498 - - - - - (237) 4,261
Current tax
payable 645 - - - - - - 645
-------- -------- -------- -------- -------- -------- -------- -------
Total current
liabilities 12,461 - (551) - - - 143 12,053
-------- -------- -------- -------- -------- -------- -------- -------
Total assets
less current 14,489 316 551 90 - 16 18 15,480
liabilities
======= ======== ======== ======== ======== ======== ======== =======
Loans and
other
borrowings 8,091 - - 107 - - (454) 7,744
Deferred tax
liabilities 2,174 (329) - (123) (7) - - 1,715
Derivative
financial
instruments - - - - - - 472 472
Other
financial
liabilities - - - 394 - - - 394
Retirement
benefit
obligation - 4,781 - - - - 4,781
Provisions 323 (44) - - - - - 279
-------- -------- -------- -------- -------- -------- -------- -------
Total
non-current
liabilities 10,588 4,408 - 378 (7) - 18 15,385
Equity
Issued
capital 432 - - - - - - 432
Reserves 3,419 (4,092) 551 (288) 7 16 - (387)
-------- -------- -------- -------- -------- -------- -------- -------
Total equity
shareholders'
funds
(deficit) 3,851 (4,092) 551 (288) 7 16 - 45
Minority
interest 50 - - - - - - 50
-------- -------- -------- -------- -------- -------- -------- -------
Total
equity 3,901 (4,092) 551 (288) 7 16 - 95
-------- -------- -------- -------- -------- -------- -------- -------
14,489 316 551 90 - 16 18 15,480
======= ======== ======== ======== ======== ======== ======== =======
* In accordance with BT's accounting policies
12
(7) Financial instruments (IAS 32 and 39)
Transition balance sheet at April 1, 2005 (unaudited)
IFRS IAS 32 and IAS 39 Restated for IAS 32 and IAS
At 31 March adjustments 39 at
2005* 1 April 2005*
GBPm GBPm GBPm
Assets
Intangible
assets 1,259 - 1,259
Property,
plant and
equipment 15,386 - 15,386
Derivative
financial
instruments 18 5 23
Investments
and other
assets 115 - 115
Deferred tax
assets 1,434 - 1,434
------ ----- ------
Total
non-current
assets 18,212 5 18,217
Inventories 106 - 106
Trade and
other
receivables 4,269 (275) 3,994
Derivative
financial
instruments 143 31 174
Other
financial
assets 3, 491 47 3,538
Cash and cash
equivalents 1,312 - 1,312
------ ----- ------
Total current
assets 9,321 (197) 9,124
Liabilities
Trade and
other
payables 6,772 (861) 5,911
Derivative
financial
instruments 375 321 696
Loans and
other
borrowings 4,261 111 4,372
Current tax
payable 645 - 645
------ ----- ------
Total current
liabilities 12,053 (429) 11,624
------ ----- ------
Total assets
less current
liabilities 15,480 237 15,717
====== ===== ======
Loans and
other
borrowings 7,744 194 7,938
Deferred tax
liabilities 1,715 (144) 1,571
Derivative
financial
instruments 472 524 996
Other
financial
liabilities 394 - 394
Retirement
benefit
obligation 4,781 - 4,781
Provisions 279 - 279
------ ----- ------
Total
non-current
liabilities 15,385 574 15,959
Equity
Issued 432 - 432
capital
Reserves (387) (337) (724)
------ ----- ------
Total equity
shareholders'
funds
(deficit) 45 (337) (292)
Minority
interest 50 - 50
------ ----- ------
Total
equity 95 (337) (242)
------ ----- ------
15,480 237 15,717
====== ===== ======
* In accordance with BT's accounting policies
FIRST QUARTER RESULTS TO JUNE 30, 2005 July 28, 2005
Appendix B - Accounting Policies under IFRS
The accounting policies set out below have been adopted to prepare the restated
balance sheet and income statements for the year ended March 31, 2005, the
associated quarterly financial information for that year and the interim
financial results for June 30, 2005. These are expected to be the principal
accounting policies used for the group's future financial statements prepared in
accordance with International Financial Reporting Standards (IFRS). Revised
policies to reflect the adoption of IAS 32 and IAS 39 from April 1, 2005 are
also included.
The IFRS position as stated is BT's current view, based on the Standards
currently in issue, and changes may arise as new accounting pronouncements are
developed and issued. Due to a number of new and revised Standards, included
within the body of Standards that comprise IFRS, there is not yet a significant
body of established best practice on which to draw in forming opinions regarding
interpretation and application. Accordingly, practice is continuing to evolve.
At this stage, therefore, the full financial effect of reporting under IFRS, as
it will be applied and reported in the group's first full IFRS financial
statements, may be subject to change.
a. Basis of preparation
The consolidated financial statements are prepared under the historical cost
convention, modified for the revaluation of certain financial assets and
liabilities (including derivative instruments) at fair value.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenditure during the
reporting period. Actual results could differ from those estimates. Estimates
are used principally when accounting for interconnect income, provision for
doubtful debts, payments to telecommunication operators, long-term contracts,
depreciation, amortisation, impairments, post retirement benefit obligations,
financial instruments, provisions for liabilities and taxes.
b. Basis of consolidation
The group financial statements consolidate the financial statements of BT Group
plc "the company" and entities controlled by the company (its subsidiaries) and
incorporate the results of its share of jointly controlled entities (joint
ventures) and associates using the equity method of accounting.
The results of subsidiaries acquired or disposed of during the year are
consolidated from the effective date of acquisition or up to the effective date
of disposal, as appropriate. Where necessary, adjustments are made to the
financial statements of subsidiaries, associates and joint ventures to bring the
accounting policies used into line with those used by the group. All intra-group
transactions, balances, income and expenses are eliminated on consolidation.
2
b. Basis of consolidation continued
Investments in associates and joint ventures are carried at cost plus
post-acquisition changes in the group's share of the net assets or liabilities
of the associate or joint venture, less any impairment in value in individual
investments. The income statement reflects the group's share of the results of
operations after tax of the associate or joint venture (the equity method).
c. Revenue
Revenue net of discounts, which excludes value added tax and other sales taxes,
comprises the value of services provided and equipment sales by group
undertakings, excluding those between them.
Revenue from calls is recognised in the income statement at the time the call is
made over the group's networks. Revenue from rentals is recognised evenly over
the period to which the charges relate.
Revenue from equipment sales is recognised at the point of sale. Prepaid call
card sales are deferred until the customer uses the stored value in the card to
pay for the relevant calls. Revenue arising from the provision of other
services, including maintenance contracts, is recognised evenly over the periods
in which the services are provided to the customer. Revenue from installation
and connection activities is recognised in the period in which it is earned.
Revenue from long term contracts is recognised throughout the duration of the
contract, to the extent that the outcome of the contract can be assessed with
reasonable certainty and in accordance with the stage of completion of
contractual obligations.
Revenue from classified directories, mainly comprising advertising revenue, is
recognised in the income statement upon completion of delivery.
d. Leases
Assets held under finance leases are capitalised and included in property, plant
and equipment at the lower of the present value of the minimum lease payments or
the fair value of the leased asset as determined at the inception of the lease.
The obligations relating to finance leases, net of finance charges in respect of
future periods, are recognised as liabilities. The interest element of the
rental obligation is allocated to accounting periods during the lease term to
reflect the constant rate of interest on the remaining balance of the obligation
for each accounting period. Rentals under operating leases are charged to the
income statement on a straight-line basis.
e. Foreign currencies
Items included in the financial statements of each of the group's entities are
measured using the currency of the primary economic environment in which the
entity operates (the 'functional currency'). The consolidated financial
statements are presented in sterling, the functional and presentation currency
of the company.
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the date of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the
translation at year end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income statement, except
where hedge accounting is applied.
On consolidation, assets and liabilities of foreign undertakings are translated
into sterling at year end exchange rates. The results of foreign undertakings
are translated into sterling at average
3
e. Foreign Currencies continued
rates of exchange for the year (unless this average is not a reasonable
approximation of the cumulative effects of the rates prevailing on the
transaction dates, in which case income and expenses are translated at the dates
of the transactions). Foreign exchange differences arising on retranslation are
recognised directly in a separate component of equity, the translation reserve.
Any differences arising from April 1, 2004, the date of transition to IFRS, are
presented as a separate component of equity. In the event of the disposal of an
undertaking with assets and liabilities denominated in foreign currency, the
cumulative translation difference from April 1, 2004 arising in the exchange
differences reserve is charged or credited to the gain or loss in the income
statement on disposal.
f. Business combinations and goodwill
The group has adopted the exemption allowed in IFRS 1 from restating business
combinations which occurred before transition date (April 1, 2004). Goodwill
arising on the acquisition of a business acquired after January 1, 1998 and
before April 1, 2004 is included in the balance sheet at original cost, less
accumulated amortisation and any provisions for impairment as at April 1, 2004.
Goodwill arising on such acquisitions is not amortised from the transition date
but is subject to annual impairment testing or more frequently if events or
circumstances indicate that goodwill may be impaired. Goodwill which arose prior
to January 1, 1998 was written off directly to the profit and loss reserve.
On the acquisition of a subsidiary undertaking (including unincorporated
businesses), joint venture or associate, from the transition date, fair values
are attributed to the acquired identifiable assets, liabilities and contingent
liabilities. Goodwill, which represents the difference between the fair value of
purchase consideration and the acquired interest in the fair values of those net
assets, is capitalised and is subject to annual impairment testing or more
frequently if events or changes in circumstances indicate that goodwill may be
impaired. Any negative goodwill is credited to the income statement in the year
of acquisition.If an undertaking is subsequently sold, the amount of goodwill
carried on the balance sheet at the date of disposal is charged to the income
statement in the period of disposal as part of the gain or loss on disposal.
Goodwill previously written off to the profit and loss reserve is not recycled
to the income statement on disposal of the business.
g. Other intangible assets
Other intangible assets, including trademarks, brands, customer relationships,
licences, development costs and software are stated at acquisition or production
cost.
When intangible assets are acquired in a business combination, their cost is
generally determined in connection with the purchase price allocation based on
their respective fair market values. When their market value is not readily
determinable, fair value is determined using generally accepted valuation
methods based on revenue, costs or other appropriate criteria.
Intangible assets are amortised on a straight line basis at rates sufficient to
write off the cost, less any estimated residual values of individual assets over
their estimated useful lives.
Licence fees paid to governments, which permit telecommunication activities to
be operated for defined periods, are amortised from the latter of the start of
the licence period or launch of service to the end of the licence period on a
straight line basis.
4
h. Property, plant and equipment
Property, plant and equipment is included in the balance sheet at cost, less
accumulated depreciation and any provisions for impairment.
(a) Cost
Cost in the case of network services includes contractors' charges and payments
on account, materials, direct labour and directly attributable overheads.
(b) Depreciation
Depreciation is provided on property plant and equipment on a straight line
basis from the time the assets are available for use, so as to write off their
costs over their estimated useful lives taking into account any expected
residual values. No depreciation is provided on freehold land.
The lives assigned to principal categories of assets are as follows:
Freehold buildings - 40 years
Leasehold land and buildings - Unexpired portion of lease or 40 years,
whichever is the shorter
Transmission equipment:
-Duct - 25 years
-Cable - 3 to 25 years
Radio and repeater equipment - 2 to 25 years
Exchange equipment - 2 to 13 years
Computers and office equipment - 3 to 6 years
Payphones, other network equipment,
motor vehicles and cableships - 2 to 20 years
Assets held under finance leases are depreciated over the shorter of the lease
term or their useful economic life. Residual values and useful lives are
re-assessed annually and if necessary changes are recognised prospectively.
i. Impairment of assets
Intangible assets with finite useful lives and property, plant and equipment are
tested for impairment if events or changes in circumstances (assessed at each
reporting date) indicate that the carrying amount may not be recoverable. When
an impairment test is conducted, the recoverable amount is assessed by reference
to the higher of the net present value of expected future cash flows of the
relevant cash generating unit and the fair value less cost to sell.
Goodwill and other intangible fixed assets with an indefinite useful life are
tested for impairment at least annually.
If a cash generating unit is impaired, provision is made to reduce the carrying
amount of the related assets to their estimated recoverable amount. Impairment
losses are allocated firstly against goodwill, and secondly on a pro rata basis
against intangible and other assets.
Where an impairment loss is recognised against an asset it may be reversed in
future periods where there has been a change in the estimates used to determine
the recoverable amount since the last impairment loss was recognised, except in
respect of impairment of goodwill which may not be reversed in any
circumstances.
5
j. Inventory
Inventory mainly comprise items of equipment, held for sale or rental,
consumable items and work in progress on long term contracts.
Equipment held and consumable items are stated at the lower of cost and
estimated net realisable value, after provisions for obsolescence.
Work in progress on long term contracts is stated at cost, after deducting
payments on account, less provision for any foreseeable losses.
k. Trade and other receivables
Trade and other receivables are stated in the balance sheet at estimated net
realisable value. Net realisable value is the invoiced amount less provisions
for bad and doubtful debtors.
Provisions are made specifically where there is evidence of a dispute or an
inability to pay. An additional provision is made based on an analysis of
balances by age, previous losses experienced and general economic conditions.
l. Termination benefits
Termination benefits are payable when employment is terminated before the normal
retirement date, or when an employee accepts voluntary redundancy in exchange
for these benefits. The group recognises termination benefits when it is
demonstrably committed to either; terminating the employment of current
employees, (arising from periodic reviews of staff levels) according to a
detailed formal plan without the possibility of withdrawl; or providing
termination benefits as a result of an offer made to encourage voluntary
redundancy.
m. Pension and long term service benefits
The group operates a funded defined benefit pension scheme, which is independent
of the group's finances, for the majority of its employees. Actuarial valuations
of the main scheme are carried out by an independent actuary as determined by
the trustees 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 valuations. In any
intervening years, the actuaries review the continuing appropriateness of the
contribution rates.
The group's net obligation in respect of defined benefit pension schemes, is
calculated separately for each plan by estimating the amount of future benefit
that employees have earned in return for their service in the current and prior
periods. That benefit is discounted to determine its present value, and the fair
value of any plan assets is deducted. The discount rate is the 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 income statement charge is split between an operating charge and a net
finance charge. The net finance charge relates to the unwinding of the discount
applied to the liabilities of the scheme offset by the expected return on the
assets of the scheme, based on conditions prevailing at the start of the year.
The cost of providing retirement pensions and other benefits is charged to the
income statement over the periods benefiting from employees' services.
The group has adopted the exemption allowed in IFRS 1 to recognise all
cumulative actuarial gains and losses at the transition date (April 1, 2004) in
reserves. Actuarial gains and losses are
6
m. Pension and long term service benefits continued
recognised in full in the period in which they occur. They are recognised
outside of the income statement in retained earnings and presented in the
statement of recognised income and expense.
The group also operates defined contribution pension schemes and the income
statement is charged with the contributions payable.
The group's net obligation in respect of long term service benefits, other than
post employment plans, is the amount of future benefit that employees have
earned in return for their service in the current and prior periods. The
obligation is calculated using the projected unit credit method and is
discounted to its present value and the fair value of any plan assets is
deducted. The discount
rate is the yield at the balance sheet date on AA credit rated bonds that have
maturity dates approximating to the terms of the group's obligations.
n. Employee share schemes
The group has a number of employee share schemes and share option plans under
which it makes equity settled share based payments to certain employees. Equity
settled share based payments are measured at fair value at the date of grant.
The fair value determined at the grant date is charged to the income statement
on a straight line basis over the vesting period with a corresponding increase
to equity.
o. Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current balances with banks
and similar institutions, which are readily convertible to known amounts of cash
and which are subject to insignificant risk of changes in value and have an
original maturity of three months or less.
For the purpose of the consolidated cash flow statement, cash and cash
equivalents consist of cash and cash equivalents as defined above, net of
outstanding bank overdrafts.
p. Tax
Current tax, including UK corporation tax and foreign tax, is provided at
amounts expected to be paid (or recovered) using the tax rates and laws that
have been enacted or substantially enacted by the balance sheet date.
Deferred tax is recognised in respect of all temporary differences identified at
the balance sheet date, except to the extent that the deferred tax arises from
the initial recognition of goodwill (if amortisation of goodwill is not
deductible for tax purposes) or the initial recognition of an asset or liability
in a transaction which is not a business combination and at the time of the
transaction affects neither accounting profit nor taxable profit and loss.
Temporary differences are differences between the carrying amount of the group's
assets and liabilities and their tax base.
Deferred tax liabilities are 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 provided on temporary differences arising on subsidiaries, joint
ventures and associates, 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.
7
p. Tax continued
Deferred tax is measured at the average 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 substantially enacted by the balance
sheet date. Measurement of deferred tax liabilities and assets reflects the tax
consequences expected to fall from the manner in which the asset or liability is
recovered or settled.
q. Non-current assets held for sale and discontinued operations
Non-current assets are classified as held for sale when their disposal is
considered highly probable. Immediately before classification as held for sale,
the measurement of the assets (and all assets and liabilities in a disposal
group) is brought up to date in accordance with applicable IFRS. Then, on
initial classification as held for sale, non-current assets and disposal groups
are recognised at the lower of carrying amount and fair value less costs to
sell.
Impairment losses on initial classification as held for sale are included in
profit or loss, even for assets measured at fair value, as are gains and losses
on subsequent remeasurement.
r. Dividends
Final dividends are recognised as a liability in the period in which they are
declared and approved by the company in general meeting. Interim dividends are
recognised when they are declared.
s. Financial instruments (to March 31, 2005)
The accounting policies adopted in respect of financial instruments in periods
up to, and including March 31, 2005, are set out in the 2005 Annual Report and
Form 20-F, except as set out below. To provide comparability, the following
principles have been applied for the classification of financial assets and
liabilities.
Financial assets are classified as either financial assets at fair value through
the income statement, loans and receivables, held-to-maturity investments, or
available for sale financial assets (see below). The classification depends on
the purpose for which the investments were acquired. Management determines the
classification of its investments at initial recognition and re-evaluates this
designation at each reporting date. Up to March 31, 2005, financial assets in
these categories were held at the lower of cost and net realisable value in
accordance with UK GAAP.
Debt instruments are stated at the amount of net proceeds adjusted to amortise
any discount over the term of the debt. The effect of the currency element of
currency swaps acting as hedges against debt is reported separately in current
and non-current assets and liabilities.
t. Financial instruments - Key accounting policies under IAS 32 and IAS 39
The following are the key accounting policies used in the preparation of the
restated April 1, 2005 opening balance sheet and subsequent periods to reflect
the adoption of IAS 32 and 39.
(a) Financial assets
1. Financial assets at fair value through income statement
This category has two sub-categories: financial assets held for trading and
those designated at fair value through the income statement at inception. A
financial asset is classified in this category if acquired principally for the
purpose of selling in the short term or if so designated by management.
Financial assets held in this category are measured at fair value.
8
t. Financial instruments - Key accounting policies under IAS 32 and IAS 39
Continued
2. Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market other than:
- those that the group intends to sell immediately or in the short
term, which are classified as held for trading;
- those for which the group may not recover substantially all of its
initial investment, other than because of credit deterioration, which are
classified as available for sale.
Loans and receivables are carried at amortised cost using the effective interest
method, with changes in carrying value recognised in the income statement.
3. Held to maturity investments
Financial assets are classified as held to maturity if the group has the
positive intent and ability, from inception, to hold the securities to their
maturity date. These financial assets have fixed or determinable payments and a
fixed maturity.
Held to maturity financial assets are reported at amortised cost using the
effective interest method, with changes in carrying value recognised in the
income statement.
4. Available for sale financial assets
Financial assets classified as available for sale are either specifically
designated in this category or not classified in any of the other categories.
Available for sale assets are carried at fair value, with unrealised gains and
losses (except for changes in exchange rates for monetary items, interest and
impairment losses) recognised in equity until the financial asset is
derecognised, at which time the cumulative gain or loss previously recognised in
equity is taken to the income statement.
(b) Financial liabilities
Financial liabilities are stated at the amount of net proceeds adjusted to
amortise any discount over the term of the debt. Financial liabilities are
subsequently measured at amortised cost using the effective interest method and
if included in a fair value hedge relationship are revalued to reflect the fair
value movements on the effective portion of the hedged risk associated with the
financial liability.
(c) Derivative financial instruments
The group uses derivative financial instruments mainly to reduce exposure to
foreign exchange risks and interest rate movements. The group does not hold or
issue derivative financial instruments for financial trading purposes. However,
derivatives that do not qualify for hedge accounting are accounted for as
trading instruments.
Derivative financial instruments are classified as held for trading and
initially recognised at cost. Subsequent to initial recognition, derivative
financial instruments are stated at fair value. The gain or loss on
remeasurement to fair value is recognised immediately in the income statement.
However, where derivatives qualify for hedge accounting, recognition of any
resultant gain or loss depends on the nature of the hedge. Derivative financial
instruments are classified as current assets or current liabilities where they
are held for trading or have a maturity within 12 months. Where derivative
financial instruments have a maturity greater than 12 months and are designated
in a hedge relationship, they are classified within either non current assets or
non current liabilities.
The fair value of swaps is the estimated amount that the group would receive or
pay to terminate the swap at the balance sheet date, taking into account current
interest and foreign exchange rates. The fair value of forward exchange
contracts is their quoted market price at the balance sheet date, being the
present value of the quoted forward price.
Derivatives embedded within assets and liabilities which are not closely related
to the underlying item are measured at fair value and accounted for separately.
When a hedging instrument expires or is sold, terminated or exercised, or the
entity revokes designation of the hedge relationship but the hedged financial
asset or liability remains or forecast transaction is still expected to occur,
the cumulative gain or loss at that point remains in equity and is recognised in
accordance with the above policy when the transaction occurs. If the hedged
transaction is no longer expected to take place or the underlying hedged
financial asset or liability no longer exists, then the cumulative unrealised
gain or loss recognised in equity is recognised immediately in the income
statement.
9
t. Financial instruments - Key accounting policies under IAS 32 and IAS 39
continued
(d) Hedge accounting
(i) Cash flow hedge
When a derivative financial instrument is designated as a hedge of the
variability in cash flows of a recognised asset or liability, or a highly
probable transaction, the effective part of any gain or loss on the derivative
financial instrument is recognised directly in equity.
For cash flow hedges of recognised assets or liabilities, the associated
cumulative gain or loss is removed from equity and recognised in the income
statement in the same period or periods during which the hedged forecast
transaction affects the income statement. The ineffective part of any gain or
loss is recognised immediately in the income statement.
When the forecasted transaction subsequently results in the recognition of a
non-financial asset or non-financial liability, or the forecast transaction for
a non-financial asset or non-financial liability the associated cumulative gain
or loss is removed from equity and included in the initial cost or carrying
amount of the non-financial asset or liability.
If a hedge of a forecasted transaction subsequently results in the recognition
of a financial asset or a financial liability, then the associated gains and
losses that were recognised directly in equity are reclassified into the income
statement in the same period or periods during which the asset acquired or
liability assumed affects the income statement.
(ii) Fair value hedge
When a derivative financial instrument is designated as a hedge of the
variability in fair value of a recognised asset or liability, or a highly
probable transaction, the change in fair value of the derivatives that are
designated as fair value hedges are recorded in the income statement, together
with any changes in fair value of the hedged asset or liability that is
attributable to the hedged risk.
(iii) Hedge of net investment in foreign operation
Exchange differences arising from the retranslation of the net investment in
foreign entities and of borrowings and other currency instruments designated as
hedges of such investments are taken to shareholders' equity on consolidation to
the extent the hedges are deemed effective. All other exchange gains or losses
are dealt with through the income statement.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BT Group PLC
(Registrant)
By: /s/ Patricia Day
--------------------
Patricia Day, Assistant Secretary. Head of Shareholder Services
Date 28 July, 2005