Current Cost Financial Statements 2013 including Openreach Undertakings. Statement by Ofcom

Transcription

1 Current Cost Financial Statements 2013 including Openreach Undertakings Statement by Ofcom

2 Ofcom Statement on BT s Current Cost Financial Statements 2013 Introduction BT s reporting obligations arise out of market reviews conducted by Ofcom and SMP service Conditions OA1 to OA34 and Directions 1 to 6. Under SMP services Condition OA6(c), BT is required to publish with the audited regulatory financial statements (RFS) any written statement made by Ofcom and provided to BT commenting on the data in, the notes to or the presentation of any or all of the RFS and/or the Accounting Documents. The RFS are produced by BT and follow the principles and methodologies as set out in BT s Primary and Secondary Accounting Documents. These documents are published alongside the RFS. They have not been reviewed by Ofcom. Notwithstanding this, Ofcom believes that we can be helpful to users of the RFS by drawing attention to several important aspects of BT s 2012/13 RFS. Primarily, we consider that users of the RFS should be aware of changes in the way BT allocates its costs and assets. Changes in allocation methodologies During 2012/13, BT changed some of the methodologies it uses to prepare its RFS. As described in Section 2.1, the effect of some of these changes is material. Under SMP services Condition OA9, BT is required to include prior year comparatives in its RFS prepared on a basis that is consistent with the current year figures, unless there are reasons for not doing so. Where BT does not include prior year comparatives, it has to set out the particulars of the departure, the reasons for it and its effect. As set out in Section 2.1, BT has restated the prior year comparatives in these Statements to reflect some, but not all, of its methodology changes. Where BT has restated the prior year comparatives, it sets out the effect at a market level, in Section 2.1. In Section 2.1, BT also identifies a number of changes where it considers the restatement of comparative information for the year ended 31 March 2012 is either not practicable or not material. One of the changes that BT has not reflected in its restated comparatives relates to the changes that are described by BT in Section 2.1 as reflecting the new organisational structure following the merger of BT Innovate & Design and BT Operate to create BT Technology, Service & Operations. BT has explained to us that, although the impact of this change is material, it is unable to restate the 2011/12 accounts for the reasons given in Section 2.1. We have written to BT requesting that it prepares a separate report setting out the reasons for, and effects of, all material methodology changes, in more detail. We intend that a version of this report should be published on BT s website alongside its RFS, in September. Current Cost Accounting valuation of assets BT has revised the basis for deriving its CCA valuation of its copper and duct assets. As explained in Section 2.1, BT has changed its valuation methodology from an absolute basis to an approach based on actual spend, indexed using RPI. The 2011/12 comparatives have been restated on this new basis. According to BT, the change in methodology resulted in a net 65m increase in duct and copper assets for that year. A review of the reporting framework We are now conducting a review of the regulatory reporting framework to ensure that it is fit for purpose. Following our consultation published in September 2012 we are now preparing for a second consultation for later this year. As part of this review, we will consider the appropriate future roles for Ofcom and for BT in determining the basis of preparation of the RFS, including the choice of allocation rules and valuation methodologies.

3 Contents Current Cost Financial Statements Section 1 Introduction to the Current Cost Financial Statements... 3 Section Introduction: Regulation in the UK... 4 Section Regulatory Financial Reporting Obligations... 6 Section Regulatory Financial Review (Annex 4)... 7 Section 2 Basis of Preparation... 8 Section Introduction to the Basis of Preparation... 9 Section Other Aspects to the Basis of Preparation (Annex 22) Section Key changes as a result of certain regulatory decisions Section 3 Statement of Responsibility Section Statement of Responsibility (Annex 2) Section 4 Audit Report Section Report of Independent Auditors (Annex 23) Section 5 Summary of Financial Performance Section 5.1 Consolidated Performance Summary (Annex 3) Section 6 Attribution of Wholesale Current Costs and Mean Capital Employed Section Attribution of Wholesale Current Costs 2013 (Annex 5A) Section Notes on Wholesale sector costs Section Attribution of Wholesale Current Costs 2012 (Annex 5A) (h) Section Attribution of Wholesale Current Cost Mean Capital Employed 2013 (Annex 6A) Section Notes on Wholesale MCE sector costs Section Attribution of Wholesale Current Cost Mean Capital Employed 2012 (Annex 6A) (h) Section 7 Review of Access Markets Section Financial Performance in Access Markets (Annex 7) Section Access Markets Review (Annex 10 & 11) Section Access Markets Group Level Review (Annex 10) Section Wholesale Analogue Exchange Line Services Section Wholesale Analogue Exchange Line Services (Annex 11) Section Wholesale Analogue Exchange Line Services calculation of FAC based on component costs and usage factors (Annex 16) Section Wholesale ISDN2 Exchange Line Services Section Wholesale ISDN2 Exchange Line Services (Annex 11) Section Wholesale ISDN2 Exchange Line Services calculation of FAC based on component costs and usage factors (Annex 16) Section Wholesale Business ISDN30 Exchange Line Services Section Wholesale ISDN30 Exchange Line Services (Annex 12) Section TISBO (up to and including 8Mbit/s) Section TISBO (up to and including 8Mbit/s (Annex 11) Section TISBO (up to and including 8Mbit/s) calculation of FAC based on component costs and usage factors (Annex 16) Section TISBO (above 8Mbit/s up to and including 45Mbit/s) Section TISBO (above 8Mbit/s up to and including 45Mbit/s) (Annex 11) Section TISBO (above 8Mbit/s up to and including 45Mbit/s) calculation of FAC based on component costs and usage factors (Annex 16) Section TISBO (above 45Mbit/s up to and including 155Mbit/s) Section TISBO (above 45Mbit/s up to and including 155Mbit/s) (Annex 11) 64 Section TISBO (above 45Mbit/s up to and including 155Mbit/s) calculation of FAC based on component costs and usage factors (Annex 16) Section AISBO (up to and including 1Gbit/s) Section AISBO (up to and including 1Gbit/s) (Annex 11) Section AISBO (up to and including 1Gbit/s) calculation of FAC based on component costs and usage factors (Annex 16) Section Wholesale Local Access (WLA) Section Wholesale Local Access (WLA) (Annex 11) Section Wholesale Local Access (WLA) calculation of FAC based on component costs and usage factors (Annex 16) Page 1

4 Contents Section 8 Review of Other Wholesale Markets Section Financial Performance in Other Wholesale Markets (Annex 8) Section Review of Other Wholesale Markets (Annex 10 & 14) Section Market Group Level Review (Annex 10) Section Call origination on fixed public narrowband networks Section Call origination on fixed public narrowband networks (Annex 13) Section Call origination on fixed public narrowband networks calculation of FAC based on component costs and usage factors (Annex 16) Section Single transit on fixed public narrowband networks Section Single transit on fixed public narrowband networks (Annex 13) Section Technical Areas (Interconnect Circuits) Section Technical Areas (Interconnect Circuits) (Annex 11) Section Technical Areas (Interconnect Circuits) calculation of FAC based on component costs and usage factors (Annex 16) Section Fixed Call Termination Section Fixed Call Termination (Annex 13) Section Fixed Call Termination calculation of FAC based on component costs and usage factors (Annex 16) Section Wholesale Trunk Segments Section Wholesale Trunk Segments (Annex 11) Section Wholesale Trunk Segments calculation of FAC based on component costs and usage factors (Annex 16) Section Technical Areas (Point of Handover) Section Market: Technical Areas (Point of Handover) (Annex 11) Section Technical Areas (Point of Handover) calculation of FAC based on component costs and usage factors (Annex 16) Section Wholesale Broadband Access Market Section Wholesale Broadband Access Market 1 (Annex 11) Section Wholesale Broadband Access Market 1 calculation of FAC based on component costs and usage factors (Annex 16) Section Wholesale Broadband Access Market Section Wholesale Broadband Access Market 2 (Annex 11) Section Wholesale Broadband Access Market 2 calculation of FAC based component costs and usage factors (Annex 16) Section 9 Reconciliation Statements Section BT Reconciliation Statement 2013 (Annex 19) Section BT Reconciliation Statement 2012 (Annex 19) (h) Section BT Reconciliation Statement MCE 2013 (Annex 20) Section 10 Openreach Information Section Openreach Income Statement Section Openreach Income Statement 2012 (h) Section Openreach MCE Statement Section Openreach MCE Statement 2012 (h) Section Reconciliation of Openreach Income Statement Section Reconciliation of Openreach Income Statement 2012 (h) Section Openreach Notes Appendix 1 Other Information Appendix Network Activity Statements Consolidated 2013 (Annex 15) Appendix Network Activity Statements Consolidated 2012 (Annex 15) (h) Appendix BT Network Services Reconciliation 2013 (Annex 17) Appendix BT Network Services Reconciliation 2012 (Annex 17) (h) Appendix Change of Current Cost Financial Statements Format Appendix 2 Price Control Statements Appendix 2.1- Price Controls in Access and Other Wholesale Markets (Annex24) (Unaudited) Glossary and Footnotes List Glossary Footnotes Additional Information Page 2

5 Section 1 Introduction to the Current Cost Financial Statements Section 1 Introduction to the Current Cost Financial Statements Page 3

6 Section 1 Introduction to the Current Cost Financial Statements Section Introduction: Regulation in the UK The UK telecoms industry is regulated through various European directives, the Communications Act 2003 (the Communications Act) and Ofcom (the UK s independent regulator) as well as other regulations and recommendations. The Communications Act The Communications Act gives Ofcom legal powers and sets out the legal requirements for how electronic communications services should be regulated in the UK. It includes the conditions imposed by the European directives. The Government is currently reviewing our sector s regulatory regime, with a new framework planned for The review is looking into how to encourage growth and innovation and how to remove unnecessary regulation. Ofcom Ofcom is the independent regulator and competition authority for the whole UK communications market. Its main duties are: to further the interests of citizens in relation to communications matters. to further the interests of consumers in relevant markets, where appropriate by promoting competition. Under the powers of the Communications Act, Ofcom sets conditions that Communications Providers (CPs) must comply with and can issue directions under these conditions. Some conditions, known as General Conditions, apply to all CPs. Others apply to certain individual companies that Ofcom has decided are universal service providers or have Significant Market Power (SMP) in a particular market. Anyone can appeal against Ofcom s decisions through a number of routes, including to the Competition Appeal Tribunal (CAT) or to the High Court. The General Conditions that apply to all CPs are mainly about protecting consumers general access and interconnection, planning for emergencies, providing information to Ofcom, and allocating and transferring phone numbers. We are the designated universal service provider for the UK (except for the Hull area where it is KCOM Group) and so we have certain universal service obligations. This is an important responsibility and we take it seriously. Our main obligation is to make sure that basic fixedline services are available at an affordable price to all consumers in the UK. We are also obliged to provide public payphones. SMP designations The European directives require Ofcom to review relevant communications markets regularly, usually every three years, and to decide whether any CP has SMP in those markets. If Ofcom decides that a CP has SMP, it could put controls in place, typically on the prices which the CP can charge. Ofcom will generally try to set charges that are reasonably based on costs and an appropriate return on the capital invested. Where Ofcom finds that a provider has SMP, it must impose appropriate remedies that may include price controls. At 31 March 2013, as a result of previous market reviews, we were deemed to have SMP in a number of markets. These markets are listed in Section Regulatory Financial Reporting Obligations. Where a provider has SMP, the Communications Act enables Ofcom to impose one or more obligations in relation to each market, including: Accounting separation - Which requires the operator to maintain accounting systems such that the financial results of each SMP market can be separately presented and that costs relating to products and markets are allocated in a transparent and appropriate way. Accounting separation is also used to ensure that there is no undue discrimination. Cost accounting - Wholesale cost accounting obligations apply where there is an obligation in relation to price controls, cost orientation or cost recovery. Wholesale activities include products and services sold to other CPs such as the provision of network access, the use of the network and the availability of various facilities. Obligations may include price controls for specified SMP products, cost orientation of prices for SMP products and the recovery of costs for the purpose of demonstrating transparency. Publication - The annual Current Cost Financial Statements satisfy the obligation relating to publication of financial information for SMP markets. The publication of information relating to SMP markets is intended to provide public assurance that we have complied with our cost accounting and accounting separation obligations. Ofcom also imposes certain audit requirements in respect of the published Current Cost Financial Statements. Impact of Ofcom regulation There are a number of regulatory decisions and outcomes of appeals that affected us during the year and will impact us in the future. Ofcom finished its review of the business connectivity markets, which cover products such as Ethernet and private circuits. It renewed price controls for another three years. The main changes were an increase in the size of the deregulated area to Western, Eastern and Central London Area including Slough (WECLA) and deregulation of long distance wholesale private circuits and some retail leased lines. We also now have SMP in high bandwidth Ethernet services outside the deregulated London area which will be subject to a charge control. These changes will be implemented in the Current Costs Financial Statements from 2013/2014. In December 2012 Ofcom issued its final determinations on disputes over historic Ethernet pricing. Ofcom concluded that between April 2006 and March 2011 the Page 4

7 Section 1 Introduction to the Current Cost Financial Statements prices we set for certain Ethernet services were too high resulting in an overcharge over this period. We disagree with the determinations and have submitted an appeal to the CAT. This ruling had no impact on the Current Cost Financial Statements of any SMP markets for the years ended 31 March 2013 and 31 March In July 2012 the Court of Appeal overturned the CAT s August 2011 decision in relation to wholesale ladder pricing. Ladder pricing links the amounts that BT charges mobile operators for mobile calls to 0800, 0845 and 0870 numbers terminating on our network to the retail price charged by mobile operators to their customers. We have been granted permission to appeal this decision to the Supreme Court and the hearing is expected in early This ruling had no impact on the Current Cost Financial Statements of any SMP markets for the years ended 31 March 2013 and 31 March In March 2011 we lost an appeal to the CAT relating to Ofcom s decision in a dispute over our charges to other CPs for trunk components of wholesale partial private circuits. In July 2012 the Court of Appeal issued its judgment on our appeal against the CAT s decision. The appeal failed to set aside Ofcom s determination or the CAT judgment, but provided helpful clarification of Ofcom s powers. This ruling had no impact on the Current Cost Financial Statements of any SMP markets for the years ended 31 March 2013 and 31 March The charge controls for Wholesale Line Rental (WLR), Local Loop Unbundling (LLU) and ISDN30 products became effective in April 2012 and impacted the prices we can charge for these products. During 2013/14, Ofcom is expected to complete its reviews of: the Fixed Access market (including WLR, LLU, Generic Ethernet Access (GEA), ISDN2 and ISDN30 products). the Wholesale Broadband Access market (including IPstream, Datastream and WBC). the Wholesale narrowband market (comprising calls and interconnection services). Where we are found to have SMP, Ofcom will carry out consultations on setting controls. These could change the prices we charge for these products. See the Ofcom website at for further details on regulation. SMP Charge Controls As a result of SMP designations, the charges we can make for a number of wholesale services are subject to charge controls. Details of charge controls are provided in the Market Financial Reviews at Section 7 and Section 8. BT s Undertakings In response to Ofcom s 2005 strategic review of telecommunications, we put forward some legally binding undertakings under the Enterprise Act These Undertakings (which include the creation of Openreach) began in September They aim to give clarity and certainty to the UK telecoms industry about the way we provide upstream regulated products. This in turn supports effective and fair competition in related downstream markets. Most of the commitments in the Undertakings have been delivered, but we were unable to move a small percentage of certain customer records to separated computer systems by the target date of 31 December Ofcom has issued a Direction, which we have accepted, that gives us until 30 November 2013 to meet this commitment. Next Generation Access Regulation In March 2009, following consultation, Ofcom published a policy statement setting out a regulatory framework for Next Generation Access (NGA). This gave sufficient regulatory certainty for BT to commit to an investment of 2.5bn on a commercial basis to make fibre broadband available to around two-thirds of UK premises. Ofcom maintained its supportive approach to fibre regulation in the 2010 Wholesale Local Access Market Review and has recently commenced another review, the Fixed Access Market Review in July Currently Ofcom does not price regulate Openreach s GEA prices or mandate prescriptive product specifications allowing flexibility for the market to develop going forward. Looking beyond this, we believe that with funds from Broadband Delivery UK (BDUK), local government and other sources, as well as further private investment, around 90% of UK premises could have access to fibre broadband by approximately BT is already rolling out NGA infrastructure in areas such as Cornwall, Northern Ireland and the Isles of Scilly which are funded by public private partnerships, as well as winning a significant number of BDUK bids and continuing to compete strongly for the remaining contracts. Page 5

8 Section 1 Introduction to the Current Cost Financial Statements Section Regulatory Financial Reporting Obligations The form and content of these Current Cost Financial Statements is based on the reporting obligations set out by Ofcom. We refer to these obligations as the Final Statements and Notifications, which consists of: The Regulatory Financial Reporting Obligations on BT and Kingston Communications issued 22 July 2004 Changes to BT s Regulatory Financial Reporting Framework issued 31 August 2005 Changes to BT s Regulatory Financial Reporting and Audit Requirements issued 16 August 2006 Changes to BT s Regulatory Financial Reporting and Audit Requirements issued 30 May 2007 Changes to BT s 2007/08 Regulatory Financial Statements issued 26 June 2008 Changes to BT and KCOM s Regulatory Financial Reporting 2008/09 update issued 15 June 2009 Changes to BT and KCOM s regulatory and financial reporting 2009/10 update issued 4 June 2010 Changes to BT and KCOM s regulatory and financial reporting 2010/11 update issued 2 June 2011 Changes to BT and KCOM s regulatory and financial reporting 2011/12 update issued 17 April 2012 Changes to BT and KCOM s regulatory and financial reporting 2012/13 update issued 25 April 2013 We are also required by Ofcom to provide additional detailed information to enable them to regulate effectively and efficiently. This additional information is not published by either party, nor is it subject to any independent examination. In the Current Cost Financial Statements for 2013, we are obliged to report on the following SMP markets: Wholesale Access markets Wholesale analogue exchange line services* Wholesale ISDN2 exchange line services* Wholesale business ISDN30 exchange line services Traditional interface symmetric broadband origination (up to and including 8Mbit/s)* Traditional interface symmetric broadband origination (above 8Mbit/s up to and including 45Mbit/s)* Traditional interface symmetric broadband origination (above 45Mbit/s up to and including 155Mbit/s)* Alternative interface symmetric broadband origination (up to and including 1Gbit/s)* Wholesale local access* Other Wholesale markets (including technical areas) Call origination on fixed public narrowband networks* Single transit on fixed public narrowband networks Technical areas (Interconnect Circuits)* Fixed call termination* Wholesale trunk segments* Technical areas (Point of Handover)* Wholesale Broadband Access (Market 1)* Wholesale Broadband Access (Market 2)* The markets marked with * in the list above have both cost accounting and accounting separation requirements. For these markets, we report within these Current Cost Financial Statements details of costs and charges for individual services within each market. The remaining markets have accounting separation requirements only. Openreach We are also required by the Undertakings (section 5.31) to disclose the results of Openreach separately and to reconcile the results to the Openreach segmental information shown in BT Group plc s Annual Report. We have included this information in Section 10. Page 6

9 Section 1 Introduction to the Current Cost Financial Statements Section Regulatory Financial Review (Annex 4) To help a user of the Current Cost Financial Statements understand the changes in the performance of products and services in each market, we are required to prepare regulatory financial reviews. These are included in Section 7 and 8 at the grouped market level, as defined by Ofcom, and at the individual SMP market level to explain: The main factors and influences that underlie each market or groups of markets. New products and services. Page 7

10 Section 2 Basis of Preparation Section 2 Basis of Preparation Page 8

11 Section 2 Basis of Preparation Section Introduction to the Basis of Preparation The ultimate holding company of British Telecommunications plc (the Company ) is BT Group plc (referred to together with its subsidiary and associated undertakings and joint ventures as the Group or BT ). Substantially all the businesses and activities of the Group are carried out by British Telecommunications plc, its subsidiaries, associated undertakings and joint ventures. BT Group plc s Annual Report dated 9 May 2013 details the basis of preparation and explains the accounting policies adopted by the Group. BT s Annual Report for 2013, on which the auditors made an unqualified report, did not contain a statement under Section 498(2) or 498(3) of the Companies Act 2006 and has been delivered to the Registrar of Companies. The Company has, by agreement with BT Group plc, prepared the Current Cost Financial Statements in accordance with the Accounting Documents, by disaggregating balances recorded in the general ledgers and other accounting records of the Group. The Accounting Documents means together the Primary Accounting Documents and the Secondary Accounting Documents. The Primary Accounting Documents set out the framework under which the Statements are prepared: Regulatory Accounting Principles - the principles we apply or use in the preparation of the Current Cost Financial Statements, for example, that all costs should be fully allocated. Attribution Methods - a high level summary of the practices we use to attribute revenue (including appropriate Transfer Charges), costs (including appropriate Transfer Charges), assets and liabilities to activities or, where those activities have been aggregated to wholesale segments in a given Market or Technical Area (as applicable), to each wholesale segment. Transfer Charge System Methodology - the approach used by our system that enables an activity to use a service from another activity and to account for it as though it had purchased that service from an unrelated party (including accounting for it at an appropriate amount). Accounting Policies - the way we apply the requirements of the Companies Act 2006, Article 4 of the International Accounting Standards (IAS) Regulation, and our accounting policies, whenever not superseded by the Regulatory Accounting Principles, in each of the Current Cost Financial Statements. This document details the accounting policies adopted in preparing the underlying financial information. Long Run Incremental Cost (LRIC) Methodology - the long run incremental cost principles, procedures and processes which form the framework we use to decide what the long run incremental costs are. This document sets out the principles followed to derive the long run incremental network costs. Where there are any inconsistencies in the Primary and Secondary Accounting Documents, the Current Cost Financial Statements are prepared in accordance with the Primary Accounting Documents in the order of priority as listed above. The Secondary Accounting Documents consists of the Detailed Attribution Methods (DAM), the Detailed Valuation Methodology (DVM), the Long Run Incremental Cost Model: Relationships and Parameters (R&P) and the Wholesale Catalogue. These documents contain more detailed descriptions of the policies, methodologies, systems, processes and procedures for deriving and calculating the costs, revenues, assets and liabilities underlying the Current Cost Financial Statements. The economic Markets defined by Ofcom s Final Statements and Notifications do not correspond to how the Group is organised for management and accounting purposes. The Current Cost Financial Statements are therefore produced by overlaying the requirements of the regulatory reporting framework on the management and accounting structure of the Group. As far as possible, revenues, costs, assets and liabilities are directly associated with a product group or component using information held within the Group s accounting records and are directly attributed to that item. Where no such direct association is possible, the remaining revenues, costs, assets and liabilities are apportioned between two or more markets, services or components using a fully allocated accounting system. This system uses apportionment bases that reflect, as far as possible, the causality of the revenue, cost, asset or liability. The amounts of revenue, cost and capital employed attributed to markets, services and components depend critically on the methods of attribution adopted. Typically, in a fully allocated accounting system, a range of attribution methods is available. In selecting appropriate attribution methods and appropriate non-financial data for use within the attribution models, that are employed in the production of these Current Cost Financial Statements, we have had to make certain estimates and exercise our judgement. We do this with regard to the regulatory accounting principles, including cost causality and objectivity, in order to comply with the requirements of the Primary Accounting Documents. However, in some cases, when preparing financial statements at a very granular level a directly cost causal and objective method of apportionment cannot be determined or implemented and the Company adopts the most appropriate basis practically available. We review and update non-financial data used within the attribution models at least annually. Certain non-financial data employed for the purposes of the Current Cost Financial Statements has been determined by sampling techniques appropriate to that data. We review and update attribution and valuation methodologies and non-financial data sources on an ongoing basis and, where deemed appropriate, will make improvements. Depending on the nature of the change, and where practical the Final Statements and Page 9

12 Section 2 Basis of Preparation Notifications require significant detail in the Current Cost Financial Statements. When preparing financial statements at such a granular level it is not always possible to develop a directly cost causal and objective method of cost apportionment and so these Financial Statements have been prepared on the basis of the methodologies we consider to be the most appropriate. In respect of the very small wholesale services within certain wholesale markets, we are aware that, in following the generic methodologies for attribution of common costs set out in the DAM, anomalies may exist in the year on year cost trends in some services. Costing methodologies and non-financial data sources are kept under review and, where appropriate, improvements are made. Depending on the nature of the change restatements may be required. Our costing systems used in the preparation of the Current Cost Financial Statements to attribute revenues, costs, assets and liabilities to SMP Markets use the general ledgers of the Group as their starting point. These ledgers are maintained to the nearest penny and this level of detail is maintained throughout the costing process. However, for consistency with the presentation of the results of the Group in BT Group plc s Annual Report, the results for each SMP Market are presented in figures rounded to the nearest whole million pounds. Charges from Wholesale Markets to Retail Residual The Mean Capital Employed Statements for the Wholesale Markets include balances relating to the charges from the Wholesale Markets to Retail Residual. Retail Residual is deemed to settle these charges in the same 22 day period (2011/12 restated: 22 days) as other operators. The Network Activity Statements show component unit costs on a 24-hour basis. Charges to Retail Residual and other CPs for call conveyance services vary by the time of day at which the service was purchased. The charges for other Wholesale Services to Retail Residual and other CPs do not require adjustment for the time of day at which they are purchased. Current Cost Accounting (CCA) adjustments (a) The Current Cost Financial Statements for the Group are prepared under the Financial Capital Maintenance (FCM) convention in accordance with the principles set out in the handbook Accounting for the Effects of Changing Prices, published in 1986 by the Accounting Standards Committee. We summarise below the treatment of CCA adjustments within the Current Cost Financial Statements: Changes in fixed asset values arising from price changes taking place in the year are referred to as holding gains or losses arising during the year and are attributed between all SMP Markets, Technical Areas, Components and Wholesale Services on the same basis as the associated assets. Other changes in fixed asset values CCA adjustments (e.g. one-off changes in valuations due to a revised methodology) are referred to as Other CCA Adjustments and are included in the current cost valuations and are also attributed between all Markets, Technical Areas, Components and Wholesale Services. A supplementary depreciation adjustment on fixed assets arising from differences between historical cost accounting (HCA) and CCA valuations is also attributed between the various Markets, Technical Areas, Components and Wholesale Services. The inflation adjustment to ordinary shareholders funds is not relevant to the SMP Markets, Technical Areas and Wholesale Services for which Current Cost Financial Statements are prepared. No CCA adjustment has been made to the valuation of goodwill as this is also not relevant to the SMP Markets, Technical Areas and Wholesale Services. (b) The CCA valuation of assets is affected by external factors such as changes in market prices and changes to our CCA policies and practices. For the year ended 31 March 2013, this resulted in a net decrease in the operating costs in SMP Markets and Technical Areas in these Current Cost Financial Statements of 158m, of which 59m relates to Residual markets, and is mainly attributed to: Change in valuation methodology of Power and Accommodation Plant classes of work from historical to indexed historical due to the divergence in the two forms of valuation methods. Change of index used for dropwire to RPI in order to align with the valuation method of copper assets. General price increases on the remaining classes of work offset by reductions due to supplementary depreciation. Regulatory Valuation of Copper-Based Local Access Network Assets In August 2005, Ofcom introduced an alternative methodology for determining its view of the current cost regulatory asset value of the copper-based local access network (Regulatory Asset Valuation adjustment or the RAV adjustment). This RAV adjustment, which results in a lower valuation, is used only by Ofcom for regulatory purposes and is not reflected in the methodologies we use to produce the Current Cost Financial Statements. As agreed with Ofcom, the RAV adjustment has not been implemented in the Current Cost Financial Statements for Comparability of current and prior year results There have been a number of changes in the year that impact on the comparability of the current and prior year results: (a) Changes to BT s financial reporting obligations as set out in the Current Cost Financial Statements and Notifications explained in Section 2.2. Page 10

13 Section 2 Basis of Preparation (b) The prior year comparatives have been restated to reflect for the following methodology improvements implemented in the current year: (i) The CCA valuation of duct and copper assets was reviewed during the year and has been changed from an absolute basis to an indexed RPI approach. Both an absolute valuation and indexation are acceptable methodologies under CCA principles. In the specific circumstances of our valuation of access network assets we consider indexation is the more appropriate method as the complexity, size and nature of any telecommunications access network means significant estimates and assumptions are made that lead to a level of uncertainty in any absolute valuation. Changes in these estimates and assumptions, improvements in data capture and varying commodity prices used in an absolute valuation also introduce volatility into the Current Cost Financial Statements. In comparison, indexation provides a valuation which is easy to understand and transparent for all users of the data. The change in valuation for 2011/12 resulted in a net 65m increase in duct and copper assets and impacted a number of markets. Further details are provided in the publication Detailed Valuation Methodology (ii) During 2012/13 we reviewed the attribution of property costs. The methodology for attributing vacant space in exchanges has been changed from an allocation of vacant space pro-rata on the basis of the current usage of occupied space to a two stage allocation which recognises the need to provide space for LLU operators followed by an allocation of remaining vacant space to main distribution frames and cable chambers as the high costs incurred from moving to smaller and more economic exchanges, and the disruption to services that would be incurred in moving cable chambers and main distribution frames, prevents us from reducing the size of the operational building portfolio. A more appropriate allocation is achieved by allocating space in this way. We have also updated our exchange space methodology to reflect planning rules requiring additional space to be retained around equipment for ventilation. Both changes to property costs impacted a number of different markets. (iii) In 2012/13 we reviewed the attribution of costs of certain 21C equipment and found the planned use of this equipment had changed and therefore had to be appropriately allocated. This had resulted in 20m of costs moving from the TISBO markets to WBA Market 1, WBA Market 2 and Residual markets. (iv) During 2012/13 we reviewed the attribution of costs of Time Division Multiplexing (TDM) cards. This resulted in 2m of costs moving from the TISBO (above 8Mbit/s up to and including 45Mbit/s) market to the TISBO (up to and including 8Mbit/s), TISBO (above 45Mbit/s up to and including 155Mbit/s), Technical Areas (Point of Handover), Wholesale business ISDN30 exchange line services, and Residual markets. (v) The average debtor days has been restated from 28 days to 22 days to better align with the calculation of debtor days used by Ofcom when modelling costs for charge control purposes. This change did not impact any market materially. The impact of these restatements on the Access Markets and Other Wholesale Markets is shown below: For the year ended 31 March 2012 Whilst there were no other restatements or re-presentations the ongoing review of cost attribution and valuation methodologies resulted in a number of additional improvements and updates to reflect changes in group structure for which the restatement of comparative information for the year ended 31 March 2012 was either not practicable or was not required as the impact was not material. These changes include: Total CCA Operating Costs Restated As originally reported Difference Mean Total CCA Capital Operating Mean Capital Employed Costs Employed Total CCA Operating Mean Capital Costs Employed m m m m m m Wholesale analogue exchange line services 1,439 6,918 1,526 6,938 (87) (20) Wholesale ISDN2 exchange line services (3) (1) Wholesale business ISDN30 exchange line services (6) (5) TISBO (up to and including 8Mbit/s) (34) (48) TISBO (above 8Mbit/s up to and including 45Mbit/s) (5) (12) TISBO (above 45Mbit/s up to and including 155Mbit/s) (6) (13) AISBO (up to and including 1Gbit/s)(g) 510 1, ,357 (20) (31) Wholesale local access 616 2, ,108 (12) (7) Total Access Markets 3,151 11,803 3,324 11,940 (173) (137) For the year ended 31 March 2012 Restated As originally reported Difference Mean Total CCA Capital Operating Mean Capital Employed Costs Employed Total CCA Operating Costs Total CCA Operating Mean Capital Costs Employed m m m m m m Call origination on FPN networks (10) (5) Single transit on FPN networks Technical areas (Interconnect Circuits) (2) (1) Fixed call termination (12) (5) Wholesale trunk segments (4) (7) Technical areas (Point of Handover) Wholesale Broadband Access - Market Wholesale Broadband Access - Market Total Other Wholesale Markets 838 1, ,485 (10) (17) The merger of BT Innovate & Design and BT Operate to create BT Technology, Service & Operations (BT TSO) the creation of BT TSO led to a review of the cost attribution methodologies for the new division. Certain methodologies have been changed as the previous cost allocation methodology was no longer practical due to a change in the nature of cost centre structure for the new division. In addition, improved analysis of costs within the new structure has allowed the development of a number of new methodologies which better reflect the nature of the Page 11

14 Section 2 Basis of Preparation underlying costs. It is has not been practicable to restate comparative information for these methodology changes as they are integrally linked to the structural change. Career Transition Centre (CTC) allocate costs as a group overhead as employees within the CTC can be utilised across BT. Provisions allocation of certain health related provisions to services that caused the claims. Openreach overheads some categories of overheads changed from being allocated using pay to using pay and return on assets as they support the network as well as people. Broadband equipment change in allocation to separately attribute the fixed and variable element of costs for Digital subscriber line access multiplexers (DSLAMs). Engineering Services updated data sources for services such as Special Fault Investigations. WBA bandwidth volumes updated data source to more accurately reflect the usage of backhaul capacity between the WBA markets. At Ofcom s request we will be providing a separate unaudited report showing the impact of the most significant of these changes on the Access Markets and Other Wholesale Markets for the year ended 31 March 2013 including estimated impacts, where practicable, for elements of the BT TSO changes. We plan to publish a version of this report in September Page 12

15 Section 2 Basis of Preparation Section Other Aspects to the Basis of Preparation (Annex 22) Section Key changes as a result of certain regulatory decisions The notes below refer to key changes as a result of Ofcom s Statement Changes to BT and KCOM s regulatory and financial reporting 2012/13 update issued 25 April 2013 that impact the Current Cost Financial Statements for the year ended 31 March Extended and changed disclosure of services in the AISBO market Ethernet Access Direct Local Access connections and rentals have been separately disclosed by bandwidth. Backhaul Extension Service and Wholesale Extension Service connections have been amalgamated. Internal EBD volumes have been separately disclosed. Extended and changed disclosure of services in WBA markets 1 and 2 Wholesale Broadband Connect services have been separately disclosed. Datastream services have been amalgamated. Changed disclosure of services in the Call Origination on Fixed Public Narrowband Networks market The Internal Wholesale call origination local exchange stick service has been amalgamated with the Internal Wholesale call origination local exchange stick (ISDN) service. Changed disclosure of services in the Fixed Call Termination market The Internal Wholesale call termination local exchange stick service has been amalgamated with the Internal Wholesale call termination local exchange stick (ISDN) service. Changed disclosure of services in the Technical Areas (Point of Handover) market Reporting of external third party point of handover rentals have been split between charges for equipment and charges for circuits. Point of handover services by bandwidth have only been reported where revenue is over 1m. Removal of average price/fac column The average price/fac column has been removed from Annex 11, 12 and 13. Implementation of LLU/WLR charge control review The reporting of DSAC and DLRIC data has been removed for the following services: MPF rental; MPF ceases; SMPF ceases; analogue core WLR rental; and analogue core WLR transfer. Page 13

16 Section 3 Statement of Responsibility Section 3 Statement of Responsibility Page 14

17 Section 3 Statement of Responsibility Section Statement of Responsibility (Annex 2) British Telecommunications plc (the Company ) is required to prepare Current Cost Financial Statements in accordance with the Final Statements and Notifications as described in Section 1.2. Under the Financial Capital Maintenance (FCM) concept of Current Cost Accounting we have revalued our assets in The approach taken in the Current Cost Financial Statements is described in Section 2.1. The Current Cost Financial Statements include comparative information for the year ended 31 March 2012 first published on 31 July 2012 subject to certain restatements and representations detailed in Section 2.1. We have prepared the Current Cost Financial Statements in accordance with the Primary Accounting Documents and Secondary Accounting Documents (these are the Detailed Attribution Methods; the Detailed Valuation Methodology; the Long Run Incremental Cost Model: Relationships and Parameters and the Wholesale Catalogue). If there are any inconsistencies in the Primary and Secondary Accounting Documents, the Current Cost Financial Statements are prepared in accordance with the Primary Accounting Documents in the following order of priority: the Regulatory Accounting Principles; the Attribution Methods; the Transfer Charging System; the Accounting Policies; and the Long Run Incremental Cost Methodology. We reconcile the Current Cost Financial Statements to BT Group plc s Annual Report and we explain any differences. We confirm that the Current Cost Financial Statements for the year ended 31 March 2013 have been prepared in accordance with the requirements of the Final Statements and Notifications and the Primary and Secondary Accounting Documents dated 31 July We confirm that the Current Cost Financial Statements for the year ended 31 March 2012 have been prepared in accordance with the requirements of the Final Statements and Notifications and the Primary and Secondary Accounting Documents dated 31 July 2012 subject to certain restatements and re-presentations as detailed in Section 2.1. We confirm that the Detailed Attribution Methods, the Detailed Valuation Methodology, the Long Run Incremental Cost Model: Relationships and Parameters and the Wholesale Catalogue all dated 31 July 2013 are appropriate to implement the principles contained in the Primary Accounting Documents dated 31 July 2013, including the Transparency Principle. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Openreach We are also required in accordance with the Undertakings to separately report the financial results of Openreach within our Current Cost Financial Statements as explained in Sections 1.1 and 1.2. The Undertakings are attached to Annex A of Part 2 of Ofcom s Final Statements on the Strategic Review of Telecommunications, and undertakings in lieu of a reference under the Enterprise Act 2002, issued on the 22 September The Undertakings require us to report the financial results of Openreach, including the following: Openreach financial information such as headline revenue, cost of sales (or gross margin), SG&A, EBITDA, depreciation, operating profit and capital expenditure, revenues broken down into the broad product groups that Openreach provides and further split between internal and external revenues, separately identified payments to other parts of the Company for products that form inputs to Openreach products (e.g. electronics); and Reconciliation of Openreach s revenue and operating profit (and other such items as may be agreed between us and Ofcom) with information about Openreach shown in BT Group plc s Annual Report. The Openreach Financial Statements can be found in Section 10 and include comparative information for the year ended 31 March The form, content and basis of preparation of the financial results of Openreach follow those used in the preparation of the Current Cost Financial Statements as described above, except where differences are agreed with Ofcom. We confirm that the Openreach Financial Statements for the year ended 31 March 2013, which have been prepared in accordance with the Primary Accounting Documents dated 31 July 2013, comply with the requirements of the Undertakings dated 22 September Warren Clements Group Controller 31 July 2013 Page 15

18 Section 4 Audit Report Section 4 Audit Report Page 16