Show in summary form the entries bt made in its consolidated

Reference no: EM13903806

Divestment of a business: interpreting ?nancial disclosures*

British Telecom (BT ), the UK telecoms group, assembled all its wireless operations in a new sub- sidiary, mmO2 plc. Because BT's fixed line and wireless operations had 'different market focus and expected growth characteristics', its board of directors decided in 2001 to split off mmO2. Under the scheme, two new holding companies, BT Group and mmO2, were established, one for fixed line and the other for wireless operations. A BT shareholder received one share in BT Group plc and one share in mmO2 plc for every share they held in the old BT. Trading in the shares of the two companies began on the London Stock Exchange on 19 November 2001.

Exhibit 14.17 shows the pro forma balance sheet of BT Group plc - after adjustment for mmO2 plc - at 30 June 2001.

BT's management decided that, in view of mmO2's current losses and its expected heavy capital outlays, it should carry less debt as an independent entity than it had as part of BT. As a result, debt was transferred from mmO2 to BT Group (see third column of Exhibit 14.17).

Exhibit 14.16: acquisitions and disposals in 2000/01: selective disclosures

Acquisition of Bestfoods in 2000		Provisional		Provisional
	Balance sheets of acquired	adjustments to align accounting	Provisional	fair values at date of
In A million	businesses	policies	revaluations	acquisition
Intangible assets	1,504	(1,126)	(378)	-
Fixed assets	2,184	(361)	-	1,823
Acquired businesses held for resale	946	-	811	1,757
Other current assets	1,816	(71)	-	1,745
Creditors Provisions for liabilities and charges: Pensions and similar obligations	(1,782) (674)	(183) 237	- -	(1,965) (437)
Deferred taxation	450	(326)	-	124
Other provisions	(938)	-	-	(938)
Minority interest	55 (34) - 21
Net assets acquired	3,561 (1,864) 433 2,130
Goodwill arising in subsidiaries	23,321
Goodwill arising in joint ventures	632
Consideration	26,083
Of which:
Cash paid			23,623
Cash and current investments of Bestfoods Translation adjustment between accounting rate and actual exchange rate at settlement date			3,028 (568)

The book values of the net assets acquired have been restated to provisional fair values as at the date of acquisition. The principal adjustments recognise acquired businesses held for resale at the present value of net expected proceeds and write off certain intangible assets. . . . The accounting policy alignment reflects the write-off of capitalised software, interest and certain intangible assets and the valuation of working capital, pension provisions and deferred tax in accordance with 's accounting policy.

Disposals in 2001

. . . In 2001, disposed businesses principally comprised Unipath and Batchelors/Oxo in the United Kingdom, Royco in the Netherlands and Elizabeth Arden and Gortons in the USA.

A million

Fixed assets	279
Current assets	351
Creditors	(112)
Provisions for liabilities and charges	(11)
Minority interest	(2)
Net assets sold	505
Attributable goodwill	223
Profit on sale attributable to	927
Consideration	1,655
Of which:
Cash	1,650
Cash, current investments and borrowings of businesses sold	(6)
Non-cash and deferred consideration	11

(Source: Annual Accounts 2000 and 2001.)

Exhibit 14.17: BT: pro forma income and balance sheets on divestment of mmO2

	Adjustments	Adjustments for mmO2	Pro forma
In B million Historical BT	for mmO2	net debt	BT Group
Profit (loss) for year to 30 March 2001 (2,378)	4,107	-	1,729
	[loss]
BALANCE SHEET at 30 June 2001
Fixed assets
Intangible assets 18,297	(15,998)	-	2,299
Tangible assets 21,610	(3,877)	-	17,733
Investments 3,675	(30)	-	3,645
Total fixed assets 43,582	(19,905)	-	23,677
Current assets
Stocks 289	(145)	-	144
Debtors 7,380	(1,602)	-	5,778
Investments 10,754	(495)	133	10,392
Cash at bank and in hand 388	(343)	343	388
Total current assets 18,811	(2,585)	476	16,702
Creditors: amounts falling due within 1 year
Loans and other borrowings (10,990)	5,777	(5,277)	(10,490)
Other creditors (8,961)	2,107	-	(6,854)
Total creditors: amounts falling due within 1 year (19,951)	7,884	(5,277)	(17,344)
Net current assets (liabilities) (1,140)	5,299	(4,801)	(642)
Total assets less current liabilities 42,442	(14,606)	(4,801)	23,035
Creditors: amounts falling due after more than 1 year
Loans and other borrowings (17,633)	11,481	(11,119)	(17,271)
Provisions for liabilities and charges (2,769)	191	-	(2,578)
Total net assets 22,040	(2,934)	(15,920)	3,186
Minority interests 82	-	-	82
Capital and reserves 21,958	(2,934)	(15,920)	3,104
22,040	(2,934)	(15,920)	3,186

(Source: BT, Circular to shareholders, September 2001. Reproduced by permission of BT Group plc.)

Required

(a) What type of divestment is BT's splitting-off of its wireless operations - a trade sale, IPO, spin-off or equity carve-out? Give reasons for your answer.

(b) Show in summary form the entries BT made in its consolidated accounts to record the divestment of mmO2 and adjustment of mmO2's net debt on 30 June 2001. Combine operating assets and operating liabilities in one line entry and debt and liquid assets in another. Why doesn't BT report a gain or loss from its divestment of mmO2?

(c) What was mmO2's net debt at 30 June 2001 after adjustments?

Reference no: EM13903806

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