Vodafone 2002 Annual Report Download - page 45

Operating and Financial Review and Prospects Vodafone Group Plc 43Annual Report & Accounts and Form 20-F
FRS 19, goodwill in respect of certain past acquisitions has been restated which
resulted in the charge for the amortisation of goodwill for the year ended
31 March 2002, the year ended 31 March 2001 and the year ended 31 March
2000, reducing by £9 million, £9 million and £2 million, respectively. Equity
shareholders’ funds were also restated, resulting in a reduction of £386 million
and £239 million as at 31 March 2001 and 31 March 2000, respectively.
FRS 17, “Retirement benefits”, replaces SSAP 24, “Accounting for Pension
Costs”, and changes existing accounting and disclosure requirements for defined
benefit pension schemes. Although transitional rules apply, when fully
implemented the principal changes will be the inclusion of pension scheme
surpluses or deficits on the balance sheet, analysis of components of the
pension charge between operating profit and net interest and the reporting of
actuarial gains and losses in the statement of total recognised gains and losses.
It is not anticipated that these changes will have a material effect on the Group’s
results or balance sheet. Disclosures required by FRS 17 can be found in note
34 to the Consolidated Financial Statements, “Pensions”.
US GAAP reconciliation
The principal differences between US GAAP and UK GAAP, as they relate to the
Company’s Consolidated Financial Statements, are the non-consolidation of
certain subsidiary undertakings, the timing of the recognition of connection
revenues and expenses, methods of accounting for goodwill for acquisitions
completed before 31 March 1998, and after 30 June 2001, the determination
of the fair value of the share consideration as a component of the purchase price
of acquisitions, thereby affecting the calculation of goodwill, completed after
31 March 1998, the accounting for certain reorganisation costs in the purchase
price allocation, capitalisation of interest, the treatment of deferred taxation, the
recognition of tax benefits on the exercise of share options and the treatment of
dividends declared or proposed after the year end by the Board of directors.
In the year to 31 March 2002, revenues under US GAAP were £17,639 million
compared with revenues under UK GAAP of £22,845 million. In the year to
31 March 2001, revenues under US GAAP were £11,103 million compared with
revenues under UK GAAP of £15,004 million. The difference in both periods
relates primarily to the non-consolidation of subsidiaries, being Omnitel and Airtel
until 29 June 2001, the date of completion of the Group’s acquisition of a further
17.8% shareholding in Airtel, following which Airtel was fully consolidated under
both US GAAP and UK GAAP. For both subsidiary undertakings, the existence of
significant participating rights of minority shareholders has required the equity
method of accounting to be adopted under US GAAP rather than the full
consolidation of results under UK GAAP. This has not affected the net income of
the Group.
Net loss under US GAAP for the year to 31 March 2002 was £16,688 million,
including a £17 million credit arising on a change in accounting principle
following the adoption of Statement of Financial Accounting Standards (“SFAS”)
No. 133. This compares with a net loss for the year of £16,155 million under
UK GAAP. In the year ended 31 March 2001, the net loss under US GAAP of
£7,071 million compared with a net loss under UK GAAP of £9,885 million.
In both financial years, the most significant adjustments giving rise to these
differences were the amortisation of goodwill and other intangible assets and the
adjustment for deferred taxation. In the year to 31 March 2002, the higher
charge for the amortisation of goodwill and other intangibles under US GAAP of
£9,719 million (2001: £5,302 million) was offset by a credit for income taxes,
primarily deferred tax, of £7,627 million (2001: £7,847 million). Additionally, an
adjustment of £387 million (2001: £365 million) was made for the capitalisation
of interest under US GAAP in respect of purchased 3G licences.
In July 2001, the United States Financial Accounting Standards Board (“FASB”)
issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and
Other Intangible Assets”. SFAS No. 141 requires that all business combinations
completed after 30 June 2001 be accounted for using the purchase method and
requires the separate recognition of intangible assets where they meet one of two
criteria – the contractual-legal criterion or the separability criterion. SFAS No. 141
is not anticipated to have a significant impact on the Group’s existing accounting
policies under US GAAP. SFAS No. 142 requires that goodwill and other intangible
assets with indefinite lives should not be amortised in the consolidated financial
statements but be reviewed at least annually for impairment at the reporting unit
level. SFAS No. 142 is effective for financial years beginning after 15 December
2001 and, accordingly, becomes effective for Vodafone in the financial year
beginning 1 April 2002. However, certain provisions of SFAS No. 142, including
the non-amortisation of goodwill and other intangible assets with indefinite lives,
should be adopted earlier and applied in respect of acquisitions completed after
30 June 2001. The Group has adopted these provisions in its US GAAP results for
the year ended 31 March 2002, the impact of which is to increase US GAAP net
income by £6m. In respect of the Group’s results for the year ending 31 March
2003, the adoption of SFAS 142 is likely to have a material effect on the Group’s
financial position and results under US GAAP, as goodwill is no longer amortised,
and is estimated to increase US GAAP income by between £900m and £1,100m.
In accordance with the requirements of SFAS No. 142, the Group is currently in
the process of undertaking an impairment review, effective 1 April 2002.
For a further explanation of the differences between UK GAAP and US GAAP,
including a summary of the impact of recently issued US accounting standards,
see note 37 to the Consolidated Financial Statements, “US GAAP information”.
Liquidity and Capital Resources
Cash flows and funding
The major sources of Group liquidity over the three years ended 31 March 2002
have been cash generated from operations, borrowings through long term and
short term issuance in the capital markets, borrowings drawn from committed
bank facilities, monetisation of assets, asset disposals and the proceeds from a
share issuance. The Group does not use off-balance sheet special purpose
entities as a source of liquidity or for other financing purposes.
The Group’s key sources of liquidity for the foreseeable future are likely to
be cash generated from operations and borrowings through long term and short
term issuances in the capital markets as well as committed bank facilities.
The Group’s liquidity and working capital may be affected by a material
decrease in cash flow from operations due to factors such as increased
competition, delays in development of new services and networks, or inability
to receive expected revenues from the introduction of new services.
See “Risk Factors”, above.