Financial statement

BT Group plc Annual Report 2022

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BT Group plc Annual Report 2022

129Financial statements

Group income statement Year ended 31 March 2022

Group income statement Year ended 31 March 2021

Notes

Before specific

items (‘Adjusted’)

£m

Specific itemsa

£m

Total (Reported)

£m

Revenue 4, 5 20,845 5 20,850 Operating costs 6 (17,673) (292) (17,965)

Operating profit (loss) 4 3,172 (287) 2,885

Finance expense 27 (833) (101) (934) Finance income 12 – 12

Net finance expense (821) (101) (922) Share of post tax profit (loss) of associates and joint ventures – – –

Profit (loss) before taxation 2,351 (388) 1,963 Taxation 10 (349) (340) (689)

Profit (loss) for the year 2,002 (728) 1,274

Earnings per share 11 Basic 20.3p (7.4)p 12.9p Diluted 19.7p (7.2)p 12.5p

Notes

Before specific

items (‘Adjusted’)

£m

Specific itemsa

£m

Total (Reported)

£m

Revenue 4, 5 21,370 (39) 21,331 Operating costs 6 (18,302) (442) (18,744)

Operating profit (loss) 4 3,068 (481) 2,587

Finance expense 27 (785) (18) (803) Finance income 12 – 12

Net finance expense (773) (18) (791) Share of post tax profit (loss) of associates and joint ventures 8 – 8

Profit (loss) before taxation 2,303 (499) 1,804 Taxation 10 (428) 96 (332)

Profit (loss) for the year 1,875 (403) 1,472

Earnings per share 11 Basic 18.9p (4.1)p 14.8p Diluted 18.6p (4.0)p 14.6p

a For a definition of specific items, see page 209. An analysis of specific items is provided in note 9.

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130

Group statement of comprehensive income Year ended 31 March

Notes 2022

£m 2021

£m

Profit for the year 1,274 1,472

Other comprehensive income (loss) Items that will not be reclassified to the income statement Remeasurements of the net pension obligation 20 2,865 (4,856) Tax on pension remeasurements 10 (399) 918 Items that have been or may be reclassified to the income statement Exchange differences on translation of foreign operations 29 65 (189) Fair value movements on assets at fair value through other comprehensive income 29 6 – Movements in relation to cash flow hedges: – net fair value gains (losses) 29 204 (1,468) – recognised in income and expense 29 (54) 850 Tax on components of other comprehensive income that have been or may be reclassified 10, 29 (31) 133

Other comprehensive income (loss) for the year, net of tax 2,656 (4,612)

Total comprehensive income (loss) for the year 3,930 (3,140)

BT Group plc Annual Report 2022

131Financial statements

Group balance sheet At 31 March

Notes 2022

£m 2021

£m

Non-current assets Intangible assets 13 13,809 13,357 Property, plant and equipment 14 20,599 19,397 Right-of-use assets 15 4,429 4,863 Derivative financial instruments 28 1,003 1,165 Investments 24 34 31 Associates and joint ventures 5 17 Trade and other receivables 17 337 314 Contract assets 5 361 344 Deferred tax assets 10 289 989

40,866 40,477

Current assets Programme rights 16 310 328 Inventories 300 297 Trade and other receivables 17 2,624 3,257 Contract assets 5 1,554 1,515 Assets classified as held for sale 23 80 – Current tax receivable 496 281 Derivative financial instruments 28 88 70 Investments 24 2,679 3,652 Cash and cash equivalents 25 777 1,000

8,908 10,400

Current liabilities Loans and other borrowings 26 873 911 Derivative financial instruments 28 51 88 Trade and other payables 18 6,142 5,980 Contract liabilities 5 833 925 Lease liabilities 15 795 730 Liabilities classified as held for sale 23 40 – Current tax liabilities 90 84 Provisions 19 222 288

9,046 9,006

Total assets less current liabilities 40,728 41,871

Non-current liabilities Loans and other borrowings 26 15,312 15,774 Derivative financial instruments 28 819 1,195 Contract liabilities 5 170 167 Lease liabilities 15 4,965 5,422 Retirement benefit obligations 20 1,143 5,096 Other payables 18 624 682 Deferred tax liabilities 10 1,960 1,429 Provisions 19 439 427

25,432 30,192

Equity Share capital 499 499 Share premium 1,051 1,051 Own shares 21 (274) (143) Merger reserve 998 998 Other reserves 29 619 436 Retained earnings 12,403 8,838

Total equity 15,296 11,679

40,728 41,871

The consolidated financial statements on pages 129 to 208 were approved by the Board of Directors on 11 May 2022 and were signed on its behalf by:

Adam Crozier Philip Jansen Simon Lowth Chairman Chief Executive Chief Financial Officer

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132

Group statement of changes in equity

Notes

Share capitala

£m

Share premiumb

£m

Own sharesc

£m

Merger reserved

£m

Other reservese

£m

Retained (loss)

earnings £m

Total equity

(deficit) £m

At 1 April 2020 499 1,051 (237) 2,572 1,119 9,759 14,763 Profit for the year – – – – – 1,472 1,472 Other comprehensive income (loss) – before tax – – – – (1,657) (4,856) (6,513) Tax on other comprehensive income (loss) 10 – – – – 133 918 1,051 Transferred to the income statement – – – – 850 – 850

Total comprehensive income (loss) for the year – – – – (674) (2,466) (3,140) Dividends to shareholders 12 – – – – – – – Unclaimed dividend over 10 years – – – – – – – Share-based payments 22 – – – – – 72 72 Tax on share-based payments 10 – – – – – 5 5 Net buyback of own shares 21 – – 94 – – (107) (13) Transfer to realised profit – – – (1,574) (9) 1,583 – Other movements – – – – – (8) (8)

At 31 March 2021 499 1,051 (143) 998 436 8,838 11,679 Profit for the year – – – – – 1,274 1,274 Other comprehensive income (loss) – before tax – – – – 275 2,865 3,140 Tax on other comprehensive income (loss) 10 – – – – (31) (399) (430) Transferred to the income statement – – – – (54) – (54)

Total comprehensive income (loss) for the year – – – – 190 3,740 3,930 Dividends to shareholders 12 – – – – – (227) (227) Unclaimed dividend over 10 years – – – – – 2 2 Share-based payments 22 – – – – – 108 108 Tax on share-based payments 10 – – – – – 11 11 Net buyback of own shares 21 – – (131) – – (65) (196) Transfer to realised profit – – – – (7) 7 – Other movementsf – – – – – (11) (11)

At 31 March 2022 499 1,051 (274) 998 619 12,403 15,296

a The allotted, called up, and fully paid ordinary share capital of BT Group plc at 31 March 2022 was £499m comprising 9,968,127,681 ordinary shares of 5p each (FY21: £499m comprising 9,968,127,681 ordinary shares of 5p each).

b The share premium account, comprising the premium on allotment of shares, is not available for distribution. c For further analysis of own shares, see note 21. d The merger reserve balance at 1 April 2020 includes £998m related to the group reorganisation that occurred in November 2001 and represented the difference between

the nominal value of shares in the new parent company, BT Group plc, and the aggregate of the share capital, share premium account and capital redemption reserve of the prior parent company, British Telecommunications plc. In addition, on 29 January 2016, the company issued 1,594,900,429 ordinary shares of 5p at 470.7p per share. These shares were used as part consideration for the acquisition of EE. As a result of this transaction the merger reserve was credited with £7,424m net of £3m issue costs. In FY21, following settlement of intercompany loans by qualifying consideration of £1,574m, equivalent balances were transferred from merger reserve to realised profit.

e For further analysis of other reserves, see note 29. f In June 2021, BT exercised an option to purchase the minority shareholding in a subsidiary (BT Communications South Africa). The obligation to purchase the subsidiary’s

equity instruments is accounted for as a financial liability with a corresponding debit to equity. Non-controlling interests are not material to the Group so are not accounted for separately.

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133Financial statements

Group cash flow statement Year ended 31 March

Notes 2022

£m 2021

£m

Cash flow from operating activities Profit before taxation 1,963 1,804 Share of post tax (profit) loss of associates and joint ventures – (8) Net finance expense 922 791

Operating profit 2,885 2,587 Other non-cash charges 76 267 (Profit) loss on disposal of businesses (37) (65) (Profit) loss on disposal of property, plant and equipment and intangible assets – (66) Depreciation and amortisation 4,405 4,347 (Increase) decrease in inventories (3) 2 (Increase) decrease in programme rights (17) 13 (Increase) decrease in trade and other receivables (53) 327 (Increase) decrease in contract assets (51) (141) Increase (decrease) in trade and other payables 99 (43) (Decrease) increase in contract liabilities (93) (48) (Decrease) increase in other liabilitiesa (1,169) (927) (Decrease) increase in provisions (80) (2)

Cash generated from operations 5,962 6,251

Income taxes paid (52) (288)

Net cash inflow from operating activities 5,910 5,963

Cash flow from investing activities Interest received 6 6 Dividends received from associates and joint ventures 1 5 Acquisition of subsidiaries – (7) Proceeds on disposal of subsidiaries, associates and joint ventures 76 164 Proceeds on disposal of current financial assetsb 13,402 13,506 Purchases of current financial assetsb (12,432) (12,085) Net (purchase) disposal of non-current asset investments (8) (11) Proceeds on disposal of property, plant and equipment and intangible assets 2 85 Purchases of property, plant and equipment and intangible assetsc (4,607) (4,903)

Net cash outflow from investing activities (3,560) (3,240)

Cash flow from financing activities Equity dividends paid (228) (2) Interest paid (755) (770) Repayment of borrowingsd (1,374) (1,162) Proceeds from bank loans and bonds 744 – Payment of lease liabilities (659) (782) Cash flows from collateral received (29) (490) Changes in ownership interests in subsidiariese (86) – Proceeds from issue of own shares 13 1 Repurchase of ordinary share capital (184) (14)

Net cash outflow from financing activities (2,558) (3,219)

Net decrease in cash and cash equivalents (208) (496)

Opening cash and cash equivalentsf 896 1,409 Net decrease in cash and cash equivalents (208) (496) Effect of exchange rate changes 4 (17)

Closing cash and cash equivalentsf 25 692 896

a Includes pension deficit payments of £1,121m (FY21: £955m). b Primarily consists of investment in and redemption of amounts held in liquidity funds. c Consists of additions to property, plant and equipment, engineering stores and software of £4,807m (FY21: £4,197m) and movements in capital accruals of £23m (FY21: £4m)

less net refund in respect of spectrum acquisition of £223m (FY21: £702m prepayment). d Repayment of borrowings includes the impact of hedging. e Relates to the acquisition of the remaining 30% of the share capital of BT OnePhone Limited. As part of the accounting for the acquisition, we revisited our original

assessment of control under IFRS 10 and concluded that it should have been classified as a subsidiary instead of a joint venture. The current period accounting reflects this assessment.

f Net of bank overdrafts of £85m (FY21: £104m).

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134

Notes to the consolidated financial statements

1. Basis of preparation Preparation of the financial statements The consolidated financial statements have been prepared in accordance with UK-adopted international accounting standards and with the requirements of the Companies Act 2006.

The consolidated financial statements are prepared on a going concern basis.

This assessment is consistent with the assessment of our viability, as set out on page 70, in estimating the financial impact of a severe but plausible outcome for each risk, both individually, in combination and through probabilistic risk modelling. This stress testing confirmed that existing projected cash flows and cash management activities provide us with adequate headroom over the going concern assessment period.

Having assessed the principal and emerging risks, the directors considered it appropriate to adopt the going concern basis of accounting when preparing the group and parent company financial statements. This assessment covers the period to May 2023, which is consistent with the FRC guidance. When reaching this conclusion, the directors took into account the group’s and parent company’s overall financial position (including trading results and ability to repay term debt as it matures without recourse to refinancing) and the exposure to principal risks.

These financial statements consolidate BT Group plc, the parent company, and its subsidiaries (together the ‘group’, ‘us’, ‘we’ or ‘our’).

The consolidated financial statements are prepared on the historical cost basis, except for certain financial and equity instruments that have been measured at fair value. The consolidated financial statements are presented in sterling, the functional currency of BT Group plc.

These financial statements cover the financial year from 1 April 2021 to 31 March 2022 (‘FY22’), with comparative figures for the financial year from 1 April 2020 to 31 March 2021 (‘FY21’).

New and amended accounting standards effective during the year The following amended standards and interpretations were effective during the year, however, they have not had a significant impact on our consolidated financial statements.

• Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)

• Covid-19-Related Rent Concessions (Amendment to IFRS 16)

Software as a Service We previously capitalised certain configuration and customisation costs associated with software as a service arrangements as intangible assets. In its April 2021 agenda decision, the IFRS Interpretations Committee (IFRIC) clarified that such costs should be expensed where the entity does not control the software being configured. We have adopted the treatment set out by the IFRIC in its agenda decision. The impact of this on the group was not material.

Interest Rate Benchmark Reform The replacement of Interbank Offered Rates (IBORs) with Alternative Reference Rates (ARRs) began from December 2021. Where floating interest bearing receivables and payables exist, and where IBOR was previously applicable, the Group began applying suitable replacement benchmark rates and now account for the instruments in accordance with the amendments to IFRS 9 Financial Instruments published in 2019 (Phase 1) and 2020 (Phase 2). The adoption of these amendments and the transition to ARRs will not have a material financial impact. The implications on the trading results of our segments from the IBOR reform have also been assessed and the expected impact is not material. The Group will move to the new benchmark rates in accordance with timelines as per the regulatory guidelines.

New and amended accounting standards that have been issued but are not yet effective The following new or amended standards and interpretations are applicable in future periods:

Amendments to IAS 37 for onerous contracts The amendments to IAS 37 specify which costs an entity includes in determining the cost of fulfilling a contract for the purpose of assessing whether the contract is onerous. The amendments apply for annual reporting periods beginning on or after 1 January 2022 to contracts existing at the date when the amendments are first applied. For BT this will be from next financial year. At the date of initial application, the cumulative effect of applying the amendments will be recognised as an opening balance adjustment to retained earnings as at 1 April 2022. The comparatives will not be restated. The Group is in the process of finalising the impact of the standard. We do not expect the impact on adoption to be material.

IFRS 17 ‘Insurance Contracts’ We are in the process of assessing the impact of adopting this standard which is effective for BT from 1 April 2023.

Other The following are not expected to have a significant impact on the consolidated financial statements:

• Disclosure of Accounting Policies (amendments to IAS 1 and IFRS practice statement 2)

• Definition of Accounting Estimate (amendments to IAS 8)

• Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (amendments to IAS 12 Income Taxes)

• Classification of liabilities as current or non-current (Amendments to IAS 1)

Presentation of specific items Our income statement and segmental analysis separately identify trading results before specific items (‘adjusted’). The directors believe that presentation of our results in this way is relevant to an understanding of our financial performance, as specific items are identified by virtue of their size, nature or incidence.

This presentation is consistent with the way that financial performance is measured by management and reported to the Board and the Executive Committee and assists in providing a meaningful analysis of our trading results. In determining whether an event or transaction is specific, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence.

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135Financial statements

3. Significant accounting policies that apply to the overall financial statements The significant accounting policies applied in the preparation of our consolidated financial statements are set out below. Other significant accounting policies applicable to a particular area are disclosed in the most relevant note. They can be identified by the following symbol .

We have applied all policies consistently to all the years presented, unless otherwise stated.

Basis of consolidation The group financial statements consolidate the financial statements of BT Group plc and its subsidiaries, and include its share of the results of associates and joint ventures using the equity method of accounting. The group recognises its direct rights to (and its share of) jointly held assets, liabilities, revenues and expenses of joint operations under the appropriate headings in the consolidated financial statements.

All business combinations are accounted for using the acquisition method regardless of whether equity instruments or other assets are acquired. No material acquisitions were made in the year.

A subsidiary is an entity that is controlled by another entity, known as the parent or investor. An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

Non-controlling interests in the net assets of consolidated subsidiaries, which consist of the amounts of those interests at the date of the original business combination and non-controlling share of changes in equity since the date of the combination, are not material to the group’s financial statements.

The results of subsidiaries acquired or disposed of during the year are consolidated from and up to the date of change of control. Where necessary, accounting policies of subsidiaries have been aligned with the policies adopted by the group. All intra-group transactions including any gains or losses, balances, income or expenses are eliminated in full on consolidation.

When the group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. The profit or loss on disposal is recognised as a specific item.

Inventories Network maintenance equipment and equipment to be sold to customers are stated at the lower of cost or net realisable value, taking into account expected revenue from the sale of packages comprising a mobile handset and a subscription. Cost corresponds to purchase or production cost determined by either the first in first out (FIFO) or average cost method.

1. Basis of preparation continued Specific items may not be comparable to similarly titled measures used by other companies. Examples of charges or credits which meet the above definition include acquisitions or disposals of businesses and investments, historical regulatory penalties or litigation claims, business restructuring programmes including our current group-wide modernisation programme, asset impairment charges, property rationalisation programmes including our Better Workplace programme, net interest on pensions and the settlement of multiple tax years. In the event that other items meet the criteria, which are applied consistently from year to year, they are also treated as specific items.

Specific items for the current and prior year are disclosed in note 9.

2. Critical & key accounting estimates and significant judgements The preparation of financial statements in conformity with IFRS requires the use of accounting estimates and assumptions. It also requires management to exercise its judgement in the process of applying our accounting policies. We continually evaluate our estimates, assumptions and judgements based on available information and experience. As the use of estimates is inherent in financial reporting, actual results could differ from these estimates.

Our critical accounting estimates are those estimates that carry a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year. We also make other key estimates when preparing the financial statements, which, while not meeting the definition of a critical estimate, involve a higher degree of complexity and can reasonably be expected to be of relevance to a user of the financial statements. Management has discussed its critical and other key accounting estimates and associated disclosures with the Audit and Risk Committee.

Significant judgements are those made by management in applying our significant accounting policies that have a material impact on the amounts presented in the financial statements. We may exercise significant judgement in our critical and key accounting estimates.

Our critical and key accounting estimates and significant judgements are described in the following notes to the financial statements. They can be identified by the following symbol .

Note Critical

estimate Key

estimate Significant judgement

10. Current and deferred income tax

13. Goodwill impairment

15. Reasonable certainty and determination of lease terms

19. Contingent liabilities associated with litigation

19. Other provisions and contingent liabilities

20. Pension obligations

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Notes to the consolidated financial statements continued

3. Significant accounting policies that apply to the overall financial statements continued Government grants Government grants are recognised when there is reasonable assurance that the conditions associated with the grants have been complied with and the grants will be received.

Grants for the purchase or production of property, plant and equipment are deducted from the cost of the related assets and reduce future depreciation expense accordingly. Grants for the reimbursement of operating expenditure are deducted from the related category of costs in the income statement. Estimates and judgements applied in accounting for government grants received in respect of BDUK and other rural superfast broadband contracts are described in note 14.

Once a government grant is recognised, any related deferred income is treated in accordance with IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’.

Foreign currencies Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of transactions and the translation of monetary assets and liabilities denominated in foreign currencies at period end exchange rates are recognised in the income statement line which most appropriately reflects the nature of the item or transaction.

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 the rates prevailing on the transaction dates (unless it is not a reasonable approximation of the cumulative effects, in which case income and expenses are translated at average rates of exchange for the year). Foreign exchange differences arising on the retranslation of foreign undertakings are recognised directly in a separate component of equity, the translation reserve.

In the event of the disposal of an undertaking with assets and liabilities denominated in a foreign currency, the cumulative translation difference associated with the undertaking in the translation reserve is charged or credited to the gain or loss on disposal recognised in the income statement.

Research and development Research expenditure is recognised in the income statement in the period in which it is incurred. Development expenditure, including the cost of internally developed software, is recognised in the income statement in the period in which it is incurred unless it is probable that economic benefits will flow to the group from the asset being developed, the cost of the asset can be reliably measured and technical feasibility can be demonstrated, in which case it is capitalised as an intangible asset on the balance sheet.

Capitalisation ceases when the asset being developed is ready for use. Research and development costs include direct and indirect labour, materials and directly attributable overheads.

Termination benefits Termination benefits (leaver costs) are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. We recognise termination benefits when they are demonstrably committed to the affected employees leaving the group.

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137Financial statements

4. Segment information

Significant accounting policies that apply to segment information

Operating and reportable segments Our operating segments are reported based on financial information provided to the Executive Committee, which is the key management committee and represents the ‘chief operating decision maker’.

Our organisational structure reflects the different customer groups to which we provide communications products and services via our customer-facing units (CFUs): Consumer, Enterprise, Global and Openreach. The CFUs are supported by technology units (TUs) comprising Digital and Networks; and corporate units (CUs) including procurement and property management.

The CFUs are our reportable segments and generate substantially all of our revenue. TUs and CUs are not reportable segments as they did not meet the quantitative thresholds as set out in IFRS 8 ‘Operating Segments’ for any of the years presented.

We aggregate the remaining operations and include within the ‘Other’ category to reconcile to the consolidated results of the group. The ‘Other’ category includes unallocated TU costs and our CUs.

Allocation of certain items to segments Provisions for the settlement of significant legal, commercial and regulatory disputes, which are negotiated at a group level, are initially recorded in the ‘Other’ segment. On resolution of the dispute, the full impact is recognised in the results of the relevant CFU and offset in the group results through the utilisation of the provision previously charged to the ‘Other’ segment. Settlements which are particularly significant or cover more than one financial year may fall within the definition of specific items as detailed in note 9.

The costs incurred by TUs and CUs are recharged to the CFUs to reflect the services it provides to them. Depreciation and amortisation incurred by TUs in relation to the networks and systems they manage and operate on behalf of the CFUs is allocated to the CFUs based on their respective utilisation. Capital expenditure incurred by TUs for specific projects undertaken on behalf of the CFUs is allocated based on the value of the directly attributable expenditure incurred. Where projects are not directly attributable to a particular CFU, capital expenditure is allocated between them based on the proportion of estimated future economic benefits.

Specific items are detailed in note 9 and are not allocated to the reportable segments as this reflects how they are reported to the Executive Committee. Finance expense and income are not allocated to the reportable segments, as the central treasury function manages this activity, together with the overall net debt position of the group.

Measuring segment performance Performance of each reportable segment is measured based on adjusted EBITDA. EBITDA is defined as the group profit or loss before interest, taxation, depreciation and amortisation. Adjusted EBITDA is defined as EBITDA before specific items, net non-interest related finance expense, and share of profits or losses of associates and joint ventures. Adjusted EBITDA is considered to be a useful measure of the operating performance of the CFUs because it approximates the underlying operating cash flow by eliminating depreciation and amortisation and also provides a meaningful analysis of trading performance by excluding specific items, which are disclosed separately by virtue of their size, nature or incidence.

Revenue recognition Our revenue recognition policy is set out in Note 5.

Internal revenue and costs Most of our internal trading relates to Openreach and arises on rentals, and any associated connection or migration charges, of the UK access lines and other network products to the CFUs, including the use of BT Ireland’s network. This occurs both directly, and also indirectly, through TUs which are included within the ‘Other’ segment. Enterprise internal revenue arises from Consumer for mobile Ethernet access and TUs for transmission planning services. Internal revenue arising in Consumer relates primarily to employee broadband and wi-fi services. Intra-group revenue generated from the sale of regulated products and services is based on market price. Intra-group revenue from the sale of other products and services is agreed between the relevant CFUs and therefore the profitability of CFUs may be impacted by transfer pricing levels.

Geographic segmentation The UK is our country of domicile and we generate the majority of our revenue from external customers in the UK. The geographic analysis of revenue is based on the country of origin in which the customer is invoiced. The geographic analysis of non-current assets, which exclude derivative financial instruments, investments and deferred tax assets, is based on the location of the assets.

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Notes to the consolidated financial statements continued

4. Segment information continued Segment revenue and profit

Year ended 31 March 2022 Consumer

£m Enterprise

£m Global

£m Openreach

£m Other

£m Total

£m

Segment revenue 9,858 5,157 3,362 5,441 27 23,845 Internal revenue (83) (105) – (2,812) – (3,000)

Revenue from external customersa 9,775 5,052 3,362 2,629 27 20,845

Adjusted EBITDAb 2,262 1,636 456 3,179 44 7,577 Depreciation and amortisationa (1,421) (724) (355) (1,876) (29) (4,405)

Operating profit (loss)a 841 912 101 1,303 15 3,172

Specific items (note 9) (287)

Operating profit 2,885 Net finance expensec (922) Share of post tax profit (loss) of associates and joint ventures –

Profit before tax 1,963

Year ended 31 March 2021 Consumer

£m Enterprise

£m Global

£m Openreach

£m Other

£m Total

£m

Segment revenue 9,885 5,449 3,731 5,244 23 24,332 Internal revenue (97) (109) – (2,756) – (2,962)

Revenue from external customersa 9,788 5,340 3,731 2,488 23 21,370

Adjusted EBITDAb 2,128 1,704 596 2,937 50 7,415 Depreciation and amortisationa (1,281) (740) (405) (1,707) (214) (4,347)

Operating profit (loss)a 847 964 191 1,230 (164) 3,068

Specific items (note 9) (481)

Operating profit 2,587 Net finance expensec (791) Share of post tax profit (loss) of associates and joint ventures 8

Profit before tax 1,804

a Before specific items. b Adjusted EBITDA, defined as EBITDA before specific items, net non-interest related finance expense, and share of profits or losses of associates and joint ventures. c Net finance expense includes specific item expense of £101m (FY21): £18m. See note 9.

Internal revenue and costs Internal cost recorded by

Year ended 31 March 2022 Consumer

£m Enterprise

£m Global

£m Openreach

£m Other

£m Total

£m

Internal revenue recorded by Consumer – 47 18 – 18 83 Enterprise 19 – 26 – 60 105 Global – – – – – – Openreach 1,649 937 212 – 14 2,812

Total 1,668 984 256 – 92 3,000

Internal cost recorded by

Year ended 31 March 2021 Consumer

£m Enterprise

£m Global

£m Openreach

£m Other

£m Total

£m

Internal revenue recorded by Consumer – 60 19 – 18 97 Enterprise 17 – 29 – 63 109 Global – – – – – – Openreach 1,592 919 231 – 14 2,756

Total 1,609 979 279 – 95 2,962

BT Group plc Annual Report 2022

139Financial statements

4. Segment information continued Capital expenditure

Year ended 31 March 2022 Consumer

£m Enterprise

£m Global

£m Openreach

£m Other

£m Total

£m

Intangible assetsa 444 249 82 99 70 944 Property, plant and equipmentb 754 320 119 2,449 221 3,863

Capital expenditure excluding spectrum 1,198 569 201 2,548 291 4,807 Purchase of spectruma 388 91 – – – 479

Capital expenditure 1,586 660 201 2,548 291 5,286

Year ended 31 March 2021 Consumer

£m Enterprise

£m Global

£m Openreach

£m Other

£m Total

£m

Intangible assetsa 311 192 95 101 84 783 Property, plant and equipmentb 771 300 93 2,148 121 3,433

Capital expenditure 1,082 492 188 2,249 205 4,216

a Additions to intangible assets as presented in note 13. b Additions to property, plant and equipment as presented in note 14, inclusive of movement on engineering stores.

Geographic segmentation Revenue from external customers

Year ended 31 March 2022

£m 2021

£m

UK 18,470 18,524 Europe, Middle East and Africa, excluding the UK 1,315 1,599 Americas 620 739 Asia Pacific 440 508

Revenuea 20,845 21,370

a Before specific items.

Non-current assets

Year ended 31 March 2022

£m

2021 (Restated)a

£m

UK 38,378 36,996 Europe, Middle East and Africa, excluding the UK 741 858 Americas 269 277 Asia Pacific 152 161

Non-current assetsb 39,540 38,292

a Prior year comparatives have been restated to reclassify a £1.3bn impairment of goodwill to more accurately reflect the region of the entity that the charge relates to. As a result the carrying amount of assets recorded in the UK region in the 2021 comparative has increased by £1.3bn, with an equal and opposite decrease in the Europe, Middle East and Africa region. This adjustment relates to the regional segmentation only and there is no impact on the initial measurement of the impairment charge or on amounts historically disclosed in note 13 Intangible Assets in respect of goodwill.

b Comprising the following balances presented in the group balance sheet: intangible assets; property, plant and equipment; right-of-use assets; associates and joint ventures; trade and other receivables and contract assets.

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Notes to the consolidated financial statements continued

5. Revenue

Significant accounting policies that apply to revenue

Revenue from contracts with customers in scope of IFRS 15 Most revenue recognised by the group (excluding Openreach where most revenue is recognised under the scope of IFRS 16) is in scope of IFRS 15 and is subject to the following revenue recognition policy.

On inception of the contract we identify a “performance obligation” for each of the distinct goods or services we have promised to provide to the customer. The consideration specified in the contract with the customer is allocated to each performance obligation identified based on their relative standalone selling prices, and is recognised as revenue as they are satisfied.

The table below summarises the performance obligations we have identified for our major service lines and provides information on the timing of when they are satisfied and the related revenue recognition policy. Also detailed in this note is revenue expected to be recognised in future periods for contracts in place at 31 March 2022 that contain unsatisfied performance obligations.

Service line Performance obligations Revenue recognition policy

Information and communications technology (ICT) and managed networks

Provision of networked IT services, managed network services, and arrangements to design and build software solutions. Performance obligations are identified for each distinct service or deliverable for which the customer has contracted, and are considered to be satisfied over the time period that we deliver these services or deliverables. Commitments to provide hardware to customers that are distinct from the other promises are considered to be satisfied at the point in time that control passes to the customer.

Revenue for services is recognised over time using a measure of progress that appropriately reflects the pattern by which the performance obligation is satisfied. For time and materials contracts, revenue is recognised as the service is received by the customer. Where performance obligations exist for the provision of hardware, revenue is recognised at the point in time that the customer obtains control of the promised asset. For long-term fixed price contracts revenue recognition will typically be based on the satisfaction of performance obligations in respect of the achievement of contract milestones and customer acceptance, which is the best measure of progress towards the completion of the performance obligation.

Fixed access subscriptions

Provision of broadband, TV and fixed telephony services including national and international calls, connections, line rental, and calling features. Performance obligations exist for each ongoing service provided to the customer and are satisfied over the period that the services are provided. Installation services are recognised as distinct performance obligations if their relationship with the other services in the contract is purely functional. These are satisfied when the customer benefits from the service. Connection services are not distinct performance obligations and are therefore combined with the associated service performance obligation.

Fixed subscription charges are recognised as revenue on a straight line basis over the period that the services are provided. Upfront charges for non- distinct connection and installation services are deferred as contract liabilities and are recognised as revenue over the same period. Variable charges such as call charges are recognised when the related services are delivered. Where installation activities are distinct performance obligations, revenue is recognised at the point in time that the installation is completed.

Mobile subscriptions

Provision of mobile postpaid and prepaid services, including voice minutes, SMS, and data services. Performance obligations exist for each ongoing service provided to the customer and are satisfied over the period that the services are provided.

Subscription fees, consisting primarily of monthly charges for access to internet or voice and data services, are recognised as the service is provided. One-off services such as calls outside of plan and excess data usage are recognised when the service is used.

Equipment and other services

Provision of equipment and other services, including mobile phone handsets and hardware such as set top boxes and broadband routers provided as part of customer contracts. Performance obligations are satisfied at the point in time that control passes to the customer. For other services, performance obligations are identified based on the distinct goods and services we have committed to provide.

Revenue from equipment sales is recognised at the point in time that control passes to the customer. Where payment is not received in full at the time of the sale, such as with equipment provided as part of mobile and fixed access subscriptions, contract assets are recognised for the amount due from the customer that will be recovered over the contract period. Revenue to be recognised is calculated by reference to the relative standalone selling price of the equipment. For other services, revenue is recognised when the related performance obligations are satisfied, which could be over time, in line with contract milestones, or at a point in time depending on the nature of the service.

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We recognise revenue based on the relative standalone selling price of each performance obligation. Determining the standalone selling price often requires judgement and may be derived from regulated prices, list prices, a cost-plus derived price, or the price of similar products when sold on a standalone basis by BT or a competitor. In some cases it may be appropriate to use the contract price when this represents a bespoke price that would be the same for a similar customer in a similar circumstance.

The fixed access and mobile subscription arrangements sold by our Consumer business are typically payable in advance, with any variable or one-off charges billed in arrears. Payment is received immediately for direct sales of equipment to customers. Where equipment is provided to customers under mobile and fixed access subscription arrangements, payment for the equipment is received over the course of the contract term. For sales by our enterprise businesses, invoices are issued in line with contractual terms. Payments received in advance are recognised as contract liabilities, amounts billed in arrears are recognised as contract assets.

We are applying the practical expedient to recognise revenue “as-invoiced” for certain fixed access and mobile subscription services revenues. Where we have a right to invoice at an amount that directly corresponds with performance to date, we recognise revenue at that amount. We have also adopted the practical expedient not to calculate the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied for these contracts.

We do not have any material obligations in respect of returns, refunds or warranties. Where we act as an agent in a transaction, such as insurance services offered, we recognise commission net of directly attributable costs. Where the actual and estimated costs to completion of the contract exceed the estimated revenue, a loss is recognised immediately.

We exercise judgement in assessing whether the initial set-up, transition and transformation phases of long-term contracts are distinct from the other services to be delivered under the contract and therefore represent distinct performance obligations. This determines whether revenue is recognised in the early stages of the contract, or deferred until delivery of the other services promised in the contract begins.

We recognise immediately the entire estimated loss for a contract when we have evidence that the contract is unprofitable. If these estimates indicate that any contract will be less profitable than previously forecast, contract assets may have to be written down to the extent they are no longer considered to be fully recoverable. We perform ongoing profitability reviews of our contracts in order to determine whether the latest estimates are appropriate. Key factors reviewed include:

• Transaction volumes or other inputs affecting future revenues which can vary depending on customer requirements, plans, market position and other factors such as general economic conditions.

• Our ability to achieve key contract milestones connected with the transition, development, transformation and deployment phases for customer contracts.

• The status of commercial relations with customers and the implications for future revenue and cost projections.

• Our estimates of future staff and third-party costs and the degree to which cost savings and efficiencies are deliverable.

Revenue from lease arrangements in scope of IFRS 16 Some consumer broadband and TV products and arrangements to provide external communications providers with exclusive use of Openreach’s fixed-network telecommunications infrastructure meet the definition of operating leases under IFRS 16.

At inception of a contract, we determine whether the contract is, or contains a lease following the accounting policy set out in note 15. Arrangements meeting the definition of a lease in which we act as lessor are classified as operating or finance leases at lease inception based on an overall assessment of whether the lease transfers substantially all the risks and rewards incidental to ownership of the underlying asset. If this is the case then the lease is a finance lease; if not, it is an operating lease. For sub-leases, we make this assessment by reference to the characteristics of the right-of-use asset associated with the head lease rather than the underlying leased asset.

Income from arrangements classified as operating leases is presented as revenue where it relates to our core operating activities, for example leases of fixed-line telecommunications infrastructure to external communications providers and leases of devices to consumer customers as part of fixed access subscription products. Operating lease income from other arrangements is presented within other operating income (note 6).

We recognise operating lease payments as income on a straight-line basis over the lease term. Any upfront payments received, such as connection fees, are deferred over the lease term. Determining the lease term is subject to the significant judgements set out in note 15.

Where the contract contains both lease and non-lease components, the transaction price is allocated between the components on the basis of relative stand-alone selling price.

Where an arrangement is assessed as a finance lease we derecognise the underlying asset and recognise a receivable equivalent to the net investment in the lease. The receivable is measured based on future payments to be received discounted using the interest rate implicit in the lease, adjusted for any direct costs. Any difference between the derecognised asset and the finance lease receivable is recognised in the income statement. Where the nature of services delivered relates to our core operating activities it is presented as revenue. Where it relates to non-core activities it is presented within other operating income (note 6).

5. Revenue continued

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Notes to the consolidated financial statements continued

5. Revenue continued Disaggregation of external revenue The following table disaggregates external revenue by our major service lines and by reportable segment.

Year ended 31 March 2022 Consumer

£m Enterprise

£m Global

£m Openreach

£m Other

£m Total

£m

ICT and managed networks – 1,715 1,672 – – 3,387 Fixed access subscriptions 3,991 1,696 268 2,564 – 8,519 Mobile subscriptions 3,247 1,176 87 – – 4,510 Equipment and other services 2,537 465 1,335 65 27 4,429

Revenue before specific items 9,775 5,052 3,362 2,629 27 20,845

Specific itemsa (note 9) 5

Revenue 20,850

Year ended 31 March 2021 Consumer

£m Enterprise

£m Global

£m Openreach

£m Other

£m Total

£m

ICT and managed networks – 1,993 1,977 – – 3,970 Fixed access subscriptions 4,089 1,762 321 2,426 – 8,598 Mobile subscriptions 3,492 1,262 87 – – 4,841 Equipment and other services 2,207 323 1,346 62 23 3,961

Revenue before specific items 9,788 5,340 3,731 2,488 23 21,370

Specific itemsa (note 9) (39)

Revenue 21,331

a Relates to regulatory matters classified as specific. See note 9.

Revenue expected to be recognised in future periods for performance obligations that are not complete (or are partially complete) as at 31 March 2022 is £13,502m (FY21: £13,317m). Of this, £7,108m (FY21: £7,415m) relates to ICT and managed services contracts and equipment and other services which will substantially be recognised as revenue within three years. Fixed access and mobile subscription services typically have shorter contract periods and so £6,394m (FY21: £5,902m) will substantially be recognised as revenue within two years.

Revenue recognised this year relating to performance obligations that were satisfied, or partially satisfied, in previous years was not material. Revenue related to customers’ unexercised rights (for example, unused amounts on prepaid SIM cards) was not material.

Lease income Presented within revenue is £2,745m (FY21: £2,496m) income from arrangements classified as operating leases under IFRS 16 and which represent core business activities for the group. Income relates predominantly to Openreach’s leases of fixed-line telecommunications infrastructure to external communications providers, classified as fixed access subscription revenue in the table above, and leases of devices to Consumer customers as part of fixed access subscription offerings, classified as equipment and other services.

During the year we also recognised £33m (FY21: £36m) operating lease income from non-core business activities which is presented in other operating income (note 6). This income relates primarily to sub-leases of unutilised properties.

Note 15 presents an analysis of payments to be received across the remaining term of operating lease arrangements.

We did not enter into any material finance lease arrangements during the year. In FY21 we renegotiated a non-strategic revenue contract delivered using elements of our leased buildings infrastructure, in exchange for an up-front payment of £196m. The revised arrangement, previously classified as an operating sub-lease, was reassessed as a finance sub-lease in line with the accounting policy set out above. We derecognised the £208m carrying amount of the associated right-of-use asset and a net deferred income balance of £33m previously reported within trade and other payables, and recognised in revenue a gain on disposal of £21m, consistent with the presentation of the previous operating lease income. As no further amounts were due, no finance lease receivable was recognised.

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5. Revenue continued

Contract assets and liabilities

Significant accounting policies that apply to contract assets and liabilities We recognise contract assets for goods and services for which control has transferred to the customer before consideration is due. These assets mainly relate to mobile handsets provided upfront but paid for over the course of a contract. Contract assets are reclassified as receivables when the right to payment becomes unconditional and we have billed the customer.

Contract liabilities are recognised when we have received advance payment for goods and services that we have not transferred to the customer. These primarily relate to fees received for connection and installation services that are not distinct performance obligations.

Where the initial set-up, transition or transformation phase of a long-term contract is considered to be a distinct performance obligation we recognise a contract asset for any work performed but not billed. Conversely a contract liability is recognised where these activities are not distinct performance obligations and we receive upfront consideration. In this case eligible costs associated with delivering these services are capitalised as fulfilment costs, see note 17.

We provide for expected lifetime losses on contract assets following the policy set out in note 17.

Contract assets and liabilities are as follows:

Year ended 31 March 2022

£m 2021

£m

Contract assets Current 1,554 1,515 Non-current 361 344

1,915 1,859

Contract liabilities Current 833 925 Non-current 170 167

1,003 1,092

£880m of the contract liability at 31 March 2021 was recognised as revenue during the year (FY21: £886m). Impairment losses of £48m were recognised on contract assets during the year (FY21: £47m).

The expected credit loss provisions recognised against contract assets vary across the group due to the nature of our customers; the expected loss rate at 31 March 2022 was 3% (FY21: 4%).

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Notes to the consolidated financial statements continued

6. Operating costs

Year ended 31 March Notes 2022

£m 2021

£m

Operating costs by nature Staff costs:

Wages and salaries 3,746 4,096 Social security costs 400 403 Other pension costs 20 591 591 Share-based payment expense 22 108 72

Total staff costs 4,845 5,162 Own work capitalised (989) (895)

Net staff costs 3,856 4,267 Net indirect labour costsa 354 294

Net labour costs 4,210 4,561 Product costsb 3,166 3,387 Sales commissionsb 628 683 Payments to telecommunications operators 1,346 1,517 Property and energy costs 1,028 1,025 Network operating and IT costs 904 916 TV programme rights charges 879 786 Provision and installation 678 558 Marketing and sales 312 255 Net impairment losses on trade receivables and contract assetsc 102 150 Other operating costs 256 343 Other operating income (241) (226) Depreciation and amortisationd

Property, plant and equipment 14 2,669 2,460 Right-of-use assets 15 688 690 Intangible assets 13 1,048 1,197

Total operating costs before specific items 17,673 18,302

Specific items 9 292 442

Total operating costs 17,965 18,744

Operating costs before specific items include the following: Leaver costse 15 11 Research and development expendituref 604 720 Foreign currency losses/(gains) 3 (9) Inventories recognised as an expense 2,297 2,315

a Net of capitalised indirect labour costs of £871m (FY21: £748m). b Product costs and sales commissions now presented as separate line items having historically been combined. FY21 comparatives have been re-presented for consistency c Consists of net impairment losses on trade receivables and contract assets in Consumer of £86m (FY21: £115m), in Enterprise of £5m (FY21: £33m), in Global of £7m

(FY21: £nil), in Openreach of £3m (FY21: £2m) and in Other of £1m (FY21: £nil). d FY22 depreciation and amortisation charges include impairment of £13m on intangible assets, £11m on owned assets and £12m on right-of-use assets. e Leaver costs are included within wages and salaries, except for leaver costs of £170m (FY21: £270m) associated with restructuring costs, which have been recorded as

specific items. f Research and development expenditure includes amortisation of £543m (FY21: £650m) in respect of capitalised development costs and operating expenses of £61m

(FY21: £69m). In addition, the group capitalised software development costs of £601m (FY21: £519m).

During the year we implemented a new accounting system along with a new chart of accounts that has provided improved visibility of the group’s cost base. As a result we have refined the classification of costs within the operating costs disclosure for FY22. Improved data has allowed us to better allocate subcontractor costs to indirect labour costs, and allocate more costs to named cost categories as opposed to within other operating costs. Following detailed analysis of the underlying causes of reallocations we have concluded they are not indicative of material errors in previously published financial data including the FY21 comparatives.

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6. Operating costs continued

Who are our key management personnel and how are they compensated? Key management personnel comprise executive and non-executive directors and members of the Executive Committee.

Compensation of key management personnel is shown in the table below:

Year ended 31 March 2022

£m 2021

£m

Short-term employee benefits 17.7 9.3 Post employment benefitsa 0.7 0.9 Share-based payments 6.7 4.9 Termination benefits – 0.2

25.1 15.3

a Post employment benefits include cash pension allowances paid to the chief executive and chief financial officer. The group does not contribute to defined contribution or defined benefit pension schemes on behalf of key management personnel.

Key management personnel are compensated solely in the form of cash and share-based payments. During the current and prior years, key management personnel made no gains from exercise of share options.

7. Employees 2022 2021

Number of employees in the groupa Year end

000 Average

000 Year end

000 Average

000

UK 79.9 80.2 80.4 81.3 Non-UK 18.5 18.8 19.3 20.9

Total employees 98.4 99.0 99.7 102.2

2022 2021

Number of employees in the groupa Year end

000 Average

000 Year end

000 Average

000

Consumer 16.6 17.2 18.5 19.2 Enterprise 11.5 11.4 11.3 11.4 Global 13.2 13.8 12.8 14.4 Openreach 37.3 36.4 35.4 34.8 Other 19.8 20.2 21.7 22.4

Total employees 98.4 99.0 99.7 102.2

a These reflect the full-time equivalent of full and part-time employees.

8. Audit, audit related and other non-audit services The following fees were paid or are payable to the company’s auditors, KPMG LLP and other firms in the KPMG network.

Year ended 31 March 2022 £000

2021 £000

Fees payable to the company’s auditors and its associates for: Audit servicesa

The audit of the parent company and the consolidated financial statements 11,400 10,482 The audit of the company’s subsidiaries 6,009 6,280

17,409 16,762 Audit related assurance servicesb 3,169 1,993

Other non-audit services All other assurance services 127 155

Total services 20,705 18,910

a Services in relation to the audit of the parent company and the consolidated financial statements. This also includes fees payable for the statutory audits of the financial statements of subsidiary companies. This excludes amounts for the audit of BT Group Employee Share Ownership Trust and Ilford Trustees (Jersey) Limited amounting to £22,000 (FY21: £21,000).

b Includes services that are required by law or regulation to be carried out by an appointed auditor and services that support us to fulfil obligations required by law or regulation. This includes fees for the review of interim results and the accrued fee for the audit of the group’s regulatory financial statements. In FY22 this included fees of £789,000 to support divestment transactions (FY21: £nil).

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Notes to the consolidated financial statements continued

8. Audit, audit related and other non-audit services continued The BT Pension Scheme is an associated pension fund as defined in the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011. In FY22 KPMG LLP received total fees from the BT Pension Scheme of £1.6m (FY21: £1.5m) in respect of the following services:

Year ended 31 March 2022 £000

2021 £000

Audit of financial statements of associates 1,602 1,494 Audit-related assurance services 16 9

Total services 1,618 1,503

9. Specific items

Significant accounting policies that apply to specific items

Our income statement and segmental analysis separately identify trading results on an adjusted basis, being before specific items. The directors believe that presentation of the group’s results in this way is relevant to an understanding of the group’s financial performance as specific items are those that in management’s judgement need to be disclosed by virtue of their size, nature or incidence.

This presentation is consistent with the way that financial performance is measured by management and reported to the Board and the Executive Committee and assists in providing an additional analysis of our reporting trading results. Specific items may not be comparable to similarly titled measures used by other companies.

In determining whether an event or transaction is specific, management considers quantitative as well as qualitative factors. Examples of charges or credits meeting the above definition and which have been presented as specific items in the current and/or prior years include business restructuring programmes, acquisitions and disposals of businesses and investments, charges or credits relating to retrospective regulatory matters, property rationalisation programmes, significant out of period contract settlements, net interest on our pension obligation, and the impact of remeasuring deferred tax balances. In the event that items meet the criteria, which are applied consistently from year to year, they are treated as specific items. Any releases to provisions originally booked as a specific item are also classified as specific.

In FY20 we included the impacts of Covid-19 on various balance sheet items as at 31 March 2020 as specific. Any releases to this provision have been released through specific items in FY21 and FY22. The impact of Covid-19 on underlying trading is recognised in our underlying (adjusted) results and not as a specific item.

Year ended 31 March 2022

£m 2021

£m

Revenue Retrospective regulatory matters (5) 39

(5) 39

Operating costs Restructuring charges 347 421 Divestment-related items (36) (60) Covid-19 (19) (17) Retrospective regulatory matters – (4) Settlement with Dixons Carphone – 149 Sale of spectrum – (66) Property rationalisation – 19

292 442

Operating loss 287 481

Net finance expense Divestment-related items 8 – Interest expense on retirement benefit obligation 93 18

101 18

Net specific items charge before tax 388 499

Taxation Tax credit on specific items above (80) (96) Tax charge on re-measurement of deferred tax 420 –

340 (96)

Net specific items charge after tax 728 403

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147Financial statements

9. Specific items continued Retrospective regulatory matters We recognised a net credit of £5m (FY21: net charge of £35m) in relation to historic regulatory matters, recognised in revenue. This reflects the movement in provisions relating to various matters.

Restructuring charges In the year we have incurred charges of £347m (FY21: £421m), primarily relating to leaver costs, staff costs where colleagues are working exclusively on transformation programmes, and consultancy costs. These costs reflect projects within our Group-wide modernisation programme, first announced in May 2020, which will deliver gross annualised cost benefits of £2.5bn by FY25, at an expected cost of £1.3bn. £0.8bn costs have been incurred to date.

Divestment-related items We recognised a credit of £36m (FY21: £60m). This primarily relates to a gain on disposal of £43m relating to the sale of Diamond IP, a non-core software business in America. This was offset by an £8m loss on disposal of business units in Italy serving customers in the public administration and SME sectors. There were also some small true-up charges on previous transactions and costs relating to ongoing divestment projects. A charge of £8m (FY21: £nil) was also recognised in finance expense relating to a hedge which became ineffective due to divestment activity.

In FY21 we completed the sale of our domestic operations in Spain and recorded a net gain of £80m. We also incurred net losses on the disposal of our domestic operations in Latin America and France of £11m and recognised £9m of other divestment related costs, including an additional £4m loss on disposal of a number of other businesses.

Covid-19 In FY20 we recognised one-off charges of £95m relating to the impact of Covid-19 on various balance sheet items. Any releases of this provision have also been booked as a specific item. During FY22 we released £19m (FY21: £17m) of these provisions which were not needed. At 31 March 2022 we retained £12m (31 March 2021: £55m) of provisions related to Covid-19.

Settlement with Dixons Carphone In FY21, following the expiry of the retail agreement between Dixons Carphone and EE Limited, we mutually agreed to resolve all outstanding matters which primarily related to contingent revenue share costs that could have previously been recognised over future years. The associated cost of £149m which includes the agreed cash payment and the write-off of balance sheet prepayments and accruals was treated as a specific item in the FY21 results. The associated cash payment was made in April 2021.

Sale of spectrum In FY21 we sold 25 MHz of unpaired 2.6 GHz spectrum and recognised a gain on disposal of £66m as a specific item.

Property rationalisation costs In FY21, we recognised costs of £19m relating to rationalisation of our property portfolio under our Better Workplace programme. In FY22, property rationalisation costs have been classified as restructuring charges where they fall under the previously announced transformation programme.

Interest expense on retirement benefit obligation During the year we incurred £93m (FY21: £18m) of interest costs in relation to our defined benefit pension obligations.

Tax on specific items A tax credit of £80m (FY21: £96m) was recognised in relation to specific items.

Remeasurement of deferred tax balances We have remeasured our deferred tax balances following the enactment of the new UK corporation tax rate of 25% from April 2023. The corresponding adjustment comprises a net tax charge of £420m in the income statement and a non-recurring tax credit of £298m in the statement of comprehensive income. This is classified as a specific item due to its size and the out of period nature of this charge.

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Notes to the consolidated financial statements continued

10. Taxation

Significant accounting policies that apply to taxation

Current income tax is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the group’s subsidiaries, associates and joint ventures operate and generate taxable income. We periodically evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation, and establish provisions where appropriate on the basis of the amounts expected to be paid to tax authorities.

Deferred tax is recognised, using the liability method, in respect of temporary differences between the carrying amount of our assets and liabilities and their tax base. Deferred tax is determined using 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 substantively enacted by the balance sheet date.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. 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 balances for which there is a right of offset within the same jurisdiction are presented net on the face of the group balance sheet as permitted by IAS 12, with the exception of deferred tax related to our pension schemes which is disclosed within deferred tax assets.

Critical accounting estimates and significant judgements made in accounting for taxation

We seek to pay tax in accordance with the laws of the countries where we do business. However, in some areas these laws are unclear, and it can take many years to agree an outcome with a tax authority or through litigation. We estimate our tax on country-by-country and issue-by-issue bases. Our key uncertainties are whether EE’s tax losses will be available to us, whether our intra-group trading model will be accepted by a particular tax authority and whether intra-group payments are subject to withholding taxes. We provide for the predicted outcome where an outflow is probable, but the agreed amount can differ materially from our estimates. Approximately 81% by value of the provisions are under active tax authority examination and are therefore likely to be re-estimated or resolved in the coming 12 months. £194m (FY21: £200m) is included in current tax liabilities or offset against current tax assets where netting is appropriate.

Under a downside case an additional amount of £543m could be required to be paid, of which £444m would relate to EE losses. This amount is not provided as we don’t consider this outcome to be probable.

Deciding whether to recognise deferred tax assets is judgemental. We only recognise them when we consider it is probable that they can be recovered. In making this judgement we consider evidence such as historical financial performance, future financial plans and trends, the duration of existing customer contracts and whether our intra-group pricing model has been agreed by the relevant tax authority.

The value of the group’s income tax assets and liabilities is disclosed on the group balance sheet. The value of the group’s deferred tax assets and liabilities is disclosed below.

Analysis of our taxation expense for the year

Year ended 31 March 2022

£m 2021

£m

United Kingdom Corporation tax at 19% (FY21: 19%) – (300) Adjustments in respect of earlier yearsa 223 6 Non-UK taxation Current (78) (65) Adjustments in respect of earlier years 7 6

Total current taxation (expense) 152 (353)

Deferred taxation Origination and reversal of temporary differences (102) 6 Adjustments in respect of earlier yearsa (190) 12 Impact of change in UK corporation tax rate to 25% (FY21: 19%) (420) – Remeasurement of temporary differences (129) 3

Total deferred taxation (expense) / credit (841) 21

Total taxation (expense) (689) (332)

a During the period certain prior period tax issues were resolved at a net tax cost of £69m, comprising a £263m deferred tax charge and a £194m current tax credit.

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149Financial statements

10. Taxation continued Factors affecting our taxation expense for the year The taxation expense on the profit for the year differs from the amount computed by applying the UK corporation tax rate to the profit before taxation as a result of the following factors:

Year ended 31 March 2022

£m 2021

£m

Profit before taxation 1,963 1,804

Expected taxation expense at UK rate of 19% (FY21: 19%) (373) (343) Effects of: (Higher)/lower taxes on non-UK profits (4) 15 Net permanent differences between tax and accountinga 179 (34) Adjustments in respect of earlier yearsb 40 24 Prior year non-UK losses used against current year profits 20 12 Non-UK losses not recognisedc (2) (9) Re-measurement of deferred tax balances (549) 3

Total taxation expense (689) (332) Exclude specific items (note 9) 340 (96)

Total taxation expense before specific items (349) (428)

a Includes income that is not taxable or UK income taxable at a different rate, and expenses for which no tax relief is received. Examples include some types of depreciation and amortisation, the benefit of R&D tax incentives and super-deduction on capital expenditure. The most significant element of this amount is the benefit from the super-deduction (£172m).

b Reflects the differences between initial accounting estimates and tax returns submitted to tax authorities, including the release and establishment of provisions for uncertain tax positions.

c Reflects losses made in countries where it has not been considered appropriate to recognise a deferred tax asset, as future taxable profits are not probable.

Tax components of other comprehensive income

Year ended 31 March

2022 Tax credit (expense)

£m

2021 Tax credit (expense)

£m

Taxation on items that will not be reclassified to the income statement Pension remeasurements (399) 918 Tax on items that have been or may be reclassified subsequently to the income statement Exchange differences on translation of foreign operations – 22 Fair value movements on cash flow hedges

– net fair value gains or (losses) (31) 111 – recognised in income and expense – –

Total tax recognised in other comprehensive income (430) 1,051

Current tax credita 8 203 Deferred tax credit (expense) (438) 848

Total tax recognised in other comprehensive income (430) 1,051

a Includes £nil (FY21: £181m) relating to cash contributions made to reduce retirement benefit obligations.

Tax (expense) credit recognised directly in equity

Year ended 31 March 2022

£m 2021

£m

Tax (expense) credit relating to share-based payments 11 5

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Notes to the consolidated financial statements continued

10. Taxation continued Deferred taxation

Fixed asset temporary

differences £m

Retirement benefit

obligationsa

£m

Share- based

payments £m

Tax losses

£m Other

£m

Jurisdictional offset

£m Total

£m

At 1 April 2020 1,590 (176) (7) (66) (33) – 1,308 Expense (credit) recognised in the income statement (11) (13) (8) 2 9 – (21) Expense (credit) recognised in other comprehensive income – (737) – – (111) – (848) Exchange differences – – (5) – – – (5) Transfer to held for sale (note 23) 8 – – (2) – – 6

At 31 March 2021 1,587 (926) (20) (66) (135) – 440

Non-current Deferred tax asset – (926) (20) (66) (135) 158 (989) Deferred tax liability 1,587 – – – – (158) 1,429

At 31 March 2021 1,587 (926) (20) (66) (135) – 440

Expense (credit) recognised in the income statement 1,326 (33) (5) (434) (13) – 841 Expense (credit) recognised in other comprehensive income – 764 – (354) 28 – 438 Expense (credit) recognised in equity – – (11) – – – (11) Acquisition of subsidiary – – – (3) – – (3) Transfer from current tax – – – – (34) – (34)

At 31 March 2022 2,913 (195) (36) (857) (154) – 1,671

Non-current Deferred tax asset – (195) (36) (857) (154) 953 (289) Deferred tax liability 2,913 – – – – (953) 1,960

At 31 March 2022 2,913 (195) (36) (857) (154) – 1,671

a Includes a deferred tax asset of £5m (FY21: £1m) arising on contributions payable to defined contribution pension plans.

The majority of the deferred tax assets and liabilities noted above are anticipated to be realised after more than 12 months.

What factors affect our future tax charges? We expect a large proportion of our capital spend on fibre roll-out to be eligible for the Government’s super-deduction regime, which allows for enhanced and accelerated tax relief for qualifying capital expenditure. These enhanced deductions are available for FY22 and FY23, driving a projected UK tax loss and no UK tax payments for these periods. These deductions together with accelerated deductions relating to pension contributions result in c.£5bn of tax losses expected to be carried forward from FY23.

What are our unrecognised tax losses and other temporary differences? At 31 March 2022 we had operating losses and other temporary differences carried forward in respect of which no deferred tax assets were recognised amounting to £3.8bn (FY21: £4.1bn). Our other temporary differences have no expiry date restrictions. The expiry date of operating losses carried forward is dependent upon the tax law of the various territories in which the losses arose. A summary of expiry dates for losses in respect of which restrictions apply is set out below:

At 31 March 2022 £m Expiry

Restricted losses Europe 1 2022 – 2025 Americas 368 2022 – 2045 Other 3 2022 – 2030

Total restricted losses 372

Unrestricted operating losses 3,095 No expiry

Other temporary differences 313 No expiry

Total 3,780

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151Financial statements

10. Taxation continued At 31 March 2022 we had UK capital losses carried forward in respect of which no deferred tax assets were recognised amounting to £16.8bn (FY21: £16.8bn). These losses have no expiry date, but we consider the future utilisation of significant amounts of these losses to be remote.

At 31 March 2022 the undistributed earnings of non-UK subsidiaries were £1.9bn (FY21: £1.8bn). No deferred tax liabilities have been recognised in respect of these unremitted earnings because the group is in a position to control the timing of any dividends from subsidiaries and hence any tax consequences that may arise. Under current tax rules, tax of £35m (FY21: £43m) would arise if these earnings were to be repatriated to the UK.

11. Earnings per share How is earnings per share calculated? Basic earnings per share is calculated by dividing the profit after tax attributable to equity shareholders by the weighted average number of shares in issue after deducting the own shares held by employee share ownership trusts and treasury shares.

In calculating the diluted earnings per share, share options outstanding and other potential shares have been taken into account where the impact of these is dilutive.

Year ended 31 March 2022 2021

Basic weighted average number of shares (millions) 9,866 9,905 Dilutive shares from share options (millions) 105 30 Dilutive shares from share awards (millions) 165 137

Diluted weighted average number of shares (millions) 10,136 10,072

Basic earnings per share 12.9p 14.8p Diluted earnings per share 12.5p 14.6p

The earnings per share calculations are based on profit after tax attributable to equity shareholders of the parent company which excludes non-controlling interests. Profit after tax was £1,274m (FY21: £1,472m) and profit after tax attributable to non-controlling interests was £2m (FY21: £3m). Profit attributable to non-controlling interests is not presented separately in the financial statements as it is not material.

12. Dividends What is the group’s dividend policy? We have a progressive dividend policy to maintain or grow the dividend each year whilst taking into consideration a number of factors including underlying medium-term earnings expectations and levels of business reinvestment.

What dividends have been paid? A final dividend of 5.39p per share amounting to approximately £528m is proposed in respect of the year ended 31 March 2022 (FY21: no final dividend paid). An interim dividend of 2.31p per share amounting to £227m was paid on 7 February 2022 (FY21: no interim dividend paid). This value may differ from the amount shown for equity dividends paid in the group cash flow statement, which represents the actual cash paid in relation to dividend cheques that have been presented over the course of the financial year.

No dividends were paid in the year ended 31 March 2021.

2022 2021

Year ended 31 March pence per

share £m pence per

share £m

Interim dividend in respect of the current year 2.31 227 – –

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Notes to the consolidated financial statements continued

13. Intangible assets

Significant accounting policies that apply to intangible assets

We recognise identifiable intangible assets where we control the asset, it is probable that future economic benefits attributable to the asset will flow to the group, and we can reliably measure the cost of the asset. We amortise all intangible assets, other than goodwill, over their useful economic life. The method of amortisation reflects the pattern in which the assets are expected to be consumed. If the pattern cannot be determined reliably, the straight line method is used.

Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the group’s share of the identifiable net assets (including intangible assets) of the acquired business. Our goodwill impairment policy is set out later in this note.

Acquired intangible assets – customer relationships and brands Intangible assets such as customer relationships or brands acquired through business combinations are recorded at fair value at the date of acquisition and subsequently carried at amortised cost. Assumptions are used in estimating the fair values of these relationships or brands and include management’s estimates of revenue and profits to be generated by them.

Telecommunications licences Licence fees paid to governments, which permit telecommunications activities to be operated for defined periods, are initially recorded at cost and amortised from the time the network is available for use to the end of the licence period or where our usage can extend beyond the initial licence period, over the period we expect to benefit from the use of the licences, which is typically 20 years. Licences acquired through business combinations are recorded at fair value at the date of acquisition and subsequently carried at amortised cost. The fair value is based on management’s assumption of future cash flows using market expectations at acquisition date.

Computer software Computer software comprises computer software licences purchased from third parties, and also the cost of internally developed software. Computer software licences purchased from third parties are initially recorded at cost. We only capitalise costs directly associated with the production of internally developed software, including direct and indirect labour costs of development, where it is probable that the software will generate future economic benefits, the cost of the asset can be reliably measured and technical feasibility can be demonstrated, in which case it is capitalised as an intangible asset on the balance sheet. Costs which do not meet these criteria and research costs are expensed as incurred.

Our development costs which give rise to internally developed software include upgrading the network architecture or functionality and developing service platforms aimed at offering new services to our customers.

Other Other intangible assets include website development costs and other licences. Items are capitalised at cost and amortised on a straight line basis over their useful economic life or the term of the contract.

Estimated useful economic lives The estimated useful economic lives assigned to the principal categories of intangible assets are as follows:

• Computer software 2 to 10 years • Telecommunications licences 2 to 20 years • Customer relationships and brands 1 to 15 years

Impairment of intangible assets Intangible assets with finite useful lives 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 performed, the recoverable amount is assessed by reference to the higher of the net present value of the expected future cash flows (value in use) of the relevant cash generating unit and the fair value less costs to dispose.

Goodwill is reviewed for impairment at least annually as described below. Impairment losses are recognised in the income statement, as a specific item. If a cash generating unit is impaired, impairment losses are allocated firstly against goodwill, and secondly on a pro-rata basis against intangible and other assets.

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153Financial statements

13. Intangible assets continued

Goodwill £m

Customer relationships

and brandsa

£m

Telecoms licences

and otherb

£m

Internally developed

softwarec

£m

Purchased softwarec

£m Total

£m

Cost At 1 April 2020 7,945 3,397 3,032 4,354 1,118 19,846 Additions – – – 596 187 783 Disposals and adjustmentsd 1 – (19) (240) (122) (380) Transfers – – – 46 (37) 9 Exchange differences (108) (14) – (3) (11) (136)

At 31 March 2021 7,838 3,383 3,013 4,753 1,135 20,122 Additionse – – 479 793 151 1,423 Acquisitions 94 – – – 2 96 Disposals and adjustmentsd (7) – (3) (239) (272) (521) Transfers – – 1 45 (44) 2 Exchange differences 43 – – 1 (1) 43 Transfer to assets held for salef (51) – – (7) – (58)

At 31 March 2022 7,917 3,383 3,490 5,346 971 21,107

Accumulated amortisation At 1 April 2020 – 1,930 574 2,951 502 5,957 Charge for the year – 322 162 593 120 1,197 Disposals and adjustmentsd – – (2) (242) (119) (363) Transfers – – – (1) 1 – Exchange differences – (14) – (2) (10) (26)

At 31 March 2021 – 2,238 734 3,299 494 6,765 Charge for the yearg – 231 179 529 109 1,048 Disposals and adjustmentsd – – (5) (229) (278) (512) Transfers – – – (2) 2 – Exchange differences – – – 1 (1) – Transfer to assets held for salef – – – (3) – (3)

At 31 March 2022 – 2,469 908 3,595 326 7,298

Carrying amount

At 31 March 2021 7,838 1,145 2,279 1,454 641 13,357 At 31 March 2022 7,917 914 2,582 1,751 645 13,809

a The remaining unamortised balance of customer relationships and brands relates to customer relationships recognised on acquisition of EE. b Telecoms licences and other primarily represents spectrum licences. These include 2100 MHz licence with book value of £693m (FY21: £744m), 1800 MHz with book value

of £636m (FY21: £682m), 700Mhz with book value of £297m (FY21: £nil), 3400 MHz with book value of £258m (FY21: £274m) and 2600 MHz with book value of £227m (FY21: £247m). Spectrum licences are being amortised over a period between 14 and 20 years.

c Includes a carrying amount of £1,046m (FY21: £608m) in respect of assets under construction, which are not yet amortised. d Fully depreciated assets in the group’s fixed asset registers were reviewed during the year, as part of the group’s annual asset verification exercise, and certain assets that

were no longer in use have been written off, reducing cost and accumulated depreciation by £0.4bn (FY21: £0.3bn). e Additions to telecoms licences and other assets include £479m recognised in relation to spectrum which represents the amount paid to Ofcom to secure the spectrum

bands together with the related interference mitigation provision. f Assets transferred to held for sale during FY22 relate to our BT Sport operations. See note 23. g Amortisation charge for FY22 includes impairment charges of £13m.

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154

Notes to the consolidated financial statements continued

13. Intangible assets continued Impairment of goodwill

Significant accounting policies that apply to impairment of goodwill

We perform an annual goodwill impairment review.

Goodwill recognised in a business combination does not generate cash flows independently of other assets or groups of assets. As a result, the recoverable amount, being the value in use, is determined at a cash generating unit (CGU) level. These CGUs represent the smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other groups of assets. Our CGUs are deemed to be Consumer, Enterprise, and Global.

We allocate goodwill to each of the CGUs that we expect to benefit from the business combination. Each CGU to which goodwill is allocated represents the lowest level within the group at which the goodwill is monitored for internal management purposes.

The value in use of each CGU is determined using cash flow projections derived from financial plans approved by the Board covering a five-year period. They reflect management’s expectations of revenue, EBITDA growth, capital expenditure, working capital and operating cash flows, based on past experience and future expectations of business performance. Cash flows beyond the fifth year have been extrapolated using perpetuity growth rates.

Key accounting estimates and significant judgements made in reviewing goodwill for impairment

Determining our CGUs The determination of our CGUs is judgemental. The identification of CGUs involves an assessment of whether the asset or group of assets generate largely independent cash inflows. This involves consideration of how our core assets are operated and whether these generate independent revenue streams. During the year we have reviewed our CGUs and have brought together the Legacy BT Consumer and Legacy EE CGUs into a combined ‘Consumer’ CGU, aligning our CGUs to our CFUs, due to increased convergence between the prior CGUs such that cash inflows are no longer independent.

Estimating value in use Our value in use calculations require estimates in relation to uncertain items, including management’s expectations of future revenue growth, operating costs, profit margins, operating cash flows, and the discount rate for each CGU. Future cash flows used in the value in use calculations are based on our latest Board-approved five-year financial plans. Expectations about future growth reflect the expectations of growth in the markets to which the CGU relates. The future cash flows are discounted using a pre-tax discount rate that reflects current market assessments of the time value of money. The discount rate used in each CGU is adjusted for the risk specific to the asset, including the countries in which cash flow will be generated, for which the future cash flow estimates have not been adjusted.

We tested our goodwill for impairment as at 31 March 2022. The carrying value of goodwill and the key assumptions used in performing the annual impairment assessment and sensitivities are disclosed below.

Cost Consumer

£m

Legacy BT Consumer

£m Legacy EE

£m Enterprise

£m Global

£m Total

£m

At 1 April 2020 – 1,183 2,768 3,483 511 7,945 Exchange differences – – – (8) (100) (108) Acquisitions and disposals – – – – 1 1

At 31 March 2021 – 1,183 2,768 3,475 412 7,838 Transfer 3,951 (1,183) (2,768) – – – Exchange differences – – – 4 39 43 Acquisitions and disposals – – – 94 (7) 87 Transfer to assets held for salea (51) – – – – (51)

At 31 March 2022 3,900 – – 3,573 444 7,917

a Assets transferred to held for sale during FY22 relate to our BT Sport operations. See note 23.

The increase in goodwill is driven primarily by the acquisition of the remaining 30% of the share capital of BT OnePhone Limited.

What discount rate have we used? The pre-tax discount rates applied to the cash flow forecasts are derived from our post-tax weighted average cost of capital. The assumptions used in the calculation of the group’s weighted average cost of capital are benchmarked to externally available data. The pre-tax discount rate used in performing the value in use calculation in FY22 was 7.6% (FY21: 8.1%). We have used the same discount rate for all CGUs except Global where we have used 7.9% (FY21: 8.5%) reflecting higher risk in some of the countries in which Global operates.

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155Financial statements

13. Intangible assets continued What growth rates have we used? The perpetuity growth rates are determined based on the forecast market growth rates of the regions in which the CGU operates, and reflect an assessment of the long-term growth prospects of that market. The growth rates have been benchmarked against external data for the relevant markets. None of the growth rates applied exceed the expected average long-term growth rates for those markets or sectors. We used a perpetuity growth rate of 2.3% (FY21: 2.3%) for Global and 2.0% (FY21: 2.0%) for Enterprise and Consumer.

What sensitivities have we applied? There is significant headroom in all of our CGUs, such that at this point in time there are no reasonably possible changes to key assumptions that would result in an impairment.

14. Property, plant and equipment

Significant accounting policies that apply to property, plant and equipment

Our property, plant and equipment is included at historical cost, net of accumulated depreciation, government grants and any impairment charges. Property, plant and equipment acquired through business combinations are initially recorded at fair value and subsequently accounted for on the same basis as our existing assets. We derecognise items of property, plant and equipment on disposal or when no future economic benefits are expected to arise from the continued use of the asset. The difference between the sale proceeds and the net book value at the date of disposal is recognised in operating costs in the income statement.

Included within the cost of network infrastructure and equipment are direct and indirect labour costs, materials and directly attributable overheads.

We depreciate property, plant and equipment on a straight line basis from the time the asset is available for use, to write off the asset’s cost over the estimated useful life taking into account any expected residual value. Freehold land is not depreciated.

Estimated useful economic lives The estimated useful lives assigned to principal categories of assets are as follows:

Land and buildings • Freehold buildings 14 to 50 years • Short-term leasehold improvements Shorter of 10 years or lease term • Leasehold land and buildings Unexpired portion of lease or 40 years, whichever is the shorter

Network infrastructure Transmission equipment • Duct 40 years • Cable 3 to 25 years • Fibre 5 to 20 years Exchange equipment 2 to 13 years Other network equipment 2 to 20 years

Other assets • Motor vehicles 2 to 10 years • Computers and office equipment 3 to 7 years

Residual values and useful lives are reassessed annually and, if necessary, changes are recognised prospectively. In FY22 we have updated the useful lives of motor vehicles from 2–9 to 2–10 years following a review of our specialised vehicle fleet.

Network share assets Certain assets have been contributed to a network share arrangement by both EE and Hutchison 3G UK Limited, with legal title remaining with the contributor. This is considered to be a reciprocal arrangement. Our share of the assets on acquisition of EE were recognised at fair value within tangible assets, and depreciated in line with policy. Subsequent additions are recorded at cost.

Impairment of property, plant and equipment We test property, plant and equipment 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 performed, we assess the recoverable amount by reference to the higher of the net present value of the expected future cash flows (value in use) of the relevant asset and the fair value less costs to dispose. If it is not possible to determine the recoverable amount for the individual asset then we assess impairment by reference to the relevant cash generating unit as described in note 13.

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Notes to the consolidated financial statements continued

14. Property, plant and equipment continued

Building Digital UK (BDUK) government grants We receive government grants in relation to BDUK and other rural superfast broadband contracts. Where we have achieved certain service levels, or delivered the network more efficiently than anticipated, we have an obligation to either re-invest or repay grant funding. Where this is the case, we recognise deferred income in respect of the funding that will be re-invested or repaid, and make a corresponding adjustment to the carrying amount of the related property, plant and equipment.

Assessing the timing of whether and when we change the estimated take-up assumption is judgemental as it involves considering information which is not always observable. Our consideration on whether and when to change the base case assumption is dependent on our expectation of the long-term take-up trend.

Our assessment of how much grant income to defer includes consideration of the difference between the take-up percentage agreed with the local authority and the likelihood of actual take-up. The value of the government grants deferred is disclosed in note 18.

Land and buildings

£m

Network infrastructure

Othera

£m

Assets under construction

£m Total

£m

Held by Openreach

£m

Held by other units

£m

Cost At 1 April 2020 945 27,152 26,741 1,662 916 57,416 Additionsb 10 (179) 114 69 3,401 3,415 Transfers 32 2,151 972 141 (3,305) (9) Disposals and adjustmentsc (19) (16) (2,193) (333) (21) (2,582) Exchange differences (22) – (146) (19) (1) (188)

At 31 March 2021 946 29,108 25,488 1,520 990 58,052 Additionsb 87 – 111 89 3,548 3,835 Transfers 18 2,128 813 156 (3,117) (2) Disposals and adjustmentsc (28) 40 (1,974) (271) 29 (2,204) Transfer to assets held for saled – – – (50) (4) (54) Exchange differences (1) – 1 – – –

At 31 March 2022 1,022 31,276 24,439 1,444 1,446 59,627

Accumulated depreciation At 1 April 2020 610 14,867 22,213 1,350 – 39,040 Charge for the year 41 1,232 1,050 137 – 2,460 Transfers (1) – 2 (1) – – Disposals and adjustmentsc (20) (23) (2,186) (332) – (2,561) Transfer to assets held for saled – – – – – – Exchange differences (18) – (133) (17) – (168)

At 31 March 2021 612 16,076 20,946 1,137 – 38,771 Charge for the yeare 37 1,372 1,092 168 – 2,669 Transfers – – (1) 1 – – Disposals and adjustmentsc (28) 28 (1,985) (240) – (2,225) Transfer to assets held for saled – – – (41) – (41) Exchange differences – – (2) – – (2)

At 31 March 2022 621 17,476 20,050 1,025 – 39,172

Carrying amount At 31 March 2021 334 13,032 4,542 383 990 19,281 Engineering stores – – – – 116 116

Total at 31 March 2021 334 13,032 4,542 383 1,106 19,397

At 31 March 2022 401 13,800 4,389 419 1,446 20,455 Engineering stores – – – – 144 144

Total at 31 March 2022 401 13,800 4,389 419 1,590 20,599

a Other mainly comprises motor vehicles, computers and fixtures and fittings. b Net of government grants of £78m (FY21: £21m). c Fully depreciated assets in the group’s fixed asset registers were reviewed during the year, as part of the group’s annual asset verification exercise, and certain assets that

were no longer in use have been written off, reducing cost and accumulated depreciation by £2.0bn (FY21: £2.3bn). Disposals and adjustments include adjustments resulting from changes in assumptions used in calculating lease-end obligations where the corresponding asset is capitalised.

d Transfers to assets held for sale during the year relate to our BT Sport operations, see note 23. e Depreciation charge for FY22 includes impairment charges of £11m.

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157Financial statements

14. Property, plant and equipment continued Included within the above disclosure are assets used in arrangements which represent core business activities for the group and which meet the definition of operating leases:

• £13,800m (FY21: £13,032m) of the carrying amount of the network infrastructure asset class represents Openreach’s network infrastructure. The majority of the associated assets are used to deliver fixed-line telecommunications services that have been assessed as containing operating leases, to both internal and external communications providers. Network infrastructure held by Openreach is presented separately in the table above however it is not practicable to separate out infrastructure not used in operating lease arrangements.

• Other assets includes devices with a carrying amount of £169m (FY21: £128m) that are made available to retail customers under arrangements that contain operating leases. These are not presented separately in the table above as they are not material relative to the group’s overall asset base.

The carrying amount of land and buildings, including leasehold improvements, comprised:

At 31 March 2022

£m 2021

£m

Freehold 92 123 Leasehold 309 211

Total land and buildings 401 334

Network infrastructure Some of our network assets are jointly controlled by EE Limited with Hutchison 3G UK Limited. These relate to shared 3G network and certain elements of network for 4G rural sites. The net book value of the group’s share of assets controlled by its joint operation MBNL is £562m (FY21: £625m) and is recorded within network infrastructure. Included within this is £73m (FY21: £95m), being the group’s share of assets owned by its joint operation MBNL.

Within network infrastructure are assets with a net book value of £10.3bn (FY21: £9.8bn) which have useful economic lives of more than 18 years. The prior year comparative has been restated from £10.3bn to exclude intangible licences associated with our network infrastructure.

15. Leases

Significant accounting policies that apply to leases

Identifying whether a lease exists At inception of a contract, we determine whether the contract is, or contains a lease. A lease exists if the contract conveys the right to control the use of an identified asset, for a period of time, in exchange for consideration. In making this assessment, we consider whether:

• The contract involves the use of an identified asset, either explicitly or implicitly. The asset must be physically distinct or represent substantially all the capacity of a physically distinct asset. Assets that a supplier has a substantive right to substitute are not considered distinct.

• The lessee (either the group, or the group’s customers) has the right to obtain substantially all the economic benefits from the use of the asset throughout the period of use; and

• The lessee has the right to direct the use of the asset, in other words, has the decision-making rights that are most relevant to changing how and for what purpose the asset is used.

Where practicable, and by class of underlying asset, we have elected to account for leases containing a lease component and one or more non-lease components as a single lease component. Where this election has been taken, it has been applied to the entire asset.

Lessee accounting We recognise a lease liability and right-of-use asset at the commencement of a lease.

Lease liabilities are initially measured at the present value of lease payments that are due over the lease term, discounted using the group’s incremental borrowing rate.

The lease term is the non-cancellable period of the lease adjusted for the impact of any extension options that we are reasonably certain the lessee will exercise, or termination options that we are reasonably certain the lessee will not exercise.

The incremental borrowing rate is the rate that we would have to pay for a loan of a similar term, and with similar security, to obtain an asset of similar value.

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Notes to the consolidated financial statements continued

15. Leases continued

Lease payments include:

• fixed payments

• variable lease payments that depend on an index or rate

• amounts expected to be paid under residual value guarantees

• the exercise price of any purchase options that we are reasonably certain to exercise

• payments due over optional renewal periods where we are reasonably certain to renew

• penalties for early termination of the lease where we are reasonably certain to terminate early

Lease liabilities are subsequently measured at amortised cost using the effective interest method. They are remeasured if there is a change in future lease payments, including changes in the index or rate used to determine those payments, or the amount we expect to be payable under a residual value guarantee.

We also remeasure lease liabilities where the lease term changes. This occurs when the non-cancellable period of the lease changes, or on occurrence of a significant event or change in circumstances within the control of the lessee and which changes our initial assessment in regard to whether the lessee is reasonably certain to exercise extension options or not to exercise termination options. Where the lease term changes we remeasure the lease liability using the group’s incremental borrowing rate at the date of reassessment. Where a significant event or change in circumstances does not occur, the lease term remains unchanged and the carrying amounts of the lease liability and associated right-of-use asset will decline over time.

Right-of-use assets are initially measured at the initial amount of the corresponding lease liabilities, adjusted for any prepaid lease payments, plus any initial direct costs incurred and an estimate of any decommissioning costs that have been recognised as provisions, less any lease incentives received. They are subsequently depreciated using the straight-line method to the earlier of the end of the useful life of the asset or the end of the lease term. Right-of-use assets are tested for impairment following the policy set out in note 14 and are adjusted for any remeasurement of lease liabilities.

We have elected not to recognise lease liabilities and right-of-use assets for short-term leases that have a lease term of 12 months or less, and leases of low-value assets with a purchase price under £5,000. We recognise lease payments associated with these items as an expense on a straight-line basis over the lease term.

Any variable lease payments that do not depend on an index or rate, such as usage-based payments, are recognised as an expense in the period to which the variability relates.

Significant judgements made in accounting for leases

The lease term is a key determinant of the size of the lease liability and right-of-use asset recognised where the group acts as lessee; and the deferral period for any upfront connection charges where the group acts as lessor. Determining the lease term requires judgement to evaluate whether we are reasonably certain the lessee will exercise extension options or will not exercise termination options. Key facts and circumstances that create an incentive to exercise those options are considered, these include:

• Our anticipated operational, retail and office property requirements in the mid and long-term.

• The availability of suitable alternative sites.

• Costs or penalties associated with exiting lease arrangements relative to the benefits to be gained, including costs of removing leasehold improvements or relocating, and indirect costs such as disruption to business.

• Significant investments in leased sites, in particular those with useful lives beyond the lease term.

• Costs associated with extending lease arrangements including rent increases during secondary lease periods.

Our definition of ‘reasonable certainty’, and therefore the lease term, will often align with the judgements made in our medium- term plan, in particular for leases of non-specialised property and equipment on rolling (or ‘evergreen’) arrangements that continue until terminated and which can be exited without significant penalty.

Following initial determination of the lease term, we exercise judgement in evaluating whether events or changes in circumstances are sufficiently significant to change the initial assessment of whether we are reasonably certain the lessee will exercise extension options or will not exercise termination options; and in the subsequent reassessment of the lease term.

Key judgements exercised in setting the lease term The quantum of the lease liability and right-of-use asset currently recognised on our balance sheet is most significantly affected by the judgement exercised in setting the lease term for the arrangement under which the bulk of our operational UK property estate is held. Setting the lease term for our leased cell sites has also involved the use of judgement albeit to a lesser degree.

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15. Leases continued

UK operational property portfolio Substantially all of our leased property estate is held under an arrangement which can be terminated in 2031, at which point we may either vacate some or all properties; or purchase the entire estate. If neither option is taken the lease continues to the next unilaterally available break point in 2041. The lease liability recognised for the arrangement reflects a lease end date of 2031. On initial recognition we concluded that, although the majority of these properties are expected to be needed on a long-term basis, we couldn’t be reasonably certain that we wouldn’t exercise the termination option or that we would exercise the purchase option. In coming to this conclusion, we had due regard to material sub-lease arrangements relating to the estate.

As time progresses our assessment may change; if this happens, we will remeasure the lease liability and right-of-use asset to reflect either the rentals due for any properties we will continue to occupy, or the cost of purchasing the estate.

On remeasurement there would be an adjustment to both the lease liability and right-of-use asset, with no overall impact on net assets.

• Exercising the purchase option would lead to an estimated increase in the lease liability and right-of-use asset of between £3bn and £5bn

• Continuing to lease the estate beyond 2031 until the next available break in 2041 would lead to an estimated increase in the lease liability and right-of-use asset of between £1bn and £2bn

Our assessment will be directly linked to future strategic decisions, which will be resolved at some time prior to 2031, around the development of the fixed network and the associated rationalisation of our exchange estate. The breadth of the ranges reflects the significant uncertainty around key variables used to determine cash outflows, especially future inflation and which properties the group will be able to exit prior to or in 2031.

Estimates are based on discounted cash outflows and do not reflect the likely and significant impact of cash inflows generated from the disposal, repurposing or subleasing of properties retained post-2031.

We are permitted to hand a limited number of properties back to the lessor prior to 2031. On initial adoption of IFRS 16 we were not reasonably certain which properties would be handed back and as such the lease term did not reflect the exercise of these options. Subsequently we exercise judgement in identifying significant events that trigger reassessment of our initial conclusion. We exercise similar judgement in identifying events triggering reassessment of whether we are reasonably certain we will not exercise termination options associated with other leased properties.

In doing so we consider decisions associated with our ongoing workplace rationalisation programme, in particular decisions to exit a particular location or lease an alternative property. Generally we remain reasonably certain that we will not exercise a termination option until implementation of the associated business plan has progressed to a stage that we are committed to exiting the property. At that point we reassess the lease term by reference to the time we expect to remain in occupation of the property and any notice period associated with exercise of the option.

Cell sites Most of the liability recognised in respect of leased cell sites relates to multi-site arrangements with commercial providers. The fixed-term nature of these arrangements means it has not been necessary to exercise significant judgement when determining the lease term. Where the arrangements offer extension options we have been required to conclude whether the options are reasonably certain to be exercised. Although the balance sheet could be materially affected by the conclusion reached in regard to these options, we have not been required to exercise a significant degree of judgement in arriving at the lease term having regard to the period of time covered by the options, the difficulty in predicting the group’s long-term network requirements, and the relatively high threshold that ‘reasonably certain’ represents.

A smaller proportion of the cell site liability relates to arrangements with individual landlords which are either rolling or can be exited with notice. When setting the initial lease term for these arrangements we exercised significant judgement in establishing the period that we are reasonably certain to require use of the site. We broadly aligned lease terms with our medium-term planning horizon after assessing the relative strengths of the following factors:

• Long-term economic incentives to remain on sites including existing capital improvements;

• A need to maintain flexibility in our ability to develop and manage our network infrastructure to react quickly to technological developments and evolving capacity requirements; and

• Incentives to renegotiate arrangements in the medium term to gain more security over sites to support future capital investment.

Although significant judgement has been exercised in determining the lease term, reaching an alternative conclusion would not have a material impact on the balance sheet having regard to the most feasible alternative lease terms.

Subsequently, we consider key events that trigger reassessment of lease terms to be developments which resolve uncertainty around our economic incentive to remain on individual sites in the long term. These are primarily lease renegotiations and significant capital investments, for example that associated our 5G rollout and other capital refresh programmes.

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Notes to the consolidated financial statements continued

15. Leases continued Right-of-use assets Most of our right-of-use assets are associated with our leased property portfolio, specifically our office, retail and exchange estate. We also lease a significant proportion of our network infrastructure, including mobile cell and switch sites.

Land and buildings

£m

Network infrastructure

£m

Motor vehicles

£m Other

£m Total

At 1 April 2020 4,829 179 377 6 5,391 Additionsa 361 6 116 11 494 Depreciation charge for the year (546) (30) (110) (4) (690) Other movementsb,c (312) (10) (8) (2) (332)

At 31 March 2021 4,332 145 375 11 4,863 Additionsa 249 13 110 1 373 Depreciation charge for the yeard (532) (37) (115) (4) (688) Transfer to assets held for salee (2) – – – (2) Other movementsb (106) (11) (1) 1 (117)

At 31 March 2022 3,941 110 369 9 4,429

a Additions comprise increases to right-of-use assets as a result of entering into new leases, and upwards remeasurement of existing leases arising from lease extensions or reassessments and increases to lease payments.

b Other movements primarily relate to terminated leases and downwards remeasurements of right-of-use assets arising from reductions or reassessments of lease terms and decreases in lease payments.

c Other movements in FY21 include derecognition of right-of-use assets with a carrying amount of £208m associated with a finance sub-lease arrangement, see note 5. d Depreciation charge for FY22 includes impairment charges of £12m. e Assets transferred to held for sale during the year relate to our BT Sport operations, see note 23.

Lease liabilities Lease liabilities recognised are as follows:

Year ended 31 March 2022

£m 2021

£m

Current 795 730 Non-current 4,965 5,422

5,760 6,152

The following amounts relating to the group’s obligations under lease arrangements were recognised in the income statement in the year:

• Interest expense of £133m (FY21: £142m) accrued on lease liabilities.

• Variable lease payments of £24m (FY21: £27m) which are not dependent on an index or rate and which have not been included in the measurement of lease liabilities.

Expenses relating to leases of low-value assets and short-term leases for which no right-of-use asset or lease liability has been recognised were not material.

The total cash outflow for leases in the year was £792m (FY21: £924m). Our cash flow statement and normalised free cash flow reconciliation present £659m (FY21: £782m) of the cash outflow as relating to the principal element of lease liability payments, with the remaining balance of £133m (FY21: £142m) presented within interest paid.

Note 28 presents a maturity analysis of the payments due over the remaining lease term for lease liabilities currently recognised on the balance sheet. This analysis only includes payments to be made over the reasonably certain lease term. Cash outflows are likely to exceed these amounts as payments will be made on optional periods that we do not currently consider to be reasonably certain, and in respect of leases entered into in future periods.

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15. Leases continued Other information relating to leases Our material lease arrangements do not have indexation clauses linked to Interbank Offered Rates (IBORs). As a result we do not consider that the upcoming Interest Rate Benchmark Reform will have a material impact on the lease liabilities or right-of-use assets recognised at 31 March 2022.

At 31 March 2022 the group was committed to future minimum lease payments of £39m in respect of leases which have not yet commenced and for which no lease liability has been recognised (31 March 2021: £4m).

The following table analyses cash payments to be received across the remaining term of operating lease arrangements where BT is lessor:

At 31 March 2022

To be recognised as

revenue (note 5)

£m

To be recognised

as other operating

income (note 6)

£m Total

£m

Less than one year 446 20 466 One to two years 148 13 161 Two to three years 40 12 52 Three to four years 3 12 15 Four to five years 3 12 15 More than five years – 24 24

Total undiscounted lease payments 640 93 733

At 31 March 2021 (re-presenteda)

To be recognised as

revenue (note 5)

£m

To be recognised

as other operating

income (note 6)

£m Total

£m

Less than one year 336 27 363 One to two years 144 13 157 Two to three years 37 10 47 Three to four years 1 10 11 Four to five years 1 10 11 More than five years – 30 30

Total undiscounted lease payments 519 100 619

a From FY22 this disclosure includes only outstanding and future cash payments to be received across the remaining term of operating lease arrangements, and excludes future revenue to be recognised on deferred income balances. This is considered to better align with the purpose of the disclosure and provides a clearer view of the group’s liquidity risk disclosure. FY21 comparatives have been re-presented to exclude a total of £163m deferred connection fees on Openreach’s ‘last mile’ products.

16. Programme rights

Significant accounting policies that apply to programme rights

Programme rights are recognised on the balance sheet from the point at which the legally enforceable licence period begins. They are accounted for as inventory and held at the lower of cost and net realisable value. They are initially recognised at cost and are consumed from the point at which they are available for use, on a straight line basis over the programming period, or the remaining licence term, as appropriate, which is generally 12 months.

Additions reflect TV programme rights for which the legally enforceable licence period has started during the year. Rights for which the licence period has not started are disclosed as contractual commitments in note 31. Payments made to receive commissioned or acquired programming in advance of the legal right to broadcast the programmes are classified as prepayments (see note 17).

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Notes to the consolidated financial statements continued

16. Programme rights continued Total

£m

At 1 April 2020 310 Additions 903 Credits received on prepaid programme rightsa (99) Release (786)

At 1 April 2021 328 Additions 861 Release (879)

At 31 March 2022 310

a Credits received in FY21 in respect of prepaid programme rights relating to sporting events postponed or cancelled as a result of the Covid-19 pandemic.

17. Trade and other receivables

Significant accounting policies that apply to trade and other receivables

We initially recognise trade and other receivables at fair value, which is usually the original invoiced amount. They are subsequently carried at amortised cost using the effective interest method. The carrying amount of these balances approximates to fair value due to the short maturity of amounts receivable.

We provide services to consumer and business customers, mainly on credit terms. We know that certain debts due to us will not be paid through the default of a small number of our customers. Because of this, we recognise an allowance for doubtful debts on initial recognition of receivables, which is deducted from the gross carrying amount of the receivable. The allowance is calculated by reference to credit losses expected to be incurred over the lifetime of the receivable. In estimating a loss allowance we consider historical experience and informed credit assessment alongside other factors such as the current state of the economy and particular industry issues. We consider reasonable and supportable information that is relevant and available without undue cost or effort.

Once recognised, trade receivables are continuously monitored and updated. Allowances are based on our historical loss experiences for the relevant aged category as well as forward-looking information and general economic conditions. Allowances are calculated by individual CFUs in order to reflect the specific nature of the customers relevant to that CFU.

Contingent assets such as any insurance recoveries, or prepaid programme rights which we expect to recoup, have not been recognised in the financial statements as these are only recognised within trade and other receivables when their receipt is virtually certain.

At 31 March 2022

£m 2021

£m

Current Trade receivables 1,339 1,209 Prepaymentsa 523 1,357 Accrued income 150 130 Deferred contract costs 336 348 Other receivables 276 213

2,624 3,257

At 31 March 2022

£m 2021

£m

Non-current Other assetsb 111 103 Deferred contract costs 226 211

337 314

a Prepayments in FY21 included £702m relating to funds prepaid to Ofcom for the recent Spectrum auction. b Other assets comprise prepayments and leasing debtors.

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17. Trade and other receivables continued Trade receivables are stated after deducting allowances for doubtful debts, as follows:

2022 £m

2021 £m

At 1 April (restateda) 378 423 Expense 35 95 Utilised (189) (131) Exchange differences (1) (9)

At 31 March (restateda) 223 378

a The opening bad debt allowance at 1 April 2020 has been restated to include £94m bad debt provision recognised by EE Limited at the time of acquisition by the group but excluded from this disclosure in error in FY16 with a follow-on impact on subsequent years’ opening and closing balances. This affects the bad debt disclosure in isolation and the trade receivables balance presented in the FY16 financial statements was accurately stated net of the acquired £94m provision.

Included within the movements above are certain items which have been classified as a specific item (see note 9). In FY22, £19m of expected credit loss provisions recognised as a specific item were released (FY21: £7m release) reflecting lower than expected credit losses.

Note 28 provides further disclosure regarding the credit quality of our gross trade receivables. Trade receivables are due as follows:

At 31 March

Not past due £m

Trade receivables specifically

impaired net of provision

£m

Past due and not specifically impaired

Total £m

Between 0 and 3

months £m

Between 3 and 6

months £m

Between 6 and 12 months

£m

Over 12 months

£m

2022 938 3 246 48 47 57 1,339 2021 845 36 205 40 51 32 1,209

Gross trade receivables which have been specifically impaired amounted to £20m (FY21: £51m).

The expected credit loss allowance for trade receivables was determined as follows:

At 31 March

Not past due £m

Trade receivables specifically

impaired net of provision

£m

Past due and not specifically impaired

Total £m

Between 0 and 3

months £m

Between 3 and 6

months £m

Between 6 and 12

months £m

Over 12 months

£m

2022 Expected loss rate % 1% 84% 12% 24% 33% 69% 14% Gross carrying amount 946 20 280 63 70 183 1,562 Loss allowance (8) (17) (34) (15) (23) (126) (223) Net carrying amount 938 3 246 48 47 57 1,339 2021 Expected loss rate % 4% 29% 15% 38% 47% 87% 24% Gross carrying amount 880 51 240 65 97 254 1,587 Loss allowance (35) (15) (35) (25) (46) (222) (378) Net carrying amount 845 36 205 40 51 32 1,209

Trade receivables not past due and accrued income are analysed below by CFU.

Trade receivables not past due Accrued income

At 31 March 2022

£m 2021

£m 2022

£m 2021

£m

Consumer 324 319 76 50 Enterprise 168 144 – – Global 446 380 – – Openreach – – 71 78 Other – 2 3 2

Total 938 845 150 130

Given the broad and varied nature of our customer base, the analysis of trade receivables not past due and accrued income by CFU is considered the most appropriate disclosure of credit concentrations.

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Notes to the consolidated financial statements continued

17. Trade and other receivables continued Deferred contract costs

Significant accounting policies that apply to deferred contract costs

We capitalise certain costs associated with the acquisition and fulfilment of contracts with customers and amortise them over the period that we transfer the associated services.

Connection costs are deferred as contract fulfilment costs because they allow satisfaction of the associated connection performance obligation and are considered recoverable. Sales commissions and other third party contract acquisition costs are capitalised as costs to acquire a contract unless the associated contract term is less than 12 months, in which case they are expensed as incurred. Capitalised costs are amortised over the minimum contract term. A portfolio approach is used to determine contract term.

Where the initial set-up, transition and transformation phases of long-term contractual arrangements represent distinct performance obligations, costs in delivering these services are expensed as incurred. Where these services are not distinct performance obligations, we capitalise eligible costs as a cost of fulfilling the related service. Capitalised costs are amortised on a straight line basis over the remaining contract term, unless the pattern of service delivery indicates a more appropriate profile. To be eligible for capitalisation, costs must be directly attributable to specific contracts, relate to future activity, and generate future economic benefits. Capitalised costs are regularly assessed for recoverability.

The following table shows the movement on deferred costs:

Deferred connection

costs £m

Deferred contract

acquisition costs –

commissions £m

Deferred contract

acquisition costs – dealer

incentives £m

Transition and transformation

£m Total

£m

At 1 April 2020 32 94 449 106 681 Additions 10 76 301 26 413 Amortisation (9) (68) (391) (19) (487) Impairment (1) (4) (11) (15) (31) Other – (4) – (13) (17)

At 31 March 2021 32 94 348 85 559 Additions 17 98 291 50 456 Amortisation (14) (78) (308) (33) (433) Impairment (1) (5) (10) (11) (27) Other (10) 15 3 (1) 7

At 31 March 2022 24 124 324 90 562

18. Trade and other payables

Significant accounting policies that apply to trade and other payables

We initially recognise trade and other payables at fair value, which is usually the original invoiced amount. We subsequently carry them at amortised cost using the effective interest method.

At 31 March 2022

£m 2021

£m

Current Trade payables 4,143 4,024 Other taxation and social security 573 491 Other payables 532 495 Accrued expenses 549 634 Deferred incomea 345 336

6,142 5,980

a Deferred income includes £96m (FY21: £96m) current and £392m (FY21: £472m) non-current liabilities relating to Building Digital UK, for which grants received by the group may be subject to re-investment or repayment depending on the level of take-up.

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165Financial statements

18. Trade and other payables continued

At 31 March 2022

£m 2021

£m

Non-current Other payables 30 12 Deferred incomea 594 670

624 682

a Deferred income includes £96m (FY21: £96m) current and £392m (FY21: £472m) non-current liabilities relating to Building Digital UK, for which grants received by the group may be subject to re-investment or repayment depending on the level of take-up.

Current trade and other payables at 31 March 2022 include £89m of trade payables that have been factored by suppliers in a supply chain financing programme (31 March 2021: £45m). These programmes are used with a limited number of suppliers with short payment terms to extend them to a more typical payment term.

19. Provisions & contingent liabilities Our provisions principally relate to obligations arising from property rationalisation programmes, restructuring programmes, asset retirement obligations, network assets, insurance claims, litigation and regulatory risks. Contingent liabilities primarily arise from litigation and regulatory matters that are not sufficiently certain to meet the criteria for recognition as provisions.

Significant accounting policies that apply to provisions & contingent liabilities

We recognise provisions when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.

Where these criteria are not met we disclose a contingent liability if the group has a possible obligation, or has a present obligation with an outflow that is not probable or which cannot be reliably estimated.

Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

Critical & key accounting estimates and significant judgements made in accounting for provisions & contingent liabilities

We exercise judgement in determining the quantum of all provisions to be recognised. Our assessment includes consideration of whether we have a present obligation, whether payment is probable and if so whether the amount can be estimated reliably.

As part of this assessment, we also assess the likelihood of contingent liabilities occurring in the future. Contingent liabilities are not recognised as liabilities on our balance sheet. By their nature, contingencies will be resolved only when one or more uncertain future events occur or fail to occur. We assess the likelihood that a potential claim or liability will arise and also quantify the possible range of financial outcomes where this can be reasonably determined.

In estimating contingent liabilities we make key judgements in relation to applicable law and any historical and pending court rulings, and the likelihood, timing and cost of resolution.

Critical accounting estimates applied in accounting for contingent liabilities Establishing contingent liabilities associated with litigation brought against the group may involve the use of critical estimates and assumptions, in particular around the ability to form a reliable estimate of any probable outflow. We provide further information in relation to specific matters in the ‘contingent liabilities’ section below.

Key accounting estimates applied in accounting for provisions and contingent liabilities Other provisions may involve the use of key (but not critical) estimates as explained below.

Property provisions relate to obligations arising in relation to our property portfolio, in particular costs to restore leased properties on vacation where this is required under the lease agreement. In measuring property provisions, we have made estimates of the costs association with the restoration of properties by reference to any relevant guidance such as rate cards. Cash outflows occur as and when properties are vacated and the obligations are settled.

Asset retirement obligations (AROs) relate to obligations to dismantle equipment and restore network sites on vacation of the site. The provision represents the group’s best estimate of the costs to dismantle equipment and restore the sites. Obligations are settled as and when sites are vacated and the timing is largely influenced by the group’s network strategy.

Network share provisions represent our future operational costs and vacant site rentals arising from obligations relating to network share agreements. Costs are expected to be incurred over a period of up to 20 years.

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Notes to the consolidated financial statements continued

19. Provisions & contingent liabilities continued

Our regulatory provision represents our best estimate of the cost to settle our present obligation in relation to historical regulatory matters. The charge/credit for the year represents the outcome of management’s re-assessment of the estimates and regulatory risks across a range of issues, including price and service issues. The prices at which certain services are charged are regulated and may be subject to retrospective adjustment by regulators. When estimating the likely value of regulatory risk we make key judgements, including in regard to interpreting Ofcom regulations and past and current claims. The precise outcome of each matter depends on whether it becomes an active issue, and the extent to which negotiation or regulatory and compliance decisions will result in financial settlement. The ultimate liability may vary from the amounts provided and will be dependent upon the eventual outcome of any settlement.

Litigation provisions represent the best estimate to settle present obligations recognised in respect of claims brought against the group. The estimate reflects the specific facts and circumstances of each individual matter and any relevant external advice received. Provisions recognised are inherently judgemental and could change over time as matters progress.

Our insurance provision is based on our gross exposure to latent disease claims from former colleagues. A third party reviews our exposure and provides an estimate of the most likely outcome.

Other provisions do not include any individually material provisions.

For all risks, the ultimate liability may vary materially from the amounts provided and will be dependent upon the eventual outcome of any settlement.

Propertya

£m

Network AROa

£m

Network share

£m Regulatory

£m Litigation

£m Insurance

£m Other

£m Total

£m

At 1 April 2020 144 179 12 79 88 89 128 719 Additions 9 – 1 32 17 7 50 116 Unwind of discount 1 – – – – – – 1 Utilised (7) (4) (1) (15) – (5) (7) (39) Released (9) (17) – – – – (56) (82) Transfers – – – – 4 – (4) –

At 31 March 2021 138 158 12 96 109 91 111 715 Additions 17 25 7 14 7 6 15 91 Unwind of discount – 1 – – – – – 1 Utilised (9) (3) (6) (26) – (5) (5) (54) Released (2) – (8) (18) (31) – (30) (89) Transfersb (2) – – (1) – – – (3)

31 March 2022 142 181 5 65 85 92 91 661

a Timing of expected cash flows associated with property and network ARO provisions varies depending on the exit dates of individual properties and sites. During FY22 there has been no material change in the judgements or assumptions applied in the measurement of our existing obligations.

b Transfers in FY22 are due to reclassification to other payables during the period.

At 31 March 2022

£m 2021

£m

Analysed as: Current 222 288 Non-current 439 427

661 715

Included within ‘Other’ provisions are contract loss provisions of £1m (FY21: £2m) relating to the anticipated total losses in respect of certain contracts.

Contingent liabilities In the ordinary course of business, we are periodically notified of actual or threatened litigation, and regulatory and compliance matters and investigations. We provide for anticipated costs where an outflow of resources is considered probable and a reasonable estimate can be made of the likely outcome. Provisions are reflected in the table above.

Where an outflow is not probable but is possible a contingent liability exists. Save as disclosed below, the group does not currently believe that there are any legal proceedings, or government or regulatory investigations that may have a material adverse impact on the operations or financial condition of the group. In respect of each of the claims below, the nature and progression of such proceedings and investigations can make it difficult to predict the impact they will have on the group. There are many reasons why we cannot make these assessments with certainty, including, among others, that they are in early stages, no damages or remedies have been specified, and/or the often slow pace of litigation.

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19. Provisions & contingent liabilities continued Class action claim In January 2021, law firm Mishcon de Reya applied to the Competition Appeal Tribunal to bring a proposed class action claim for damages they estimated at £608m (inclusive of compound interest) or £589m (inclusive of simple interest) on behalf of our landline customers alleging anti-competitive behaviour through excessive pricing by BT to customers with certain residential landline services. Ofcom considered this topic more than four years ago. At that time, Ofcom’s final statement made no finding of excessive pricing or breach of competition law more generally. The claim seeks to hold against us the fact that we implemented a voluntary commitment to reduce prices for customers that have a BT landline only and not to increase those prices beyond inflation (CPI). At the reporting date we are not aware of any evidence to indicate that a present obligation exists such that any amount should be provided for. In September 2021 the Competition Appeal Tribunal certified the claim to proceed to a substantive trial on an opt-out basis (class members are automatically included in the claim unless they choose to opt-out). We appealed the opt-out nature of that decision and in May 2022 the Court of Appeal determined that the claim should proceed on an opt-out basis. The next procedural hearing is listed on 13 May 2022. BT intends to defend itself vigorously.

Italian business Milan Public Prosecutor prosecutions: In February 2019 the Milan Public Prosecutor served BT Italia S.P.A. (BT Italia) with a notice (which named BT Italia, as well as various individuals) to record the Prosecutor’s view that there is a basis for proceeding with its case against BT Italia for certain potential offences, namely the charge of having adopted, from 2011 to 2016, an inadequate management and control organisation model for the purposes of Articles 5 and 25 of Legislative Decree 231/2001.

BT Italia disputes this and maintains in a defence brief filed in April 2019 that: (a) BT Italia did not gain any interest or benefit from the conduct in question; and (b) in any event, it had a sufficient organisational, management and audit model that was circumvented/ overridden by individuals acting in their own self-interest. However, following a series of committal hearings in Autumn 2020, on 10 November 2020, the Italian court agreed (as is the normal process unless there are limitation or other fundamental issues with the claim) that BT Italia, and all but one of the individuals, should be committed to a full trial.

The trial commenced on 26 January 2021 and is expected to last at least two years. On 23 April 2021, the Italian court allowed some parties to be joined to the criminal proceedings as civil parties (‘parte civile’) – a procedural feature of the Italian criminal law system. These claims are directed at certain individual defendants (which include former BT/BT Italia employees). Those parties have now applied to join BT Italia as a respondent to their civil claims (‘responsabile civile’) on the basis that it is vicariously responsible for the individuals’ wrongdoing. If successful, the quantum of those claims is not anticipated to be material.

Phones 4U Since 2015 the administrators of Phones 4U Limited have made allegations that EE and other mobile network operators colluded to procure Phones 4U’s insolvency. Legal proceedings for an unquantified amount were issued in December 2018 by the administrators and in April 2019 we submitted our defence to this claim. The first trial, on the question of breach, is due to start on 16 May 2022, and the second trial, on quantum (if necessary), would be listed after that. We continue to dispute these allegations vigorously.

20. Retirement benefit plans Background to BT’s pension plans The group has both defined benefit and defined contribution retirement benefit plans. The group’s main plans are in the UK and the largest by membership is the BT Pension Scheme (BTPS) which is a defined benefit plan that was closed to future benefit accrual in 2018 for over 99% of the active membership at the time. The BT Hybrid Scheme (BTHS), which combines elements of both defined benefit and defined contribution plans, was set up for non-management employees impacted by the closure of the BTPS and was closed to new entrants in 2019.

New entrants to BT in the UK are eligible to join a defined contribution plan, currently the BT Retirement Saving Scheme (BTRSS), a contract-based arrangement operated by Standard Life.

EE Limited operates the EE Pension Scheme (EEPS), which has a defined benefit section that was closed to future benefit accrual in 2014 and a defined contribution section.

The group also has retirement arrangements around the world in line with local markets and culture.

What are they? Future implications for BT?

Defined contribution plans

Benefits in a defined contribution plan are linked to the value of each member’s fund, which is based on:

• contributions paid

• the performance of each individual’s chosen investments.

The group has no exposure to investment and other experience risks.

Defined benefit plans

Benefits in a defined benefit plan are determined by the plan rules and are:

• dependent on factors such as age, years of service and pensionable pay

• not dependent on actual contributions made by the company or members.

The group is exposed to investment and other experience risks and may need to make additional contributions where it is estimated that the benefits will not be met from regular contributions, expected investment income and assets held.

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Notes to the consolidated financial statements continued

20. Retirement benefit plans continued

Significant accounting policies that apply to retirement benefit plans

Defined benefit plans The net defined benefit liability, or deficit, in respect of the defined benefit plans is the present value of all expected future benefit cash flows to be paid by each plan, calculated using the projected unit credit method by professionally qualified actuaries (also known as the Defined Benefit Obligation (DBO) or liabilities) less the fair value of the plan assets.

The income statement expense is allocated between an operating charge and net finance expense.

• The operating charge reflects the increase in the liability resulting from the pension benefit earned by active employees in the current period, the cost of administering the plans and any past service costs/credits such as those arising from curtailments or settlements.

• The net finance expense reflects the interest on the net defined benefit liability recognised in the group balance sheet, based on the discount rate at the start of the year.

Remeasurements of the net defined benefit liability are recognised in full in the group statement of comprehensive income in the year in which they arise. These comprise:

• The impact on the liabilities of changes in financial assumptions, which are based on market conditions at the balance sheet date, and demographic assumptions, such as life expectancy, compared with those adopted at the start of the year;

• The impact on the liabilities of actual experience over the year being different compared to the assumptions made at the start of the year, for example, from members choosing different benefit options at retirement or actual pension increases being different to the pension increase assumption; and

• The return on plan assets being above or below the amount included in the net finance expense.

Defined contribution plans The operating charge for the defined contribution pension plans represents the contributions payable for the year.

Amounts in the financial statements Group income statement The expense arising from all group retirement benefit arrangements recognised in the group income statement is shown below.

Year ended 31 March 2022

£m 2021

£m

Recognised in the income statement before specific items (note 6) – Service cost (including administration expenses and PPF levy):

– defined benefit plans 67 63 – defined contribution plans 525 527

– Past service cost (1) 1 Subtotal 591 591 Recognised in the income statement as specific items (note 9)

– Costs to close BTPS and provide transition paymentsa for affected employees 14 21 – Interest on pensions deficit 93 18

Subtotal 107 39

Total recognised in the income statement 698 630

a All employees impacted by the closure of the BTPS were eligible for transition payments from the date of closure into their BTRSS pot for a period linked to the employee’s age.

Group balance sheet The net defined benefit liability in respect of defined benefit plans reported in the group balance sheet are set out below.

2022 2021

At 31 March Assets

£m Liabilities

£m Deficita

£m Assets

£m Liabilities

£m Deficita

£m

BTPS 53,465 (54,309) (844) 53,172 (57,737) (4,565) EEPS 1,004 (1,017) (13) 934 (1,127) (193) Other plansb 468 (754) (286) 506 (844) (338) Total (gross of tax) 54,937 (56,080) (1,143) 54,612 (59,708) (5,096) Deferred tax asset 190 925

Total (net of tax) (953) (4,171)

a BT is not required to limit any pension surplus or recognise additional pensions liabilities in individual plans as economic benefits are available in the form of either future refunds or reductions to future contributions. In particular, a refund of surplus is available following the gradual settlement of the liabilities over time until there are no members remaining in the BTPS or EEPS.

b Included in the liabilities of other plans is £115m (FY21: £146m) related to unfunded pension arrangements.

BT Group plc Annual Report 2022

169Financial statements

20. Retirement benefit plans continued Movements in defined benefit plan assets and liabilities The table below shows the movements in the defined benefit plan assets and liabilities and shows where they are reflected in the financial statements.

Assets £m

Liabilities £m

Deficit £m

At 31 March 2020 53,471 (54,611) (1,140) Service cost (including administration expenses and PPF levy) (44) (19) (63) Past service cost – (1) (1) Interest on pension deficit 1,281 (1,299) (18)

Included in the group income statement (82)

Return on plan assets above the amount included in the group income statement 1,766 – 1,766 Actuarial (loss) arising from changes in financial assumptions – (8,504) (8,504) Actuarial gain arising from changes in demographic assumptions – 1,746 1,746 Actuarial gain arising from experience adjustments – 136 136

Included in the group statement of comprehensive income (4,856)

Regular contributions by employer 17 – 17 Deficit contributions by employer 955 – 955

Included in the group cash flow statement 972

Contributions by employees 1 (1) – Benefits paid (2,822) 2,822 – Other (e.g. foreign exchange) (13) 23 10

Other movements 10

At 31 March 2021 54,612 (59,708) (5,096)

Service cost (including administration expenses and PPF levy) (47) (20) (67) Past service credit – 1 1 Interest on pension deficit 1,095 (1,188) (93)

Included in the group income statement (159)

Return on plan assets above the amount included in the group income statement 780 – 780 Actuarial gain arising from changes in financial assumptions – 2,932 2,932 Actuarial gain arising from changes in demographic assumptions – 804 804 Actuarial (loss) arising from experience adjustmentsa – (1,651) (1,651)

Included in the group statement of comprehensive income 2,865

Regular contributions by employer 114 – 114 Deficit contributions by employer 1,121 – 1,121

Included in the group cash flow statement 1,235

Contributions by employees 1 (1) – Benefits paid (2,748) 2,748 – Other (e.g. foreign exchange) 9 3 12

Other movements 12

At 31 March 2022 54,937 (56,080) (1,143)

a Primarily reflects the impact on the liabilities of actual inflation being higher than assumed at the prior reporting date. There has been a broadly equivalent benefit to inflation-linked assets from higher inflation.

Overview and governance of the BTPS What are the benefits under the BTPS? Benefits earned for pensionable service prior to 1 April 2009 are based upon a member’s final salary and a normal pensionable age of 60.

Between 1 April 2009 and 30 June 2018, Section B and C active members accrued benefits based upon a career average re-valued earnings (CARE) basis and a normal pensionable age of 65. On a CARE basis benefits are built up based upon earnings in each year and the benefit accrued for each year is increased by the lower of inflation or the individual’s actual pay increase in each year to retirement.

For Section A members, benefits earned for pensionable service up to 30 June 2018 are all based upon a member’s final salary and a normal pensionable age of 60.

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170

Notes to the consolidated financial statements continued

20. Retirement benefit plans continued Under the BTPS rules, increases for the majority of benefits are linked to either the Retail Price Index (RPI) or the Consumer Price Index (CPI) as summarised in the table below.

Before retirement After retirement

Sections A & Ba Preserved benefits increase before retirement based on CPI

Increases to benefits in payment are currently based on CPI

Section C Increases to benefits in payment are currently based on RPI up to a maximum of 5%

a Section A members have typically elected to take Section B benefits at retirement.

How is the BTPS governed and managed? BT Pension Scheme Trustees Limited (the Trustee) has been appointed by BT as an independent trustee to administer and manage the BTPS on behalf of the members in accordance with the terms of the BTPS Trust Deed and Rules and relevant legislation (principally the Pensions Acts of 1993, 1995, 2004 and 2021).

Under the terms of the Trust Deed there are nine Trustee directors, all of whom are appointed by BT, as illustrated below. Trustee directors are usually appointed for a three-year term but are then eligible for re-appointment.

Chairman of the Trustee directors Appointed by BT after consultation

with, and with the agreement of, the relevant trade unions.

Member nominated Trustee directors Appointed by BT based on

nominations by trade unions.

Employer nominated Trustee directors Appointed by BT. Two normally hold

senior positions within the group and two normally hold (or have held) senior positions in commerce or industry.

BTPS IAS 19 assets

Critical accounting estimates and significant judgements made when valuing our pension assets

Under IAS 19, plan assets should be measured at fair value at the balance sheet date.

The pension assets include quoted and unquoted investments. A portion of unquoted investments are valued based on inputs that are not directly observable, which require more judgement. The assumptions used in valuing unquoted investments are affected by market conditions.

Around £5.6bn of these unquoted investments are formally valued periodically by the investment manager and the latest valuation precedes the balance sheet date. These valuations have been adjusted for cash movements between the previous valuation date and 31 March 2022. The valuation approach and inputs for these investments would only be approximately updated where there were indications of significant market movements, which was not the case at 31 March 2022 or in 2021. The BTPS exposure to Russian assets is less than 0.1% of the BTPS assets.

The asset-backed funding arrangement, issued to the BTPS in May 2021, which has a fair value of £1.4bn at 31 March 2022, is not recognised as a pension asset when measuring the group’s IAS 19 net defined benefit liability as it is a non-transferable financial instrument issued by the reporting entity.

Valuation of main quoted investments

• Equities listed on recognised stock exchanges are valued at closing bid prices.

• Bonds that are regularly traded are valued using broker quotes.

• Exchange traded derivative contracts are valued based on closing bid prices.

BT Group plc Annual Report 2022

171Financial statements

20. Retirement benefit plans continued

Valuation of main unquoted investments

• Equities are valued using the International Private Equity and Venture Capital (IPEVC) guidelines where the most significant assumptions are the discount rate and earnings assumptions.

• Property investments are valued on the basis of open market value by an independent valuer using RICS guidelines. The significant assumptions used in the valuation are rental yields and occupancy rates.

• Bonds, including those issued by BT, that are not regularly traded are valued by an independent valuer using pricing models making assumptions for credit risk, market risk and market yield curves.

• Over the counter derivatives are valued by an independent valuer using cash flows discounted at market rates. The significant assumptions used in the valuation are the yield curves and cost of carry.

• Holdings in investment funds are typically valued at the Net Asset Value provided by the fund administrator or investment manager. The significant assumption used in the valuation is the Net Asset Value.

• Infrastructure investments are valued by an independent valuer using a model-based valuation such as a discounted cash flow approach, or at the price of recent market transactions if they represent fair value. Where a discounted cash flow model is used, the significant assumptions used in the valuation are the discount rate and the expected cash flows.

• The value of the longevity insurance contract held by the BTPS is measured by discounting the projected cash flows payable under the contract (projected by an actuary, consistent with the terms of the contract). The significant assumptions used to value the asset are the discount rate (including adjustments to the risk free rate) and the mortality assumptions.

How are the BTPS assets invested? The Trustee regularly reviews the allocation of assets between different investment classes, taking into account current market conditions and trends. The allocations reflect the Trustee’s views on the appropriate balance to be struck between seeking returns and incurring risk, and on the extent to which the assets should be allocated to match liabilities.

The table below shows the fair value of the BTPS assets analysed by asset category, subdivided by valuations based on a quoted market price in an active market, and those that are not (such as investment funds).

2022a 2021a

At 31 March

Total assets

£bn

of which quotedb

£bn Total

%

Total assets

£bn

of which quotedb

£bn Total

%

Growth Equities UK 0.3 0.2 1 0.3 0.3 1

Overseas developed 6.5 5.6 12 7.0 6.5 13 Emerging markets 1.0 0.9 2 1.3 1.3 2

Private Equity 1.2 – 2 1.6 – 3 Property UK 3.4 – 6 2.9 – 5

Overseas 0.8 – 2 0.8 – 2 Other growth assets Absolute Returnc 1.0 – 2 1.1 – 2

Non Core Creditd 4.7 1.4 9 4.3 1.4 8 Mature Infrastructure 1.4 – 3 1.3 – 2

Liability matching Government bonds UK 15.1 15.1 28 14.3 14.3 27 Investment grade credit Global 13.9 11.7 26 14.1 11.5 27 Secure income assetse 2.6 – 5 2.1 – 4

Cash, derivatives and other Cash balances 2.9 – 5 1.4 – 3 Longevity insurance contractf (1.0) – (2) (0.8) – (2) Otherg (0.3) – (1) 1.5 – 3

Total 53.5 34.9 100 53.2 35.3 100

a At 31 March 2022, the BTPS did not hold any equity issued by the group (FY21: nil). The BTPS held £1,930m (FY21: £2,216m) of bonds issued by the group. b Assets with a quoted price in an active market. c This allocation seeks to generate a positive return in all market conditions. d This allocation includes a range of credit investments, including emerging market, sub-investment grade and unrated credit. The allocation seeks to exploit investment

opportunities within credit markets using the expertise of a range of specialist investment managers. e This allocation includes property, infrastructure and credit investments which provide a stable income to the BTPS. f The Trustee has hedged some of BTPS’s longevity risk through a longevity insurance contract which was entered into in 2014. The value reflects experience to date on the

contract from higher than expected deaths and movements partly offset a corresponding reduction in BTPS’s liabilities over the same period. g Includes collateral posted in relation to derivatives held by the BTPS.

BT Group plc Annual Report 2022

172

Notes to the consolidated financial statements continued

20. Retirement benefit plans continued BTPS IAS 19 Liabilities

Critical accounting estimates and significant judgements made when valuing our pension liabilities

The measurement of the service cost and the liabilities involves judgement about uncertain events including the life expectancy of members, price inflation and the discount rate used to calculate the net present value of the future pension payments. We use estimates for all of these uncertain events. Our assumptions reflect historical experience, actuarial advice and our judgement regarding future expectations at the balance sheet date.

What are the forecast benefits payable from the BTPS? There were 274,000 members in the BTPS at 30 June 2021, the date of the membership data used to value the IAS 19 liabilities. Members belong to one of three sections depending upon the date they first joined the BTPS, which impacts the benefits they are expected to receive.

Benefits to members from the BTPS are expected to be paid over more than 60 years. Projecting future expected benefit payments requires a number of assumptions, including future inflation, retirement ages, benefit options chosen and life expectancy and is therefore inherently uncertain. Actual benefit payments in a given year may be higher or lower, for example if members retire sooner or later than assumed, or take a greater or lesser cash lump sum at retirement than assumed. The liabilities are the present value of the future expected benefit payments.

The chart below illustrates the estimated benefits payable from the BTPS, and projected liabilities, forecast using the IAS 19 assumptions. Whilst benefit payments are expected to increase over the earlier years, the value of the liabilities is expected to reduce.

Forecast benefits payable by BTPS at 31 March 2022 (unaudited)

B en

ef it

pa ym

en ts

(£ bn

)

IA S

19 li

ab ili

tie s (

£b n)

3.0

2.5

2.0

1.5

1.0

0.5

0

60

50

40

30

20

10

02022 2042 2062 2082

Forecast benefit payments (left axis)

IAS 19 liabilities (right axis)

The estimated duration of the BTPS liabilities, which is an indicator of the weighted average term of the liabilities, is 14 years using the IAS 19 assumptions.

What is the breakdown of the membership and IAS 19 liabilities? Active

members Deferred

members Pensioners Total

Sections A and B liabilities (£bn) – 5.5 30.7 36.2 Section C liabilities (£bn) – 12.4 5.7 18.1

Total IAS 19 liabilities (£bn) – 17.9 36.4 54.3

Total number of members (000’s) – 67 207 274

What are the key assumptions and how have they been set? The key financial assumptions used to measure the IAS 19 liabilities of the BTPS, where the nominal rates have been rounded to the nearest 0.05%, are shown below.

Nominal rates (per year) Real rates (per year)a

At 31 March 2022 2021 2022 2021

Discount rate 2.75% 2.05% (0.92)% (1.11)% Inflation – average increase in RPI 3.70% 3.20% – – Inflation – average increase in CPI 3.25% 2.75% (0.43)% (0.44)%

a The real rate is calculated relative to RPI inflation.

BT Group plc Annual Report 2022

173Financial statements

20. Retirement benefit plans continued The BTPS represents around 97% of the group’s pension liabilities. While the financial assumptions may vary for each scheme, the nominal financial assumptions weighted by liabilities across all schemes are equal to the figures shown in the table above (to the nearest 0.05%).

The key demographic assumptions used to measure the IAS 19 liabilities of the BTPS relate to how long members are expected to live. Based on these assumptions, the forecast life expectancies for BTPS members aged 60 are as follows:

2022 2021

At 31 March Number of

years Number of

years

Male in lower pension bracket (below £20,300 p.a.) 25.2 25.5 Male in higher pension bracket (above £20,300 p.a.) 27.3 27.6 Female 27.8 27.9

Average additional life expectancy for a male member retiring at age 60 in 10 years’ time 0.4 0.4

The table below summarises the approach used to set the key IAS 19 assumptions for the BTPS and key drivers for the movement in the assumptions.

Detail

Discount rate IAS 19 requires that the discount rate is determined by reference to market yields at the balance sheet date on high quality corporate bonds. The currency and term of these should be consistent with the currency and estimated term of the pension liabilities.

The assumption is calculated by applying the projected BTPS benefit cash flows to a corporate bond yield curve constructed by our external actuary based on the yield on AA-rated corporate bonds.

In setting the yield curve, judgement is required on the selection of appropriate bonds to be included in the universe and the approach used to then derive the yield curve.

The increase in the discount rate over the year reflects changes in the market yield of corporate bonds.

RPI and CPI inflation

The RPI inflation assumption is calculated by applying the projected BTPS benefit cash flows to an inflation curve derived from market yields on government bonds, and making an adjustment for an inflation risk premium (to reflect the extra premium paid by investors for inflation linked assets).

The CPI inflation assumption is calculated with reference to the RPI inflation assumption taking into account market forecasts and independent estimates of the expected difference.

In 2020, it was announced that RPI will be aligned with CPIH from 2030 onwards. Therefore, CPI inflation is assumed to be in line with RPI inflation after 2030, as historically CPI and CPIH inflation have been broadly comparable.

Before 2030, CPI inflation is assumed to be 1% lower than RPI inflation, reflecting the latest published inflation forecasts. At the prior reporting date CPI inflation was assumed to be 0.9% lower than RPI inflation before 2030. This change reduced the BTPS IAS 19 liabilities by £0.2bn.

Pension increases Benefits are assumed to increase in line with the RPI or CPI inflation assumptions, based on the relevant index for increasing benefits, as prescribed by the rules of the BTPS and summarised above.

Longevity The longevity assumption takes into account:

• the actual mortality experience of the BTPS pensioners, based on a formal review conducted at the 2020 triennial funding valuation

• future improvements in longevity based on a model published by the UK actuarial profession’s Continuous Mortality Investigation (CMI) (updating to use the CMI 2020 Mortality Projections model, with a long-term improvement parameter of 1% per year).

There is significant uncertainty on the impact of the Covid-19 pandemic on mortality. The default CMI 2020 model makes no allowance for deaths in 2020, when there were higher deaths due to the Covid-19 pandemic, but provides an additional parameter to allow users to make their own judgement of the extent to which deaths in 2020 will impact future improvements. We have assumed a short-term slow down in life expectancy improvements, with a neutral impact over the longer-term. Based on analysis carried out by the CMI, this scenario is equivalent to applying a 15% weighting on 2020 data and has reduced the BTPS IAS 19 liabilities by £0.7bn.

BT Group plc Annual Report 2022

174

Notes to the consolidated financial statements continued

20. Retirement benefit plans continued Risks underlying the BTPS deficit Background A large increase in our pension scheme obligations could stop us from being able to fund our business cash flows or meet our payment commitments. Things like future low investment returns, high inflation, longer life expectancy and regulatory changes may all mean the BTPS becomes more of a financial burden to BT.

Changes in external factors, such as bond yields, can have an impact on the IAS 19 and funding assumptions, impacting the measurement of BTPS liabilities. These factors can also impact the BTPS assets. The BTPS hedges some of these risks, including interest rates, inflation, longevity and currency using financial instruments and insurance contracts with reference to the funding liabilities.

Some of the key financial risks, and mitigations, for the BTPS are set out in the table below.

Changes in government bond yields

A fall in government bond yields will lead to:

• a fall in corporate bond yields (assuming no changes in credit spreads), and therefore the IAS 19 discount rate. A fall in the IAS 19 discount rate will increase the IAS 19 liabilities.

• an increase in the value of government bonds, interest rate derivatives, and corporate bonds held by the BTPS.

We estimate the change in the BTPS assets will more than offset the increase in the IAS 19 liabilities, but only partly offset an increase in the funding liabilities.

Changes in credit spreads

A fall in credit spreads will lead to a fall in corporate bond yields, and therefore an increase in the IAS 19 liabilities and a corresponding increase in asset values.

Changes in inflation expectations

A significant proportion of the benefits paid to members are currently increased in line with RPI or CPI inflation.

Changes in average inflation expectations over the lifetime of the plan An increase in average inflation expectations will lead to:

• an increase in the IAS 19 liabilities

• an increase in the value of index-linked bonds and other inflation linked assets held by the BTPS

We estimate the change in the BTPS assets will more than offset the increase in the IAS 19 liabilities, but only partly offset an increase in the funding liabilities.

Changes in inflation over the next year If inflation over the next year is lower or higher than assumed, it would lead to a fall or increase in the IAS 19 liabilities. We estimate the change in asset values will broadly offset the movement in the IAS 19 liabilities.

Changes in growth assets

A significant proportion of the BTPS assets are invested in growth assets, such as equities and property. Although the BTPS has temporary hedges in place to partly offset the impact of a fall in equity markets, and adopts a diverse portfolio, a fall in these growth assets will lead to a worsening of the net defined benefit liability.

Changes in life expectancy

An increase in the life expectancy of members will result in benefits being paid out for longer, leading to an increase in the BTPS liabilities.

The BTPS holds a longevity insurance contract which covers around 20% of the BTPS’s total exposure to improvements in longevity, providing long-term protection and income to the BTPS in the event that members live longer than currently expected.

Other risks include: changes in legislation or regulation which impact the value of the liabilities or assets; and member take-up of options before and at retirement to reshape their benefits.

BT Group plc Annual Report 2022

175Financial statements

20. Retirement benefit plans continued IAS 19 Scenario analysis The potential negative impact of the key risks is illustrated by the following five scenarios. These have been assessed by BT’s independent actuary as scenarios that might occur no more than once in every 20 years.

1-in-20 events

Scenario 2022 2021

1. Fall in bond yieldsa 0.8% 1.1% 2. Increase in credit spreadsb 0.7% 0.7% 3. Increase to average inflation expectations over the lifetime of the planc 0.6% 0.7% 4. Fall in growth assetsd 20.0% 20.0% 5. Increase to life expectancy 1.00 years 1.00 years

a Scenario assumes a fall in the yields on both government and corporate bonds. b Scenario assumes an increase in the yield on corporate bonds, with no change to yield on government bonds. c Scenario assumes average RPI and CPI inflation expectations over the lifetime of the plan increase by the same amount. d Impact includes the potential impact of temporary equity hedges held by the BTPS. Scenario considers combinations of changes to the key inputs used to value the growth

assets, leading to a 20% fall in the aggregate value of the growth assets prior to temporary hedges held by the BTPS.

The impact shown under each scenario looks at each event in isolation – in practice a combination of events could arise.

Impact of illustrative scenarios which might occur no more than once in every 20 years Scenario analysis – IAS 19 position at 31 March 2022

6.4

£b n

10

8

6

2

4

0

(2)

(4)

(6)

7.6 (4.7) (0.8) 3.5 3.8 0.0 (3.4) 2.7 0.6

0.8 percentage point fall in bond yields

0.7 percentage point increase in credit spreads

0.6 percentage point increase to inflation rate

20% fall in growth assets

1.00 year increase in life expectancy

Increase/(decrease) in liabilities

Increase/(decrease) in assets

The sensitivities have been prepared using the same approach as FY21 which involves calculating the liabilities and assets assuming the change in market conditions assumed under the scenario occurs.

BTPS funding Triennial funding valuation A funding valuation is carried out for the Trustee by a professionally qualified independent actuary at least every three years. The purpose of the funding valuation is for BT and the Trustee to agree cash contributions from BT to the BTPS to ensure the BTPS has sufficient funds available to meet future benefit payments to members. It is prepared using the principles set out in UK Pension legislation, such as the 2004 Pensions Act, and uses a prudent approach overall.

This differs from the IAS 19 valuation, which is used for deriving the balance sheet and P&L figures in the Group accounts with principles being set out in the IFRS standards, and uses a best-estimate approach overall (with the exception of the discount rate, which IAS 19 requires to be based on the yields on high quality corporate bonds regardless of the investment held by the BTPS).

The different purpose and principles lead to different assumptions being used, and therefore a different estimate for the liabilities and deficit.

The latest funding valuation was performed as at 30 June 2020. The next funding valuation will have an effective date of no later than 30 June 2023.

BT Group plc Annual Report 2022

176

Notes to the consolidated financial statements continued

20. Retirement benefit plans continued The results of the two most recent funding valuations are shown below.

June 2020 valuation

£bn

June 2017 valuation

£bn

BTPS funding liabilities (65.3) (60.4) Market value of BTPS assets 57.3 49.1

Funding deficit (8.0) (11.3)

Percentage of accrued benefits covered by the BTPS assets at valuation date 88% 81% Percentage of accrued benefits on a solvency basis covered by the BTPS assets at the valuation date 71% 62%

Key assumptions – funding valuation The most recent funding valuations were determined using the following prudent long-term assumptions.

Nominal rates (per year) Real rates (per year)a

June 2020 valuation

%

June 2017 valuation

%

June 2020 valuation

%

June 2017 valuation

%

Average single equivalent discount rate 1.4 2.6 (1.7) (0.8) Average long-term increase in RPI 3.2 3.4 – – Average long-term increase in CPI 2.4 2.4 (0.7) (1.0)

a The real rate is calculated relative to RPI inflation and is shown as a comparator.

The discount rate at 30 June 2020 was derived from prudent return expectations above a risk-free yield curve based on gilt and swap rates. The discount rate reflects the investment strategy over time, allowing for the BTPS to de-risk to a portfolio consisting predominantly of bond and bond-like investments by 2034. It has been set consistently with the 2017 valuation, mechanically updated to reflect the move in swap pricing from LIBOR to SONIA, leading to a prudent discount rate of 1.4% per year above the risk-free yield curve in 2020, trending down to 0.8% per year above the risk-free yield curve from 2035. The assumption was equivalent to using a flat discount rate of 0.9% per year above the risk-free yield curve at 30 June 2020.

The average life expectancy assumptions at the funding valuation dates, for members 60 years of age, are as follows.

Number of years from valuation date June 2020

assumptions June 2017

assumptions

Male in lower pension bracket 25.8 25.9 to 27.2 Male in higher pension bracket 28.0 28.6 Female 28.5 28.6 to 28.9

Average additional life expectancy for a member retiring at age 60 in 10 years’ time 0.9 0.9

Changes in the funding position (unaudited) The Scheme Actuary has carried out an interim assessment as at 30 June 2021, estimating the BTPS’s funding position to have improved from a funding deficit of £8.0bn to £4.1bn. BT and the Trustee will agree cash contributions in the usual way at the next full triennial funding valuation, scheduled to take place as at 30 June 2023.

Changes in market conditions can have a different impact on the funding liabilities and the IAS 19 liabilities. For example, the funding liabilities use a discount rate linked to a risk-free rate, whereas the IAS 19 liabilities use a discount rate based on corporate bond yields (and so are affected by changes in credit spreads). The estimated impact of the scenarios illustrated on page 175 on the 30 June 2021 interim assessment of the funding position are shown in the table below.

Scenario analysis – Funding position at 30 June 2021 8.6

£b n

10

8

6

2

4

0

(2)

(4)

8.4 0.0 (0.9) 5.6 4.1 0.0 (3.3) 3.1 0.7

0.7 percentage point increase in credit spreads

0.8 percentage point fall in bond yields

0.6 percentage point increase to inflation rate

20% fall in growth assets

1.00 year increase in life expectancy

Increase/(decrease) in liabilities

Increase/(decrease) in assets

BT Group plc Annual Report 2022

177Financial statements

20. Retirement benefit plans continued Future funding obligations and deficit repair plan Under the terms of the Trust Deed, the group is required to have a funding plan, determined at the conclusion of the triennial funding valuation, which is a legal agreement between BT and the Trustee and should address the deficit over a maximum period of 20 years.

In May 2021, the 2020 triennial funding valuation was finalised, agreed with the Trustee and certified by the Scheme Actuary. The funding deficit at 30 June 2020 was £8.0bn. The funding deficit was agreed to be met as follows:

• £2bn met through an Asset Backed Funding arrangement (ABF) which is structured as a Scottish Limited Partnership (SLP) with BT and BTPS as limited partners, and BT Corporate Limited as general partner. The underlying asset is a loan note issued by EE Group Investments Limited, with an initial face value of £1.9bn. The BTPS has an entitlement to the full value of the loan note in the event of an insolvency of BT.

The loan note had a term of approximately 13 years. On or before 30 June each year (with a final payment in June 2033), the ABF will distribute capital and interest amounting to £180m to the BTPS, provided that the BTPS was in deficit on a funding basis as at 30 June of the preceding year. If the BTPS reaches full funding at any 30 June, the payments to the BTPS will cease. The stream of payments are financed through distributions from EE Limited and shares in EE Limited provide security over the payment stream. No impact is expected on the day-to-day operations of BT or EE as a result. The fair value of the BTPS investment in the ABF at the date of investment was £1.66bn, with BT receiving tax relief on that amount spread over four years. This is calculated as the net present value of the annual capital and interest payments, and is less than the face value of the underlying loan note reflecting the probability of the BTPS becoming fully funded, and therefore the annual capital and interest payments to the BTPS ending before the underlying loan note matures. Following receipt of the first £180m capital and interest payment, the fair value of the BTPS investment in the ABF as at 31 March 2022 was £1.4bn.

The ABF has no impact on the gross IAS 19 deficit in the BT Group plc consolidated accounts initially, but has reduced the deferred tax asset recognised, as some tax relief has been received up-front. Annual capital and interest payments will reduce the IAS 19 net defined benefit liability.

• Cash contributions over the 10 years to 30 June 2030.

Co-investment vehicle BT and the Trustee agreed a co-investment vehicle at the 30 June 2020 valuation which provides BT with some protection against the risk of overfunding by allowing money to be returned to BT if not needed by the BTPS, enabling BT to provide upfront funding with greater confidence.

BT has the option to pay deficit repair plan payments after 30 June 2023 into the co-investment vehicle (which is a SLP separate to the SLP used for the ABF), which will be invested as if part of the overall BTPS investment strategy. The value of the assets held in the vehicle are included in the assets of the BTPS for the purposes of calculating both the funding deficit and the IAS 19 net defined benefit liability.

To the extent there is a funding deficit at 30 June 2034, the co-investment vehicle will pay funds to the BTPS. BT will receive tax relief on funds paid at this point, rather than in the year when funds are paid from BT into the vehicle.

Any remaining funds in the co-investment vehicle will then be returned to BT in three annual payments in 2035, 2036 and 2037, unless the BTPS has subsequently moved into funding deficit or the Trustee, acting prudently but reasonably, decides to defer or reduce these payments.

At 31 March 2022, there were less than £1m of assets in the co-investment vehicle.

Future funding commitment At the 2020 valuation, BT agreed additional contributions will be automatically payable in the event the deficit repair plan is no longer sufficient to meet the funding deficit.

Should an annual update of the funding position reveal that the BTPS has fallen more than £1bn behind plan, BT will commence additional payments of between £150m to £200m per year. The payments will stop once the funding deficit at a future annual update has improved such that the remaining deficit repair plan is sufficient to meet the funding deficit. Payments can switch-on again if the funding deficit position subsequently deteriorates.

The first annual test was carried out as at 30 June 2021. This showed that the deficit repair plan was still sufficient to meet the funding deficit, and hence no additional contributions were required. The next annual test will be carried out as at 30 June 2022.

Any additional contributions under this agreement cease by 30 June 2034.

BT Group plc Annual Report 2022

178

Notes to the consolidated financial statements continued

20. Retirement benefit plans continued These payments are set out in the table below.

Year to 31 March 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034

Cash provided by BT 800a 610b 600c 600c 600c 600c 600c 600c 500c – – – Cash provided by ABF structure 180 180 180 180 180 180 180 180 180 180 180 180

Total 980 790 780 780 780 780 780 780 680 180 180 180

a £400m due by 30 June. b £500m due by 30 June. c £490m of each payment due by 30 June. £10m is directly payable to the BTPS, and BT has the option to pay remaining amounts into the co-investment vehicle.

Other protections BT has agreed to provide the Trustee with certain protections to 2035, or until the deficit calculated using the long-term discount rate, currently 0.8% per year above the risk-free yield curve, (Protections Deficit) has reduced below £2bn. A £2bn deficit on this measure is currently broadly equivalent to a nil funding deficit. The protections include:

Feature Detail

Shareholder distributions

BT will provide additional payments to the BTPS by the amount that shareholder distributions exceed a threshold. For the three years following the 2020 valuation, the threshold allows for 10% per year dividend per share growth based on dividends restarting at 7.7p per share in 2021/22.

BT has agreed to implement a similar protection at each subsequent valuation, with the terms to be negotiated at the time.

BT will consult with the Trustee if:

• it considers share buybacks for any purpose other than relating to employee share awards;

• it considers making any shareholder distributions in any of the next 3 years if annual normalised free cash flow of the Group is below £1bn in the year and distributions within the year would be in excess of 120% of the above threshold; or

• it considers making a special dividend.

Material corporate events

In the event that BT generates net cash proceeds greater than a threshold from disposals (net of acquisitions) in any financial year, BT will make additional contributions to the BTPS. The threshold is £750m until 30 June 2023, and £1bn thereafter (increased by CPI from 30 June 2020).

The amount payable is one third of the total net cash proceeds, or the amount by which the Protections Deficit exceeds £2bn if lower.

BT will consult with the Trustee if:

• it considers making acquisitions with a total cost of more than £1.0bn in any 12-month period;

• it considers making disposals of more than £1.0bn;

• it considers making a Class 1 transaction (acquisition or disposal);

• it is likely to be subject to a takeover offer; or

• there is any other material corporate or third-party events which may have a material detrimental impact on BT’s covenant to the BTPS, and BT will use best endeavours to agree appropriate mitigation

This obligation is on-going until otherwise terminated.

Negative pledge A negative pledge that future creditors will not be granted superior security to the BTPS in excess of a £0.5bn threshold, to cover any member of the BT group. Business as usual financing arrangements are not included within the £0.5bn threshold.

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179Financial statements

20. Retirement benefit plans continued In the highly unlikely event that the group were to become insolvent there are additional protections of BTPS members’ benefits:

Feature Detail

Crown Guarantee The Crown Guarantee was granted by the Government when the group was privatised in 1984 and would only come into effect upon the insolvency of BT.

The Trustee brought court proceedings to clarify the scope and extent of the Crown Guarantee. The Court of Appeal judgement on 16 July 2014 established that:

• the Crown Guarantee covers BT’s funding obligation in relation to the benefits of members of the BTPS who joined post-privatisation as well as those who joined pre-privatisation (subject to certain exceptions)

• the funding obligation to which the Crown Guarantee relates is measured with reference to BT’s obligation to pay deficit contributions under the rules of the BTPS.

The Crown Guarantee is not taken into account for the purposes of the actuarial valuation of the BTPS and is an entirely separate matter, only being relevant in the highly unlikely event that BT became insolvent.

Pension Protection Fund (PPF)

Further protection is also provided by the PPF which is the fund responsible for paying compensation in schemes where the employer becomes insolvent.

Other benefit plans EEPS The EEPS is the second largest defined benefit plan sponsored by the group. It has a defined benefit section that is closed to future accrual, with liabilities of around £1.0bn, and a defined contribution section with around 8,000 members.

At 31 March 2022, the defined benefit section’s assets are invested across a number of asset classes including global equities (26%), property & illiquid alternatives (31%), an absolute return portfolio (17%) and a liability driven investment portfolio (26%).

A triennial valuation of the defined benefit section as at 31 December 2021 is currently underway. The previous triennial valuation was performed as at 31 December 2018 and agreed in March 2020. This showed a funding deficit of £161m. The group is scheduled to contribute £3.3m each month until 31 July 2022.

BTRSS The BTRSS is the largest defined contribution plan maintained by the group with around 66,000 active members. In the year to 31 March 2022, £469m of contributions were payable by the group to the BTRSS.

BTHS The BTHS combines elements of both defined benefit and defined contribution pension plans. At 31 March 2022 it had IAS 19 liabilities of around £45m and £9.9m of contributions were payable by the group to the BTHS.

21. Own shares

Significant accounting policies that apply to own shares

Own shares are recorded at cost and deducted from equity. When shares held for the beneficial ownership of employees vest unconditionally or are cancelled they are transferred from the own shares reserve to retained earnings at their weighted average cost.

Treasury sharesa Employee share ownership trusta Total

millions £m millions £m millions £m

At 1 April 2020 86 (223) 7 (14) 93 (237) Own shares purchasedb – – 11 (14) 11 (14) Yourshare issue (35) 90 – – (35) 90 Share options exercisedb – 1 – – – 1 Share awards vested – – (9) 17 (9) 17

At 31 March 2021 51 (132) 9 (11) 60 (143)

Own shares purchasedb – – 114 (210) 114 (210) Yourshare issue (1) 2 (18) 34 (19) 36 Share options exercisedb (9) 22 – – (9) 22 Share awards vested – – (11) 21 (11) 21

At 31 March 2022 41 (108) 94 (166) 135 (274)

a At 31 March 2022, 41,429,938 shares (FY21: 50,724,972) with an aggregate nominal value of £2m (FY21: £3m) were held at cost as treasury shares and 94,120,883 shares (FY21: 9,172,675) with an aggregate nominal value of £5m (FY21: £nil) were held in the Trust.

b See group cash flow statement. The cash paid for the repurchase of ordinary shares was £184m (FY21: £14m). 15m shares (FY21: nil) were purchased via a forward contract. The cash received for proceeds on the issue of treasury shares was £13m (FY21: £1m).

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Notes to the consolidated financial statements continued

21. Own shares continued The treasury shares reserve represents BT Group plc shares purchased directly by the group. The BT Group Employee Share Ownership Trust (the Trust) also purchases BT Group plc shares.

The treasury shares and the shares in the Trust are being used to satisfy our obligations under employee share plans, further details of which are provided in note 22.

22. Share-based payments

Significant accounting policies that apply to share-based payments

We operate a number of equity-settled share-based payment arrangements, under which we receive services from employees in consideration for equity instruments (share options and shares) of the group. Equity-settled share-based payments are measured at fair value at the date of grant. Market-based performance criteria and non-vesting conditions (for example, the requirement for employees to make contributions to the share purchase programme) are reflected in this measurement of fair value. The fair value determined at the grant date is recognised as an expense on a straight line basis over the vesting period, based on the group’s estimate of the options or shares that will eventually vest and adjusted for the effect of non market-based vesting conditions. Fair value is measured using either the Binomial options pricing model or Monte Carlo simulations, whichever is more appropriate to the share-based payment arrangement.

Service and performance conditions are vesting conditions. Any other conditions are non-vesting conditions which have to be taken into account to determine the fair value of equity instruments granted. In the case that an award or option does not vest as a result of a failure to meet a non-vesting condition that is within the control of either counterparty, this is accounted for as a cancellation. Cancellations are treated as accelerated vesting and all remaining future charges are immediately recognised in the income statement. As the requirement to save under an employee saveshare arrangement is a non-vesting condition, employee cancellations, other than through a termination of service, are treated as an accelerated vesting.

No adjustment is made to total equity for awards that lapse or are forfeited after the vesting date.

Year ended 31 March 2022

£m 2021

£m

Employee saveshare plans 29 38 Yourshare 28 18 Executive share plans: Incentive Share Plan (ISP) 14 (8) Deferred Bonus Plan (DBP) 11 10 Retention and Restricted Share Plans (RSP) 26 14

108 72

What share incentive arrangements do we have? Our plans include savings-related share option plans for employees and those of participating subsidiaries and several share plans for executives. All share-based payment plans are equity-settled. Details of these plans are set out below.

Employee Saveshare Plans Under an HMRC-approved savings-related share option plan, employees save on a monthly basis, over a three or five-year period, towards the purchase of shares at a fixed price determined when the option is granted. This price is set at a 20% discount to the market price for five-year plans and 10% for three-year plans. The options must be exercised within six months of maturity of the savings contract, otherwise they lapse. Similar plans operate for our overseas employees. The scheme did not operate in FY22.

Incentive Share Plan (ISP) Participants are entitled to shares under the ISP in full at the end of a three-year period only if the group has met the relevant pre-determined corporate performance measures and if the participants are still employed by the group. The last ISP award was granted in 2019. For this award, 40% of each award is linked to a total shareholder return (TSR) target for a comparator group of companies from the beginning of the relevant performance period; 40% is linked to a three-year cumulative normalised free cash flow measure; and 20% to growth in underlying revenue.

The cash flow and revenue targets under the 2019 ISP were adjusted in FY22 to reflect acquisitions and divestments during the three-year period to ensure performance is being measured on a like-for-like basis. This resulted in a charge of £14m for the year (FY21: credit of £8m).

Deferred Bonus Plan (DBP) Awards are granted annually to selected employees. Shares in the group are transferred to participants at the end of three years if they continue to be employed by the group throughout that period.

Retention and Restricted Share Plans (RSP) Awards are granted to selected employees. Shares in the group are transferred to participants at the end of a specified retention or restricted period if they continue to be employed by the group throughout that period.

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22. Share-based payments continued Yourshare In June 2021, all eligible employees of the group were awarded £500 of BT shares (FY21: £500). The shares will be held in trust for a 3 year vesting period after which they will be transferred to employees, providing they have been continuously employed during that time. A similar plan operates for overseas employees.

Under the terms of Yourshare and the executive share plans, dividends are reinvested in shares that are added to the relevant share awards.

Employee Saveshare Plans Movements in Employee Saveshare options are shown below.

Number of share options

Weighted average exercise price

Year ended 31 March 2022

millions 2021

millions 2022

pence 2021

pence

Outstanding at 1 April 414 214 121 202 Granted – 283 – 85 Forfeited (41) (59) 127 175 Exercised (9) – 152 85 Expired (22) (24) 229 277

Outstanding at 31 March 342 414 113 121

Exercisable at 31 March – – – 282

The weighted average share price for all options exercised during FY22 was 185p (FY21: 134p).

The following table summarises information relating to options outstanding and exercisable under Employee Saveshare plans at 31 March 2022.

Normal dates of vesting and exercise (based on calendar years) Exercise price

per share

Weighted average

exercise price

Number of outstanding

options millions

Weighted average

remaining contractual

life (months)

2022 164p – 243p 201p 36 10 2023 82p – 170p 108p 102 22 2024 164p 164p 44 34 2025 82p 82p 160 46

Total 113p 342 34

Executive share plans Movements in executive share plan awards are shown below:

Number of shares (millions)

ISP DBP RSP Total

At 1 April 2020 91 12 13 116 Awards granted – 10 41 51 Awards vested – (2) (6) (8) Awards lapsed (25) – (1) (26)

At 1 April 2021 66 20 47 133

Awards granted – 7 23 30 Awards vested – (4) (7) (11) Awards lapsed (35) (1) (6) (42) Dividend shares reinvested – – 1 1

At 31 March 2022 31 22 58 111

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Notes to the consolidated financial statements continued

22. Share-based payments continued Fair values The following table summarises the fair values and key assumptions used for valuing grants made under the Employee Saveshare plans in FY21. There were no grants under Employee Saveshare in FY22.

Year ended 31 March 2021 Employee Saveshare

Weighted average fair value 23p Weighted average share price 114p Weighted average exercise price of options 85p Expected dividend yield 5.19% – 6.49% Risk free rates -0.001% – 0.11% Expected volatility 28.33% – 28.39%

Employee Saveshare grants are valued using a Binomial options pricing model. Awards under the ISP were valued using Monte Carlo simulations. TSRs are generated for BT and the comparator group at the end of the three-year performance period, using each company’s volatility and the cross correlation between pairs of stocks. There were no ISP awards granted in FY21 or FY22.

Volatility has been determined by reference to BT’s historical volatility which is expected to reflect the BT share price in the future. An expected life of six months after vesting date is assumed for Employee Saveshare options. For all other awards the expected life is equal to the vesting period. The risk-free interest rate is based on the UK gilt curve in effect at the time of the grant, for the expected life of the option or award.

The fair values for the DBP and RSP were determined using the market price of the shares at the grant date. The weighted average share price for DBP awards granted in FY22 was 203p (FY21: 117p) and for RSP awards granted in FY22 was 201p (FY21: 103p).

23. Divestments and assets & liabilities classified as held for sale

Significant accounting policies that apply to divestments and assets & liabilities classified as held for sale

We classify non-current assets or a group of assets and associated liabilities, together forming a disposal group, as ‘held for sale’ when their carrying amount will be recovered principally through disposal rather than continuing use and the sale is highly probable. Sale is considered to be highly probable when management are committed to a plan to sell the asset or disposal group and the sale should be expected to qualify for recognition as a completed divestment within one year from the date of classification. We measure non-current assets or disposal groups classified as held for sale at the lower of their carrying amount and fair value less costs of disposal. Intangible assets, property, plant and equipment and right-of-use assets classified as held for sale are not depreciated or amortised.

Upon completion of a divestment, we recognise a profit or loss on disposal calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest less costs incurred in disposing of the asset or disposal group and (ii) the carrying amount of the asset or disposal group (including goodwill). The profit or loss on disposal is recognised as a specific item, see note 9.

In the event that non-current assets or disposal groups held for sale form a separate and identifiable major line of business, the results for both the current and comparative periods are reclassified as ‘discontinued operations’.

Divestments During the year we completed the disposals of Diamond IP, a non-core software business in America, and certain business units in Italy serving customers in the public administration and SME sectors, recording a combined net gain of £35m.

In FY21 we recorded a net gain of £80m on disposal of our domestic operations in Spain, a combined net loss of £11m on the disposals of our domestic operations in France and Latin America, and a net loss of £4m relating to the disposal of a number of other businesses.

The divestment of these operations is in line with our long-term strategy. The disposals in the current or prior year have not been reclassified as discontinued operations as they do not meet our definition of a separate major line of business.

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183Financial statements

23. Divestments and assets & liabilities classified as held for sale continued The net consideration recognised on completion of these divestments was as follows:

2022 £m

2021 £m

Intangible assets (including goodwill) 12 37 Property, plant and equipment 6 39 Right-of-use assets 1 38 Other non-current assets 1 3 Current assets 26 159 Liabilities (15) (199)

Net assets of operations disposeda 31 77 Less: recycling from translation reserveb (1) (23)

Net impact on the consolidated balance sheet 30 54 Profit on disposalc 41 65

Net consideration 71 119

Satisfied by Proceeds received in the year per the cash flow statement 76 164 Adjustments to non-cash considerationd (2) (25) Costs of disposale (3) (20)

Net consideration 71 119

a FY21 assets are stated after impairment charge booked on held for sale classification in FY20 on the France and Latin America divestments. b Cumulative translation differences previously held in equity and recycled to the income statement on disposal of foreign operations. c FY22 profit on disposal includes true-ups on divestments completed in prior years. The net gain is fully recognised as specific items, see note 9. d Includes provisions for proceeds to be paid back to the purchaser through deferred or contingent payments or where negotiations on post-completion purchase price

adjustments were ongoing at the end of the year. e £1m (FY21: £13m) disposal costs have been paid and are included within cash flows from operating activities in the cash flow statement. The remaining £2m (FY21: £7m)

costs were accrued for at the end of the year.

Assets and liabilities held for sale At 31 March 2022, the group had one disposal group held for sale, BT Sport, which was previously held within the Consumer segment. No other disposal groups were classified as held for sale during FY21 or FY22.

BT Sport In May 2022 we reached an agreement with Warner Bros. Discovery (Discovery) to create a sports joint venture (JV) combining BT Sport and Discovery’s Eurosport UK business into a separate legal entity with both BT and Discovery each holding a 50% interest and equal voting rights. The production and operational assets of BT Sport will transfer to, and become a wholly owned subsidiary of, Discovery who will manage and operate the production of the sport content.

Discovery will have the option to acquire BT’s 50% interest in the JV at specified points during the first four years of the JV. The price payable under the Call Option will be 50% of the JV, at a price to be determined at the time, plus any unpaid fixed consideration and remaining earn-out as described below. If the Call Option is not exercised, BT will have the ability to exit its shareholding in the JV either through a sale or IPO.

At completion of the transaction, BT is expected to lose control of the BT Sport operations and the group’s interest in the combined business is expected to be classified as a Joint Venture under IFRS 11 based on the assessment of ownership and joint control over the key decisions of the JV (50/50 with Discovery) established through the joint venture agreement. BT will enter into a distribution agreement with the JV to procure the sport content required to continue to supply our existing broadband, TV and mobile customers. BT’s agreement with the JV will extend beyond 2030 and for the first four years includes a minimum revenue guarantee of approximately £500m per annum, after which the agreement will change to a fully variable arrangement.

BT Sport’s distribution agreement with Virgin Media will transfer into the JV, and the JV will also enter into a new agreement with Sky extending beyond 2030 to provide for its distribution of the JV’s combined sports content. BT will also enter into a distribution agreement with Discovery to provide discovery+, the non-fiction entertainment streaming service to its direct BT TV and BT Sport customers.

The transaction is subject to regulatory approval, but it is expected to conclude by the end of 2022 and meets the held for sale criteria per IFRS 5. Accordingly, the asset and liabilities of the BT Sport disposal group have been classified as held for sale at 31 March 2022.

The assets of the disposal group have been tested for impairment under existing relevant standards immediately prior to classification as held for sale with no impairment recognised.

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Notes to the consolidated financial statements continued

23. Divestments and assets & liabilities classified as held for sale continued As the estimated fair value from the joint venture transaction, net of any costs incurred or liabilities recognised, is higher than the carrying value of the disposal group, no impairment has been recognised subsequent to classification as held for sale. We used the discounted cash flows due to BT from fixed consideration of £93m payable in four instalments over the next three years and variable consideration whereby BT will be issued with redeemable preferred shares in the JV which will entitle BT to receive an earn out from the JV of up to approximately £540m over the first four years post completion subject to certain conditions being met, plus a potential exit value from the sale of the group’s 50% interest, as total gross consideration. BT’s obligation under the minimum revenue guarantee in the distribution agreement has been treated as a reduction to the fair value of the consideration in the impairment test. The inputs into the fair value calculation are classified as Level 3 on the fair value hierarchy and supported by internal valuation models over which we have applied sensitivities on the future cash flows from the JV and the trading multiples for the exit valuation.

BT Sport has not been reclassified as a discontinued operation as it does not meet our definition of a separate major line of business.

The BT Sport disposal group comprises the following assets and liabilities:

At 31 March 2022

£m

Assets Intangible assetsa 55 Property, plant and equipment 13 Right-of-use assets 2 Trade and other receivables 10

Assets held for saleb 80

Liabilities Trade and other payables 38 Lease liabilities 2

Liabilities held for sale 40

a Intangible assets includes goodwill of £51m that has been allocated to the disposal group on a relative value approach as per IAS 36. b £310m of programme rights relating to sports broadcasting rights acquired for the BT Sport operations have not been reclassified to held for sale as the carrying amount of

these assets is expected to be recovered principally through continuing use before completion of the transaction.

24. Investments

Significant accounting policies that apply to investments

Investments classified as amortised cost These investments are measured at amortised cost. The carrying amount of these balances approximates to fair value. Any gain or loss on derecognition is recognised in the income statement.

Investments classified as fair value through profit and loss These investments are initially recognised at fair value plus direct transaction costs. They are re-measured at subsequent reporting dates to fair value and changes are recognised directly in the income statement.

Equity instruments classified as fair value through other comprehensive income We have made an irrevocable election to present changes in the fair value of equity investments that are not held for trading in other comprehensive income. All gains or losses are recognised in other comprehensive income and are not reclassified to the income statement when the investments are disposed of, aside from dividends which are recognised in the income statement when our right to receive payment is established. Equity investments are recorded in non-current assets unless they are expected to be sold within one year.

At 31 March 2022

£m 2021

£m

Non-current assets Fair value through other comprehensive income 34 20 Fair value through profit or loss – 11

Total non-current asset investments 34 31

Current assets Investments held at amortised cost 2,679 3,652

Current asset investments 2,679 3,652

Investments held at amortised cost relate to money market investments denominated in sterling of £2,225m (FY21: £3,171m), in euros of £436m (FY21: £456m) and in US dollars of £18m (FY21: £25m). Within these amounts are investments in liquidity funds of £1,912m (FY21: £3,570m), £67m collateral paid on swaps (FY21: £82m) and repurchase agreements £700m (FY21: £nil).

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185Financial statements

24. Investments continued Fair value estimation

Fair value hierarchy At 31 March 2022

Level 1 £m

Level 2 £m

Level 3 £m

Total held at fair value

£m

Non-current and current investments Fair value through other comprehensive income 4 – 30 34

Total 4 – 30 34

Fair value hierarchy At 31 March 2021

Level 1 £m

Level 2 £m

Level 3 £m

Total held at fair value

£m

Non-current and current investments Fair value through other comprehensive income – – 20 20 Fair value through profit or loss 11 – – 11

Total 11 – 20 31

The three levels of valuation methodology used are:

Level 1 – uses quoted prices in active markets for identical assets or liabilities.

Level 2 – uses inputs for the asset or liability other than quoted prices that are observable either directly or indirectly.

Level 3 – uses inputs for the asset or liability that are not based on observable market data, such as internal models or other valuation methods.

Level 3 balances consist of investments classified as fair value through other comprehensive income of £30m (FY21: £20m) which represent investments in a number of private companies. If specific market data is not available, these investments are held at cost, adjusted as necessary for impairments, which approximates to fair value.

25. Cash and cash equivalents

Significant accounting policies that apply to 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 cash, are subject to insignificant risk of changes in value and have an original maturity of three months or less. All are held at amortised cost on the balance sheet, equating to fair value.

For the purpose of the consolidated cash flow statement, cash and cash equivalents are as defined above net of outstanding bank overdrafts. Bank overdrafts are included within the current element of loans and other borrowings (note 26).

At 31 March 2022

£m 2021

£m

Cash at bank and in hand 324 371 Cash equivalents UK deposits 353 601 Indian rupee deposits 90 23 Other deposits 10 5

Total cash equivalents 453 629

Total cash and cash equivalents 777 1,000 Bank overdrafts (note 26) (85) (104)

Cash and cash equivalents per the cash flow statement 692 896

Cash and cash equivalents include restricted cash of £24m (FY21: £38m), of which £22m (FY21: £29m) was held in countries where local capital or exchange controls currently prevent us from accessing cash balances. The remaining balance of £2m (FY21: £9m) was held in escrow accounts, or in commercial arrangements akin to escrow.

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Notes to the consolidated financial statements continued

26. Loans and other borrowings

Significant accounting policies that apply to loans and other borrowings

We initially recognise loans and other borrowings at the fair value of amounts received net of transaction costs. They are subsequently measured at amortised cost using the effective interest method and, if included in a fair value hedge relationship, are re-valued to reflect the fair value movements on the associated hedged risk. The resulting amortisation of fair value movements, on de-designation of the hedge, is recognised in the income statement.

What’s our capital management policy? The objective of our capital management policy is to target an overall level of debt consistent with our credit rating target while investing in the business, supporting the pension scheme and meeting our distribution policy. In order to meet this objective, we may issue or repay debt, issue new shares, repurchase shares, or adjust the amount of dividends paid to shareholders. We manage the capital structure and make adjustments to it accordingly to reflect changes in economic conditions and the risk characteristics of the group. The Board regularly reviews the capital structure. No changes were made to these objectives and processes during FY22. For details of share issues and repurchases in the year see note 21.

Our capital structure consists of net debt and shareholders’ equity. The analysis below summarises the components which we manage as capital.

At 31 March 2022

£m 2021

£m

Net debt 18,009 17,802 Total parent shareholders’ equitya 15,274 11,650

Capital structure 33,283 29,452

a Excludes non-controlling interests of £22m (FY21: £29m).

Net debt and net financial debt Net debt consists of loans and other borrowings and lease liabilities, less current asset investments and cash and cash equivalents, including items which have been classified as held for sale on balance sheet.

Our net debt calculation starts from the expected undiscounted cash flows that should arise when our financial instruments mature. Currency denominated balances within net debt are translated to sterling at swapped rates where hedged. Fair value adjustments and accrued interest applied to loans and other borrowings, current asset investments and cash equivalents to reflect the effective interest method are removed. Net financial debt is net debt excluding lease liabilities.

Net debt and net financial debt are considered to be alternative performance measures as they are not defined in IFRS. The most directly comparable IFRS measure is the aggregate of loans and other borrowings and lease liabilities (current and non-current), current asset investments and cash and cash equivalents. A reconciliation from these IFRS measures to net debt and net financial debt is given below.

At 31 March Notes 2022

£m 2021

£m

Loans and other borrowingsa 16,185 16,685 Lease liabilities 15 5,760 6,152 Net liabilities classified as held for saleb 23 2 – Less: Cash and cash equivalents 25 (777) (1,000) Current asset investments 24 (2,679) (3,652)

18,491 18,185 Adjustments: To retranslate debt balances at swap rates where hedged by currency swapsc (234) (142) To remove accrued interest applied to reflect the effective interest method and fair value adjustments (248) (241)

Net debt 18,009 17,802

Lease liabilities (5,760) (6,152) Lease liabilities classified as held for saleb (2) –

Net financial debt 12,247 11,650

a Includes overdrafts of £85m at 31 March 2022 (31 March 2021: £104m). b There are lease liabilities classified as held for sale, refer to note 23. c The translation difference between spot rate and hedged rate of loans and borrowings denominated in foreign currency.

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26. Loans and other borrowings continued The table below shows the key components of net debt and the increase of £207m this year.

At 31 March

2021 £m

Cash flows

£m

Net lease additionsa

£m

Foreign exchange

£m

Transfer to within one year

£m

Other movementsd

£m

At 31 March

2022 £m

Loans and other borrowings due within one yearb 911 (1,421) – 59 1,341 (17) 873 Lease liabilities due within one year 730 (792) – – 857 – 795 Loans and other borrowings due after one year 15,774 743 – 71 (1,341) 65 15,312 Lease liabilities due after one year 5,422 – 397 3 (857) – 4,965 Liabilities classified as held for sale – – – – – 2 2 Impact of cross-currency swapsc (142) – – (92) – – (234) Removal of the accrued interest and fair value adjustments (242) – – – – (9) (251)

Gross debte 22,453 (1,470) 397 41 – 41 21,462 Less: Cash and cash equivalents (1,000) 226 – (3) – – (777) Current asset investments (3,652) 970 – 3 – – (2,679) Removal of the accrued interest 1 – – – – 2 3

Net debt 17,802 (274) 397 41 – 43 18,009

At 31 March

2020 £m

Cash flows £m

Net lease additionsa

£m

Foreign exchange

£m

Transfer to within one year

£m

Other movementsd

£m

At 31 March

2021 £m

Loans and other borrowings due within one yearb 2,842 (1,731) – (179) – (21) 911 Lease liabilities due within one year 812 (924) – – 842 – 730 Loans and other borrowings due after one year 16,492 – – (742) – 24 15,774 Lease liabilities due after one year 5,748 – 543 (27) (842) – 5,422 Liabilities classified as held for sale 62 – – – – (62) – Impact of cross-currency swapsc (1,049) – – 907 – – (142) Removal of the accrued interest and fair value adjustments (257) – – – – 15 (242)

Gross debte 24,650 (2,655) 543 (41) (44) 22,453 Less: Cash and cash equivalents (1,549) 532 – 15 – 2 (1,000) Current asset investments (5,092) 1,421 – 19 – – (3,652) Assets classified as held for sale (43) 43 – – – – – Removal of the accrued interest 3 – – – – (2) 1

Net debt 17,969 (659) 543 (7) – (44) 17,802

a Net lease additions are net non-cash movements in lease liabilities during the period, and primarily comprise new and terminated leases, remeasurements of existing leases and lease interest charges.

b Includes accrued interest and bank overdrafts. c Translation of debt balances at swap rates where hedged by cross-currency swaps. d Other movements include removal of accrued interest applied to reflect the effective interest rate method, removal of fair value adjustments and movements relating to

held for sale assets and liabilities (see note 23). e Cash flows from gross debt of £1,470m outflow (FY21: £2,655m outflow) include repayment of borrowings £1,374m (FY21: £1,162m outflow), proceeds from bank loans and

bonds £744m inflow (FY21: nil), cash flows from collateral received £29m outflow (FY21: £490m outflow), payment of lease liabilities £659m outflow (FY21: £782m outflow), interest paid on lease liabilities £133m outflow (FY21: £142m outflow), and change in bank overdraft £19m outflow (FY21: £79m outflow).

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188

Notes to the consolidated financial statements continued

26. Loans and other borrowings continued The table below gives details of the listed bonds and other debt.

At 31 March 2022

£m 2021

£m

0.5% €575m bond due June 2022a,d – 491 1.125% €1,100m bond due March 2023a,d – 936 0.875% €500m bond due September 2023a 423 426 4.5% US$675m bond due December 2023a 520 496 1% €575m bond due June 2024a 489 493 1% €1,100m bond due November 2024a 929 935 3.50% £250m index linked bond due April 2025 468 449 0.5% €650m bond due September 2025a 549 553 1.75% €1,300m bond due March 2026a 1,098 1,106 1.5% €1,150m bond due June 2027a 977 984 2.125% €500m bond due September 2028a 425 428 5.125% US$700m bond due December 2028a 537 512 5.75% £600m bond due December 2028 680 690 1.125% €750m bond due September 2029a 631 635 3.25% US$1,000m bond due November 2029a 762 726 9.625% US$2,670m bond due December 2030a (minimum 8.625%b) 2,077 1,981 3.125% £500m bond due November 2031 503 503 3.64% £330m bond due June 2033 339 339 1.613% £330m index linked bond due June 2033 362 347 6.375% £500m bond due June 2037a 523 522 3.883% £330m bond due June 2039 340 340 1.739% £330m index linked bond due June 2039 363 348 3.924% £340m bond due June 2042 350 350 1.774% £340m index linked bond due June 2042 374 358 3.625% £250m bond due November 2047 250 250 4.25% US$500m bond due November 2049a 383 366 1.874% €500m hybrid bond due August 2080a,c 426 429 4.250% $500m hybrid bond due November 2081a,c 383 – 4.875% $500m hybrid bond due November 2081a,c 384 –

Total listed bonds 15,545 15,993

Other loans 555 588 Bank overdrafts (note 25) 85 104

Total other loans and borrowings 640 692

Total loans and other borrowings 16,185 16,685

a Designated in a cash flow hedge relationship. b The interest rate payable on this bond attracts an additional 0.25% for rating category downgrade by either Moody’s or Standard & Poor’s to the group’s senior unsecured

debt below A3/A– respectively. In addition, if Moody’s or Standard & Poor’s subsequently increase the ratings then the interest rate will be decreased by 0.25% for each rating category upgrade by either rating agency. In no event will the interest rate be reduced below the minimum rate reflected in the above table.

c Includes call options between 3.5 years and 9.5 years. d Bond redeemed in March 2022.

Unless previously designated in a fair value hedge relationship, all loans and other borrowings are carried on our balance sheet and in the table above at amortised cost. The fair value of listed bonds is £16,750m (FY21: £18,554m).

The fair value of our listed bonds is estimated on the basis of quoted market prices (Level 1).

The carrying amount of other loans and bank overdrafts equates to fair value due to the short maturity of these items (Level 3).

The interest rates payable on loans and borrowings disclosed above reflect the coupons on the underlying issued loans and borrowings and not the interest rates achieved through applying associated cross-currency and interest rate swaps in hedge arrangements.

The group does not have any listed bonds that are exposed to any benchmark interest rates that are impacted by the Interest Rate Benchmark reform. Overdraft arrangements have transitioned onto Alternative Reference Rates (ARRs) where applicable.

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189Financial statements

26. Loans and other borrowings continued Loans and other borrowings are analysed as follows:

At 31 March 2022

£m 2021

£m

Current liabilities Listed bonds 233 219 Other loans and bank overdraftsa 640 692

Total current liabilities 873 911

Non-current liabilities Listed bonds 15,312 15,774

Total non-current liabilities 15,312 15,774

Total loans and other borrowings 16,185 16,685

a Includes collateral received on swaps of £555m (FY21: £588m).

The carrying values disclosed in the above table reflect balances at amortised cost adjusted for accrued interest and fair value adjustments to the relevant loans or borrowings. These do not reflect the final principal repayments that will arise after taking account of the relevant derivatives in hedging relationships which are reflected in the table below. All borrowings as at 31 March 2022 were unsecured.

The principal repayments of loans and borrowings at hedged rates amounted to £15,700m (FY21: £16,301m) and repayments fall due as follows:

2022 2021

At 31 March

Carrying amount

£m

Effect of hedging

and interest

£m

Principal repayments

at hedged rates

£m

Carrying amount

£m

Effect of hedging

and interest

£m

Principal repayments

at hedged rates

£m

Within one year, or on demand 873 (233) 640 911 (219) 692

Between one and two years 935 43 978 1,427 (69) 1,358 Between two and three years 1,415 76 1,491 915 63 978 Between three and four years 2,532 (59) 2,473 1,427 65 1,492 Between four and five years 379 (8) 371 2,529 (77) 2,452 After five years 10,041 (294) 9,747 9,463 (134) 9,329

Total due for repayment after more than one year 15,302 (242) 15,060 15,761 (152) 15,609

Total repayments 16,175 (475) 15,700 16,672 (371) 16,301

Fair value adjustments 10 13

Total loans and other borrowings 16,185 16,685

27. Finance expense

Year ended 31 March 2022

£m 2021

£m

Finance expense Interest on:

Financial liabilities at amortised cost and associated derivatives 628 572 Lease liabilities 133 142 Derivatives 4 –

Fair value movements on derivatives not in a designated hedge relationship 4 (1) Reclassification of cash flow hedge from other comprehensive income 64 72

Total finance expense before specific items 833 785

Specific items (note 9) 101 18

Total finance expense 934 803

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190

Notes to the consolidated financial statements continued

28. Financial instruments and risk management We issue or hold financial instruments mainly to finance our operations; to finance corporate transactions such as share buybacks and acquisitions; for the temporary investment of short-term funds; and to manage currency and interest rate risks. In addition, various financial instruments, for example trade receivables and payables arise directly from operations.

How do we manage financial risk? Our activities expose us to a variety of financial risks: market risk (including interest rate risk and foreign exchange risk), credit risk and liquidity risk.

Treasury operation We have a centralised treasury operation whose primary role is to manage liquidity and funding requirements as well as our exposure to associated market risks, and credit risk.

Treasury policy Treasury policy is set by the Board. Group treasury activities are subject to a set of controls appropriate for the magnitude of borrowing, investments and group-wide exposures. The Board has delegated authority to operate these policies to a series of panels responsible for the management of key treasury risks and operations. Appointment to and removal from the key panels requires approval from two of the following: the chairman, the chief executive or the chief financial officer.

There has been no change in the nature of our risk profile between 31 March 2022 and the date of approval of these financial statements.

How do we manage interest rate risk? Management policy Interest rate risk arises primarily from our long-term borrowings. Interest cash flow risk arises from borrowings issued at variable rates, partially offset by cash held at variable rates. Fair value interest rate risk arises from borrowings issued at fixed rates.

Our policy, as set by the Board, is to ensure that at least 70% of on-going net debt is at fixed rates. Short-term interest rate management is delegated to the treasury operation while long-term interest rate management decisions require further approval by the chief financial officer, the director tax, treasury, insurance and pensions or the group treasury director who each have been delegated such authority from the Board.

Hedging strategy In order to manage our interest rate profile, we enter into cross-currency and interest rate swap agreements to vary the amounts and periods for which interest rates on borrowings are fixed. The duration of the swap agreements matches the duration of the debt instruments. The majority of the group’s long-term borrowings are subject to fixed sterling interest rates after applying the impact of these hedging instruments.

Interest Rate Benchmark reform The UK Financial Conduct Authority announced on 5 March 2021 that as part of the Interest Rate Benchmark Reform, LIBOR will start being discontinued as a benchmark rate from 31 December 2021. The group has no floating rate debt securities. It has 5 US dollar cross-currency interest rate swaps and 21 sterling interest rate swaps impacted by the IBOR reform maturing between 2028 and 2030. The net exposure of these swaps is nil. The group has adhered to the International Swaps And Derivatives Association, Inc. (ISDA) 2020 IBOR Fall backs Protocol, however, BT has varied some terms on a bilateral basis to apply five-day lookback without observational shift. The impact of any resulting ineffectiveness arising from the discontinuation of LIBOR will be immaterial to the group and will not adversely affect the group’s ability to manage interest rate risk.

How do we manage foreign exchange risk? Management policy Foreign currency hedging activities protect the group from the risk that changes in exchange rates will adversely affect future net cash flows.

The Board’s policy for foreign exchange risk management defines the types of transactions typically covered, including significant operational, funding and currency interest exposures, and the period over which cover should extend for each type of transaction.

The Board has delegated short-term foreign exchange management to the treasury operation and long-term foreign exchange management decisions require further approval from the chief financial officer, the director tax, treasury, insurance and pensions or the group treasury director.

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191Financial statements

28. Financial instruments and risk management continued Hedging strategy A significant proportion of our external revenue and costs arise within the UK and are denominated in sterling. Our non-UK operations generally trade and are funded in their functional currency which limits their exposure to foreign exchange volatility.

We enter into forward currency contracts to hedge foreign currency capital purchases, purchase and sale commitments, interest expense and foreign currency investments. The commitments hedged are principally denominated in US dollar, euro and Indian rupees. As a result, our exposure to foreign currency arises mainly on non-UK subsidiary investments and on residual currency trading flows.

We use cross-currency swaps to swap foreign currency borrowings into sterling. The table below reflects the currency and interest rate profile of our loans and borrowings after the impact of hedging.

2022 2021

At 31 March

Fixed rate interest

£m

Floating rate

interest £m

Total £m

Fixed rate interest

£m

Floating rate

interest £m

Total £m

Sterling 13,515 1,746 15,261 14,129 1,688 15,817 Euro – 436 436 – 464 464 Other – 3 3 – 20 20

Total 13,515 2,185 15,700 14,129 2,172 16,301

Ratio of fixed to floating 86% 14% 100% 87% 13% 100% Weighted average effective fixed interest rate – sterling 3.9% 3.8%

The floating rate loans and borrowings and committed facilities bear interest rates fixed in advance for periods up to one year, primarily by reference to RPI, CPI and LIBOR which have transitioned onto ARRs where applicable.

Sensitivity analysis The income statement and shareholders’ equity are exposed to volatility arising from changes in interest rates and foreign exchange rates. To demonstrate this volatility, management has concluded that the following are reasonable benchmarks for performing sensitivity analysis:

• For interest, a 1% increase in interest rates and parallel shift in yield curves across sterling, US dollar and euro currencies.

• For foreign exchange, a 10% strengthening of sterling against other currencies.

The impact on equity, before tax and excluding any impact related to retirement benefit plans, of a 1% increase in interest rates and a 10% strengthening of sterling against other currencies is as detailed below:

At 31 March

2022 £m

Increase (reduce)

2021 £m

Increase (reduce)

Sterling interest rates 666 816 US dollar interest rates (429) (438) Euro interest rates (247) (349) Sterling strengthening (203) (255)

A 1% decrease in interest rates and 10% weakening of sterling against other currencies would have broadly the same impact in the opposite direction.

The impact of a 1% change in interest rates on the group’s annual net finance expense and our exposure to foreign exchange volatility in the income statement, after hedging, (excluding translation exposures) would not have been material in FY22 and FY21.

Credit ratings We continue to target a BBB+/Baa1 credit rating over the cycle, with a BBB floor. We regularly review the liquidity of the group and our funding strategy takes account of medium-term requirements. These include the pension deficit and shareholder distributions.

Our December 2030 bond contains terms that require us to pay higher rates of interest when our credit ratings are below A3 in the case of Moody’s or A– in the case of Standard & Poor’s (S&P). Additional interest of 0.25% per year accrues for each ratings category downgrade by each agency below those levels effective from the next coupon date following a downgrade. Based on the total notional value of debt outstanding of £2bn at 31 March 2022, our finance expense would increase/decrease by approximately £10m a year if the group’s credit rating were to be downgraded/upgraded, respectively, by one credit rating category by both agencies.

BT Group plc Annual Report 2022

192

Notes to the consolidated financial statements continued

28. Financial instruments and risk management continued Our credit ratings were as detailed below:

2022 2021

At 31 March Rating Outlook Rating Outlook

Rating agency Fitch BBB Stable BBB Stable Moody’s Baa2 Negative Baa2 Negative Standard & Poor’s BBB Stable BBB Stable

How do we manage liquidity risk? Management policy We maintain liquidity by entering into short and long-term financial instruments to support operational and other funding requirements, determined by using short and long-term cash forecasts. These forecasts are supplemented by a financial headroom analysis which is used to assess funding adequacy for at least a 12-month period. On at least an annual basis the Board reviews and approves the long-term funding requirements of the group and on an ongoing basis considers any related matters. We manage refinancing risk by limiting the amount of borrowing that matures within any specified period and having appropriate strategies in place to manage refinancing needs as they arise. The maturity profile of our loans and borrowings at 31 March 2022 is disclosed in note 26. We have no term debt maturities in FY23.

Our treasury operation reviews and manages our short-term requirements within the parameters of the policies set by the Board. We hold cash, cash equivalents and current investments in order to manage short-term liquidity requirements. At 31 March 2022 we had undrawn committed borrowing facilities of £2.1bn (FY21: £2.1bn) maturing in March 2027.

In the UK, the group has arranged for funders to offer a supplier financing scheme to the group’s suppliers. This enables suppliers who sign up to the arrangements to sell their invoices to the funders and to be paid earlier than the invoice due date. The group assesses the arrangement against indicators to assess if debts which vendors have sold to the funder under the supplier financing scheme continue to meet the definition of trade payables or should be classified as borrowings. At 31 March 2022 the payables met the criteria of trade payables.

Interest Rate Benchmark reform The group’s syndicated Revolving Credit Facility (undrawn at 31st March 2022), previously referring to IBOR rates, has been updated to reference alternative benchmark rates for sterling (Sonia) and US dollars (SOFR). Notional cash pooling arrangements and overdraft arrangements have transitioned onto ARRs where applicable. Any outstanding group contracts with reference to LIBOR benchmarks include provisions for calculation of interest based on alternative benchmark rates.

The following table provides an analysis of the remaining cash flows including interest payable for our non-derivative financial liabilities on an undiscounted basis, which may therefore differ from both the carrying value and fair value.

Non-derivative financial liabilities At 31 March 2022

Loans and other

borrowings £m

Interest on loans

and other borrowings

£m

Trade and other payables

£m Provisions

£m

Lease liabilities

£m Total

£m

Due within one year 640 568 5,224 4 788 7,224 Between one and two years 935 564 – 4 784 2,287 Between two and three years 1,415 538 – 3 729 2,685 Between three and four years 2,532 515 – – 626 3,673 Between four and five years 379 477 – – 589 1,445 After five years 10,041 2,809 – – 2,983 15,833

15,942 5,471 5,224 11 6,499 33,147

Interest payments not yet accrued – (5,238) – – – (5,238) Fair value adjustment 10 – – – – 10 Impact of discounting – – – – (739) (739)

Carrying value on the balance sheeta,b 15,952 233 5,224 11 5,760 27,180

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193Financial statements

28. Financial instruments and risk management continued

Non-derivative financial liabilities At 31 March 2021

Loans and other

borrowings £m

Interest on loans

and other borrowings

£m

Trade and other payables

£m Provisions

£m

Lease liabilities

£m Total

£m

Due within one year 692 528 5,153 1 724 7,098 Between one and two years 1,427 528 – 3 791 2,749 Between two and three years 915 515 – 4 762 2,196 Between three and four years 1,427 489 – 2 710 2,628 Between four and five years 2,529 467 – 2 592 3,590 After five years 9,463 3,076 – – 3,391 15,930

16,453 5,603 5,153 12 6,970 34,191

Interest payments not yet accrued – (5,384) – – – (5,384) Fair value adjustment 13 – – – – 13 Impact of discounting – – – – (818) (818)

Carrying value on the balance sheeta,b 16,466 219 5,153 12 6,152 28,002

a Foreign currency-related cash flows were translated at closing foreign exchange rates as at the relevant reporting date. Future variable interest cash flows were calculated using the most recent interest or indexation rates at the relevant balance sheet date.

b The carrying amount of trade and other payables excludes £624m (FY21: £682m) of non-current trade and other payables which relates to non-financial liabilities, and £918m (FY21: £827m) of other taxation and social security and deferred income.

Trade and other payables are held at amortised cost. The carrying amount of these balances approximates to fair value due to the short maturity of amounts payable.

The following table provides an analysis of the contractually agreed cash flows in respect of the group’s derivative financial instruments. Cash flows are presented on a net or gross basis in accordance with settlement arrangements of the instruments.

Derivatives – Analysed by earliest payment datea

Derivatives – Analysis based on holding instrument to maturity

Derivative financial liabilities At 31 March 2022

Net settled

£m

Gross settled

outflows £m

Gross settled inflows

£m Total

£m

Net settled

£m

Gross settled

outflows £m

Gross settled inflows

£m Total

£m

Due within one year 300 940 (873) 367 77 940 (873) 144 Between one and two years 247 1,615 (1,508) 354 77 1,615 (1,508) 184 Between two and three years 18 1,679 (1,566) 131 77 1,679 (1,566) 190 Between three and four years 17 736 (685) 68 77 736 (685) 128 Between four and five years 17 511 (513) 15 77 511 (513) 75 After five years 65 4,789 (4,725) 129 279 4,789 (4,725) 343

Totalb 664 10,270 (9,870) 1,064 664 10,270 (9,870) 1,064

Derivatives – Analysed by earliest payment datea

Derivatives – Analysis based on holding instrument to maturity

Derivative financial liabilities At 31 March 2021

Net settled

£m

Gross settled

outflows £m

Gross settled inflows

£m Total

£m

Net settled

£m

Gross settled

outflows £m

Gross settled inflows

£m Total

£m

Due within one year 130 1,365 (1,274) 221 90 1,365 (1,274) 181 Between one and two years 283 1,248 (1,166) 365 90 1,248 (1,166) 172 Between two and three years 268 1,663 (1,541) 390 90 1,663 (1,541) 212 Between three and four years 28 1,646 (1,540) 134 90 1,646 (1,540) 196 Between four and five years 28 703 (652) 79 90 703 (652) 141 After five years 114 4,439 (4,266) 287 401 4,439 (4,266) 574

Totalb 851 11,064 (10,439) 1,476 851 11,064 (10,439) 1,476

a Certain derivative financial instruments contain break clauses whereby either the group or bank counterparty have the right to terminate the swap on certain dates. If the break clause was exercised, the mark to market position would be settled in cash.

b Foreign currency-related cash flows were translated at closing foreign exchange rates as at the relevant reporting date. Future variable interest rate cash flows were calculated using the most recent rate applied at the relevant balance sheet date.

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194

Notes to the consolidated financial statements continued

28. Financial instruments and risk management continued How do we manage credit risk? Management policy Our exposure to credit risk arises from financial assets transacted by the treasury operation (primarily derivatives, investments, cash and cash equivalents) and from trading-related receivables.

For treasury-related balances, the Board’s defined policy restricts exposure to any one counterparty by setting credit limits based on the credit quality as defined by Moody’s and Standard & Poor’s. The minimum credit ratings permitted with counterparties in respect of new transactions are A3/A– for long-term and P1/A1 for short-term investments. If counterparties in respect of existing transactions fall below the permitted criteria we will take action where appropriate.

The treasury operation continuously reviews the limits applied to counterparties and will adjust the limit according to the nature and credit standing of the counterparty, and in response to market conditions, up to the maximum allowable limit set by the Board.

Operational management policy Our credit policy for trading-related financial assets is applied and managed by each of the customer-facing units (CFUs) to ensure compliance. The policy requires that the creditworthiness and financial strength of customers are assessed at inception and on an ongoing basis. Payment terms are set in accordance with industry standards. Where appropriate, we may minimise risks by requesting securities such as deposits, guarantees and letters of credit. We take proactive steps including constantly reviewing credit ratings of counterparties to minimise the impact of adverse market conditions on trading-related financial assets.

Exposures The maximum credit risk exposure of the group’s financial assets at the balance sheet date is as follows:

At 31 March Notes 2022

£m 2021

£m

Derivative financial assets 1,091 1,235 Investments 24 2,713 3,683 Trade and other receivablesa 17 1,489 1,339 Contract assets 5 1,915 1,859 Cash and cash equivalents 25 777 1,000

Total 7,985 9,116

a The carrying amount excludes £337m (FY21: £314m) of non-current trade and other receivables which relate to non-financial assets, and £1,135m (FY21: £1,918m) of prepayments, deferred contract costs and other receivables.

The credit quality and credit concentration of cash equivalents, current asset investments and derivative financial assets are detailed in the tables below. Where the opinion of Moody’s and Standard & Poor’s (S&P) differ, the lower rating is used.

Moody’s/S&P credit rating of counterparty 2022

£m 2021

£m

Aa2/AA and above 1,946 3,571 Aa3/AA– 1,118 656 A1/A+ 768 775 A2/A 269 334 A3/A– 122 115 Baa1/BBB+ – 65 Baa2/BBB and below – –

Totala 4,223 5,516

a We hold cash collateral of £555m (FY21: £588m) in respect of derivative financial assets with certain counterparties.

The concentration of credit risk for our trading balances is provided in note 17, which analyses outstanding balances by CFU. Where multiple transactions are undertaken with a single financial counterparty or group of related counterparties, we enter into netting arrangements to reduce our exposure to credit risk by making use of standard International Swaps and Derivatives Association (ISDA) documentation. We have also entered into credit support agreements with certain swap counterparties whereby, on a daily, weekly and monthly basis, the fair value position on notional £2,024m of long dated cross-currency swaps and interest rate swaps is collateralised.

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195Financial statements

28. Financial instruments and risk management continued Offsetting of financial instruments The table below shows our financial assets and liabilities that are subject to offset in the group’s balance sheet and the impact of enforceable master netting or similar agreements.

Related amounts not set off in the balance sheet

Financial assets and liabilities At 31 March 2022

Amounts presented in

the balance sheet

£m

Right of set off with derivative counterparties

£m

Cash collateral

£m

Net amount

£m

Derivative financial assets 1,091 (431) (555) 105 Derivative financial liabilities (870) 431 67 (372)

Total 221 – (488) (267)

Related amounts not set off in the balance sheet

Financial assets and liabilities At 31 March 2021

Amounts presented in the balance

sheet £m

Right of set off with derivative counterparties

£m

Cash collateral

£m

Net amount

£m

Derivative financial assets 1,235 (585) (588) 62 Derivative financial liabilities (1,283) 585 82 (616)

Total (48) – (506) (554)

Derivatives and hedging We use derivative financial instruments mainly to reduce exposure to foreign exchange and interest rate risks. Derivatives may qualify as hedges for accounting purposes if they meet the criteria for designation as cash flow hedges or fair value hedges in accordance with IFRS 9.

Significant accounting policies that apply to derivatives and hedge accounting All of our derivative financial instruments are held at fair value on the balance sheet.

Derivatives designated in a cash flow hedge The group designates certain derivatives in a cash flow hedge relationship. Where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the hedge. To qualify for hedge accounting, hedge documentation must be prepared at inception, the hedge must be in line with BT’s risk management strategy and there must be an economic relationship based on the currency, amount and timing of the respective cash flows of the hedging instrument and hedged item. This is assessed at inception and in subsequent periods in which the hedge remains in operation. Hedge accounting is discontinued when it is no longer in line with BT’s risk management strategy or if it no longer qualifies for hedge accounting.

The group targets a one-to-one hedge ratio. The economic relationship between the hedged item and the hedging instrument is assessed on an ongoing basis. Ineffectiveness can arise from subsequent change in the forecast transactions as a result of altered timing, cash flows or value.

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 same line of the income statement and in the same period or periods that the hedged transaction affects the income statement. Any ineffectiveness arising on a cash flow hedge is recognised immediately in the income statement.

Other derivatives Our policy is not to use derivatives for trading purposes. However, due to the complex nature of hedge accounting, some derivatives may not qualify for hedge accounting, or may be specifically not designated as a hedge because natural offset is more appropriate. These derivatives are classified as fair value through profit and loss and are recognised at fair value. Any direct transaction costs are recognised immediately in the income statement. Gains and losses on re-measurement are recognised in the income statement in the line that most appropriately reflects the nature of the item or transaction to which they relate.

Where the fair value of a derivative contract at initial recognition is not supported by observable market data and differs from the transaction price, a day one gain or loss will arise which is not recognised in the income statement. Such gains and losses are deferred and amortised to the income statement based on the remaining contractual term and as observable market data becomes available.

The fair values of outstanding swaps and foreign exchange contracts are estimated using discounted cash flow models and market rates of interest and foreign exchange at the balance sheet date.

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196

Notes to the consolidated financial statements continued

28. Financial instruments and risk management continued

At 31 March 2022

Current asset

£m

Non- current

asset £m

Current liability

£m

Non- current liability

£m

Designated in a cash flow hedge 77 878 25 712 Other 11 125 26 107

Total derivatives 88 1,003 51 819

At 31 March 2021

Current asset

£m

Non- current

asset £m

Current liability

£m

Non- current liability

£m

Designated in a cash flow hedge 56 950 58 1,023 Other 14 215 30 172

Total derivatives 70 1,165 88 1,195

All derivative financial instruments are categorised at Level 2, with the exception of the energy contracts which are categorised at Level 3 of the fair value hierarchy as defined in note 24.

Instruments designated in a cash flow hedge include interest rate swaps and cross-currency swaps hedging euro and US dollar- denominated borrowings. Forward currency contracts are taken out to hedge step-up interest on currency denominated borrowings relating to the group’s 2030 US dollar bond. The hedged cash flows will affect the group’s income statement as interest and principal amounts are repaid over the remaining term of the borrowings (see note 26).

We hedge forecast foreign currency purchases, principally denominated in US dollar, euro and Indian rupees 12 months forward with certain specific transactions hedged further forward. The related cash flows are recognised in the income statement over this period.

The amounts related to items designated as hedging instruments were as follows:

Hedged items At 31 March 2022

Notional principal

£m Asset

£m Liability

£m

Balance in cash flow

hedge related reserves

(gain)/loss £m

Fair value (gain)/loss recognised

in OCI £m

Amount recycled from

cash flow hedge related

reserves to P&L

£m

Sterling, euro and US dollar denominated borrowingsa 11,688 889 (731) (26) (83) 61 Step up interest on the 2030 US dollar bondb 122 5 – (29) (6) 3 Foreign currency purchases, principally denominated in US dollar, euro and Indian rupeesc 946 30 (3) (21) (51) (10) Energy contractsd 31 (3) (28) (64) –

Total cash flow hedges 12,756 955 (737) (104) (204) 54

Deferred tax – – 16 Derivatives not in a designated hedge relationship 136 (133) –

Carrying value on the balance sheet 1,091 (870) (88)

a Sterling, euro and US dollar denominated borrowings are hedged using cross-currency swaps and interest rate swaps. Amounts recycled to profit and loss are presented within operating costs and finance expense.

b Step up interest on US dollar denominated borrowings are hedged using forward currency contracts. Amounts recycled to profit and loss are presented within finance expense. c Foreign currency purchases, principally denominated in US dollar, euro and Indian rupees are hedged using forward currency contracts. Amounts recycled to profit and loss

are presented within cost of sales, operating costs or fixed assets, in line with the underlying hedged item. d Energy contracts are hedged using contracts for difference and virtual power purchase agreements in order to provide long term power cost certainty. Amounts recycled to

profit and loss are presented within operating costs.

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197Financial statements

28. Financial instruments and risk management continued

Hedged items At 31 March 2021

Notional principal

£m Asset

£m Liability

£m

Balance in cash flow hedge

related reserves

(gain)/loss £m

Fair value (gain)/loss recognised

in OCI £m

Amount recycled from

cash flow hedge related

reserves to P&L

£m

Sterling, euro and US dollar denominated borrowingsa 12,302 999 (974) (3) 1,349 (862) Step up interest on the 2030 US dollar bondb 147 – (7) (26) 16 3 Foreign currency purchases, principally denominated in US dollar, euro and Indian rupeesc 2,145 7 (64) 40 88 9 Energy contractsd – (36) 36 15 –

Total cash flow hedges 14,594 1,006 (1,081) 47 1,468 (850)

Deferred tax – – (16) Derivatives not in a designated hedge relationship 229 (202) –

Carrying value on the balance sheet 1,235 (1,283) 31

a Sterling, euro and US dollar denominated borrowings are hedged using cross-currency swaps and interest rate swaps. Amounts recycled to profit and loss are presented within operating costs and finance expense.

b Step up interest on US dollar denominated borrowings are hedged using forward currency contracts. Amounts recycled to profit and loss are presented within finance expense. c Foreign currency purchases, principally denominated in US dollar, euro and Indian rupees are hedged using forward currency contracts. Amounts recycled to profit and loss

are presented within cost of sales, operating costs or fixed assets, in line with the underlying hedged item. d Energy contracts are hedged using contracts for difference and virtual power purchase agreements in order to provide long term power cost certainty. Amounts recycled to

profit and loss are presented within operating costs.

With the exception of one hedge which became ineffective due to divestment activity (see note 9), all cash flow hedges were fully effective in the period.

29. Other reserves Other comprehensive income

Capital redemption

reserve £m

Cash flow reservea

£m

Fair value reserve

£m

Cost of hedging reservec

£m

Translation reserved,g

£m Total

£m

At 1 April 2020 27 476 – – 616 1,119 Exchange differencese – – – – (189) (189) Net fair value gain (loss) on cash flow hedges – (1,481) – 13 – (1,468) Movements in relation to cash flow hedges recognised in income and expensef – 804 – 46 – 850 Tax recognised in other comprehensive income – 111 – – 22 133 Transfer to realised profit – – – – (9) (9)

At 31 March 2021 27 (90) – 59 440 436 Exchange differencese – – – – 65 65 Net fair value gain (loss) on cash flow hedges – 59 – 145 – 204 Movements in relation to cash flow hedges recognised in income and expensef – (86) – 32 – (54) Fair value movement on assets at fair value through other comprehensive income – – 6 – – 6 Tax recognised in other comprehensive income – (31) – – – (31) Transfer to realised profitb – – (7) – – (7)

At 31 March 2022 27 (148) (1) 236 505 619

a The cash flow reserve is used to record the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

b Realised profit includes profit on disposal of investments held at fair value through other comprehensive income. c The cost of hedging reserve reflects the gain or loss on the portion excluded from the designated hedging instrument that relates to the currency basis element of our cross

currency swaps and forward points on certain foreign exchange contracts. It is initially recognised in other comprehensive income and accounted for similarly to gains or losses in the cash flow reserve.

d The translation reserve is used to record cumulative translation differences on the net assets of foreign operations. The cumulative translation differences are recycled to the income statement on disposal of the foreign operation.

e Excludes £1m (FY21: £nil) of exchange differences in relation to retained earnings attributed to non-controlling interests. f Movements in cash flow hedge related reserves recognised in income and expense include a net charge to other comprehensive income of £126m (FY21: restated credit of

£778m) which have been reclassified to operating costs, and a net credit to the cash flow reserve of £72m (FY21: credit of £72m) which have been reclassified to finance expense (see note 27).

g Included within the £65m movement in translation reserve is £1m (FY21: £23m) which relate to disposals (see note 23).

BT Group plc Annual Report 2022

198

Notes to the consolidated financial statements continued

30. Related party transactions Key management personnel comprise executive and non-executive directors and members of the Executive Committee. Compensation of key management personnel is disclosed in note 6.

Amounts paid to the group’s retirement benefit plans are set out in note 20.

Transactions with associates and joint ventures are shown below:

At 31 March 2022

£m 2021

£m

Sales of services to associates and joint ventures 5 9 Purchases from associates and joint ventures 44 51 Amounts receivable from associates and joint ventures 2 3 Amounts payable to associates and joint ventures 1 5

Other related party transactions include the purchase of energy from an entity owned by the BT Pension Scheme. Total purchases during the year were £12m (FY21: £13m). £1m was due to the other party as at 31 March 2022 (FY21: £2m). The balance is unsecured and no guarantees have been given.

31. Financial commitments Financial commitments were as follows:

At 31 March 2022

£m 2021

£m

TV programme rights commitments 997 1,691 Capital commitments 1,596 1,370 Other commitments 295 263

Total 2,888 3,324

TV programme rights commitments, mainly relating to football broadcast rights, are those for which the licence period has not yet started. A sale of our BT Sport operations to which these commitments relate is considered highly probable. The group is contractually committed to future rights payments until the sale completes at which point the commitment will transfer to the new established joint venture. Further details on the transaction and held for sale assets and liabilities are included in note 23.

Other than as disclosed below and in note 19, there were no contingent liabilities or guarantees at 31 March 2022 other than those arising in the ordinary course of the group’s business and on these no material losses are anticipated. We have insurance cover to certain limits for major risks on property and major claims in connection with legal liabilities arising in the course of our operations. Otherwise, the group generally carries its own risks.

Commitments and guarantees BT plc From March 2019 a formal guarantee was put in place by BT Group plc to fully and unconditionally guarantee the obligations of its wholly owned subsidiary British Telecommunications plc (“BT plc”) under its corporate bonds. This guarantee has been given in respect of all bonds issued since that date and was retrospectively applied to bonds issued prior to that date. It applies to all bonds issued in BT plc’s Yankee, Euro Medium Term Note and hybrid bond programmes, and under the BT plc £600m 5.75% bonds due in 2028.

Legal and regulatory proceedings See note 19 for contingent liabilities associated with legal and regulatory proceedings.

32. Post balance sheet events BT Sport In May 2022, we reached an agreement with Warner Bros. Discovery (Discovery) to create a sports joint venture (JV) combining BT Sport and Discovery’s Eurosport UK business into a separate legal entity with both BT and Discovery each holding a 50% interest and equal voting rights. The production and operational assets of BT Sport will transfer to, and become a wholly owned subsidiary of, Discovery who will manage and operate the production and distribution of the sport content. Discovery will have the option to acquire BT’s 50% interest in the JV at specified points during the first four years of the JV. At completion of the transaction, BT is expected to lose control of the BT Sport operations and the group’s interest in the combined business is expected to be classified as a Joint Venture. BT will enter into a distribution agreement with the JV to procure the sport content required to continue to supply our existing broadband, TV and mobile customers. BT’s agreement with the JV will extend beyond 2030, and for the first four years includes a minimum revenue guarantee of approximately £500m per annum, after which the agreement will change to a fully variable arrangement.

The transaction is subject to regulatory approval, but it is expected to conclude by the end of 2022. The transaction meets the held for sale criteria per IFRS 5 and accordingly the asset and liabilities of the BT Sport disposal group have been classified as held for sale at 31 March 2022. Further details are provided in note 23.

BT Group plc Annual Report 2022

199Financial statements

At 31 March Note 2022

£m 2021

£m

Non-current assets Investment in subsidiary undertaking 2 11,201 11,096 Other investmentsa 585 972

11,786 12,068

Current assets Cash and cash equivalents 5 3

5 3

Current liabilities Trade and other payablesb 32 27

32 27

Total assets less current liabilities 11,759 12,044

Non-current liabilities Trade and other payablesb 26 –

26 –

Equity Ordinary shares 499 499 Share premium 1,051 1,051 Capital redemption reserve 27 27 Own shares (274) (143) Profit and loss accountc 10,430 10,610

Total equity 11,733 12,044

11,759 12,044

a Other investments consists of loan to group undertakings of £580m (FY21: £971m) and accrued interest of £5m (FY21:£1m). The loan attracts interest of LIBOR plus 37.5 basis points and will transition onto ARRs after the balance sheet date (FY21: LIBOR plus 37.5 basis points). The loan is measured at amortised cost using the effective interest rate method. The expected credit loss provision against long-term loan to group undertakings is immaterial. In the 2021 Annual Report, this balance sheet caption was labelled ‘Trade and other receivables’. We have opted to change the name to ‘Other investments’ as it better represents the loan to group undertaking and aligns to how it is classified in the British Telecommunication plc Annual Report.

b Current trade and other payables consists of loans from group undertakings of £16m (FY21: £10m) and other creditors of £16m (FY21: £17m).The non-current trade and other payables comprises the obligation to purchase own shares into trust via a forward contract.

c As permitted by Section 408(3) of the Companies Act 2006, no profit and loss account of the company is presented. The profit for the financial year, dealt with in the profit and loss account of the company was £2m (FY21: £6m).

The financial statements of the company on pages 199 to 202 were approved by the Board of Directors on 11 May 2022 and were signed on its behalf by:

Adam Crozier Philip Jansen Simon Lowth Chairman Chief Executive Chief Financial Officer

Financial Statements of BT Group plc BT Group plc company balance sheet Registered number 4190816

BT Group plc Annual Report 2022

200

Note

Called up share

capitala

£m

Share premium

account £m

Capital redemption

reserve £m

Merger reserve

£m

Own sharesb

£m

Profit and loss

accountb,c £m

Total £m

At 1 April 2020 499 1,051 27 1,574 (237) 9,065 11,979 Profit for the financial year – – – – – 6 6 Transfer to realised profit 3 – – – (1,574) – 1,574 – Capital contribution in respect of share-based payments – – – – – 72 72 Net buyback of own shares – – – – 94 (107) (13)

At 31 March 2021 499 1,051 27 – (143) 10,610 12,044 Profit for the financial year – – – – – 2 2 Dividends paid – – – – – (227) (227) Unclaimed dividends over 10 years – – – – – 2 2 Share-based payments – – – – – 3 3 Capital contribution in respect of share-based payments – – – – – 105 105 Net buyback of own shares – – – – (131) (65) (196)

At 31 March 2022 499 1,051 27 – (274) 10,430 11,733

a The allotted, called up and fully paid ordinary share capital of the company at 31 March 2022 was £499m (31 March 2021: £499m), representing 9,968,127,681 (31 March 2021: 9,968,127,681) ordinary shares of 5p each.

b In FY22, 19,672,628 shares (FY21: 44,573,595) were issued from Own shares to satisfy obligations under employee share schemes and executive share awards at a cost of £43m (FY21: £108m). At 31 March 2022, 41,429,938 shares (FY21: 50,724,972) with an aggregate nominal value of £2m (FY21: £3m) were held at cost as treasury shares and 94,120,883 shares (FY21: 9,172,675) with an aggregate nominal value of £5m (FY21: £nil) were held in the Trust.

c As permitted by Section 408(3) of the Companies Act 2006, no profit and loss account of the company is presented. The profit for the financial year, dealt with in the profit and loss account of the company was £2m (FY21: £6m).

BT Group plc company statement of changes in equity

BT Group plc Annual Report 2022

201Financial statements

1. BT Group plc accounting policies Principal activity The principal activity of the company is to act as the ultimate holding company of the BT group.

Accounting basis As used in these financial statements and associated notes, the term ‘company’ refers to BT Group plc (a public company limited by shares). These separate financial statements are prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101). In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of UK-adopted international accounting standards, but makes amendments where necessary in order to comply with Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken.

Financial statements The financial statements are prepared on a going concern basis and under the historical cost convention. Refer to page 134 for further details of this assessment.

As permitted by Section 408(3) of the Companies Act 2006, the company’s profit and loss account has not been presented.

New and amended accounting standards effective during the year There have been no new or amended accounting standards or interpretations adopted during the year that have a significant impact on the financial statements.

Exemptions As permitted by FRS 101, the company has taken advantage of the disclosure exemptions available under that standard in relation to business combinations, share-based payments, non-current assets held for sale, financial instruments, capital management, and presentation of comparative information in respect of certain assets, presentation of a cash flow statement, standards not yet effective, impairment of assets and related party transactions. The company intends to continue to take advantage of these exemptions in future years. Further detail is provided below.

Where required, equivalent disclosures have been given in the consolidated financial statements of BT Group plc.

The BT Group plc consolidated financial statements for the year ended 31 March 2022 contain a consolidated cash flow statement. Consequently, as permitted by IAS 7 ‘Statement of Cash flow’, the company has not presented its own cash flow statement.

The BT Group plc consolidated financial statements for the year ended 31 March 2022 contain related party disclosures. Consequently, the company has taken advantage of the exemption in IAS 24, ‘Related Party Disclosures’ not to disclose transactions with other members of the BT Group.

The BT Group plc consolidated financial statements for the year ended 31 March 2022 contain financial instrument disclosures which comply with IFRS 7, ‘Financial Instruments: Disclosures’. Consequently, the company is exempt from the disclosure requirements of IFRS 7 in respect of its financial instruments.

Investment in subsidiary undertaking Investment in subsidiary undertaking is stated at cost and reviewed for impairment if there are indicators that the carrying value may not be recoverable. An impairment loss is recognised to the extent that the carrying amount cannot be recovered either by selling the asset or by continuing to hold the asset and benefiting from the net present value of the future cash flows of the investment.

Taxation Full provision is made for deferred taxation on all temporary differences which have arisen but not reversed at the balance sheet date. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that there will be sufficient taxable profits from which the underlying timing differences can be deducted. The deferred tax balances are not discounted.

Dividends Dividend distributions are recognised as a liability in the year in which the dividends are approved by the company’s shareholders. Interim dividends are recognised when they are paid; final dividends when authorised in general meetings by shareholders. Dividend income is recognised on receipt.

Share capital Ordinary shares are classified as equity. Repurchased shares of the company are recorded in the balance sheet as part of Own shares and presented as a deduction from shareholders’ equity at cost.

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 cash and are subject to insignificant risk of changes in value and have an original maturity of three months or less.

Share-based payments The company does not incur a charge for share-based payments. However, the issuance by the company of share options and awards to employees of its subsidiaries represents additional capital contributions to its subsidiaries. An addition to the company’s investment in subsidiaries is recorded with a corresponding increase in equity shareholders’ funds. The additional capital contribution is determined based on the fair value of options and awards at the date of grant and is recognised over the vesting period.

2. Investment in subsidiary undertaking

Cost Total

£m

At 1 April 2020 11,024 Additions 72

At 31 March 2021 11,096

Additions 105

At 31 March 2022 11,201

Additions of £105m (FY21: £72m) comprise capital contributions in respect of share-based payments.

The company held a 100% investment in BT Group Investments Limited, a company registered in England and Wales, throughout FY22 and FY21.

Notes to the company financial statements

BT Group plc Annual Report 2022

202

3. Merger reserve On 29 January 2016, the company issued 1,594,900,429 ordinary shares of 5p at 470.70p per share resulting in a total of £80m being credited to the share capital.

These shares were used as part consideration for the acquisition of EE, which completed on 29 January 2016. As a result of this transaction, a merger reserve was created of £7,424m net of £3m issue costs. The acquisition of EE was structured by way of a share-for-share exchange. This transaction fell within the provisions of Section 612 of the Companies Act 2006 (merger relief) such that no share premium was recorded in respect of the shares issued. The company chose to record its investment in EE at fair value and therefore recorded a merger reserve equal to the value of the share premium which would have been recorded had Section 612 of the Companies Act 2006 not been applicable i.e. equal to the difference between the fair value of EE and the aggregate nominal value of the shares issued).

This merger reserve was initially considered unrealised on the basis it was represented by the investment in EE. This was not considered to represent qualifying consideration (in accordance with Tech 02/10 (Guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006)), as superseded by Tech 02/17 (Guidance on realised and distributable profits under the Companies Act 2006).

Immediately following the acquisition of EE, the company’s investment in EE was transferred to the company’s subsidiary, BT plc, in exchange for an intercompany loan. To the extent the loan is settled in qualifying consideration, the related proportion of the merger reserve is considered realised. Hence the merger reserve is an unrealised reserve until it is realised by the settlement of the intercompany loan by qualifying consideration.

During 2020/21, the remaining £1,574m (2019/20: £1,575m) of merger reserve was transferred to realised profit following the settlement of an intercompany loan by qualifying consideration. The merger reserve is now nil.

4. Other information Dividends An interim dividend of 2.31p per share amounting to £227m was paid on 7 February 2022. A final dividend of 5.39p per share amounting to approximately £528m is proposed in respect of the year ended 31 March 2022 (FY21: no interim or final dividend paid).

Employees and directors The chairman and the executive and non-executive directors of BT Group plc were the only employees and directors of the company during FY22 and FY21. The costs relating to qualifying services provided to the company’s principal subsidiary, British Telecommunications plc, are recharged to that company.

Notes to the company financial statements continued

BT Group plc Annual Report 2022

203Financial statements

Subsidiaries

Company name

Group interest

in allotted

capitala Share

class

Held directly United Kingdom

1 Braham Street, London, E1 8EE, United Kingdom

BT Group Investments Limited 100% ordinary BT Group Nominees Limited 100% ordinary Held via other group companies Algeria

20 Micro zone d’Activités Dar El Madina, Bloc B, Loc N01 Hydra, Alger, 16000, Algeria

BT Algeria Communications SARL 100% ordinary Argentina

Maipu No 1210, piso 8 (C1006), Buenos Aires, Argentina

BT Argentina S.R.L. 100% ordinary Australia

Level 1, 76 Berry Street, North Sydney NSW 2060, Australia

BT Australasia Pty Limited 100% ordinary

100% preference Austria

Louis-Häfliger-Gasse 10, 1210, Wien, Austria

BT Austria GmbH 100% ordinary Azerbaijan

The Landmark III Building, 8th Floor, c/o Deloitte & Touche, 96 Nizami Street, Baku, AZ 1010, Azerbaijan

BT Azerbaijan Limited, Limited Liability Company 100% ordinary Bahrain

Suite #659, 6th floor, Building No. 247, Road 1704, Diplomat Area 317, Bahrain

BT Solutions Limited (Bahrain Branch)b 100% – Bangladesh

UTC Building, 19th Floor, Kawran Bazar, Dhaka-1215, Dhaka, Bangladesh

BT Communications Bangladesh Limited 100% ordinary Barbados

3rd Floor, The Goddard Building, Haggatt Hall, St. Michael, BB11059, Barbados

BT (Barbados) Limited 100% ordinary Belarus

58 Voronyanskogo St, Office 89, Minsk 220007, Belarus

BT BELRUS Foreign Limited Liability Company 100% ordinary

Company name

Group interest

in allotted

capitala Share

class

Belgium

Telecomlaan 9, 1831 Diegem, Belgium

BT Global Services Belgium BV 100% ordinary BT Professional Services (Holdings) N.V. 100% ordinary Global Security Europe Limited – Belgian Branchb 100% – Rue de L’Aêropostale 8, 4460 Grâce-Hollogne, Belgium

IP Trade SA 100% ordinary Bermuda

Century House, 16 Par-la-Ville Road, Hamilton, HM08, Bermuda

Communications Global Network Services Limited 100% ordinary Bolivia

Avda. 6 de Agosto N° 2700, Torre Empresarial CADECO, Piso 4, La Paz, Bolivia

BT Solutions Limited Sucursal Boliviab 100% – Bosnia and Herzegovina

Trg Heroja 10/1, Sarajevo, 71000, Bosnia and Herzegovina

BTIH Teleconsult Drustvo sa organicenom odgovornoscu za posredovanje i zastupanje d.o.o. Sarajevo 100% – Botswana

Deloitte House, Fairgrounds Office Park, Plot 64518, Gaborone, PO BOX 1839, Botswana

BT Global Services Botswana (Proprietary) Limited 100% ordinary Brazil

Avenida Das Naçôes Unidas, 4777 – 14 andar, São Paulo, SP, Brazil

BT Communications do Brasil Limitada 100% quotas Avenida Das Naçôes Unidas, 4777 – 14 andar, Pinheiros,São Paulo, SP, 05477-000, Brazil

BT Global Communications do Brasil Limitada 100% quotas Bulgaria

51B Bulgaria Blvd., fl. 4, Sofia, 1404, Bulgaria

BT Bulgaria EOOD 100% ordinary Canada

Regus Brookfield Place, 161 Bay Street 26th and 27th Floors, Toronto ON M5J 2S1, Canada

BT Canada Inc. 100% common

Company name

Group interest

in allotted

capitala Share

class

Chile

Rosario Norte 407, Piso 6, Las Condes, Santiago, Chile

Servicios de Telecomunicaciones BT Global Networks Chile Limitada 100% ordinary China

Building 16, 6th Floor, Room 602-B, No. 269 Wuyi Road, Hi-tech Park, Dalian, 116023, China

BT Technology (Dalian) Company Limited 100% registered No. 3 Dong San Huan Bei Lu, Chao Yang District, Beijing, 100027, China

BT Limited, Beijing Officeb 100% – Room 2101-2103, 21/F, International Capital Plaza, No. 1318 North Sichuan Road, Hong Kou District, Shanghai, 200080, China

BT China Limited- Shanghai Branch Officeb 100% – Room 702A, Tower W3,Oriental Plaza, 1 East Chang An Avenue, Dongcheng, Beijing, 100738, China

BT China Limited 100% registered Unit 1537B, Floor 15th, No. 55, Xili Road, Shanghai Free Trade Zone, Shanghai, China

BT China Communications Limited 50% ordinary Colombia

Calle 113, 7-21,Torre A Oficina 1015 Teleport Business, Bogota, Colombia

BT Colombia Limitada 100% quotas Costa Rica

Heredia-Belen La Ribera, Centro Corporativo El Cafeta, Edificio B, segundo piso, Oficinas de Deloitte, San José, Costa Rica

BT Global Costa Rica SRL 100% ordinary Côte d’Ivoire

Abidjan Plateau, Rue du commerce, Immeuble Nabil 1er étage, 01 BP 12721 Abidjan 01, Côte d’Ivoire

BT Cote D’Ivoire 100% ordinary Croatia

Savska Cesta 64, Zagreb, 10000, Croatia

BT Solutions Limited Podruznica Hrvatskab 100% – Cyprus

Hadjianastassiou, Ioannides LLC, DELOITTE LEGAL, Maximos Plaza, Tower 3, 2nd Floor, 213 Arch. Makariou III Avenue, Limassol, 3030, Cyprus

BT Solutions Limitedb 100% – Arch. Makarios III, 213, Maximos Plaza, Tower 3, Floor 2, Limassol, 3030, Cyprus

BT Global Europe B.V.b 100% –

Related undertakings

BT Group plc Annual Report 2022

204

Company name

Group interest

in allotted

capitala Share

class

Czech Republic

Pujmanové 1753 / 10a, Nusle, 140 00, Prague, 4, Czech Republic

BT Limited, organizacni slozkab 100% – BT Global Europe B.V., odštěpný závodb 100% – Denmark

Havneholmen 29, 1561, Kobenhavn V, Copenhagen, Denmark

BT Denmark ApS 100% ordinary Dominican Republic

Av. Abraham Lincoln Esq. Jose Amado Soler, Edif. Progresso, Local 3-A, Sector Ens. Serralles, Santo Domingo, Dominican Republic

BT Dominican Republic, S. A. 100% ordinary Ecuador

Av. Amazonas N21-252 y Carrión, Edificio Londres, 4° Piso, Quito, Ecuador

BT Solutions Limited (Sucursal Ecuador)b 100% – Egypt

95 C st. El Sayed El Mirghany, Heliopolis Cairo, Egypt

BT Telecom Egypt LLC 100% stakes El Salvador

Edificio Avante Penthouse Oficina, 10-01 Y 10-03 Urbanizacion, Madre Selva, Antiguo Cuscatlan, La Libertad, El Salvador

BT El Salvador, Limitada de Capital Variable 100% ordinary Estonia

A.H. Tammsaare tee 47, Tallinn, 11316, Estonia

BT Solutions Limited Eesti Filiaalb 100% – Finland

Mannerheimvägen 12 B 6, 00100 Helsinki, Finland

BT Nordics Finland Oy 100% ordinary France

Tour Ariane, 5 place de la Pyramide, La Defense Cedex, 92088 PARIS, France

BT France S.A.S. 100% ordinary Germany

Barthstraße 4, 80339, Munich, Germany

BT (Germany) GmbH & Co. oHG 100% ordinary BT Deutschland GmbH 100% ordinary BT Garrick GmbH 100% ordinary Frankfurter Straße 21-25, Eschborn, 65760, Frankfurt am Main, Germany

IP Trade Networks GmbH 100% ordinary

Company name

Group interest

in allotted

capitala Share

class

Widdersdorfer Strasse 252, 50933, Cologne, Germany

Global Security Europe Limited – Germany Branchb 100% – Ghana

5th Floor, Vivo Place, Cantonments City, Rangoon Lane, P.O. Box MB 595, Accra, Ghana

BT Ghana Limited 100% ordinary Greece

75 Patision Street, Athens, 10434, Greece

BT Solutions Limited- Greek Branchb 100% – Guatemala

5ta avenida 5-55 zona 14, Edificio Europlaza World Business Center, Torre IV, nivel 7, oficina 702, Guatemala City, Guatemala

BT Guatemala S.A. 100% unique Honduras

Colonia Pueblo Nuevo, Edificio Torre Morazán, Torre No. 1, Piso 9, Municipio del Distrito Central, Departamento de, Francisco Morazán, Tegucigalpa, 10918, Honduras

BT Sociedad De Responsabilidad Limitada 100% – Hong Kong

38th Floor Dorset House, Taikoo Place, 979 King’s Road, Island East, Quarry Bay, Hong Kong

BT Hong Kong Limited 100% ordinary Infonet China Limited 100% ordinary Hungary

Budafoki U. 91-93, Budapest, 1117, Hungary

BT Global Europe B.V. Magyarorszagi Fioktelepeb 100% – BT Limited Magyarorszagi Fioktelepeb 100% – BT ROC Kft 100% business India

11th Floor, Eros Corporate Tower, Opp. International Trade Tower, Nehru Place, New Delhi, 110019, India

BT (India) Private Limited 100% ordinary BT e-Serv (India) Private Limited 100% equity BT Global Business Services Private Limited 100% ordinary BT Global Communications India Private Limited 100% ordinary BT Telecom India Private Limited 100% ordinary A-47, Hauz Khas, New Delhi, Delhi-DL, 110016, India

Orange Services India Private Limited 100% ordinary

Company name

Group interest

in allotted

capitala Share

class

Indonesia

20/F of IWG Spaces at World Trade Centre 3, JI. Jend. Sudirman, RT.4/RW.2, Karet Kuningan, Kota Administrasi Jakarta Selatan, Jakarta, 12920, Indonesia

PT BT Indonesia 100% ordinary PT BT Communications Indonesia 95% ordinary Isle of Man

Third Floor, St Georges Court, Upper Church Street, Douglas, IM1 1EE, Isle of Man

Belmullet Limited 100% ordinary Communicator Insurance Company Limited 100% ordinary Priestgate Limited 100% ordinary Israel

Beit Oz, 14 Abba Hillel Silver Rd, Ramat Gan, 52506, Israel

B.T. Communication Israel Ltd 100% ordinary Italy

Strada Santa Margherita, 6 / A, 43123, Parma, Italy

BT Enìa Telecomunicazioni S.P.A. 99% ordinary Via Correggio 5, San Donato Milanese, 20097, Milan, Italy

Radianz Italia S.r.l. 100% ordinary Via Mario Bianchini 15, 00142 Roma, Italy

BT Global Services Limitedb 100% – Via Pianezza n° 123, 10151, Torino, Italy

Atlanet SpA 99% ordinary Via Tucidide 56, Torre 7, 20134, Milano, Italy

Basictel SpA 99% ordinary BT Italia S.p.A. 99% ordinary BT Nederland N.V.b 100% – Nuova Societa di Telecomunicazioni SpA 99% ordinary Jamaica

Suite #6, 9A Garelli Avenue, Half way tree, St. Andrew, Kingston 10, Jamaica

BT Jamaica Limited 100% ordinary Japan

ARK Mori Building, 12-32 Akasaka, 1-Chome, Minato-Ku, Tokyo, 107 – 6024, Japan

BT Global Japan Corporation 100% ordinary BT Japan Corporation 100% ordinary Jersey

26 New Street, St Helier, JE2 3RA, Jersey

Ilford Trustees (Jersey) Limited 100% ordinary PO Box 264, Forum 4, Grenville Street, St Helier, JE4 8TQ, Jersey

BT Jersey Limited 100% ordinary

Subsidiaries continued

Related undertakings continued

BT Group plc Annual Report 2022

205Financial statements

Company name

Group interest

in allotted

capitala Share

class

Jordan

Wadi AlSer – Dahiet Prince Rashid – King Abdullah Street, Building No. 391 – 3rd Floor, Jordan

BT (International) Holdings Limited (Jordan) 100% ordinary Kazakhstan

No 201, 2nd Floor, Building 1a, Business Centre Nurly-Tau, 5 Al-Farabi Avenue, Almaty, 050057, Kazakhstan

BT Kazakhstan LLP 100% – Kenya

Aln House, Eldama Ravine close, off Eldama Ravine Road, Westlands, P O Box 764, Sarit Centre, Nairobi, 00606, Kenya

BT Communications Kenya Limited 100% ordinary P.O. BOX 10032-00100, Nairobi, Kenya

BT Telecommunications Kenya Limited 100% ordinary Korea

8th Floor, KTB Building, 66 Yeoui-daero, Yeongdeungpo-gu, Seoul, 07325, Korea

BT Global Services Korea Limited 100% common Latvia

Muitas iela 1A, Riga, LV-1010, Latvia

BT Latvia Limited, Sabiedriba ar ierobezotu atbildibu 100% ordinary Lebanon

Abou Hamad, Merheb, Nohra & Chedid Law Firm, Chbaro Street, 22nd Achrafieh Warde Building, 1st Floor, Beirut, P.O.BOX 165126, Lebanon

BT Lebanon S.A.L. 100% ordinary Lithuania

Aludariu str 2-33, LT-01113 Vilnius, Lithuania

UAB BTH Vilnius 100% ordinary Luxembourg

12 rue Eugene Ruppert, L 2453, Luxembourg

BT Global Services Luxembourg SARL 100% ordinary BT Broadband Luxembourg Sàrl 100% ordinary Macao

Avenida da.Praia Grande, No. 367-371, Keng Ou Building, 15th andar C, em Macao, Macau, Macao

BT Hong Kong Ltd. – Macau Branchb 100% – Malawi

KEZA Office Park Blocks 3, First Floor, Near Chichiri, Shopping Mall, Blantyre, Malawi

BT Malawi Limited 100% ordinary

Company name

Group interest

in allotted

capitala Share

class

Malaysia

Level 5, Tower 3, Avenue 7, Bangsar South, No.8, Jalan Kerinchi, 59200 Kuala Lumpur, Malaysia

BT Global Services Solutions Sdn Bhd 100% ordinary BT Global Technology (M) Sdn. Bhd. 100% ordinary BT Systems (Malaysia) Sdn Bhd 100% ordinary Malta

Level 1, LM Complex, Brewery Street, Zone 3, Central Business District, Birkirkara CBD, 3040, Malta

BT Solutions Limitedb 100% – Mauritius

c/o Deloitte, 7th Floor Standard Chartered Tower, 19-21 Bank Street, Cybercity, Ebène, 72201, Mauritius

BT Global Communications (Mauritius) Limited 100% ordinary Mexico

Edificio Plaza Inverlat Blvd, Manuel Avila Camacho 1, Piso, Piso 6, Colonia Lomas de Chapultepec, Miguel Hidalgo, Mexico City, 11009, Mexico

BT LatAm México, S.A. de C.V. 100% common Montenegro

Vasa Raickovica 4b, Podgorica, Podgorica, Montenegro

BT Montenegro DOO 100% – Morocco

Bd. Abdelmoumen, Immeuble Atrium, n 374, Lot. Manazyl Al Maymoune, 5eme etage, Casablanca, 20390, Morocco

BT Solutions Limited – Morocco Branchb 100% – Mozambique

Avenida Kenneth Kaunda, number 660, Sommershield, Maputo City, Mozambique

BT Mozambique, Limitada 100% quotas Namibia

Unit 3, 2nd floor, Ausspann Plaza, Dr Agostinho Neto Road, Ausspannplatz, Windhoek, Private Bag, 12012, Namibia

BT Solutions Limitedb 100% – Netherlands

Herikerbergweg 2, 1101 CM, Amsterdam, Netherlands

BT Global Europe B.V. 100% ordinary BT (Netherlands) Holdings B.V. 100% ordinary BT Nederland N.V. 100% ordinary BT Professional Services Nederland B.V. 100% ordinary Global Security Europe Limitedb 100% –

Company name

Group interest

in allotted

capitala Share

class

New Zealand

c/o Deloitte, Level 18, 80 Queen Street, Auckland Central, Auckland, 1010, NZ, New Zealand

BT Australasia Pty Limited – New Zealand Branchb 100% – Nicaragua

De donde fué el Restaurante Marea Alta Ahora quesillos, El Pipe, 2 cuadras al este, 10 Metros al norte, frente al, Hotel El Gran Marquez, Casa #351, Nicaragua, 2815, Nicaragua

BT Nicaragua S.A. 100% capital Nigeria

Civic Towers, Plot GA1, Ozumba Mbadiwe Avenue, Victoria Island, Lagos, Nigeria

BT (Nigeria) Limited 100% ordinary North Macedonia

Str. Dame Gruev no.8, 5th floor, Building “Dom na voenite invalidi”, SKOPJE 1000, North Macedonia

BT Solutions Limited Branch Office in Skopjeb 100% – Norway

Munkedamsveien 45, Oslo, 0121, Norway

BT Solutions Norway AS 100% ordinary Oman

Maktabi Building, Building No. 458, Unit No. 413 4th Floor, Road No – R41, Block No. 203, Plot No. 107, Zone No. SW41, Complex No. 271, Al Watiyah, Bausher, Muscat, Sultanate of Oman, Oman

BT International Holdings Limited & Co. LLC 100% ordinary Pakistan

Cavish Court, A-35, Block 7&8, KCHSU, Shahrah-e-Faisal, Karachi, 75350, Pakistan

BT Pakistan (Private) Limited 100% ordinary Panama

50th and 74th Street, San Francisco, PH 909, 15th and 16th Floor, Panama City, Panama

BT de Panama, S.R.L. 100% ordinary Paraguay

Av. Brasilia N° 767 casi Siria, Asunción, Paraguay

BT Paraguay S.R.L. 100% quotas Peru

Urb. Jardin Av. Las Begonias No. 441, San Isidro, Lima, Peru

BT Peru S.R.L. 100% ordinary Philippines

11th Floor, Page One Building, 1215 Acacia Ave Madrigal Business Park, Ayala Alabang, Muntinlupa, Metro Manila, 1780, Philippines

IT Holdings, Inc 100% ordinary

Subsidiaries continued

BT Group plc Annual Report 2022

206

Company name

Group interest

in allotted

capitala Share

class

40th Floor, PBCom Tower 6795, Ayala Avenue cor. Rufino St, Makati City, 1226, Philippines

BT Communications Philippines Incorporated 100% ordinary c/o Sun Microsystems Phil Inc., 8767 Paseo de Roxas, Makati City, Philippines

PSPI-Subic, Inc 51% ordinary Poland

126/134 Marszalkowska St., Room 128, 00-008 WARSAW, Warsaw, Poland

BT Poland Spółka Z Ograniczoną Odpowiedzialnością 100% ordinary Portugal

Rua D. Francisco Manuel de Melo 21-1, 1070-085 Lisboa, Portugal

BT Portugal – Telecomunicaçöes, Unipessoal Lda 100% ordinary Puerto Rico

The Prentice-Hall Corporation System, Puerto Rico, Inc., c/o Fast Solutions, LLC, Citi Tower, 252 Ponce de Leon Avenue, Floor 20, San Juan, Puerto Rico, 00918, Puerto Rico

BT Communications Sales, LLC Puerto Rico branchb 100% – Qatar

1413, 14th Floor, Al Fardan Office Tower, Doha, 31316, Qatar

BT Global Services (North Gulf) LLC 49% ordinary Republic of Ireland

2 Grand Canal Plaza, Upper Grand Canal Street, Dublin 4, Republic of Ireland

BT Communications Ireland Limited 100% ordinary BT Communications Ireland Group Limited 100% ordinary BT Communications Ireland Holdings Limited 100% ordinary BT Global Communications (Ireland) Limited 100% ordinary The Faraday Procurement Company Limited 100% ordinary Whitestream Industries Limited 100% ordinary BDO, Beaux Lane House, Mercer Street Lower, Dublin 2, Ireland

Canal Capital Investment Limited 100% ordinary Romania

Cladirea A1, Biroul Nr. 52, Nr 35-37, Str. Oltenitei, Sector 4, Bucharest, Romania

BT Global Services Limited Londra Sucursala Bucurestib 100% –

Company name

Group interest

in allotted

capitala Share

class

Russia

Room 62, prem xx, Floor 2, Pravdy, 26, 127137, Moscow, Russian Federation

BT Solutions Limited Liability Company 100% – Serbia

Dimitrija Georgijevica Starike 20, Belgrade, 11070, Serbia

BT Belgrade d.o.o 100% ordinary Sierra Leone

84 Dundas Street, Freetown, Sierra Leone

BT (SL) Limited 100% ordinary Singapore

Level 3, #03-01/02 & #03-04, Block B, Alexandra Technopark, 438B Alexandra Road, Singapore, 119968

BT (India) Private Limited Singapore Branchb 100% – BT Global Services Technologies Pte. Ltd. 100% ordinary BT Global Solutions Pte. Ltd. 100% ordinary BT Singapore Pte. Ltd. 100% ordinary Slovakia

Dvorakovo nabrezie 4, 811 02, Bratislava, Slovakia

BT Slovakia s.r.o. 100% ordinary Slovenia

Cesta v Mestni Log 1, Ljubljana, 1000, Slovenia

BT GLOBALNE STORITVE, telekomunikacijske storitve, obdelava podatkov, podatkovnih baz; d.o.o. 100% ordinary South Africa

BT Building, Woodmead North Office Park, 54 Maxwell Drive, Woodmead, 2191, South Africa

BT Communications Services South Africa (Pty) Limited 70% ordinary BT Limitedb 100% – Spain

C/ María Tubau, 3, 28050 de Madrid, Spain

BT Global ICT Business Spain SLU 100% ordinary Sri Lanka

Level 03, No 11, Castle Lane, Colombo, 04, Sri Lanka

BT Communications Lanka (Private) Limited 100% ordinary Sudan

Alskheikh Mustafa Building, Parlman Street, Khartoum, Sudan

Newgate Communication (Sudan) Co. Ltd 100% ordinary

Company name

Group interest

in allotted

capitala Share

class

Sweden

Box 30005, 104 25, Stockholm, Sweden

BT Nordics Sweden AB 100% ordinary Switzerland

Richtistrasse 5, 8304 Wallisellen, Switzerland

BT Switzerland AG 100% ordinary Taiwan

Shin Kong Manhattan Building, 14F, No. 8, Sec. 5, Xinyi Road, Taipei, 11049, Taiwan

BT Limited Taiwan Branchb 100% – Tanzania

Region Dar Es Salaam, District Kinondoni, Ward Msasani, Street Msasani Peninsula, Road 1 Bains Singh Avenue, Plot number 1403/1, Ground Floor, 14111, United Republic of Tanzania

BT Solutions Limited – Tanzania Branchb 100% – Thailand

No.63 Athenee Tower, 23rd Floor (CEO Suite, Room No.38), Wireless Road, Kwaeng Lumpini, Khet Pathumwan, Bangkok, 10330, Thailand

BT Siam Communications Co., Ltd 49% class B BT Siam Limited 69% preference Trinidad and Tobago

2nd Floor CIC Building, 122-124 Frederick Street, Port of Spain, Trinidad and Tobago

BT Solutions Limitedb 100% – Tunisia

Rue de I’, Euro Immeuble Slim, Block A-2nd floor-Les berges du Lac, Tunis, 1053, Tunisia

BT Tunisia S.A.R.L 100% ordinary Turkey

Acıbadem Mahallesi Çeçen Sk. Akasya A, Kule Kent Etabı Apt. No: 25 A/28-, Üsküdar, Istanbul, Turkey

BT Bilisim Hizmetleri Anonim Şirketi 100% ordinary BT Telekom Hizmetleri Anonim Şirketi 100% common Uganda

Engoru, Mutebi Advocates, Ground Floor, Rwenzori House, 1 Lumumba Avenue, Kampala, 22510, Uganda

BT Solutions Limitedb 100% – Ukraine

Office 702, 34 Lesi Ukrainky Boulevard, Kyiv 01042, Ukraine

BT Ukraine Limited Liability Company 100% stakes United Arab Emirates

Office No G03, Ground Floor, EIB Building No 04, Dubai, United Arab Emirates

BT MEA FZ-LLC 100% ordinary

Subsidiaries continued

Related undertakings continued

BT Group plc Annual Report 2022

207Financial statements

Company name

Group interest

in allotted

capitala Share

class

Office no.206 BLOCK B, Diamond Business Center 1, Al Barsha South Third, Dubai, P.O. BOX 25205, United Arab Emirates

BT UAE Limited – Dubai Branch (1)b 100% – BT UAE Limited – Dubai Branch (2)b 100% – United Kingdom

1 Braham Street, London, E1 8EE, United Kingdom

Autumnwindow Limited 100% ordinary Autumnwindow No.2 Limited 100% ordinary Autumnwindow No.3 Limited 100% ordinary Belmullet (IoM) Limitedb 100% – BPSLP Limited 100% ordinary British Telecommunications plc 100% ordinary Bruning Limited 100% ordinary BT (International) Holdings Limited 100% ordinary BT (RRS LP) Limited 100% ordinary BT Communications Ireland Group Limited – UK Branchb 100% – BT Corporate Trustee Limited 100%

limited by guarantee

BT European Investments Limited 100% ordinary BT Fifty-One 100% ordinary BT Fifty-Three Limited 100% ordinary BT Global Security Services Limited 100% ordinary BT Global Services Limited 100% ordinary BT Holdings Limited 100% ordinary BT IoT Networks Limited 100% ordinary BT Lancashire Services Limited 100% ordinary BT Limited 100% ordinary BT Ninety-Five Limited 100% ordinary BT Nominees Limited 100% ordinary BT OnePhone Limitedc 100% ordinary BT Property Holdings (Aberdeen) Limited 100% ordinary BT Property Limited 100% ordinary BT Sixty-Four Limited 100% ordinary BT SLE Euro Limited 100% ordinary BT SLE USD Limited 100% ordinary BT Solutions Limited 100% ordinary BT UAE Limited 100% ordinary Communications Global Network Services Limited – UK Branchb 100% – Communications Networking Services (UK) 100% ordinary EE Group Investments Limited 100% ordinary ESAT Telecommunications (UK) Limited 100% ordinary Extraclick Limited 100% ordinary

Company name

Group interest

in allotted

capitala Share

class

Global Security Europe Limited 100% ordinary Newgate Street Secretaries Limited 100% ordinary Numberrapid Limited 100% ordinary Pelipod Ltd 100% ordinary Radianz Limited 100% ordinary Southgate Developments Limited 100% ordinary Tudor Minstrel 100% ordinary Alexander Bain House, 15 York Street, Glasgow, Lanarkshire, G2 8LA, Scotland

BT Corporate Limited 100% ordinary BT Falcon 1 LP 100% – BT Falcon 2 LP 100% – Holland House (Northern) Limited 100% ordinary BDO LLP, 55 Baker Street, London, W1U 7EU, United Kingdom

BT Centre Nominee 2 Limited 100% ordinary BT Cornwall Limited 100% ordinary BT Facilities Services Limited 100% ordinary BT Managed Services Limited 100% ordinary EE Finance Limited 100% ordinary groupBT Limited 100% ordinary Kelvin House, 123 Judd Street, London, WC1H 9NP, United Kingdom

Openreach Limited 100% ordinary The Balance, 2 Pinfold Street, Sheffield, S1 2GU, United Kingdom

Plusnet plc 100% ordinary Trident Place, Mosquito Way, Hatfield, Hertfordshire, AL10 9BW, United Kingdom

EE (Group) Limited 100% ordinary EE Limited 100% ordinary EE Pension Trustee Limited 100% ordinary Mainline Communications Group Limited 100% ordinary Mainline Digital Communications Limited 100% ordinary Orange Furbs Trustees Limited 100% ordinary Orange Home UK Limited 100% ordinary Orange Personal Communications Services Limited 100% ordinary United States

c/o Corporation Service Company, 251 Little Falls Drive, Wilmington DE 19808, United States

BT Americas Holdings Inc. 100% common BT Americas Inc. 100% common BT Communications Sales LLC 100% units BT Federal Inc. 100% common BT Procure L.L.C. 100% units BT United States L.L.C. 100% units Infonet Services Corporation 100% common

Company name

Group interest

in allotted

capitala Share

class

Uruguay

Rincón 487 Piso 11, Montevideo, ZIP CODE 11.000, Uruguay

BT Solutions Limited Sucursal Uruguayb 100% – Venezuela

Edificio Parque Cristal, Torre Oeste, Piso 5, Oficina 5, Avenida Francisco de Miranda, Urbanización Los Palos Grandes, Caracas 1060, Venezuela

BT LatAm Venezuela, S.A. 100% ordinary BT Global (Venezuela) S.A. 100% ordinary Vietnam

16th Floor Saigon Tower, 29 Le Duan Road, District 1, Ho Chi Minh City, 710000, Socialist Republic of Vietnam

BT (Vietnam) Co. Ltd. 100% ordinary Zambia

Plot No. 11058, Haile Selassie Avenue, Zimbabwe, Lusaka, Lusaka Province, 34972, Zambia

BT Solutions Limitedb 100% – Zimbabwe

3 Baines Avenue, Box 334, Harare, Zimbabwe

Numberrapid Limitedb 100% –

Subsidiaries continued

BT Group plc Annual Report 2022

208

Associates

Company name

Group interest

in allotted

capitala Share

class

Held via other group companies Mauritius

IFS Court, Bank Street, TwentyEight Cybercity, Ebene, 72201, Mauritius

Mahindra – BT Investment Company (Mauritius) Limited 43% ordinary Philippines

32F Philam Life Tower, 8767 Paseo de Roxas, Makati City, Philippines

ePLDTSunphilcox JV, Inc 20% ordinary SunPhilcox JV, Inc 20% ordinary United Kingdom

24/25 The Shard, 32 London Bridge Street, London, SE1 9SG, United Kingdom

Digital Mobile Spectrum Limited 25% ordinary Unit 1, Colwick Quays Business Park, Colwick, Nottingham, Nottinghamshire, NG4 2JY, United Kingdom

Midland Communications Distribution Limited 35% ordinary Phoneline (M.C.D) Limited 35% ordinary 2nd Floor, Aldgate Tower, 2 Leman Street, London, E1 8FA, United Kingdom

Youview TV Limited 14% voting

Joint ventures

Company name

Group interest

in allotted

capitala Share

class

Held via other group companies Indonesia

20/F of IWG Spaces at World Trade Centre 3, JI, Jend. Sudirman, RT.4/RW.2, Karet Kuningan, Kota Administrasi Jakarta Selatan, Jakarta, 12920, Indonesia

PT Sun Microsystems Indonesia 60% ordinary Philippines

11th Floor, Page One Building, 1215 Acacia Avenue, Madrigal Business Park, Ayala Alabany, Muntinlupa city, 1780 City, Manila, 1780, Philippines

Sun Microsystems Philippines, Inc 51% common United Kingdom

6th Floor, One London Wall, London, EC2Y 5EB, United Kingdom

Internet Matters Limited 25% – St Helen’s 1 Undershaft, London, EC3P 3DQ, United Kingdom

Rugby Radio Station (General Partner) Limited 50% ordinary Rugby Radio Station (Nominee) Limited 50% ordinary Rugby Radio Station LP 50% –

All joint ventures are governed by a joint venture agreement.

Joint operations

Company name

Group interest

in allotted

capitala Share

class

Held via other group companies United Kingdom

Sixth Floor, Thames Tower, Station Road, Reading, RG1 1LX, United Kingdom

Mobile Broadband Network Limited 50% ordinary

EE Limited and Hutchison 3G UK Limited (together ‘the Companies’) each have a 50% share in the joint operation Mobile Broadband Network Limited (‘MBNL’). MBNL’s ongoing purpose is the operation and maintenance of radio access sites for mobile networks through a sharing arrangement. This includes the efficient management of shared infrastructure and a 3G network on behalf of the Companies, acquiring certain network elements for shared use, and coordinating the deployment of new infrastructure and networks on either a shared or a unilateral basis (unilateral elements being network assets or services specific to one company only). The group is committed to incurring 50% of costs in respect of restructuring the shared MBNL network, a broadly similar proportion of the operating costs (which varies in line with usage), and 100% of any unilateral elements.

MBNL is accounted for as a joint operation.

Guarantees for the joint operation are given by British Telecommunications plc and CK Hutchison Holdings Limited.

The principal place of business of the joint operation is in the UK.

a The proportion of voting rights held corresponds to the aggregate interest in percentage held by the holding company and subsidiaries undertaking.

b No shares issued for a branch. c In April 2021, group acquired the remaining 30%

ordinary shares of BT OnePhone Limited therefore the company is now a wholly owned subsidiary.

Related undertakings continued

BT Group plc Annual Report 2022

209Financial statements

Alternative performance measures Introduction We assess the performance of the group using a variety of alternative performance measures that are not defined under IFRS and are therefore termed non-GAAP measures. The non-GAAP measures we use are: adjusted revenue, adjusted operating costs, adjusted finance expense, adjusted EBITDA, adjusted operating profit, adjusted profit before tax, adjusted earnings per share, return on capital employed, normalised free cash flow and net debt. The rationale for using these measures, along with a reconciliation from the nearest measures prepared in accordance with IFRS, are presented below.

The alternative performance measures we use may not be directly comparable with similarly titled measures used by other companies.

Specific items Our income statement and segmental analysis separately identify trading results on an adjusted basis, being before specific items. The directors believe that presentation of the group’s results in this way is relevant to an understanding of the group’s financial performance as specific items are those that in management’s judgement need to be disclosed by virtue of their size, nature or incidence.

This presentation is consistent with the way that financial performance is measured by management and reported to the Board and the Executive Committee and assists in providing an additional analysis of our reporting trading results.

In determining whether an event or transaction is specific, management considers quantitative as well as qualitative factors. Examples of charges or credits meeting the above definition and which have been presented as specific items in the current and/or prior years include business restructuring programmes, acquisitions and disposals of businesses and investments, charges or credits relating to retrospective regulatory matters, property rationalisation programmes, significant out of period contract settlements, net interest on our pension obligation, and the impact of remeasuring deferred tax balances. In the event that items meet the criteria, which are applied consistently from year to year, they are treated as specific items. Any releases to provisions originally booked as a specific item are also classified as specific.

Details of items meeting the definition of specific items in the current and prior year are set out in note 9.

Reported revenue, reported operating costs, reported operating profit, reported net finance expense, reported profit before tax and reported earnings per share are the equivalent IFRS measures. A reconciliation from these can be seen in the group income statement on page 129.

Additional information

Net debt and net financial debt Net debt consists of loans and other borrowings, lease liabilities (both current and non-current) less current asset investments and cash and cash equivalents, including items which have been classified as held for sale on balance sheet.

Our net debt calculation starts from the expected future undiscounted cash flows that should arise when our financial instruments mature. Currency-denominated balances within net debt are translated to sterling at swap rates where hedged. Fair value adjustments and accrued interest applied to loans and borrowings, current asset investments and cash equivalents to reflect the effective interest method are removed.

Net debt is a measure of the group’s net indebtedness that provides an indicator of overall balance sheet strength. It is a key indicator used by management to assess both the group’s cash position and its indebtedness. The use of the term ‘net debt’ does not necessarily mean that the cash included in the net debt calculation is available to settle the liabilities included in this measure.

Net financial debt is net debt excluding lease liabilities. It allows for the comparison to net debt measures reported before the introduction of IFRS 16 on 1 April 2019, and reflects a view that lease liabilities are operational debt in substance, rather than financing transactions.

Net debt and net financial debt are considered to be alternative performance measures as they are not defined in IFRS. A reconciliation from loans and other borrowings, lease liabilities, cash and cash equivalents, and current asset investments, the most directly comparable IFRS measures to net debt and net financial debt, is set out in note 26.

BT Group plc Annual Report 2022

210

Return on Capital Employed We use a return on capital employed (ROCE) measure that serves as an indicator of how efficiently we generate returns from the capital invested in the business. It is a group KPI that is directly relatable to the outcome of investment decisions.

ROCE represents the group’s returns as percentage of capital employed.

Returns are defined as adjusted earnings before interest and tax. We use an adjusted measure (before specific items) for the reasons explained in the ‘specific items’ section above.

Capital employed represents equity, debt and debt-like liabilities. We net the derivative financial instruments and cash and cash equivalent balances that we use to manage financial risk against gross debt, and exclude current and deferred tax balances as the measure is determined on a pre-tax basis.

While our long-term capital investment programmes such as our full fibre rollout deliver value-creating long term returns, they suppress ROCE in the short-to-medium term.

The following table sets out the calculation of our ROCE measure. In doing so it reconciles returns to operating profit, the most directly comparable IFRS measure, and presents the components of capital employed.

Year ended 31 March 2022

£m 2021

£m

Reported operating profit for the period 2,885 2,587 Share of post tax profits (losses) of associates and joint ventures – 8 Specific items (non-finance and tax) 287 481

Return for the period 3,172 3,076

Equity, debt and debt-like liabilities Loans and other borrowings 16,185 16,685 Lease liabilities 5,760 6,152 Retirement benefit obligations 1,143 5,096 BDUK grant funding deferral 488 568 Total equity 15,296 11,679 Adjust for balances used to hedge financial risk Cash and cash equivalents (777) (1,000) Investments (2,713) (3,683) Net derivative financial instruments (221) 48 Adjust for tax balances Net deferred tax liabilities 1,671 440 Net current tax receivable (406) (197)

Capital employed 36,426 35,788

Return on capital employed 8.7% 8.6%

Adjusted EBITDA In addition to measuring financial performance of the group and customer-facing units based on operating profit, we also measure performance based on EBITDA and adjusted EBITDA. EBITDA is defined as the group profit or loss before interest, taxation, depreciation and amortisation. Adjusted EBITDA is defined as EBITDA before specific items, net non-interest related finance expense, and share of post-tax profits or losses of associates and joint ventures. EBITDA is a common measure used by investors and analysts to evaluate the operating financial performance of companies, particularly in the telecommunications sector.

We consider EBITDA and adjusted EBITDA to be useful measures of our operating performance because they approximate the underlying operating cash flow by eliminating depreciation and amortisation. EBITDA and adjusted EBITDA are not direct measures of our liquidity, which is shown by our cash flow statement, and need to be considered in the context of our financial commitments.

A reconciliation of reported profit for the period, the most directly comparable IFRS measure, to EBITDA and adjusted EBITDA is set out below.

Year ended 31 March 2022

£m 2021

£m

Reported profit for the period 1,274 1,472 Tax 689 332

Reported profit before tax 1,963 1,804 Net interest related finance expense 813 773 Depreciation and amortisation 4,405 4,347

EBITDA 7,181 6,924 EBITDA specific items 287 481 Net other finance expense 109 18 Share of post tax losses (profits) of associates and joint ventures – (8)

Adjusted EBITDA 7,577 7,415

Additional information continued

BT Group plc Annual Report 2022

211Financial statements

Normalised free cash flow Normalised free cash flow is one of the group’s key performance indicators by which our financial performance is measured. It is primarily a liquidity measure. However, we also believe it is an important indicator of our overall operational performance as it reflects the cash we generate from operations after capital expenditure and financing costs, both of which are significant ongoing cash outflows associated with investing in our infrastructure and financing our operations.

Normalised free cash flow is defined as free cash flow (net cash inflow from operating activities after net capital expenditure) after net interest paid and payment of lease liabilities, before pension deficit payments (including their cash tax benefit), dividends from associates, non-current asset investments, payments relating to spectrum, and specific items. For non-tax related items the adjustments are made on a pre-tax basis. It excludes cash flows that are determined at a corporate level independently of ongoing trading operations such as dividends, share buybacks, acquisitions and disposals, and repayment and raising of debt.

Normalised free cash flow is not a measure of the funds that are available for distribution to shareholders.

A reconciliation from cash inflow from operating activities, the most directly comparable IFRS measure, to free cash flow and normalised free cash flow, is set out below.

Year ended 31 March 2022

£m 2021

£m

Cash generated from operations 5,962 6,251 Tax paid (52) (288)

Net cash inflow from operating activities 5,910 5,963 Net purchase of property, plant and equipment and intangible assets (4,607) (4,818)

Free cash flow 1,303 1,145 Interest received 6 6 Interest paid (755) (770) Add back pension deficit payments 1,121 955 Remove cash tax benefit of pension deficit payments – (181) Dividends from associates 1 5 Add back net cash flow from specific items 606 390 Add back net sale of non-current asset investments (8) (11) Add back prepayment in respect of spectrum licence auction (223) 702 Remove payment of lease liabilities (659) (782)

Normalised free cash flow 1,392 1,459

Below we reconcile normalised free cash flow by unit:

Year ended 31 March 2022

£m 2021

£m

Consumer 917 714 Enterprise 791 1,352 Global 131 187 Openreach 448 486 Other (895) (1,280) Intra-group items – –

Normalised free cash flow 1,392 1,459

BT Group plc Annual Report 2022

212

Certain information included in this Annual Report and Accounts is forward looking and involves risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed or implied by forward looking statements. Forward looking statements cover all matters which are not historical facts and include, without limitation, projections relating to results of operations and financial conditions and the Company’s plans and objectives for future operations. Forward looking statements can be identified by the use of forward looking terminology, including terms such as ‘believes’, ‘estimates’, ‘anticipates’, ‘expects’, ‘forecasts’, ‘intends’, ‘plans’, ‘projects’, ‘goal’, ‘target’, ‘aim’, ‘may’, ‘will’, ‘would’, ‘could’ or ‘should’ or, in each case, their negative or other variations or comparable terminology. Forward looking statements in this Annual Report and Accounts are not guarantees of future performance. All forward looking statements in this Annual Report and Accounts are based upon information known to the Company on the date of this Annual Report and Accounts. Accordingly, no assurance can be given that any particular expectation will be met and readers are cautioned not to place undue reliance on forward looking statements, which speak only at their respective dates. Additionally, forward looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority), the Company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise. Nothing in this Annual Report and Accounts shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.

Cautionary statement regarding forward-looking statements

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