BT Group plc Detailed Attribution Methods (DAM) 2014 15th August 2014

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Contents

Section Description Page

Section 1 Introduction 4

Section 2 Business Overview 6

Section 3 Overview 9

Section 4.1 Except Bases 32

Section 4.2 Other Bases 50

Section 5 Activity Group Dictionary 122

Section 6 Plant Group Dictionary 132

Section 7 Network Component Allocations 206

Section 8 Data Sources 252

Section 9 Line of Business Organisational Unit Codes (OUCs) 292

Section 10 Glossary of Terms 293

Appendix A Key Destinations (attached in Excel spreadsheet format DAM 2014_Appendix A)

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Appendix B Sectors List (attached in Excel spreadsheet format DAM 2014_Appendix B)

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1 Introduction

In the UK, the telecommunications industry is regulated through various European Union directives, the Communications Act 2003 (the Communications Act), Ofcom (the UKs independent communications regulator), and other regulations and recommendations.

1.1 Regulatory Reporting Requirements

Regulatory financial reporting obligations are imposed by Ofcom to monitor and enforce other ex-ante obligations e.g. for cost orientation, cost recovery, price controls and no undue discrimination. We are required to demonstrate compliance with these obligations in certain SMP markets.

1.2 The Accounting Documents

The Regulatory Financial Statements (RFS) are prepared in accordance with the Accounting Documents, where the Accounting Documents means together the Primary Accounting Documents (PAD) and the Secondary Accounting Documents.

The PAD sets out the framework under which the statements are to be prepared.

The Secondary Accounting Documents set out more detailed descriptions of the policies, methodologies, systems, processes and procedures for deriving or calculating the costs, revenues, assets and liabilities underlying the RFS and comprise the following three documents:

The Detailed Attribution Methods (DAM) - describes the processes used to derive the fully allocated costs of BTs network components, SMP Markets, Technical Areas and Disaggregated Activities (as applicable).

The Detailed Valuation Methodology (DVM) - describes the methods used to derive current cost valuations.

The Long Run Incremental Cost Model: Relationship and Parameters (R&P) - describes the calculation of the long run incremental costs for network elements.

The Wholesale Catalogue - describes the wholesale services included in the Wholesale SMP markets and technical areas where BT has a regulatory financial reporting obligation.

1.3 The DAM

The purpose of the DAM is to:

Describe the costing principles used by BT to prepare the RFS on a fully allocated cost basis.

Describe the methods used in the Accounting Separation process to attribute revenue, costs and capital employed to the Markets, Technical Areas and Disaggregated Activities in the RFS.

Outline the systems and processes used by BT to support Accounting Separation.

The DAM provides detailed and granular descriptions of the procedures used to apply the principles set out in the PAD.

The DAM is structured in sections explaining the different stages of the Accounting Separation process. Accounting Separation is the attribution of costs, revenues and capital employed to the defined Markets and Disaggregated Activities of BT.

Section 1 - Provides an introduction and guide to using the DAM.

Section 2 - Provides an overview of the BT business, describes how the underlying financial transactions supporting the business activities and functions recorded in the financial ledgers are grouped to provide the starting costs, revenues, assets and liabilities used by the Accounting Separation (AS) system. This provides the starting cost pools (F8 items), grouped and presented by different areas of BTs business (sectors). The AS system attributes the costs, revenues, assets and liabilities to defined products and components which aggregate into the Markets, Technical Areas and Disaggregated Activities to create a view of BTs financial position and results against SMP Markets.

Section 3 - Provides an overview of the AS solution, in terms of the underlying costing principles and the conceptual flow of costs and revenues from source financial systems to the separated Markets, Technical Areas and Disaggregated Activities to create a view of BT. It sets out the main types of cost pool used by

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the solution, in terms of F8 items, activity groups, plant groups, network components and products, and explains the flow of costs and revenues across the different types of cost pool. This section also provides an overview description of each sector.

Section 4 - The base methodology dictionary provides a complete description of the attribution base methodologies referred to in the sector tables (Appendix B) for each given base methodology, based on the current year profit and loss accounts and closing balance sheet. In the majority of cases opening balance sheet destinations are not materially different. Where a methodology applies to the opening balance sheet only, the key destinations will still be shown (see Appendix A).

Section 5 - Provides an overview description of activity groups, followed by a table setting out the Activity Groups contained in the DAM. The table shows, for each Activity Group, a high level summary of the methodology that is applied to attribute the costs to the next cost pool (e.g. plant groups, products) in the AS system. The main costs pool destinations can be found in the Key Destination tables (Appendix A). The Activity Group Dictionary provides a complete description of the attribution methodologies applicable to the Activity Groups based on the current year profit and loss accounts and closing balance sheet. In the majority of cases the opening balance sheet destinations are not materially different.

Section 6 - Sets out the Plant Groups used in the AS system. The attribution table shows a high level summary of the base methodology used for each Plant Group follows the overview of the Plant Groups. The Plant Group dictionary sets out the detailed descriptions of the Plant Group attribution methodologies. The main costs pool destinations can be found in the Appendix A key destinations table.

Section 7 - Sets out an overview of network components, followed by attribution tables. These explain the attribution of network components and standard services to final products in the AS system.

Section 8 - Provides a dictionary of data sources.

Section 9 - Shows the Line of Business Organisational Unit Codes (LoB OUCs).

Section 10 - Glossary of terms used.

Appendix A - The key destinations table identifies the key destinations of all the markets described in sections 4-6. This is based on the current year Profit and Loss account and closing Balance Sheet. In the majority of cases the opening balance destinations are not materially different.

Appendix B The Sector Allocation Table identifies the base applied to each F8 code/OUC combination Descriptions for these bases can be found in sections 4-6. Key destinations are contained in Appendix A.

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2 Business Overview

This section provides:

a brief overview of our business and the regulatory financial reporting obligations.

a brief description of how the underlying financial transactions supporting the business activities and functions recorded in BT Groups financial ledgers are grouped into cost pools (F8 items) to provide the starting costs, revenues, assets and the liabilities used by the Accounting Separation (AS) system.

2.1 BT Group and Regulatory Reporting

We explained in the RFS and the PAD that we are subject to various regulatory financial reporting obligations for Markets, Technical Areas and Disaggregated Activities (as applicable) where we are deemed to have Significant Market Power (SMP).

We prepare the RFS which show our costs, revenues, assets and liabilities against defined regulatory Markets and Services. The statements are prepared via the AS process and comprise a financial performance summary, review of financial performance by groupings of markets and by individual markets, other information including the network activity statement and the calculation of Fully Allocated Costs (FAC) based on component costs and usage factors statement and reconciliation statements. For regulatory reporting purposes, revenue is recorded against a range of services provided. Cost associated with operational and support activities undertaken to support the provision of these services are recorded against sectors such as planning and development, provision and installation, maintenance and plant support. This is explained in Section 3 of the DAM.

2.2 AS Systems and the Reporting Hierarchy

Our financial and reporting system uses a hierarchical pyramid coding structure to support the data capture and information summation at the Line of Business (LoB) and activities level. This is explained below.

The diagram above shows the grouping of financial accounting information from general ledger cost accounts to F8 codes and sectors. The different levels of the hierarchy are discussed below.

GL Codes

F8 Codes

SFR Lines

AS Sectors

WholesaleSMP

Sectors

RetailResidual

GFR Lines

Accounting Transactions Layer

Base & Apportionment Layer

Financial & Management Accounting Layer

Group Financial Accounting Layer

Regulatory Reporting Layer

OUC

ASPIRE Reporting Layer

Used in Feeder Systems

Used in Financial & Management Reporting Systems

Used in Financial & Management Reporting Systems

Diagram: BTs SMP Reporting and Coding Structure

BTs_SMP_Reporting_Diagram_2_2_0910

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Accounting Transaction (GL Codes) Layer

The costs, revenues, assets and liabilities of our main business activities (within the operating businesses of BT Retail, BT Wholesale, Openreach, BT Global Services, and other parts of the BT Group organisation) are recorded in the group General Ledger (GL) system. There are approximately 28,000 GL Codes.

Base Apportionment (F8 codes) Layer

General ledger codes are grouped into F8 codes, which represent groups of similar general ledger codes. One or many GL Codes are aggregated to an F8 code. The costs, revenues, assets and liabilities associated with an individual F8 code (for a given Organisational Unit Code - see OUC description below) will be attributed to Products, Plant Groups (PGs) and/ or Activity Groups (AGs) using a base methodology appropriate to the OUC that records. There are approximately 18,000 F8 Codes.

The Regulatory Reporting system ASPIRE receives general ledger feeds at the F8 code level and attributes costs, revenues, assets and liabilities to the regulatory Markets and Services.

Financial and Management Accounting (SFR Lines and Reports) Layer

General ledger codes are aggregated to Standard Financial Report (SFR) Lines. One or many GL Codes are aggregated to a SFR line which form the basis of BTs Financial and Management Reports used internally. The SFRs form the basis of both Financial and Management reports. There are approximately 100 SF Reports and approximately 8,200 SFR Lines.

Group Accounting (GFR Lines and Reports) Layer

SF Lines aggregate to Group Financial Reporting (GFR) Lines. One or many SFR Lines are aggregated to a GFR line. GFR lines form the basis of BTs Group Financial Reports, from which, BTs external Financial Reports are produced. There are approximately 50 GF Reports and approximately 1,510 GFR Lines.

Self-accounting Units (SAUs) not using the BT Group General Ledger (GL) system provide summarised details of their financial accounts on a Group Financial Return (GFR), with line items from the GFR mapped to GL codes for use in the AS system. All SAU revenues, costs and liabilities are allocated to the BT Retail Residual Market.

Regulatory Reporting (AS Sectors and SMP Sectors) Layer

One or many F8 codes are grouped into similar functional categories called AS sectors to make regulatory reporting more manageable. Although sectors contain functionally similar categories of cost, an individual sector is likely to use multiple attribution base methodologies. AS sectors can be grouped in two broad categories Income Statement and Balance Sheet. There are approximately 150 AS sectors.

All AS sectors point to SMP sectors. One or many AS sectors can point to a SMP sector. It is worth noting that the pointing of AS sectors to SMP sectors for BTs Wholesale Markets reporting are different from BT Retail Residual. This is primarily due to the different nature of the activities carried out within Wholesale and Retail.

The AS sectors are grouped in to SMP reporting sectors to produce the Wholesale SMP Reports.

Organisational Unit Code (OUC)

OUCs provide a horizontal, organisational cut of the financial data in the vertical GL-F8-sector pyramid. Costs/ revenues/assets/liabilities are recorded by OUC, at the class of work/general ledger account level.

The codes for OUCs follow a hierarchical structure, with the first level of the OUC code defining the highest level of the organisation unit and the subsequent letters of the OUC code representing the more detailed sub-divisions within the top-level organisation unit. For example, OUC code K, represents BT Wholesale, and code KB represents a subsidiary organisational unit within BT Wholesale.

A sector is represented by a series of F8 codes, with OUCs showing their financial values against the different F8 codes. Each sector can be represented by a matrix of the F8-OUC combinations. The AS system looks at each F8-OUC combination to identify an appropriate base attribution methodology to attribute the costs, revenues, assets and liabilities. There are approximately 35,000 OUC codes.

F8_OUC combinations are the lowest level at which discrete cost pools are defined for the purposes of the Accounting Separation System

F8_OUC_Combination

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2.2.2 Attribution of BTs financial information to Markets and Services

The DAM explains how the costs, revenues, assets and liabilities of the BT Group business are attributed to the products of the defined regulatory Markets and Services.

The DAM sets out for each sector the component F8/OUC codes and the base methodologies that are applied to each F8/OUC code to attribute them to products (and/or intermediate cost pools). Several F8-OUC combinations may share the same base, if they have similar cost behaviour.

The base methodologies are summarised in the sector tables against the relevant F8/OUC code, and described in detail in the Base Methodology Dictionary.

2.2.3 Scope of Document

There are approximately 40,000 separate F8/OUC combinations populated in BTs ledgers (that is, showing a year-end balance reflecting the posting of transactions by one or more OUCs to the relevant F8 codes during the year). Approximately 7,000 F8/OUC items account for more than 90% of the total ledger value represented by the total population of F8/OUC items.

The DAM has been written specifically to describe the attribution of the items comprising at least 90% of the total ledger value in absolute terms. However, actual coverage exceeds this threshold. Methodologies have been described that are relevant to the attribution of the items that make up approximately 90% of each sector within the ledgers. Some attribution methods apply to more than one F8/OUC combination. Therefore, there are F8/OUC items whose attribution would be described by the methodologies included in the DAM, but which are not specifically identified. The methodologies described cover substantially all of the revenues, costs and capital employed recorded in the ledgers.

The document follows this principle of identifying only those material items, rather than the total population of items that is relevant to a methodology. Key destination tables specify the destinations of at least 90% of the costs being attributed by a methodology.

We do not document every single item of revenue, cost and capital employed because the 90% coverage applied identifies substantially all of the different ways in which attribution is carried out.

OUCF8

F8_OUC_Diamgra

IV M KB KU J W etc

247190 x x x x

247174 x x x

249279 x

291016 x

297174 x

247191 x

etc

F8 Description

Sector e.g. Transport

OUC Base Ref Summary Ref

Fuel206210 Y FUEL

Etc. Etc. Etc. Etc.

Sectir_Transport_v1_Diagram_0910

203980 MT MTPN Y3 EXCEPT Summary description of base

206220 Licences Y3 EXCEPT

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3 Overview

3.1 Basis of preparation

The Regulatory Financial Statements (RFS) show costs, revenues, assets and liabilities on a current cost accounting (CCA) basis, for the defined regulatory Markets, Technical areas and the Disaggregated activities of BT.

The source of the financial data is the central ledgers and consolidation system for BT, where financial transactions are recorded by the organisational units within BT, supplemented by CCA adjustments as described in the Detailed Valuation Methodology (DVM). Accounting Separation (AS) uses this information to present costs, revenues, assets and liabilities for each of the Markets, Technical Areas and Disaggregated Activities defined for regulatory purposes.

3.1.1 Source of transactions

The historical cost, financial transactions and balances for use in the separated accounts come from two main sources:

The core central General Ledger (GL) system.

The Group Consolidation System (GCS).

Core GL system

The core BT businesses record their financial transactions on a historic cost basis in the core GL system. These ledgers are supplemented by feeder systems that capture details at transaction level of:

Pay.

Stores.

Other additional costs.

Transactions relating to engineering activities are collected and posted to the ledgers at Class of Work (CoW) level. CoW specifies the type of activity or asset type on which the engineer is engaged. Transactions for non-engineering activities are captured in the GL against the relevant functions involved (e.g. marketing, billing, etc.).

Consolidation system for self-accounting units

The non-core BT businesses do not use BTs core GL to record their financial transactions and instead provide details of their financial information on a Group Financial Return (GFR). GFR follows a standard format, allowing individual GFR line items to be mapped to a special GL code for use in the AS system.

CCA Adjustments

The current cost accounting adjustments for BT Group and other adjustments such as accounting journals posted outside the GL system are also recorded through the GFR system. The adjustments follow a similar mapping, from the GFR to individual GL account codes, for use in the AS system. CCA adjustments are described in detail in the DVM.

3.1.2 Gross Adjusted Costs

Costs are presented on a gross adjusted basis, i.e. this reflects all external costs together with all transfer charges between divisions. There are two main types of transfer charges:

Cost transfer charges between divisions/organisational units, which go through the GLs. Such charges are eliminated in the consolidated results, and usually in the AS framework, where they are replaced by the underlying cost.

Transfer charges between Markets e.g. from the Wholesale Significant Market Power (SMP) Markets to the BT Retail Residual. Such charges are calculated and presented only within the AS framework (rather than through the GLs).

3.2 Costing principles

In order to translate the financial information of the accounting ledgers from a functional and organisational view to the separate Markets, Technical Areas and Disaggregated Activities defined for regulatory purposes, it is necessary to attribute each financial cost (or revenue, etc.) item to the relevant Market, Technical Areas and Disaggregated Activity.

The AS system achieves this by defining each Market and Technical Area in terms of its Disaggregated Activities (Components, Retail Products and Wholesale Services) a number of constituent services, and attributing the source costs, revenues, assets and

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liabilities to the relevant services. The attribution is underpinned by a strict set of costing principles as explained in the Primary Accounting Documents.

Cost drivers or bases

This is the underlying basis on which costs are incurred, e.g. accommodation costs are incurred on the basis of floor space requirements. The cost driver or base method is therefore floor-space.

Allocation

The item of cost is allocated wholly to a particular Retail Product, Plant Group (PG) or Activity Group (AG), without the need to split the underlying cost pool.

Apportionment

This is where an item of cost cannot be identified directly with one Product (or PG or AG) and needs to be split across several cost pools on an appropriate basis. The cost driver will provide an objective basis for splitting the costs, as the cost driver will show how the cost was caused subsequently the costs are then split in proportion to the value of the driver associated with each subsequent cost pool.

Attribution

This is a general term encompassing both allocation and apportionment.

There are certain types of cost (e.g. the costs of running the Chairmans Office) which do not have a causal relationship with any Products. Additionally, at very detailed levels of reporting, cost attribution may not be possible on a strictly cost causal basis (e.g. attribution of common sales costs to a series of similar services). In such cases, a reasonable method is used.

3.3 Conceptual model

The AS solution provides a logical structure for the attribution of costs, revenues, assets and liabilities of BT to, ultimately, the components and Products that aggregate into:

Markets.

Technical Areas.

Disaggregated Activities.

Wholesale Services of BT.

The term cost pool is used as a generic term referring potentially to a pool of cost, revenues, assets or liabilities.

3.3.1 Attribution of GL/F8/OUCs

Costs, revenues, assets and liabilities form the starting cost pools of the attribution process. These are defined in terms of F8/Organisational Unit Code (OUC) combinations.

An F8 code is a group of one or more similar GL codes within the core GL system. In an OUC each F8 code can be attributed using an appropriate cost driver of base methodology. F8/OUC cost pools are allocated or apportioned to Products, Intermediate Activities or PGs.

3.3.2 Attribution of Initial Intermediate Activity Groups (Initial IAGs)

Initial IAGs are intermediate cost pools used to collect costs relating to activities such as fleet, facilities management and general corporate costs. The category includes the apportionment of specific activity costs for units that perform a service to other organisation units and recover their costs through a transfer charge. The external costs of the unit supplying the services are apportioned on the basis of an analysis of the transfer charges to the receiving units. The costs of the Initial IAGs may be attributed to Products and support PGs.

3.3.3 Attribution of Support PGs

Support PGs are intermediate cost pools used to collect costs relating to plant overheads, such as accommodation costs for network buildings and costs of providing power to the exchanges and transmission assets. These costs are apportioned directly to the relevant PGs, which they support.

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3.3.4 Attribution of PGs

PGs are intermediate cost pools used to collect costs relating to the BT Wholesale Markets. The PGs carry the capital costs and values (depreciation, net book values) and expense items (e.g. maintenance) for specific types of network assets, as well as other general costs allocated to PGs via Initial IAGs and support PGs. PGs are attributed to Network Components on a one to one or one to many basis. A PG could contribute costs to many Network Components, and a Network Component could receive costs from many PGs. Examples of PGs are Local Lines Fibre Cable (Current and Capital) and Main Digital Exchange Switch block.

3.3.5 Attribution/Charging of Network Components

Network Components collect costs from the PGs and constitute discrete parts of the network. The Network Components (which are in some cases grouped for presentation in the RFS) are used to provide network services to Markets and Products as well as to Other Communication Providers (OCPs). Network Components are charged to Services or OCPs via Standard Services. Calculation of charges for Network Components may support Standard Services or be consumed directly (non Standard Services), and the charging structure is different for each.

Standard Services are segments of the network that represent a bundle of network Components. The Standard Services provide use of the network to both BT businesses (e.g. BT Wholesale) and OCPs.

The charge applied is calculated as:

3.3.6 Products and Markets

By the end of the final stage of attribution from Network Components and own use AGs to Products, all the non-network costs and the network charges are attributed to Wholesale Services. Wholesale Services can be grouped together to represent the distinct Markets, Technical Areas and Disaggregated Activities defined for regulatory purposes.

EqualsMultiplied byVolume ofusage byProduct

UnitCharge Charge Applied

ChargingofNwkComponents

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3.4 System process

BT uses a system called ASPIRE to perform the fully allocated cost attribution for AS. The system defines different categories of costs, which are treated in a similar manner in the system. At each level of the system processing, a particular category of costs will be emptied (attributed) to other cost pools, and usually receive no further costs itself. This causes a sequential flow of costs across different categories at each stage of the system, with all the costs ultimately emptying into the end Product categories. The process of cost pools emptying as the costs are attributed forwards is referred to as exhaustion.

The diagram below illustrates the main processing stages of the ASPIRE system for AS.

Diagram: Overview of ASPIREs main processing stages for AS

AG113 AG114 NCs

AGs

PGs

Prods

AG112+

PGs

Prods

AG113+

PGs

Prods

Prods PGs Prods NCs AG300s

Prods

Key Interfaces Processing levels/sequence

Price data (NCC or cost plus)

Revenue and cost data

Other transaction data

Level8

NCs

Level 9Std &

non stdservices

Level 10AG300s

Std &non stdservices

AG300s

ProdsProds

General ledger feed

Group FinancialReturn (GFR)

extract

Attr

ibut

ion

of c

osts

, rev

enue

, ass

ets

and

liabi

litie

s (fu

lly a

lloca

ted

cost

ing)

Attr

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ion

ofch

arge

s

Exha

uste

dto

:So

urce

cost

cent

re Level 1

AG300s

Prods

SystemProcess_diagram

Level 2 Level 3 Level 4 Level 5 Level 6 Level 7 Level 8 Level 9 Level 10

Costs,revenues,

assets,liabilities,

at F8OUC level

AG101-106,

AG111

AG120- 129

AG130 - 139

PGsAG213

AG114+

PGs

Prods

AG112

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3.4.1 Key Interfaces

Different types of data are fed into ASPIRE tables from a number of sources. The diagram below illustrates the main types of transaction data entering the ASPIRE system prior to processing:

All of the above data types, except for the core GL feed are uploaded to ASPIRE via a data management and validation system called ASSURE to ensure data integrity and maintain version control.

Financial account data

In the first stage of the system process, the cost, revenue, assets and liabilities for apportioning are brought into ASPIRE. This is done through two main feeds:

Core GL feed

The core GL feed provides values for costs, revenues, assets and liabilities at GL account level. This covers areas of the business that use the central accounting system and GL for BT (i.e. excluding the Self-Accounting Units). The information is input into ASPIRE via an automatic upload.

Non-core GL feed

The non-core GL feed provides values for costs, revenues, assets and liabilities for parts of the BT business that do not use the main central accounting systems and GL. These parts of the business (Self-Accounting Units) provide financial information on a GFR, with information reported by individual GFR line (e.g. GFR 15642 Other Operating Income - Other). The GFR information is then updated into a system called Group Consolidation System (GCS), maintained centrally by BT Group. Information at GFR level from GCS is translated into specific OUC and GL code references, which will be used in the ASPIRE system. The non-core trial balance feed is then uploaded to ASPIRE (via the ASSURE system) to enable the GL codes, OUC references and values to be populated in ASPIRE.

Other cost adjustments such as CCA adjustments and accounting journals are also entered into ASPIRE via the non-core GL feed.

GL accounts are the lowest level at which financial information is brought into ASPIRE. A CHART file is fed into ASPIRE, which sets out a mapping of GL accounts to F8 codes, sectors, transaction types etc. This is done through a series of markers, which enable the system to track and report results against a number of views:

Overview of Data entering ASPIRE

Financial Accounts Data Non- Financial Accounts Data

ASPIRE

Core General Ledger(GL)

Non Core General Ledger

CHARTTurnover to Product

Volumes Data

Bases DataFeed

(GL) Feed - by sub- product

relationship

Data_ entering_ Aspire_ 041006.vsd

KeyInterfaces

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Diagram: Overview of a CHART file which is fed into ASPIRE

Non-financial account data

In addition to the basic financial data in ASPIRE, volume data and other non-financial data for base attribution methodologies are entered. For example, data on the square metre usage of different buildings by different activities would be converted into a set of percentages (representing the proportion of total space used by each activity) and entered into ASPIRE, for use in the apportionment of accommodation costs on the basis of floor space usage.

Base and volumes information comes from a variety of sources (e.g. Core Transmission Costing System (CTCS) and Call Statistics Centralisation System (CSCS) for Product volume data).

3.4.2 System processing levels

Level 1 (Fully Allocated Cost (FAC))

The source cost pools at level 1 are the F8/OUC combinations of cost, revenues, assets and liabilities including current cost adjustments.

F8/OUC combinations for revenue are allocated directly to Products and activities at level 1. F8/OUC combinations for costs, assets and liabilities are allocated to subsequent cost pools and/or Products using a number of possible methods.

The AS solution uses the following types of method, which are processed in the following order by the system:

Attributions using external data base methodologies:

Allocation directly to a specified cost pool on a one to one basis.

Apportionment to subsequent cost pools on the basis of non-financial data.

Apportionment of overheads of certain OUCs to subsequent cost pools using specific information.

Attributions based on results of previous apportionments by the system.

Apportionment to subsequent cost pools in proportion to the pay costs (per pay - type F8 codes) received by those cost pools.

Apportionment to subsequent cost pools in proportion to a specific type of pay costs (per specified restricted pay - type F8 codes e.g. maintenance pay F8 codes) received by those cost pools.

Apportionment to subsequent cost pools on the basis of previously apportioned costs pan-divisional.

Level 2 (FAC)

The IAGs (AGs 101 and 106) are attributed to subsequent AGs, PGs and/or Products.

Levels 3 5 (FAC)

At level 3, AG 112 Corporate Overhead Costs are apportioned to subsequent AGs, PGs and/or Products. This is followed by the apportionment of AG 113 Total Liquid Funds and Interest (cash and bank balances, short-term investments and borrowings, etc.) at level 4, and AG 114 Non-Core residual balances at level 5.

Level 6 (FAC)

Product Types K CID1 CID2 CID3 CID4 CID5 CID6

CID7

CID8 CID9

CID10

Transaction type

Sub transaction type

Finance type

SFR Sector

Sub Sector (LRIC marker) SFR Line

Direct Indirect

F8 Code Core/ Non-

Core Indicator Ownership

Key CID

Central Information Database (see Data Source Section)

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At level 6, the support PGs and Liquid Funds (Network) are apportioned to the PGs to which they provide support.

The Activity Group AG401-AG415 [the driver AGs] is apportioned to the PGs to which they provide support.

Level 7 (FAC)

At level 7, the intermediate retail activities are apportioned to the Products driving the retail overheads.

Level 8 (FAC)

Level 8 performs the attribution of PGs to network components. This takes place over a number of discrete stages in the Network Cost Apportionment Module (NCAM) of the system:

PGs are assigned to network components using apportionment percentages held in fixed base tables.

The key stages of processing for Network charges, which also start at level 8 in the system, are as follows:

Level 8.1 (Network charges)

Level 8.1 performs the calculation of charges by Network Components, using the following data source/s:

Network Components used in Standard Services - prices are taken from price lists outside the system.

Network Components used in Non Standard Services - prices are calculated (outside this module) by taking the Fully Allocated Costs (FACs) of network Components (per the output from the Fully Allocated Costing (FAC) module), with the price calculated as cost plus a return on capital employed (including network own use).

The processing level 8.2 attributes Network Components to Standard Services (or Non Standard Services) based on the volume of usage by the Standard or Non Standard Services.

Level 8.5 Openreach Part Services

At level 8.7 all Network components have been fully allocated to services.

3.4.3 Controls

There are a number of controls in the AS system to ensure the accuracy and completeness of the results. The key controls include:

AS data vetting system

All data entry to the ASPIRE system, except the direct interfaces from the GL, takes place through the ASSURE system. The ASSURE system manages version control and improves data integrity. Data is entered or loaded into ASSURE via a bespoke user interface system, and can be managed and reworked in a variety of ways. Once a table has been updated, it is changed from a Local to Global phase. It cannot then be re-edited unless it is changed back to Local by the Run Control Manager, which helps to ensure data integrity. Once data has been collected from all the users it is submitted to an ASPIRE run and cannot be altered after that point.

Specification of data sets for runs

Each run of the system is given a unique reference, which dictates the combination of data sets and reference data to be used in the run. These are determined from electronic control sheets to effectively commission the run.

Completeness of processing

ASPIRE produces a series of probity reports to show the completeness of processing at each level of the system.

3.4.4 Self Accounting Units

Revenue, costs and net assets from Self Accounting Units (SAUs) are attributed directly to the Retail Residual activity with the exception of Liquid Funds transactions e.g. cash, short term borrowings, short term investments and net interest payable, which are apportioned to AG113.

3.5 Transfer charges as a basis for cost attribution

A number of the individual methodology/base descriptions set out in Section 4 (Base Methodology Dictionary) refer to the use of an internal transfer charge destination as the basis for attribution of the actual cost underlying the transfer charge within the AS process. This section explains the rationale for using this basis.

The purpose of transfer charging is to:

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Enable customer-facing divisions, which are responsible for their own profitability, to receive a correct allocation of income and expenditure.

Enable support functions to charge for their services to other group units.

Enable control to be exercised over use of key resources.

Maintain proper control in accounting units of certain balance sheet items.

There is a well-established process for the recording of transfer charges between organisational units, and for the monitoring and control by each unit to ensure that the amount of the charge is properly stated in accordance with the transfer charge agreement, and that the amounts are recorded in the correct organisational unit.

Within the AS process, the transfer charge amounts recorded by each unit are replaced with the actual cost underlying the charge, and for which the charge is made. The actual cost is then attributed consistent with the treatment of the transfer charge. This occurs principally in respect of the following types of cost and is attributed on a cost-causal basis:

Motor transport charged on the basis of the number and types of vehicles used by each OUC.

Computing charged on a monthly fixed charged, taking account of variations in volumes e.g. a reduction in volumes will result in lower charges.

Accommodation charged on the basis of floor space occupied by each organisational unit, taking account of the variations in underlying cost (e.g. a central London office space being charged at a higher rate than an office space in a rural location).

3.6 Use of System Generated Bases

In some instances, the regulatory accounting process uses previously attributed costs as the basis for further cost attribution. These bases are system generated. A report is run from the accounting system that shows how costs have been attributed to Plant Groups, so that we know what proportion of previously attributed costs has been attributed to Plant Groups 1, Plant Groups 2 etc. The costs subject to the system generated base are then attributed to Plant Groups 1, 2 etc. in these same proportions. For example, supervisory and management labour costs are considered to be incurred in support of the range of activities supervised and/or managed. Accordingly, the supervisory pay costs are attributed as an overhead of the underlying directly apportioned costs.

If an OUC, for example PQR1 is engaged in maintenance activity, and the pay costs that result from such activity are attributed to Plant Groups 1 and 2 in the ratio 60:40, then the supervisory costs incurred in OUC PQR are also attributed to Plant Groups 1 and 2 in the same 60:40 ratio. The system generates the base because it is used to determine the 60:40 split of the underlying maintenance costs incurred by OUC PQR1.The system base is generated using data designators..

3.6.1 Apportioned to specific cost pools on the basis of previously apportioned costs pan-divisionally

These bases (known as Rule Type 12s in the ASPIRE System) apportion group costs, revenues and capital employed across multiple business units. These bases are assigned two markers that govern:

a) The Primary Data Designator 1 (DD1) Identifies the income/cost transactions the system should draw upon to calculate the appropriate base.

Primary Designator

Transactions drawn upon Cost type to be driven

CAPEXP All non-pay capital additions (purchases of non-current assets)

Capital expenditure payables

DTTCP All Trade Receivables ledgered by BT during the year

Balance Sheet bad debts

NCOFADA Transmission Depreciation and non-current assets

Depreciation Core Transmission: Cable & Other

NCOFADM Apparatus Depreciation and non-current assets

Depreciation Apparatus

NCOFAEA Amortisation and non-current assets Depreciation Software

OPEACN Accommodation costs Sundry receivables and payables arising from

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Primary Designator

Transactions drawn upon Cost type to be driven

accommodation costs

OPECST External operating costs excluding pay, depreciation and capital additions

VAT related payables

OPEOTH Total operating costs, excluding depreciation and pay costs

Prepayments

OPEPST External operating costs, excluding depreciation, pay and POAS

Miscellaneous trade payables

OPEXPS All operating costs, excluding depreciation incurred by BT during the year

Prepayments receivables

REDUND All redundancy and new start pay costs Redundancy accruals

TOTPAY Total capital and current pay costs Payroll related receivables and payables

b) The Secondary Data Designator 2 Identifies the AS cost pools to which the divisional balances should be apportioned.

Secondary Designator

Destinations of previously attributed relevant costs (e.g. accommodation costs, payroll costs) to be taken into account in deriving the base

ALA Majority of all Products, AGs and PGs excluding Openreach PGs

ALL All AS cost pools excluding Openreach PGs

ALLA All AS cost pools

COR Substantially all core Products and PGs excluding Openreach PGs

CORA Substantially all core Products and PGs

ORP All Openreach cost pools

PENA All units in the BT Pension scheme i.e. all UK specific Products, e.g. core Products and PGs

SYBA All units in the BT Sharesave scheme i.e. all UK specific Products, e.g. core Products and PGs

3.6.2 Apportioned on the basis of pay costs

System generated pay bases can draw on previously apportioned pay costs in a variety of ways. For example the TOTPAY pan divisional base described in section 3.6.1 draws on all pay costs on a pan divisional basis BT wide. Another type of base (known as a Rule Type 6 in ASPIRE) draws on previously apportioned pay costs specific to a Line of business. Using this base it is also possible to restrict the calculation to specific parts of a Line of Business drawing on previously apportioned costs within a defined organisational range (exceptional OUCs are cost pools whose costs are attributed using different bases compared to the standard methodology used by other OUCs for any give cost type).

The table below lists all the major Rule Type 6 bases.

Designator Procedure

FTD This base is compiled from previously allocated Maintenance pay F8 codes, (excluding exceptional OUC pay)

FTK This base is compiled from previously allocated Provision and Installation and Maintenance pay F8 codes

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(excluding non-core pay and exceptional OUC pay)

FTQ This base is compiled from the previously allocated Capital and Current pay F8 codes (excluding non-core pay and exceptional OUC pay)

A further type of pay base is known as a Rule Type 4 in the ASPIRE system. This base is similar to the Rule Type 6 base but draws upon apportioned pay within specific OUCs including exceptional OUCs. This RT4 pay base has one data designator called PCT.

The PCT designator offers the ability of specifying a range of Wholesale, Openreach, Retail and Global Services cost pools to which the cost should be apportioned. This type of base can be used where the engineering Travel and Subsistence of certain OUCs has to be apportioned over a limited range of PGs using a pay base specific to the PGs supported by those units.

3.7 Sectors

We define our main activities in terms of sectors for reporting purposes. The sectors show the:

Main types of services we provided - with revenue recorded against these services.

Main functional activities we perform - with operating costs incurred against these activities.

Main non-current assets underpinning our activities - with fixed asset values and costs recorded against these assets.

Other assets, liabilities and provisions that we incur in support of our services and activities.

There are two types of reporting sectors:

a) Internally reported ASPIRE sectors

Each of the internally reported sectors contains a number of F8 codes, which represent groups of GL codes for costs, revenue, assets and liabilities. The F8 codes provide the starting point for the attribution of costs, revenues, assets and liabilities in the AS system.

b) Externally reported sectors

F8 codes in an ASPIRE sector are attributed to Wholesale services and Retail products using specific bases. Once revenues and costs are attributed, each service can still be reported by ASPIRE sector. Wholesale ASPIRE sectors are further grouped into higher level sectors for external reporting purposes. We provide a mapping of ASPIRE sectors into reported Wholesale markets in Section 3.7.1.2.

3.7.1 Sector Allocations

This section provides a description of ASPIRE sectors covering 90% of the absolute value of the cost allocation for each sector and details of cost booked. We separately include in Appendix B a table which shows the allocations from the F8 cost or income pools in each sector with a summary description of the base allocation method. Detailed descriptions of each base are provided in sections 4, 5 and 6.

3.7.1.1 Revenue

Revenue is grouped into the following sectors and all relate to Retail activities:

Ref Sector Description AA Other Revenue AU Supply of Service Out - Prod Specific AW Intra-group Elimination

3.7.1.2 Operating Costs and Balance Sheet Sectors

This section describes the operating costs and balance sheet sectors relating to activities that we provides to our customers.

Provision/Maintenance Provision/Maintenance consists of the following ASPIRE sectors. The most material cost relates to D-side copper which is apportioned on the basis of the number of lines.

ASPIRE sector Description Includes:

B1 Provision and Installation Installation activities such as the physical installation of network equipment, cable and/or customer premises equipment to provide network connectivity

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and other services to customers.

Provision activities such as work to activate and enable the service to a customer. This may involve software configuration to activate or de-activate particular services, using the underlying physical equipment and network provided through installation activities.

B2 Maintenance

Costs to operate our network in good working condition to meet service requirements such as performing activities to test, maintain and repair the network e.g. scheduled or planned maintenance of particular network assets or ad hoc maintenance problems reported by BT staff or customers.

Network Support Network Support consists of the ASPIRE sectors below. The key drivers for the apportionment of network support costs include pay, the relative floor space occupied by fixed assets and the current cost replacement value of assets.

ASPIRE sector Description Includes:

BK Plant Support

The costs of activities undertaken to support the running of our Network. E.g. Government levied business rates payable on BT Network installations and specialised estates such as telephone exchanges, radio stations; Coaching pay costs booked by Customer Service Coach (CSC) staff; Transmission Repair and Control pay costs on all core transmission equipment and private circuits; Pay costs for the provision, re-arrangement or cessation of network services; Pay costs relating to plant protection and inspection associated with statutory notices; e.g. inspection of low voltage overhead power crossing clearance; and miscellaneous support work costs e.g. the cost of installation (and subsequent recovery) of emergency plant incorporated in the network at the time of failure of other plant.

General Support General Support consists of the ASPIRE sectors below. The key drivers for the apportionment of General Support include pay costs and activity surveys.

ASPIRE sector Description Includes:

B0 General Support

Staff costs for BT people in the UK transition centre or completing project work. Other costs related to computing, security, mobile and general network maintenance. Also includes cost for payments relating to service level guarantee scheme, wayleaves payments in respect of network plant and the Ofcom administration fee.

B4 Planning and Development Costs relating to the planning of the network and the development of new technologies and service offerings e.g. pay costs for operational planning and planning agency staff and research and development contracts.

B6 Supplies

Costs associated with the procurement of materials and services (to support business operations) and the issuing of supplies from stores e.g. outsourcing of finance and accounting work, logistics and procurement pay costs, freight and carriage costs of items held in stores, tools and small items.

B7 Transport Costs associated with vehicles e.g. costs of acquiring, maintaining, leasing, managing and retiring our fleet of vehicles.

BA Computing

Mainly BT TSO costs re-charged to the rest of BT Group for their use of services such as computer operations, research and development and user support to our employees e.g. installing, setting up computers and helpdesk support.

BB Customer Service Costs associated with customer service activities to maintain customer satisfaction e.g. call centre management and customer service field

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operations such as faults and maintenance tests.

BE Personnel and Administration

Costs associated with the provision of personnel services e.g. recruitment, release of staff/redundancies, development and implementation of performance management processes and other human resources (HR) support activities.

BV Customer Support Costs associated with performing diagnostic tests in support of maintenance and repair work and operation of the work manager system to schedule and control repair and maintenance work undertaken by BT engineers.

General Management General Management consists of the ASPIRE sectors below. The key drivers are activity surveys and pay costs.

ASPIRE sector Description

Includes:

BF General Management and Other

Costs associated with general management activities and other general expenses e.g. New Start leaver payments, General management pay costs for board members for business units, senior managers and support staff working on general management activities; General management and other incidentals such as costs for conference facilities; General legal charges, Group insurance charges, Corporate provisions, and operating costs incurred by our non-core businesses (i.e. subsidiaries, self-accounting units, etc.).

B5 Operator Services Costs associated with operator assistance (OA) services, emergency calls and directory enquiry (DQ) services.

Finance and Billing Finance and Billing consists of the ASPIRE sectors below. The key drivers for the apportionment of Finance and Billing include activity surveys and pay costs.

ASPIRE sector Description

Includes:

B9 Finance and Billing

Costs incurred from various activities of a financial nature, such as budget building and management reporting, and costs incurred to generate a bill for the customer and to collect payment. Accounting and general finance activities include financial and management accounting, budgeting, forecasting and payroll processing. Billing activities include customer service, billing and credit control; bad debt costs and post office handling costs.

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Accommodation Accommodation sector consists of the following ASPIRE sectors. Accommodation costs are mainly apportioned based on the use of floor space and utilities.

ASPIRE sector Description

Includes:

BC Accommodation

Costs incurred for buildings maintenance and decoration of sites and buildings, costs of rent payable to landlords on buildings occupied by BT, costs of business rates on land and buildings, building electricity supply costs in both operational and office buildings and payments to external contractors for cleaning services in BT accommodation.

Bad Debts Bad debts include costs associated with writing off amounts that cannot be collected from customers.

ASPIRE sector

Description Includes:

BW Bad Debts The internal and external costs associated with writing off amounts that cannot be collected from customers. The majority of these costs relate to the Retail Residual market.

Other Costs Other Costs consists of the ASPIRE sectors below. The key drivers include the pence per minute charging of the other operators for BT traffic on their network.

ASPIRE sector

Description Includes:

B8 Marketing and Sales

Costs to retain and win business from existing, new business and retail customers. E.g. conducting market research to gain intelligence on BTs markets and understanding the demands of our customers and competitor services; providing marketing services such as the design, planning and implementation of marketing activities, publicity and promotions; managing contact with customers and handling customer orders such as understanding the specific needs of the customers, confirming their credit vetting, and determining the feasibility of meeting the order requirements.

BG SLRC Variance Cost variances between actual labour costs and the standard rates used for management costing purposes.

BU Elimination of Intra-group Transactions between BT group businesses.

C1 Other Operating Income

Other operating income relating to non-telecommunications services and hence separately recorded from BTs core Revenue (calls, connections and rental charges etc.). This mainly consists of profits on the disposal of land, buildings and sale of scrap copper cables. There is also smaller sundry other income categories.

C2 Payments to OCP

Payments made to OCPs for use of their network e.g. where BT carries a call originating from a BT customer but terminating on a mobile phone, BT makes a payment to the Operator for carrying the call over their network. Payments may also arise from instances of call termination where BT use OCPs to terminate a call, transit traffic where BT carries traffic over its network for part of a call, but also uses another operators network. Payments are also made for Premium Rate Services (PRS) where BT customers make calls to the premium rate service telephone numbers of other operators and calls to BT Freephone numbers.

C3 Payments to OA Same as sector C2, but for International CPs.

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ASPIRE sector

Description Includes:

C7 Internal Product Charge from Core

Transfer charges for Products used internally within BT. For internal management purposes, BT runs a 'transfer-charging' process. GL codes for the transfer charges are set up as matched pairs, one for the charge out and one for the charge in. These GL codes are associated with F8 codes. Therefore there will be matching pairs of F8 codes, one for the charge out (F8 codes beginning with 24) and one for the charge in (F8 codes beginning with 28).

EC Other Intangible Asset Identifiable intangible assets such as goodwill and indefinite life assets.

F0 Specific item interest The net amount of interest payable and receivable by BT on its bank balance which relates to specific items e.g. pensions.

F1 Employee Profit Sharing The cost of provisions made for payments under the employee profit sharing scheme.

F2 Net Short Term Interest The net amount of short term interest payable and receivable by BT on its bank balances.

F3 Associated Companies The share of profit or loss before tax of associated undertaking and the profit and loss account charges for the amortisation of goodwill arising from the acquisition of subsidiary undertakings.

T3 Divisional Supply Service Out Internal trading for BT Basic / Social telephony, billing services, directories billing, retail billing to Redcare. (Costs transfer out)

U3 Divisional Sup Service In Internal trading for BT Basic / Social telephony, billing services, directories billing, retail billing to Redcare. (Costs transfer in)

F4 Corporation Tax The current year corporation tax charge for BT and subsidiaries, as well as prior year adjustments.

F5 Deferred Tax The current year deferred tax charge and prior year adjustments.

Depreciation Depreciation is analysed between land and buildings, access, switch and transmission and other (including network power, computers and software). This is described in the individual asset sectors below. The key drivers are engineering models and direct mapping of BT classes of work to network components and then onto the appropriate service, based on usage factors and actual service volumes. Balance Sheet Land & Buildings This sector contains the asset values that are booked to BT Classes of Work for land and buildings, including freehold, long leases and short leases. The sector includes corporate office and network buildings owned by BT. Asset values are mainly apportioned based on the use of floor space and utilities.

ASPIRE sector

Description Includes:

DF Accommodation Plant Net

The asset values and depreciation for Network Plant Accommodation necessary for the operation of network equipment e.g. ventilation and cooling plant. Specific assets held within this sector (by CoW) include:

ACPM - Accommodation Plant, Equipment-Related - Motor Transport

ACPS - Accommodation Plant, Security for the provision and installation of security equipment.

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ACPR - Accommodation Communication Plant Rooms.

ACPA - Accommodation Plant Access Services Division such as the cost of construction provision, installation and recovery of ASD (i.e. Openreach) network equipment-related plant (also known as accommodation plant).

ACPN - Accommodation Plant, Equipment Related - Network Operational Buildings.

ACPC - Accommodation Plant - Computer Centres.

DP Land

The asset values for land analysed between historic cost values and the CCA adjustments applied to provide a current cost valuation of the assets.

The main classes of work against which land values are recorded are land freehold, land long lease and land short lease.

DQ Buildings

The asset values and depreciation for buildings fixed assets.

Buildings relate to the freehold, long leasehold and short leasehold buildings that we own such as corporate office building, our shops and service centres, and network buildings (e.g. exchange buildings) that we own.

DR Accommodation Plant

Costs and depreciation costs for accommodation plant.

Accommodation plant is held in our freehold, long leasehold and short leasehold buildings, and contains asset items such as furniture and sundry other items used in the buildings e.g. AFH- Accommodation Plant in our Freehold buildings, ALL - Accommodation Plant in our Long lease buildings and ASL - Accommodation Plant in our Short lease, buildings.

Access - Copper This sector contains the asset values for access copper (all the copper cables in the access network and all other necessary equipment required to carry signals between the user and the exchange). It includes 'Main' Copper and 'Distribution' Copper, as illustrated in the diagram below. The key driver is the direct mapping of Classes of Work (CoW) to network components and then onto the appropriate service based on usage factors and actual service volumes.

The sector consists of:

ASPIRE sector Description Includes:

D2 Access: Copper

LDC Construction, Local Distribution Cable for the provision or recovery of Access Copper Distribution and Branch Cables applicable to the copper build programme. This covers all work to increase the capacity of the network. Excludes duct.

LDCR - Renewal, Local Line Copper Distribution Cable for the replacement of Access network metallic distribution and branch cables.

LMC - Construction, Local/Main Exchange-side Cable relating to the provision or recovery of Access copper main cables to increase the capacity of the network.

LMCR Renewal, Local Line Copper Main Cable for the replacement of

Local Exchange

Primary ConnectionPoint PCP

Main Copper

CU

STOM

ERPR

EMISES

DistributionCopper

SectorD2AccessCopper

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Access network metallic main cables and ancillary plant as a result of a fault.

ADSL costs of contract, store and labour for the Construction of Digital Subscriber-line.

NWB/NWR - Provision and Installation of business and residential Exchange lines.

Access Fibre This sector contains the asset values and depreciation for access fibre and radio. The key driver is the mapping of CoW to network components and then onto the appropriate service based on usage factors and actual service volumes.

ASPIRE sector

Description Includes:

D1 Access: Fibre and Radio

The asset values and depreciation for Access Fibre (optical fibre cables in the access network) and Access Radio (cellular, microwave and satellite radio systems used to connect the user and the exchange). This includes costs relating to:

LFDC and LFSC - Construction of Local Line Optical Fibre Spine and Distribution Cable such as the provision, re-arrangement and recovery of optical fibre cable, blown fibre tubing, blown fibre bundle, and sub duct in the access fibre network.

LFXE - Construction of Local Line of Exchange Service Module.

LFME - Construction of Local Network Service Module Equipment.

TPWA - Construction of Access Radio Systems.

Access Duct This sector contains the asset and depreciation values for duct. Duct is a pipe, tube or conduit through which underground copper or fibre cables are passed. Duct in the network is split into 'main'/'Exchange Side' (Class of Work LMD) and 'Distribution' (Class of Work LDD), Main Underground Duct (Class of Work MUD) and Core Junction Duct (Class of Work CJD). The fibre Network is split into similar sections; the Exchange side is known as Spine Fibre and the Distribution side is known as Distribution Fibre and the main is Core Fibre. The key driver is a duct occupancy model that allocates CoW to network cable components and then onto the appropriate service based on usage factors and actual service volumes.

ASPIRE sector Description Includes:

D3 & DB Access: Duct Core Transmission: Duct

Asset values and depreciation for Access Duct. Specific assets include the costs of provision or recovery of:

LDD - Construction of Local Distribution Duct for Copper Cable.

LMD - Construction, Local main (Exchange-side) Duct for Copper.

LDR - Renewal, Local line Duct for Copper Cable (either Main or Distribution) to replace or partially replace duct for Access copper cables.

LFD - Construction, Local Duct for Optical Fibre Cable in the Access Fibre Network.

LFD - Construction, Local Duct for Optical Fibre Cable in the Access Fibre Network.

MUD/MUDR - Construction/Renewal of Backhaul/Inner Core Duct. This asset class covers the provision and recovery/renewal of Backhaul/Inner Core Duct. Construction covers all Core Network duct work.

CJD/CJDR - Construction/Renewal of Backhaul/Inner Core Duct. This asset class covers the provision and recovery/renewal of Core network duct.

Switch

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This sector contains the asset values and depreciation for switching equipment located in BT exchanges and provides the switching function of telephone networks. The key drivers are engineering models that allocate CoW to network component and then onto the appropriate service based on usage factors and actual service volumes.

ASPIRE sector

Description Includes:

D4 Local Exchanges: Digital

The asset values and depreciation for:

Digital Local Exchanges LDX/LYX - Construction, Local Digital Exchange. This asset class covers all equipment and associated costs incurred as part of basic exchange provision, extension, or re-arrangement. CoW LDX for Digital Local Exchanges manufactured by System X, LYX for Digital Local Exchanges manufactured by Ericsson.

Main Distribution Frames LMDF - Construction, MDF for exchanges. This asset class covers the provision, extension, upgrade, replacement, re-arrangement and recovery of MDFs connected with Inland (BTUK) telephone exchanges. MDFs are those distribution frames providing direct interface with external circuits terminations (customer or other exchanges).

DMC - Construction Operator Service System - Provision and recovery of operating access, Automatic Voice Response (AVR), Directory Assistance System and Operator Keyboard Display Terminal equipment controlled by Operator Services.

D8 Main Exchanges

The asset values and depreciation for the provision, rearrangement, recovery and upgrade of:

MDX - Main Network Switching Digital which are digital exchanges providing the certain functions to digital traffic e.g. setting up and clearing down calls, switching traffic and signalling to other exchanges and subscribers.

NGS - Next Generation Switch which is a new form of switch. There are two types: one using traditional circuit switching technology the other a hybrid using ATM packet switching technology.

DC Intelligent Networks

The asset values and depreciation for the Intelligent Networks Platform that allows functionality to be distributed flexibly at a variety of nodes on and off the network and allows the architecture to be modified to control the services. The 'Intelligent Network' provides network functionality beyond basic switching. Specific assets include:

Costs of construction of the Intelligent Networks Platform (INC)

Costs of the Signalling Network and Interconnect (SIGNI) including Signalling Transfer Point (STP) and Signalling Point Relay (STP) switches and Signalling Traffic Management (STMS) equipment.

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Transmission This sector contains the asset values for transmission. Transmission includes Core Transmission Synchronous Digital Hierarchy (SDH), Plesiochronous Digital Hierarchy (PDH), Asynchronous Transfer Mode (ATM), Cables and Repeaters.

The Core transmission network is used to link exchanges. For AS purposes the Core Transmission network is split into the Core Distribution network and the Core trunk network, illustrated below:

ASPIRE sector Description Includes:

DA

Core Transmission: Cable and Other

SDH Costs of provision and re-arrangement of Construction of Synchronous Digital Hierarchy transmission equipment. SDH is a key element of BT's core transmission network.

ATM capital expenditure for Asynchronous Transfer Mode platform equipment. ATM (also referred to as Broadband Integrated Services Digital Network (ISDN) is a fast, cell-switched technology. All broadband transmissions (whether audio, data, imaging or video) are divided into a series of cells and routed across an ATM network consisting of links connected by ATM switches.

MUC costs associated with the Construction of Main Underground (Core) Cable to increase the capacity of the network.

CJF costs associated with the Construction of Core Optical Fibre Cable in the Core Network.

CRF costs associated with the Construction of Repeaters, Optical Fibre in the Core Network.

CRD costs associated with the Construction of repeaters, digital, non-optical in the Core Network.

DD

International Transmission

NCRR - International Radio and Repeaters. This asset class is used for Earth Station Capital expenditure on Broadcast Services or Shared Infrastructure Earth Station Assets. The asset class includes Satellite Earth Stations: mobile satellite dishes, small fixed dish systems and radio equipment at Cable or earth station. It also includes microwave links used for Broadcast Services or share infrastructure.

DK

Private Circuits and SMDS

DTTM - Construction of Customer Wideband Services. This asset class covers contract, stores and labour for the construction, installation, commissioning, replacement, re-arrangement of equipment at local exchanges and customers premises to carry wideband services to customers such as Wideband bearer electronics to support Kilostream service and Access SDH and test equipment for testing and maintenance of customers wideband services.

DTTK - Construction of Kilostream/Automatic cross Connect Equipment (ACE) Services. This asset class covers contract, stores and labour for the construction, installation, commissioning replacement, re-arrangement of Kilostream core network equipment for Kilostream Private Circuits e.g. ACE, Multiplexing Site Units (MSU) and Equipment Network Access (ENA) Contract, stores and labour for the work associated with the Analogue Offload Programme, and supply and installation of all customer end related equipment used for Kilostream Private Circuits (e.g. Line cards, Modern Units, and Network Terminating Units) and

LocalExchange

Main(DMSU)

AccessNetwork

CoreDistribution Core Trunk

CabinetPCP Main

(DMSU)

SectorDaCoreTransmission

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includes Cost of stores or other materials ordered for the provision of Kilostream service (e.g. Line Cards, modem units, NTU) and the racking and cabling for Kilostream core network equipment.

DTTS - Construction of Customer Wideband Services. This asset class covers construction, provision, installation, commissioning, replacement, re-arrangement or recovery of electronic equipment (but not service) for the various Short Haul Data Services (SHDS).

DTTW - This asset class covers cost of provisions and such as stores and labour for the construction, installation, commissioning, replacement and upgrade of equipment at BT local exchanges and customers premises.

DTTSW - Construction of SHDS links. Construction, provision, installation, commissioning and replacement, electronic equipment for products incorporating SHDS equipment.

DT

21st Century Network

MSAN (Multi Service Access Nodes) - provide customer access into the network for Voice, Broadband and some Connectivity via line-cards and the traffic generated is sent to Metro Nodes for switching. This can be via other MSANs.

Metro/Core Nodes - Core Nodes are a special type of Metro Node where there is a mesh or net of transmission between them. Most Core nodes are connected to all other Core Nodes. Metro Nodes switch traffic and contain the intelligence to direct its path. All traffic will traverse the Metro Node to some degree whether it falls into the category of Voice, Broadband or Connectivity.

21C WDM Transmission (Wave Division Multiplexing).

i-Nodes (Call Servers) - i-Nodes are used just for Voice customers and contain intelligence for numbering and the intelligence for routing i.e. Call Set-Up and Network Features.

Ethernet Switches - Ethernet Switches are for Connectivity access into the network and are located at sites that can take advantage of WDM transmission to send and receive traffic to the Metro node.

CCI (Common Capability Intelligence) - Common Capability Intelligence is a set of re-usable components used to build our products and services. It includes session management and intelligence voice routing, authentication of customer identity, identification of customer location and instant messaging.

The key drivers are engineering inventories and models that allocate CoW to network components and then onto the appropriate service based on usage factors and actual service volumes. Other This sector contains the asset values for a range of assets used by BT businesses including categories such as Software, Motor Transport and 21CN. The key drivers are surveys, engineering models and direct mapping of CoW to network components and then onto the appropriate service based on usage factors and actual service volumes.

ASPIRE sector

Description Includes:

DG Network Power

TPC - Construction of Telecom Power Plant. This asset class covers the provision, installation, construction, replacement and re-arrangement of power plant systems and distributions feeding network operational equipment in operational buildings, i.e. telephone, radio and repeater stations.

DH Capital Miscellaneous Miscellaneous capital expenditure

DI Other Non-Voice Plant IPNC (Internet Protocol Network Capital) including assets and

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depreciation.

DJ Net Enabling Computers Network enabling computing fixed assets and depreciation.

DL Public Payphones PCOH This asset class covers the planning, provision and recovery of

payphone housing, including lighting and power, other than managed sites.

DM Apparatus Sector DM contains the asset values and depreciation of Apparatus equipment.

DN Motor Transport NVAC - New Vehicles and Accessories purchased and include pool cars,

vans, light goods vehicles, heavy goods vehicles and 4 wheel drive vehicles and trailers.

DO General Computers

COMPA - BT Own Use Computer Mainframes and Peripherals. This includes computers which require a controlled environment e.g. air conditioning, water cooling, includes front end processors, tape drives, disk drives, silos, dedicated terminals etc.

COMPE - BT Own Use Personal Computers. Includes the processor, display monitor, keyboard, internal CD ROM and modem, one or more diskette drives, internal fixed disk storage and the operating system software purchased as an integral part of the PC.

COMPF - BT Own Use Data Communication Equipment. These includes data transmission hardware and test equipment such as modems, multiplexors, routers, bridges, patch panels, protocol converters, line testers, monitor protocol analysers, cluster controllers, hyper-channels, file servers and Open System Cabling Architecture (OSCA) cables.

IABC - Internal Infrastructure Cabling and Local Area Networks (LAN) in BT offices.

DS Office Machines

IDX - Big and Large Switches. This asset class covers the provision of all big and large switches and of small/medium switches with an installed cost in excess of 1,500 for the COMMSURE (business continuity solutions) scheme. The COMMSURE scheme provides switch systems to be held on stand-by, to provide participating customers with temporary service in the event of an emergency..

OM - Office machines (BT own use). This asset class covers the procurement and installation of office machines for BT's own use, where the cost is 1,500 or more.

EA Software

Application system software - Designed to meet a specific business need with an established intended use (and not for use for any other purposes).

Operating system software - Manages the basic operations of a computer system and the flow of information into and out of the main processor.

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Other Investments

This sector represents the shares of investments in subsidiaries and associated undertakings and relates purely to Retail Residual products. The relevant ASPIRE sectors are as follows:

ASPIRE sector Description Includes:

E7 Other Investments the shares of investments in subsidiaries and associated undertakings and relates purely to Retail Residual products

E8 FA Invest Adj. CCA CCA adjustments to fixed asset investments

E5 Other Non-Current Assets Other non-current assets

Working Capital The figures for receivables and payables include an approximation of the internal notional receivables and payables that would be incurred if trades between BTs lines of business were undertaken to a third party and at arms length. They are based upon the average trading terms of BT Groups external trades.

ASPIRE sector Description

Includes:

G1 Trading Inventories

Trade and finished goods inventories.

Work in progress.

Raw material inventory.

GN AS Notional Receivables This is the calculated cost to BT of financing the payment terms it offers

HN AS Notional Payables This is the calculated amount owed by BT Wholesale to BT Openreach for EOI services

G2 Trade Receivables

Geneva receivables - These are receivables associated with invoices raised through the Geneva system, a billing system used by BT Retail, Global Services and BT Wholesale. It contains customer data, such as the Products they currently rent, usage and any discounts applied.

Customer Service System (CSS) billed receivables - These are receivables associated with invoices raised through the CSS. These receivables balances are generated by the Retail business unit of BT and include, for example, balances for invoices due from PSTN call services provided to business and residential customers.

Other Communication Provider (OCP) receivables.

G3 Intra-group Receivables Internal trading between our lines of businesses relating to receivables.

G4 Short Term Investments: TP

Listed UK investments.

Listed non-UK investments.

Unlisted investments.

Overnight deposits.

Term deposits at banks.

Certificates of tax deposits.

G5 Short Term Investments: IG BTs intra-group investments (funds deposited by one area of the business into another part of the business) are directly allocated to Retail Residual.

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G6 Cash At Bank The material balances in this sector represent sterling bank accounts, with different F8 codes used for accounts with different banks.

G9 Accrued Income

This sector relates to the balance sheet value of accrued income for services provided to and used by customers but not yet invoiced by BT. Accrued income arises where the invoice schedule for a particular customer service allows the customer to use the service in advance of being billed e.g. for telephony calls made by residential customers, where customers are billed quarterly in arrears for the call charges.

GA Prepayments Prepayments of general expenditure from BT.

GB Other Receivables This sector relates to the balance sheet value of Other Receivables for

amounts owing to BT. It contains sundry and miscellaneous receivable balances.

GC Pay Recharges Relates to pay accounting in BT. This sector always nets to zero.

GD Derivative Financial Instrument (Current Assets) This sector holds the balance sheet value of current derivative financial

instruments and relates purely to Retail Residual products.

H1 Short Term Borrowing

The borrowings include:

Overdrafts.

Short-term loans.

Other short-term loans (excluding bank overdrafts).

Commercial paper.

Liability balances on commercial paper held by the Treasury.

H2 Provisions under one year Potential liabilities faced by BT that are due within a year.

H3 Trade Payables

The key balances of trade Payables in this sector include:

Accounts Payable control.

Other Communication Provider (OCP) Payables.

Capital Trade Payables other.

H4 Intra-group Payable Internal trading between our lines of businesses relating to payables.

H6 Other Tax and Social Security

Key balances include:

Output VAT payables, arising from VAT collected by BT from its customers.

Input VAT receivable balances, arising from VAT paid by BT on inputs purchased.

National Insurance contributions for employees, payable by BT.

H7 Provisions Miscellaneous provisions

H8 Other Payables Sundry and miscellaneous payable balances.

H9 Accrued Expenses Accrued expenses not yet paid by BT.

HA Deferred Income Income received for services not yet provided to customers.

HF Derivative Financial Instrument (Payables) This sector holds the balance sheet value of derivative financial instrument

payables and relates purely to Retail Residual products.

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Provisions for liabilities and charges This sector consists of the following:

ASPIRE sector Description Includes:

I2 Provision: Other Provisions This sector contains the balance sheet values of other provisions, which are primarily BTs warranty provisions.

I4 Provisions: Pensions This sector contains the balance sheet values of provisions for pension liabilities.

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4.1 Base Methodology Dictionary Except bases

OUC Descriptions (For all descriptions below, see Appendix A for Key Destinations)

BE Openreach Service Design

Description

This unit contains the Chief Engineers Office, Network Strategy and Business Solutions group.

Methodology

This base apportions Pay, Non-Pay and Assets of the business unit using the same allocation rules as for the BT TSO Development charge into Openreach. This base is a subset of the TA except base (see below).

BH Openreach Human Resources

Description

This base apportions Pay, Non-Pay and Assets relating to Openreach Human Resources department.

Methodology

Allocates directly to 100% to AG 401 (Openreach Pay Driver)

BL Openreach Network Investment

Description

This base apportions the costs of the access network and capital build expenditure.

Methodology

This uses the FTQ base that is referring to all Unit Pay.

Data Source/s

The data is system generated from ASPIRE.

BT Openreach Current Liabilities

Description

This is a record of the liabilities incurred from unpaid invoices. The value of these invoices relate to current account expenditure received by the accounts payments centre which are unpaid at the period end.

Methodology

This is the FTQ driven on the OUC.

Data Source/s

The data is system generated from ASPIRE.

BY Openreach Centre Costs

Description

This is the adjustment made for running then Openreach CEOs office. This includes staff leaver payments, recognition event costs and advertising costs

Methodology

This is base, 100% apportioned to AG401 (Openreach Pay Driver)

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BZ Openreach Adjustment

Description

This is the adjustment made for running then Openreach CEOs office; an example of these are stock adjustments and stocktaking, provisions for insurable incidents and other business costs.

Methodology

100% apportioned to AG401 (Openreach Pay Driver)

BLE Openreach Ethernet End to End

Description

This base allocates the Pay, Non-Pay costs of the planning team with staff supporting the provisioning of Openreach services. An example is the actual total pay bill for Supervision and Support staff within the team.

Methodology

100% direct to PG573B Openreach Service Centre Provision Ethernet.

BLH BLP2 Openreach Copper Recovery Team

Description

This base allocates the Pay, Non-Pay costs associated with Organisational Unit Code (OUC) BLH. BLH is a copper recovery team where scrap is recovered from the network and then sold as income.

Methodology

100% direct to PG986R Openreach Other Activities.

BP Openreach Sales and Product Management team

Description

This base allocates the Pay; Non-Pay costs associated with Organisational Unit Code (OUC) BP. BP is the Sales and Product Management division of Openreach. As the various teams support specific services, their costs cannot be spread on a direct pay or revenue basis.

Methodology

100% direct to PG502B SG&A Openreach Sales Product Management.

BW

BWA

BWA1

BWA2

BWA3

BWA6

BWB

BWC

BWD

BWE5

BWF

BWG

BWG6

Openreach Service Division

Description

This base apportions the Profit and Loss (P&L), supporting the provisioning and repair of Openreach services. As the various teams support specific services, their costs cannot be spread on a Direct pay or revenue basis.

Methodology

A breakdown of each teams headcount is obtained. The OUC base is then constructed by reference to the respective service that each team member works on. Where a team works for a specific service (for example Wholesale Line Rentals (WLR) External Connections, then their FTE will be spread across Basic and Premier lines by reference to their respective volumes.

Data Source/s

Headcount analysis.

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C Corporate Costs

Description

The costs within this OUC include costs relating to personnel and administration, computing, planning and development, general support and general management type costs. These costs are identified as Corporate Costs, which support BT in general (both the people in BT and the management of its assets).

Methodology

AG112 is an activity pool including costs in support of the Chairmans office, Group Personnel, Chief Technology Officer and Technology Director. These activities tend to be of a head office nature.

Costs are allocated 100% to the Corporate Costs AG112.

CRG Group Internal Communications

Description

This base apportions the costs (e.g. current ETG and Non ETG Pay) associated with BT's internal communications team. The team keep BT employees informed about major company issues and initiatives. Costs are mainly pay, internal publicity and postage.

Methodology

AG112 is an activity pool including costs in support of the Chairmans office, Group Personnel, Chief Technology Officer and Technology Director. These activities tend to be of a head office nature.

Costs are allocated 100% to the Corporate Costs AG112.

CRX Group External Communications

Description

This base apportions the cost of BTs external communication team. These units are responsible for the BT Group website and for Media Relations.

Methodology

AG112 is an activity pool including costs in support of the Chairmans office, Group Personnel, Chief Technology Officer and Technology Director. These activities tend to be of a head office nature.

Costs are allocated 100% to the Corporate Costs AG112.

CW Description

This base apportions Profit and Loss (P&L) costs and Balance sheet items booked to Group Billing Organisational Unit Code (OUC) CW.

Methodology

Group Billing was created from the combination BT Retail and BT Wholesale b