Nociones Generales

Goodwill and acquisition related intangible assets Goodwill decreased by £75m during 2011 to £1,357m. This reduction primarily reflected an impairment of £39m and the impact of foreign exchange movements. Acquired intangible assets decreased by £79m during 2011 to £209m, principally due to amortisation of £61m, impairments of £10m and the impact of foreign exchange movements.

OVER VIEW BUSINESS REVIEW FINANCIAL REVIEW REPOR T OF THE DIREC TORS FINANCIAL ST A TEMENTS TION

FINANCIAL REVIEW

FINANCIAL REVIEW FINANCIAL POSITION AND RESOURCES

Property, plant and equipment and software

Property, plant and equipment and internally developed and purchased software decreased by £362m to £16,446m at 31 March 2011, principally due to capital expenditure of £2,590m, (further details of which are given below) which was more than offset by £2,979m of depreciation and amortisation.

Capital expenditure

Capital expenditure, on an accruals basis, totalled £2,590m in 2011 (2010: £2,533m; 2009: £3,088m), in line with our expectations of around £2.6bn.

The capital expenditure by major area over the last three years is shown below.

In 2011 platforms and networks expenditure was £1,145m (2010: £1,135m). A significant element of the platform expenditure was on our super-fast fibre-based broadband services network. To date, we have spent £0.6bn of our £2.5bn potential investment in our fibre roll-out programme. This expenditure is being managed within our capital expenditure plans. Access expenditure was £591m (2010: £566m) for connecting our customers to the network. Customer related expenditure was £599m (2010: £560m), principally relating to major customer contracts in BT Wholesale and BT Global Services. This also included product development, testing and fault reduction investments across the group.

Of the capital expenditure, £227m (2010: £280m) arose outside of the UK. Contracts placed for ongoing capital expenditure totalled £467m at 31 March 2011 (2010: £383m).

Capital expenditure for the last five financial years is included in the Financial statistics section on page 160.

Deferred tax

The deferred tax asset of £461m (2010: £2,196m) relates to the group’s retirement benefit obligations, as detailed in note 23 to the consolidated financial statements. The deferred tax liability decreased by £244m to £1,212m at 31 March 2011, mainly reflecting the 2% reduction in the rate of UK corporation tax, effective 1 April 2011. Movements in deferred tax assets and liabilities are disclosed in note 24 to the consolidated financial statements.

Cash and cash equivalents

For further details on cash and cash equivalents refer to Liquidity and Funding and capital management on pages 50 and 52 respectively.

Trade and other receivables

Current trade and other receivables decreased by £364m to £3,332m at 31 March 2011 principally reflecting improvements to working capital in BT Global Services.

Capital expenditure £m

2009 2010 2011

Regulatory & compliance Support functions Access Customer related Platforms & networks

0 1,000 500 2,000 1,500 3,000 2,500 3,500

Trade and other payables

Trade and other payables decreased by £417m to £6,114m at 31 March 2011 principally reflecting the impact of the reduction in our cost base in 2011.

Loans and other borrowings

For further details of movements in our loans and other borrowings, see Net debt on page 52.

Provisions

Current and non-current provisions increased by £115m to £956m at 31 March 2011. The movements in provisions are disclosed in note 25 to the consolidated financial statements.

Retirement benefit obligations

A summary of movements in the IAS 19 accounting deficit is set out below:

2011 2010

Deficit £bn £bn

At 1 April (7.9) (4.0)

Current service cost (0.3) (0.2)

Interest (0.1) (0.3)

Actuarial gain (loss) 5.2 (4.3)

Contributions 1.3 0.9

At 31 March (1.8) (7.9)

Deferred tax asset 0.4 2.2

Net of deferred tax at 31 March (1.4) (5.7₎

The market value of the BTPS assets have increased by £1.7bn since 31 March 2010 to £37.0bn at 31 March 2011 principally reflecting the continuation of strong asset performance with a 7% return and deficiency contributions of £1.0bn offsetting benefits paid of £2.0bn. At 31 March 2011 the value of the BTPS liabilities have decreased by £4.3bn to £38.7bn principally as a result of the £3.5bn impact of the UK Government decision that the Consumer Prices Index (CPI), rather than the Retail Prices Index (RPI), will be used for revaluation and indexation of occupational pension rights. The present value of the liabilities continues to reflect the low real yield on bonds over the last two years. Further details and detailed pensions accounting disclosures are provided in note 23 to the consolidated financial statements.

Equity

A summary of the movements in equity is set out below:

2011 2010

£m £m

(Deficit) equity at 1 April (2,626) 169

Profit for the year 1,504 1,029

Other comprehensive income (loss) 3,449 (3,661)

Dividends to shareholders (543) (263)

Share-based payment 68 81

Tax on share-based payment 91 19

Net issue of treasury shares 8 4

Movements in non-controlling interests – (4)

Equity (deficit) at 31 March 1,951 (2,626₎

The increase in equity in 2011 is principally due to the profit for the year and the recognition of actuarial gains on retirement benefit obligations.

BT Group plc, the parent company, had a profit and loss reserve, net of the treasury reserve, of £9,198m at 31 March 2011. The financial statements of BT Group plc are prepared in accordance with UK GAAP.

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FINANCIAL REVIEW FINANCIAL POSITION AND RESOURCES /ALTERNATIVE PERFORMANCE MEASURES

Other comprehensive income

Included in other comprehensive income for 2011 of £3,449m (2010: £3,661m other comprehensive loss) are actuarial gains of £5,109m (2010: £4,324m loss), foreign exchange losses on the translation of overseas operations of £140m (2010: £119m loss), net fair value losses on cash flow hedges of £14m (2010: £575m) and a tax charge of £1,521m (2010: £1,350m credit) relating to items recognised in other comprehensive income.

Treasury shares

At 31 March 2011 the company held 389m shares (2010: 401m) in Treasury. These shares are used to settle exercises of share options and share awards. The carrying value of £1,078m (2010: £1,105m) has been deducted from retained earnings.