1st Quarter - Appendix B

BT Group PLC
28 July 2005





FIRST QUARTER RESULTS TO JUNE 30, 2005 July 28, 2005



Appendix B - Accounting Policies under IFRS


The accounting policies set out below have been adopted to prepare the restated
balance sheet and income statements for the year ended March 31, 2005, the
associated quarterly financial information for that year and the interim
financial results for June 30, 2005. These are expected to be the principal
accounting policies used for the group's future financial statements prepared in
accordance with International Financial Reporting Standards (IFRS). Revised
policies to reflect the adoption of IAS 32 and IAS 39 from April 1, 2005 are
also included.

The IFRS position as stated is BT's current view, based on the Standards
currently in issue, and changes may arise as new accounting pronouncements are
developed and issued. Due to a number of new and revised Standards, included
within the body of Standards that comprise IFRS, there is not yet a significant
body of established best practice on which to draw in forming opinions regarding
interpretation and application. Accordingly, practice is continuing to evolve.
At this stage, therefore, the full financial effect of reporting under IFRS, as
it will be applied and reported in the group's first full IFRS financial
statements, may be subject to change.

a.       Basis of preparation

The consolidated financial statements are prepared under the historical cost
convention, modified for the revaluation of certain financial assets and
liabilities (including derivative instruments) at fair value.

The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenditure during the
reporting period. Actual results could differ from those estimates. Estimates
are used principally when accounting for interconnect income, provision for
doubtful debts, payments to telecommunication operators, long-term contracts,
depreciation, amortisation, impairments, post retirement benefit obligations,
financial instruments, provisions for liabilities and taxes.

b.       Basis of consolidation

The group financial statements consolidate the financial statements of BT Group
plc "the company" and entities controlled by the company (its subsidiaries) and
incorporate the results of its share of jointly controlled entities (joint
ventures) and associates using the equity method of accounting.

The results of subsidiaries acquired or disposed of during the year are
consolidated from the effective date of acquisition or up to the effective date
of disposal, as appropriate. Where necessary, adjustments are made to the
financial statements of subsidiaries, associates and joint ventures to bring the
accounting policies used into line with those used by the group. All intra-group
transactions, balances, income and expenses are eliminated on consolidation.

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b.       Basis of consolidation continued

Investments in associates and joint ventures are carried at cost plus
post-acquisition changes in the group's share of the net assets or liabilities
of the associate or joint venture, less any impairment in value in individual
investments. The income statement reflects the group's share of the results of
operations after tax of the associate or joint venture (the equity method).

c.       Revenue

Revenue net of discounts, which excludes value added tax and other sales taxes,
comprises the value of services provided and equipment sales by group
undertakings, excluding those between them.

Revenue from calls is recognised in the income statement at the time the call is
made over the group's networks. Revenue from rentals is recognised evenly over
the period to which the charges relate.

Revenue from equipment sales is recognised at the point of sale. Prepaid call
card sales are deferred until the customer uses the stored value in the card to
pay for the relevant calls. Revenue arising from the provision of other
services, including maintenance contracts, is recognised evenly over the periods
in which the services are provided to the customer. Revenue from installation
and connection activities is recognised in the period in which it is earned.

Revenue from long term contracts is recognised throughout the duration of the
contract, to the extent that the outcome of the contract can be assessed with
reasonable certainty and in accordance with the stage of completion of
contractual obligations.

Revenue from classified directories, mainly comprising advertising revenue, is
recognised in the income statement upon completion of delivery.

d.       Leases

Assets held under finance leases are capitalised and included in property, plant
and equipment at the lower of the present value of the minimum lease payments or
the fair value of the leased asset as determined at the inception of the lease.
The obligations relating to finance leases, net of finance charges in respect of
future periods, are recognised as liabilities. The interest element of the
rental obligation is allocated to accounting periods during the lease term to
reflect the constant rate of interest on the remaining balance of the obligation
for each accounting period. Rentals under operating leases are charged to the
income statement on a straight-line basis.

e.       Foreign currencies

Items included in the financial statements of each of the group's entities are
measured using the currency of the primary economic environment in which the
entity operates (the 'functional currency'). The consolidated financial
statements are presented in sterling, the functional and presentation currency
of the company.

Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the date of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the
translation at year end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income statement, except
where hedge accounting is applied.

On consolidation, assets and liabilities of foreign undertakings are translated
into sterling at year end exchange rates. The results of foreign undertakings
are translated into sterling at average

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e. Foreign Currencies continued

rates of exchange for the year (unless this average is not a reasonable
approximation of the cumulative effects of the rates prevailing on the
transaction dates, in which case income and
expenses are translated at the dates of the transactions). Foreign exchange
differences arising on retranslation are recognised directly in a separate
component of equity, the translation reserve. Any differences arising from April
1, 2004, the date of transition to IFRS, are presented as a separate component
of equity. In the event of the disposal of an undertaking with assets and
liabilities denominated in foreign currency, the cumulative translation
difference from April 1,
2004 arising in the exchange differences reserve is charged or credited to the
gain or loss in the income statement on disposal.

f.        Business combinations and goodwill

The group has adopted the exemption allowed in IFRS 1 from restating business
combinations which occurred before transition date (April 1, 2004). Goodwill
arising on the acquisition of a business acquired after January 1, 1998 and
before April 1, 2004 is included in the balance sheet at original cost, less
accumulated amortisation and any provisions for impairment as at April 1, 2004.
Goodwill arising on such acquisitions is not amortised from the transition date
but is subject to annual impairment testing or more frequently if events or
circumstances indicate that goodwill may be impaired. Goodwill which arose prior
to January 1, 1998 was written off directly to the profit and loss reserve.

On the acquisition of a subsidiary undertaking (including unincorporated
businesses), joint venture or associate, from the transition date, fair values
are attributed to the acquired identifiable assets, liabilities and contingent
liabilities. Goodwill, which represents the difference between the fair value of
purchase consideration and the acquired interest in the fair values of those net
assets, is capitalised and is subject to annual impairment testing or more
frequently if events or changes in circumstances indicate that goodwill may be
impaired. Any negative goodwill is credited to the income statement in the year
of acquisition.If an undertaking is subsequently sold, the amount of goodwill
carried on the balance sheet at the date of disposal is charged to the income
statement in the period of disposal as part of the gain or loss on disposal.
Goodwill previously written off to the profit and loss reserve is not recycled
to the income statement on disposal of the business.

g.       Other intangible assets

Other intangible assets, including trademarks, brands, customer relationships,
licences, development costs and software are stated at acquisition or production
cost.

When intangible assets are acquired in a business combination, their cost is
generally determined in connection with the purchase price allocation based on
their respective fair market values. When their market value is not readily
determinable, fair value is determined using generally accepted valuation
methods based on revenue, costs or other appropriate criteria.

Intangible assets are amortised on a straight line basis at rates sufficient to
write off the cost, less any estimated residual values of individual assets over
their estimated useful lives.

Licence fees paid to governments, which permit telecommunication activities to
be operated for defined periods, are amortised from the latter of the start of
the licence period or launch of service to the end of the licence period on a
straight line basis.

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h.       Property, plant and equipment

Property, plant and equipment is included in the balance sheet at cost, less
accumulated depreciation and any provisions for impairment.

(a) Cost
Cost in the case of network services includes contractors' charges and payments
on account, materials, direct labour and directly attributable overheads.

(b) Depreciation
Depreciation is provided on property plant and equipment on a straight line
basis from the time the assets are available for use, so as to write off their
costs over their estimated useful lives taking into account any expected
residual values. No depreciation is provided on freehold land.

The lives assigned to principal categories of assets are as follows:

Freehold buildings                  - 40 years
Leasehold land and buildings        - Unexpired portion of lease or 40 years,
                                      whichever is the shorter
Transmission equipment:
         -Duct                      - 25 years
         -Cable                     - 3 to 25 years
Radio and repeater equipment        - 2 to 25 years
Exchange equipment                  - 2 to 13 years
Computers and office equipment      - 3 to 6 years
Payphones, other network equipment,
motor vehicles and cableships       - 2 to 20 years

Assets held under finance leases are depreciated over the shorter of the lease
term or their useful economic life. Residual values and useful lives are
re-assessed annually and if necessary changes are recognised prospectively.

i.         Impairment of assets

Intangible assets with finite useful lives and property, plant and equipment are
tested for impairment if events or changes in circumstances (assessed at each
reporting date) indicate that the carrying amount may not be recoverable. When
an impairment test is conducted, the recoverable amount is assessed by reference
to the higher of the net present value of expected future cash flows of the
relevant cash generating unit and the fair value less cost to sell.

Goodwill and other intangible fixed assets with an indefinite useful life are
tested for impairment at least annually.

If a cash generating unit is impaired, provision is made to reduce the carrying
amount of the related assets to their estimated recoverable amount. Impairment
losses are allocated firstly against goodwill, and secondly on a pro rata basis
against intangible and other assets.

Where an impairment loss is recognised against an asset it may be reversed in
future periods where there has been a change in the estimates used to determine
the recoverable amount since the last impairment loss was recognised, except in
respect of impairment of goodwill which may not be reversed in any
circumstances.

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j.         Inventory

Inventory mainly comprise items of equipment, held for sale or rental,
consumable items and work in progress on long term contracts.

Equipment held and consumable items are stated at the lower of cost and
estimated net realisable value, after provisions for obsolescence.

Work in progress on long term contracts is stated at cost, after deducting
payments on account, less provision for any foreseeable losses.

k.       Trade and other receivables

Trade and other receivables are stated in the balance sheet at estimated net
realisable value. Net realisable value is the invoiced amount less provisions
for bad and doubtful debtors.

Provisions are made specifically where there is evidence of a dispute or an
inability to pay. An additional provision is made based on an analysis of
balances by age, previous losses experienced and general economic conditions.

l.         Termination benefits

Termination benefits are payable when employment is terminated before the normal
retirement date, or when an employee accepts voluntary redundancy in exchange
for these benefits. The group recognises termination benefits when it is
demonstrably committed to either; terminating the employment of current
employees, (arising from periodic reviews of staff levels) according to a
detailed formal plan without the possibility of withdrawl; or providing
termination benefits as a result of an offer made to encourage voluntary
redundancy.

m.     Pension and long term service benefits

The group operates a funded defined benefit pension scheme, which is independent
of the group's finances, for the majority of its employees. Actuarial valuations
of the main scheme are carried out by an independent actuary as determined by
the trustees at intervals of not more than three years, to determine the rates
of contribution payable. The pension cost is determined on the advice of the
group's actuary, having regard to the results of these valuations. In any
intervening years, the actuaries review the continuing appropriateness of the
contribution rates.

The group's net obligation in respect of defined benefit pension schemes, is
calculated separately for each plan by estimating the amount of future benefit
that employees have earned in return for their service in the current and prior
periods. That benefit is discounted to determine its present value, and the fair
value of any plan assets is deducted. The discount rate is the yield at the
balance sheet date on AA credit rated bonds that have maturity dates
approximating the terms of the group's obligations. The calculation is performed
by a qualified actuary using the projected unit credit method.

The income statement charge is split between an operating charge and a net
finance charge. The net finance charge relates to the unwinding of the discount
applied to the liabilities of the scheme offset by the expected return on the
assets of the scheme, based on conditions prevailing at the start of the year.
The cost of providing retirement pensions and other benefits is charged to the
income statement over the periods benefiting from employees' services.

The group has adopted the exemption allowed in IFRS 1 to recognise all
cumulative actuarial gains and losses at the transition date (April 1, 2004) in
reserves. Actuarial gains and losses are 

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m.     Pension and long term service benefits continued

recognised in full in the period in which they occur. They are recognised 
outside of the income statement in retained earnings and presented in the 
statement of recognised income and expense.

The group also operates defined contribution pension schemes and the income
statement is charged with the contributions payable.

The group's net obligation in respect of long term service benefits, other than
post employment plans, is the amount of future benefit that employees have
earned in return for their service in the current and prior periods. The
obligation is calculated using the projected unit credit method and is
discounted to its present value and the fair value of any plan assets is
deducted. The discount
rate is the yield at the balance sheet date on AA credit rated bonds that have
maturity dates approximating to the terms of the group's obligations.

n.       Employee share schemes

The group has a number of employee share schemes and share option plans under
which it makes equity settled share based payments to certain employees. Equity
settled share based payments are measured at fair value at the date of grant.
The fair value determined at the grant date is charged to the income statement
on a straight line basis over the vesting period with a corresponding increase
to equity.

o.       Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and current balances with banks
and similar institutions, which are readily convertible to known amounts of cash
and which are subject to insignificant risk of changes in value and have an
original maturity of three months or less.

For the purpose of the consolidated cash flow statement, cash and cash
equivalents consist of cash and cash equivalents as defined above, net of
outstanding bank overdrafts.

p.       Tax

Current tax, including UK corporation tax and foreign tax, is provided at
amounts expected to be paid (or recovered) using the tax rates and laws that
have been enacted or substantially enacted by the balance sheet date.

Deferred tax is recognised in respect of all temporary differences identified at
the balance sheet date, except to the extent that the deferred tax arises from
the initial recognition of goodwill (if amortisation of goodwill is not
deductible for tax purposes) or the initial recognition of an asset or liability
in a transaction which is not a business combination and at the time of the
transaction affects neither accounting profit nor taxable profit and loss.
Temporary differences are differences between the carrying amount of the group's
assets and liabilities and their tax base.

Deferred tax liabilities are offset against deferred tax assets within the same
taxable entity or qualifying local tax group. Any remaining deferred tax asset
is recognised only when, on the basis of all available evidence, it can be
regarded as probable that there will be suitable taxable profits, within the
same jurisdiction, in the foreseeable future against which the deductible
temporary difference can be utilised.

Deferred tax is provided on temporary differences arising on subsidiaries, joint
ventures and associates, except where the timing of the reversal of the
temporary difference can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future.

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p.       Tax continued

Deferred tax is measured at the average tax rates that are expected to apply in
the periods in which the asset is realised or liability settled, based on tax
rates and laws that have been enacted or substantially enacted by the balance
sheet date. Measurement of deferred tax liabilities and assets reflects the tax
consequences expected to fall from the manner in which the asset or liability is
recovered or settled.

q.       Non-current assets held for sale and discontinued operations

Non-current assets are classified as held for sale when their disposal is
considered highly probable. Immediately before classification as held for sale,
the measurement of the assets (and all assets and liabilities in a disposal
group) is brought up to date in accordance with applicable IFRS. Then, on
initial classification as held for sale, non-current assets and disposal groups
are recognised at the lower of carrying amount and fair value less costs to
sell.

Impairment losses on initial classification as held for sale are included in
profit or loss, even for assets measured at fair value, as are gains and losses
on subsequent remeasurement.

r.        Dividends

Final dividends are recognised as a liability in the period in which they are
declared and approved by the company in general meeting. Interim dividends are
recognised when they are declared.

s.       Financial instruments (to March 31, 2005)

The accounting policies adopted in respect of financial instruments in periods
up to, and including March 31, 2005, are set out in the 2005 Annual Report and
Form 20-F, except as set out below. To provide comparability, the following
principles have been applied for the classification of financial assets and
liabilities.

Financial assets are classified as either financial assets at fair value through
the income statement, loans and receivables, held-to-maturity investments, or
available for sale financial assets (see below). The classification depends on
the purpose for which the investments were acquired. Management determines the
classification of its investments at initial recognition and re-evaluates this
designation at each reporting date. Up to March 31, 2005, financial assets in
these categories were held at the lower of cost and net realisable value in
accordance with UK GAAP.

Debt instruments are stated at the amount of net proceeds adjusted to amortise
any discount over the term of the debt. The effect of the currency element of
currency swaps acting as hedges against debt is reported separately in current
and non-current assets and liabilities.

t.       Financial instruments - Key accounting policies under IAS 32 and IAS 39

The following are the key accounting policies used in the preparation of the
restated April 1, 2005 opening balance sheet and subsequent periods to reflect
the adoption of IAS 32 and 39.

(a) Financial assets
1. Financial assets at fair value through income statement
This category has two sub-categories: financial assets held for trading and
those designated at fair value through the income statement at inception. A
financial asset is classified in this category if acquired principally for the
purpose of selling in the short term or if so designated by management.
Financial assets held in this category are measured at fair value.

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t.       Financial instruments - Key accounting policies under IAS 32 and IAS 39
         Continued

2. Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market other than:
-   those that the group intends to sell immediately or in the short
    term, which are classified as held for trading;
-   those for which the group may not recover substantially all of its
    initial investment, other than because of credit deterioration, which are
    classified as available for sale.

Loans and receivables are carried at amortised cost using the effective interest
method, with changes in carrying value recognised in the income statement.

3. Held to maturity investments
Financial assets are classified as held to maturity if the group has the
positive intent and ability, from inception, to hold the securities to their
maturity date. These financial assets have fixed or determinable payments and a
fixed maturity.

Held to maturity financial assets are reported at amortised cost using the
effective interest method, with changes in carrying value recognised in the
income statement.

4. Available for sale financial assets
Financial assets classified as available for sale are either specifically
designated in this category or not classified in any of the other categories.
Available for sale assets are carried at fair value, with unrealised gains and
losses (except for changes in exchange rates for monetary items, interest and
impairment losses) recognised in equity until the financial asset is
derecognised, at which time the cumulative gain or loss previously recognised in
equity is taken to the income statement.

(b) Financial liabilities
Financial liabilities are stated at the amount of net proceeds adjusted to
amortise any discount over the term of the debt. Financial liabilities are
subsequently measured at amortised cost using the effective interest method and
if included in a fair value hedge relationship are revalued to reflect the fair
value movements on the effective portion of the hedged risk associated with the
financial liability.

(c) Derivative financial instruments
The group uses derivative financial instruments mainly to reduce exposure to
foreign exchange risks and interest rate movements. The group does not hold or
issue derivative financial instruments for financial trading purposes. However,
derivatives that do not qualify for hedge accounting are accounted for as
trading instruments.

Derivative financial instruments are classified as held for trading and
initially recognised at cost. Subsequent to initial recognition, derivative
financial instruments are stated at fair value. The gain or loss on
remeasurement to fair value is recognised immediately in the income statement.
However, where derivatives qualify for hedge accounting, recognition of any
resultant gain or loss depends on the nature of the hedge. Derivative financial
instruments are classified as current assets or current liabilities where they
are held for trading or have a maturity within 12 months. Where derivative
financial instruments have a maturity greater than 12 months and are designated
in a hedge relationship, they are classified within either non current assets or
non current liabilities.

The fair value of swaps is the estimated amount that the group would receive or
pay to terminate the swap at the balance sheet date, taking into account current
interest and foreign exchange rates. The fair value of forward exchange
contracts is their quoted market price at the balance sheet date, being the
present value of the quoted forward price.

Derivatives embedded within assets and liabilities which are not closely related
to the underlying item are measured at fair value and accounted for separately.

When a hedging instrument expires or is sold, terminated or exercised, or the
entity revokes designation of the hedge relationship but the hedged financial
asset or liability remains or forecast transaction is still expected to occur,
the cumulative gain or loss at that point remains in equity and is recognised in
accordance with the above policy when the transaction occurs. If the hedged
transaction is no longer expected to take place or the underlying hedged
financial asset or liability no longer exists, then the cumulative unrealised
gain or loss recognised in equity is recognised immediately in the income
statement.

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t.       Financial instruments - Key accounting policies under IAS 32 and IAS 39
         continued

(d) Hedge accounting
(i) Cash flow hedge
When a derivative financial instrument is designated as a hedge of the
variability in cash flows of a recognised asset or liability, or a highly
probable transaction, the effective part of any gain or loss on the derivative
financial instrument is recognised directly in equity.

For cash flow hedges of recognised assets or liabilities, the associated
cumulative gain or loss is removed from equity and recognised in the income
statement in the same period or periods during which the hedged forecast
transaction affects the income statement. The ineffective part of any gain or
loss is recognised immediately in the income statement.

When the forecasted transaction subsequently results in the recognition of a
non-financial asset or non-financial liability, or the forecast transaction for
a non-financial asset or non-financial liability the associated cumulative gain
or loss is removed from equity and included in the initial cost or carrying
amount of the non-financial asset or liability.

If a hedge of a forecasted transaction subsequently results in the recognition
of a financial asset or a financial liability, then the associated gains and
losses that were recognised directly in equity are reclassified into the income
statement in the same period or periods during which the asset acquired or
liability assumed affects the income statement.

(ii) Fair value hedge
When a derivative financial instrument is designated as a hedge of the
variability in fair value of a recognised asset or liability, or a highly
probable transaction, the change in fair value of the derivatives that are
designated as fair value hedges are recorded in the income statement, together
with any changes in fair value of the hedged asset or liability that is
attributable to the hedged risk.

(iii) Hedge of net investment in foreign operation
Exchange differences arising from the retranslation of the net investment in
foreign entities and of borrowings and other currency instruments designated as
hedges of such investments are taken to shareholders' equity on consolidation to
the extent the hedges are deemed effective. All other exchange gains or losses
are dealt with through the income statement.



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