Notes to Consolidated Financial Statements

All amounts are in millions of Canadian dollars, except where noted.

See Note 27, Reconciliation of Canadian GAAP to United States GAAP, for a description and reconciliation of the significant differences between Canadian GAAP and United States GAAP that affect our financial statements.

Note 1: Significant Accounting Policies

Basis of Presentation

We have prepared the consolidated financial statements according to Canadian generally accepted accounting principles (GAAP).
     We consolidate the financial statements of all of the companies we control. We proportionately consolidate our share of the financial statements of our joint venture interests. All transactions and balances between these companies have been eliminated on consolidation.

Comparative Figures

We have reclassified some of the figures for the comparative periods in the consolidated financial statements to make them consistent with the presentation for the current period.
     We have restated financial information for previous periods to reflect: 

• the adoption of section 3110 of the Canadian Institute of Chartered Accountants (CICA) Handbook, Asset Retirement Obligations, effective January 2004, as described under Recent Changes to Accounting Standards
• the change in classification of Emergis Inc. (Emergis) and other minor business dispositions to discontinued operations.

Using Estimates

When preparing financial statements according to GAAP, management makes estimates and assumptions relating to:

• reported amounts of revenues and expenses
• reported amounts of assets and liabilities
• disclosure of contingent assets and liabilities.

Actual results could be different from these estimates.

Recognizing Revenue

We recognize operating revenues when they are earned, specifically when:

• services are provided or products are delivered to customers
• there is clear proof that an arrangement exists
• amounts are fixed or can be determined
• our ability to collect is reasonably assured.

In particular, we recognize:

• fees for long distance and wireless services, and other fees, such as network access fees, licence fees, hosting fees, maintenance fees and standby fees, when we provide the services or over the term of the contract
• subscriber revenue when customers receive the service 
• advertising revenue when advertisements are aired, or printed and distributed
• revenue from the sale of equipment when the equipment is delivered to customers and accepted 
• revenue on long-term contracts as services are provided, equipment is delivered and accepted, or contract milestones are met. 

Cash and Cash Equivalents

We generally classify highly liquid investments with a short-term maturity of three months or less as Cash and cash equivalents.

Securitization of Accounts Receivable

We consider a transfer of accounts receivable to be a sale when we give up control of them in exchange for proceeds from a trust (other than our retained beneficial interest in the accounts receivable).
     We determine the fair value of the accounts receivable transferred based on the present value of future expected cash flows, which we project using management’s best estimates of discount rates, weighted average life of accounts receivable, credit loss ratios and other key assumptions. We recognize a loss on this kind of transaction, which is included in Other income. The loss partly depends on the carrying amount of the accounts receivable that are transferred. We allocate this amount to accounts receivable sold, or to our retained interest, according to its relative fair value on the day the transfer is made.
     Accounts receivable are transferred on a fully-serviced basis. As a result, we: 

• recognize a servicing liability on the day accounts receivable are transferred to the trust
• amortize this liability to earnings over the expected life of the transferred accounts receivable.

Capital Assets

We carry capital assets at cost, less accumulated amortization. Most of our telecommunications assets are amortized using the group depreciation method. When we retire assets in the ordinary course of business, we charge their original cost to accumulated amortization. In general, we amortize capital assets on a straight-line basis over the estimated useful lives of the assets. We review the estimates of the useful lives of the assets every year and adjust them if needed.

Software 

Customer relationships 

We capitalize construction costs, labour and overhead (including interest) related to assets we build or develop.
     We capitalize some of the costs of developing or buying software for internal use. We expense software maintenance and training costs when they are incurred. The expense is included in Operating expenses in the statement of operations.
     We assess capital assets for impairment when events or changes in circumstances indicate that we may not be able to recover their carrying value. We calculate impairment by deducting the asset’s fair value, based on discounted cash flows expected from its use and disposition, from its carrying value. Any excess is deducted from earnings.

Equity Method
An investment is initially recorded at cost and adjustments are made to include our share of the investment’s net earnings or losses. These adjustments are included in our net earnings. The amount of our investment is reduced by the amount of dividends received or receivable from the investment.

Cost Method
The investment is recorded at cost. Dividends received or receivable from the investment are included in our net earnings.

Accounting for Investments

We use the following methods to account for investments that are not consolidated or proportionately consolidated in our financial statements:

• the equity method for our investments in companies where we have a significant influence on their operating, investing and financing activities
• the cost method for our investments in all other companies.

     We include investments in Other long-term assets on the balance sheet. Earnings from investments are included in Other income in the statement of operations.
     We expense declines in the fair values of our investments when management considers them to be longer term. The expense is included in Other income in the statement of operations.

Costs of Issuing Debt and Equity

The costs of issuing debt are capitalized in Other long-term assets. They are amortized on a straight-line basis over the term of the related debt and are included in Interest expense in the statement of operations. The costs of issuing equity are reflected in the statement of deficit.

Indefinite-Life Intangible Assets

Our indefinite-life intangible assets consist mainly of the Bell brand name, spectrum licences and television licences. We assess these assets for impairment in the fourth quarter of every year and when events or changes in circumstances indicate that an asset might be impaired. We calculate the impairment by deducting the asset’s fair value, based on estimates of discounted future cash flows or other valuation methods, from its carrying value. Any excess is deducted from earnings.

Goodwill
Goodwill is created when we acquire a business. It is calculated by deducting the fair value of the net assets acquired from the consideration given and represents the value of factors that contribute to greater earning power, such as a good reputation, customer loyalty or intellectual capital.

Goodwill

We assess goodwill of individual reporting units for impairment in the fourth quarter of every year and when events or changes in circumstances indicate that goodwill might be impaired. We assess goodwill for impairment in two steps:

• we identify a potential impairment by comparing the fair value of a reporting unit to its carrying value. Fair value is based on estimates of discounted future cash flows or other valuation methods. When the fair value of the reporting unit is less than its carrying value, we allocate the fair value to all of its assets and liabilities, based on their fair values. The amount that the fair value of the reporting unit exceeds the total of the amounts assigned to its assets and liabilities is the fair value of goodwill.
• we determine if there is an impairment by comparing the carrying value of goodwill to its fair value. Any excess is deducted from earnings.

Translation of Foreign
Currencies
The way we account for a foreign operation depends on whether it is self-sustaining or integrated. A self-sustaining foreign operation is largely independent of the parent company. An integrated foreign operation depends on the parent company to finance or run its operations.

Translation of Foreign Currencies

Self-Sustaining Foreign Operations

For self-sustaining foreign operations, we use: 

• the exchange rates on the date of the balance sheet for assets and liabilities
• the average exchange rates during the year for revenues and expenses.

Translation exchange gains and losses are reflected as a currency translation adjustment in shareholders’ equity. When we reduce our net investment in a self-sustaining foreign operation, we recognize a portion of the currency translation adjustment in earnings.

Integrated Foreign Operations

For integrated foreign operations, we use:

• the exchange rates on the date of the balance sheet for monetary assets and liabilities, such as cash, accounts receivable and payable, and long-term debt
• the historical exchange rates for non-monetary assets and liabilities, such as capital assets 
• the average exchange rates during the year for revenues and expenses.

Translation exchange gains and losses are included in Other income in the statement of operations.

Domestic Transactions and Balances in Foreign Currencies

For domestic transactions made in foreign currencies, we use: 

• the exchange rates on the date of the balance sheet for monetary assets and liabilities 
• the historical exchange rates for non-monetary assets and liabilities
• the average exchange rates during the year for revenues and expenses.

Translation exchange gains and losses are included in Other income in the statement of operations.

Derivative Financial Instruments

We use various derivative financial instruments to hedge against:

• interest rate risk
• foreign exchange rate risk
• changes in the price of BCE Inc. common shares relating to special compensation payments (SCPs).

We do not use derivative financial instruments for speculative or trading purposes.
     We document all relationships between derivatives and the items they hedge, and our risk management objective and strategy for using various hedges. This process includes linking every derivative to:

• a specific asset or liability on the balance sheet, or
• a specific net investment in self-sustaining foreign operations, or
• a specific firm commitment, or
• an anticipated transaction.

We assess how effective derivatives are in managing risk when the hedge is put in place, and on an ongoing basis. If a hedge becomes ineffective, we stop using hedge accounting.
     We follow these policies when accounting for derivatives:

• foreign exchange translation gains or losses on the net investment in foreign subsidiaries are recorded as a currency translation adjustment. Any realized or unrealized gains or losses on instruments covering the net investment are also recognized as a currency translation adjustment.
• deferred gains or losses relating to derivatives that qualify for hedge accounting are recognized in earnings when the hedged item is sold or when the anticipated transaction is ended early 
• gains and losses related to hedges of anticipated transactions are recognized in earnings or are recorded as adjustments of carrying values when the transaction takes place 
• derivatives that are economic hedges, but do not qualify for hedge accounting, are recognized at fair value. We record the change in fair value in earnings.
• any premiums paid for financial instruments are deferred and expensed to earnings over the term of the contract
• any forward premiums or discounts on forward foreign exchange contracts that are used to hedge long-term debt denominated in foreign currencies are amortized as an adjustment to interest expense over the term of the forward contract.

The following describes our policies for specific kinds of derivatives.

Interest Rate Swap Agreements

We use interest rate swap agreements to help manage the fixed and floating interest rate mix of our total debt portfolio. These agreements often involve exchanging interest payments without exchanging the notional principal amount that the payments are based on. We record the exchange of payments as an adjustment of interest expense on the hedged debt. We include the related amount payable or receivable from counterparties in Other long-term assets or liabilities.

Foreign Currency Swap Agreements

We use foreign currency swap agreements to manage the foreign exchange rate exposure of some of our debt that is denominated in foreign currencies. We designate these agreements as hedges of firm commitments to pay interest and/or principal on the foreign currency risk. We recognize gains and losses on these contracts the same way we recognize the gains and losses on the hedged item. Unrealized gains or losses are included in Other long-term assets or liabilities.

Forward Contracts

We use forward contracts to manage:

• designated in foreign currencies. We designate these agreements as hedges of firm commitments to pay the principal in the foreign currency.
• the exposure to anticipated forecasted transactions denominated in foreign currencies. We designate these agreements as hedges of future cash flows.
• changes in the price of BCE Inc. common shares relating to SCPs.

We recognize gains and losses on these contracts the same way we recognize the gains and losses on the hedged item. Unrealized gains or losses are included in Other long-term assets or liabilities.

Employee Benefit Plans

(i) Defined Benefit Plans

We maintain defined benefit (DB) plans that provide pension benefits for some of our employees. Benefits are based on the employee’s length of service and average rate of pay during his or her last five years of service. Most employees are not required to contribute to the plans. The plans provide increasing pension benefits to help protect a portion of the income of retired employees against inflation.
     We are responsible for adequately funding our DB pension plans. We make contributions to them based on various actuarial cost methods that are permitted by pension regulatory bodies. Contributions reflect actuarial assumptions about future investment returns, salary projections and future service benefits.
     We also provide other future benefits to some of our employees, including: 

• health-care and life insurance benefits during retirement
• other post-employment benefits, including various disability plans, workers’ compensation and medical benefits to former or inactive employees, their beneficiaries and dependants, from the time their employment ends until their retirement starts, under certain circumstances.

We do not fund the other employee future benefit plans.
     We accrue our obligations and related costs under employee benefit plans, net of the fair value of plan assets. Pension and other retirement benefit costs are determined using: 

• the projected benefit method, prorated on years of service, which takes into account future pay levels
• a discount rate based on market interest rates of high-quality bonds with maturities that match the timing and benefits expected to be paid by the plans
• management’s best estimate of the plans’ expected investment performance, pay increases, retirement ages of employees and expected health-care costs.

Curtailment
A curtailment is a significant reduction in plan benefits that can result when a DB pension plan is amended or restructured. Types of curtailments include: 

Settlement
A company makes a settlement when it substantially settles all or part of an accrued benefit obligation. An example is a lump-sum cash payment to employees in exchange for their rights to receive future benefits.

We value pension plan assets at fair value, which is determined using current market values. We use a market-related value to calculate the expected return on plan assets. This value is based on a four-year weighted average of the fair value of the pension plan assets.
     We amortize past service costs from plan amendments on a straight-line basis over the average remaining service period of employees who were active on the day of the amendment. This represents the period that we expect to realize economic benefits from the amendments.
     Transitional assets and obligations that arose upon implementation of new accounting standards for employee future benefits are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plans.
     We use the corridor approach to recognize actuarial gains and losses into earnings. First we deduct 10% of the benefit obligation or the market-related value of plan assets, whichever is greater, from the unamortized net actuarial gains or losses based on a market-related value basis. Then we amortize the excess over the average remaining service period of active employees. At the end of 2004, this ranges from approximately 10 to 17 years, with a weighted average period of 14 years.
     When the restructuring of a benefit plan results in both a curtailment and a settlement of obligations, we account for the curtailment before we account for the settlement.
     December 31 is the measurement date for most of our employee benefit plans. Our actuaries perform a valuation at least every three years to determine the actuarial present value of the accrued pension and other retirement benefits. The last actuarial valuation of most of our pension plans was performed on January 1, 2003.

(ii) Defined Contribution Plans

Some of our subsidiaries offer defined contribution (DC) plans that provide certain employees with pension benefits.
     In January 2005, BCE Inc. and Bell Canada introduced a DC pension plan for its employees. Current employees had the option of retaining their DB coverage or switching to the new DC coverage.
     Going forward, most new employees will participate in the DC pension arrangements.
     We recognize a pension cost for DC plans when the employee provides service to the company, essentially coinciding with the cash contributions to the plan.

Income Taxes

Current income tax expense is the estimated income taxes payable for the current year before any refunds or the use of losses incurred in previous years. We use the asset and liability method to account for future income taxes. Future income taxes reflect: 

• the temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the amounts used for tax purposes, on an after-tax basis 
• the benefit of losses and non-refundable tax credits that will more likely than not be realized and carried forward to future years to reduce income taxes.

We calculate future income taxes using the rates enacted by tax law and those substantively enacted. A tax law is substantively enacted when it has been tabled in the legislature but may not have been passed into law. The effect of a change in tax rates on future income tax assets and liabilities is included in earnings in the period when the change is substantively enacted.

Subscriber Acquisition Costs

We expense all subscriber acquisition costs when services are activated.

Stock-Based Compensation Plans

BCE Inc.’s stock-based compensation plans include employee savings plans (ESPs), restricted share units (RSUs) and long-term incentive plans. Before 2000, the long-term incentive plans often included SCPs.
     Starting in 2004, we made a number of prospective changes to the key features in our stock-based compensation plans, including:

• the value of the long-term incentive plans where stock options are granted was reduced to account for the introduction of a new mid-term incentive plan that uses RSUs
• setting specific performance targets that must be met before the option can be exercised.

We credit to share capital any amount employees pay when they exercise their stock options or buy shares. We recognize the contributions BCE Inc. makes under ESPs as compensation expense. We also recognize compensation expense or recovery relating to SCPs.

RSUs

For each RSU granted we record a compensation expense that equals the market value of a BCE Inc. common share at the date of grant prorated over the vesting period. The compensation expense is adjusted for future changes in the market value of BCE Inc. common shares until the vesting date. The cumulative effect of the change in value is recognized in the period of the change. Vested RSUs will be paid in BCE Inc. common shares purchased on the open market or in cash, as the holder chooses, as long as minimum share ownership requirements are met.

Black-Scholes Option Pricing Model
The Black-Scholes option pricing model is a financial model we use to calculate the weighted average fair value of a stock option granted using four key assumptions: stock dividend yield, expected stock volatility, risk-free interest rate and expected life of the stock option.

Stock Options

Effective January 2003, we use the fair-value based method to account for employee stock options and the Black-Scholes option pricing model to measure the compensation expense of options. This method is used for options granted on or after January 1, 2002. For options that contain specific performance-based targets, this is reflected in the calculation of the weighted average fair value per option granted.

Recent Changes to Accounting Standards

Asset Retirement Obligations

Effective January 1, 2004, we retroactively adopted section 3110 of the CICA Handbook, Asset Retirement Obligations. This section describes how to recognize and measure liabilities related to the legal obligations of retiring property, plant and equipment.
     These obligations are initially measured at fair value and are adjusted for any changes resulting from age, and any changes to the timing or the amount of the original estimate of undiscounted cash flows. The asset retirement cost is capitalized as part of the related assets and is amortized into earnings over time.
     The impact on our consolidated statements of operations for the year ended December 31, 2004 and the comparative periods was negligible. At December 31, 2003 and 2002, this resulted in:

• an increase of $6 million in capital assets
• an increase of $17 million in other long-term liabilities
• a decrease of $4 million in future income tax liabilities
• an increase of $7 million in the deficit.

Impairment of Long-Lived Assets

Effective January 1, 2004, we adopted section 3063 of the CICA Handbook, Impairment of Long-Lived Assets. Adopting this section affects how we recognize, measure and disclose the impairment of long-lived assets.
     An impairment loss is recognized on a long-lived asset to be held and used when its carrying value exceeds the total undiscounted cash flows expected from its use and disposition.
     Before January 1, 2004, the amount of the loss was determined by deducting the asset’s net recoverable amount (based on undiscounted cash flows expected from its use and disposition) from its carrying value.
     After January 1, 2004, the amount of the loss is determined by deducting the asset’s fair value (based on discounted cash flows expected from its use and disposition) from its carrying value.

Hedging Relationships

Effective January 1, 2004, we adopted Accounting Guideline 13, Hedging Relationships. The guideline specifies when hedge accounting can be used, and includes requirements for documenting and designating hedge relationships. It also requires companies to regularly and frequently assess the effectiveness of these hedging relationships. The guideline does not change the method of accounting for derivative instruments in hedging relationships.
     Adopting this guideline did not affect our consolidated financial statements. All outstanding hedges that previously qualified for hedge accounting continue to qualify for hedge accounting under this guideline.

Consolidation of Variable Interest Entities

Effective July 1, 2003, we adopted Accounting Guideline 15, Consolidation of Variable Interest Entities, on a retroactive basis without a restatement of previous periods. This resulted in an increase of $25 million in the deficit at July 1, 2003. At December 31, 2004 we had no interest in these types of entities.

Future Changes to Accounting Standards

Financial Instruments

The CICA issued revisions to section 3860 of the CICA Handbook, Financial Instruments – Disclosure and Presentation. The revisions change the accounting for certain financial instruments that have liability and equity characteristics. It requires instruments that meet specific criteria to be classified as liabilities on the balance sheet. Some of these financial instruments were previously classified as equities.
     These revisions come into effect on January 1, 2005. Because we do not have any instruments with these characteristics, adopting this section on January 1, 2005 will not affect our consolidated financial statements.

Comprehensive Income

The CICA issued section 1530 of the CICA Handbook, Comprehensive Income. The section is effective for fiscal years beginning on or after October  1, 2006. It describes how to report and disclose comprehensive income and its components.
     Comprehensive income is the change in a company’s net assets that results from transactions, events and circumstances from sources other than the company’s shareholders. It includes items that would not normally be included in net earnings, such as: 

• changes in the currency translation adjustment relating to self-sustaining foreign operations
• unrealized gains or losses on available-for-sale investments.

The CICA also made changes to section 3250 of the CICA Handbook, Surplus, and reissued it as section 3251, Equity. The section is also effective for fiscal years beginning on or after October 1, 2006. The changes in how to report and disclose equity and changes in equity are consistent with the new requirements of section 1530, Comprehensive Income.
     Adopting these sections on January 1, 2007 will require us to start reporting the following items in the consolidated financial statements:

• comprehensive income and its components
• accumulated other comprehensive income and its components.

Financial Instruments – Recognition and Measurement

The CICA issued section 3855 of the CICA Handbook, Financial Instruments – Recognition and Measurement. The section is effective for fiscal years beginning on or after October 1, 2006. It describes the standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives.

     This section requires that:

• all financial assets be measured at fair value, with some exceptions like loans and investments that are classified as held-to-maturity 
• all financial liabilities be measured at fair value if they are derivatives or classified as held for trading purposes. Other financial liabilities are measured at their carrying value.
• all derivative financial instruments be measured at fair value, even when they are part of a hedging relationship.

We are currently evaluating the impact on our consolidated financial statements of adopting this section on January 1, 2007.

Hedges

The CICA recently issued section 3865 of the CICA Handbook, Hedges. The section is effective for fiscal years beginning on or after October 1, 2006, and describes when and how hedge accounting can be used.
     Hedging is an activity used by a company to change an exposure to one or more risks by creating an offset between: 

• changes in the fair value of a hedged item and a hedging item 
• changes in the cash flows attributable to a hedged item and a hedging item, or
• changes resulting from a risk exposure relating to a hedged item and a hedging item.

Hedge accounting makes sure that all gains, losses, revenues and expenses from the derivative and the item it hedges are recorded in the statement of operations in the same period.
     We are currently evaluating the impact on our consolidated financial statements of adopting this section on January 1, 2007.

Note 2: Segmented Information

In the first quarter of 2004, we changed our internal organizational structure and started reporting our results of operations under five segments: Consumer, Business, Aliant, Other Bell Canada and Other BCE. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance.
     The Consumer segment provides local telephone, long distance, wireless, Internet access, video and other services to Bell Canada’s residential customers, mainly in Ontario and Québec. Wireless services are also offered in Western Canada and video services are provided nationwide.
     The Business segment provides local telephone, long distance, wireless, data (including Internet access) and other services to Bell Canada’s small and medium-sized businesses and large enterprise customers in Ontario and Québec, as well as business customers in Western Canada.
     The Aliant segment provides local telephone, long distance, wireless, data (including Internet access) and other services to residential and business customers in Atlantic Canada, and represents the operations of our subsidiary, Aliant Inc. (Aliant). At December 31, 2004, Bell Canada owned 53% of Aliant. The remaining 47% was publicly held.
     The Other Bell Canada segment includes Bell Canada’s Wholesale business, and the financial results of Télébec Limited Partnership (Télébec), NorthernTel Limited Partnership (NorthernTel) and Northwestel Inc. (Northwestel). Our Wholesale business provides local telephone, long distance, wireless, data and other services to competitors who resell these services. Télébec, NorthernTel and Northwestel provide telecommunications services to less populated areas of Québec, Ontario and Canada’s northern territories. At December 31, 2004, Bell Canada owned 100% of Northwestel and 63% of Télébec and NorthernTel. The Bell Nordiq Income Fund owned the remaining 37%.
     The Other BCE segment includes the financial results of our media, satellite and information technology (IT) businesses as well as the costs incurred by our corporate office. This segment includes Bell Globemedia Inc. (Bell Globemedia), Telesat Canada (Telesat) and CGI Group Inc. (CGI).
     Bell Globemedia provides information and entertainment services to Canadian customers and access to distinctive Canadian content. It includes CTV Inc. (CTV), Canada’s leading private broadcaster, and The Globe and Mail, Canada’s leading national newspaper. BCE Inc. owns 68.5% of Bell  Globemedia. The Woodbridge Company Limited and affiliates own the remaining 31.5%.
     Telesat provides satellite communications and systems management and is a consultant in establishing, operating and upgrading satellite systems worldwide. BCE Inc. owns 100% of Telesat.
     CGI provides a full range of IT services and business solutions including outsourcing, systems development and integration and consulting. CGI is publicly traded. BCE Inc. owns 29% of CGI.
     In classifying our operations for planning and measuring performance, all restructuring and other items at Bell Canada and its subsidiaries except for Aliant are included in the Other Bell Canada segment and not allocated to the Consumer or Business segments.

The accounting policies used by the segments are the same as those we describe in Note 1, Significant Accounting Policies. Segments negotiate sales with each other as if they were unrelated parties.
     We measure the profitability of each segment based on its operating income.
     Our operations, including most of our revenues, capital assets and goodwill, are located in Canada.

The table below is a summary of financial information by segment. We have not presented comparative figures for 2002 because information is not available.

For the year ended December 31, 2004 

External customers 

Inter-segment 

Total operating revenues 

Operating income (loss) 

Other income 

Interest expense 

Income taxes 

Non-controlling interest 

Earnings from continuing operations 

Segment assets 

Investments at equity 

Capital expenditures 

For the year ended December 31, 2003 

Operating revenues 

External customers 

Inter-segment 

Total operating revenues 

Operating income 

Other income 

Interest expense 

Income taxes 

Non-controlling interest 

Earnings from continuing operations 

Segment assets 

Investments at equity 

Capital expenditures 

AGTI provides business and IT consulting, project and change management, and productivity improvement services.

Infostream is a systems and storage technology firm that provides networking solutions for voice over Internet protocol (VoIP), storage area networks and network management.

Charon is a full-service IT solutions provider that specializes in server-based computing, systems integration, IT security, software development and IT consulting.

AMS is a business and technology consulting firm to government and to the health-care, financial services and telecommunications industries.

Elix offers technology consulting, integration and implementation of call routing and management systems, IT application integration, and design and implementation of electronic voice-driven response systems.

Cognicase provides technology services, including implementing e-business solutions.

Note 3: Business Acquisitions and Dispositions

The consolidated statements of operations include the results of acquired businesses from the date they were purchased.

Business Acquisitions

We made a number of business acquisitions in 2004, including:

• Canadian operations of 360networks Corporation (360networks) – In November 2004, Bell Canada acquired the Canadian operations of 360networks, a telecommunications service provider. The purchase included the shares of 360networks’ subsidiary GT Group Telecom Services Corporation and certain related interconnected U.S. network assets. Following the purchase, Bell Canada sold the retail customer operations in Central and Eastern Canada to Call-Net Enterprises Inc. (Call-Net). For a share of the revenues, Bell Canada now provides to Call-Net network facilities and other operations and support services so Call-Net can service its new customer base. The fair value of the net assets acquired exceeded the purchase price. For accounting purposes, the excess was eliminated by: 
  – reducing the amounts assigned to the acquired non-monetary assets to nil
  – recognizing the balance of $69 million as an extraordinary gain in our consolidated statement of operations.
  
• Our 29% proportionate share of CGI's acquisition of AGTI Consulting Services Inc. (AGTI) – In November 2004, CGI acquired 51% of AGTI. CGI now owns 100% of AGTI. Prior to the acquisition, CGI proportionately consolidated AGTI.
• DownEast Mobility Limited (DownEast) – In October 2004, Aliant acquired 100% of the outstanding shares of DownEast, a communication solutions retailer.
• Bell West – In August 2004, Bell Canada acquired Manitoba Telecom Services Inc.'s (MTS) 40% interest in Bell West. Bell Canada now owns 100% of Bell West.
• Infostream Technologies Inc. (Infostream) – In May 2004, Bell Canada acquired 100% of the outstanding shares of Infostream.
• Charon Systems Inc. (Charon) – In May 2004, Bell Canada acquired 100% of the assets of Charon.
• Our 29% proportionate share of CGI's acquisition of American Management Systems Incorporated (AMS) – In May 2004, CGI acquired 100% of the outstanding common shares of AMS.
• Elix Inc. (Elix) – In March 2004, Bell Canada acquired 75.8% of the outstanding shares of Elix.
• Accutel Conferencing Systems Inc. (Canada) and Accutel Conferencing Systems Corp. (U.S.) (collectively Accutel) – In February 2004, Bell Canada acquired 100% of the outstanding shares of Accutel, which provides teleconferencing services.

During 2003, CGI acquired 100% of the outstanding common shares of Cognicase Inc. (Cognicase). It issued Class A subordinate shares to pay part of the purchase price, which reduced BCE’s equity interest in CGI to 29.9% from 31.5% . BCE recognized a dilution gain of $5 million.
     Of the goodwill acquired in 2004, $18 million was deductible for tax purposes. In 2003, none of the goodwill acquired was deductible for tax purposes.
     The following table provides a summary of all business acquisitions made in 2004 and 2003. The purchase price allocation for all 2004 acquisitions is based on estimates. The final purchase price allocation for each business acquisition is expected to be completed within 12 months of the acquisition date.

Consideration received: 

Non-cash working capital 

Capital assets 

Other long-term assets 

Goodwill 

Long-term debt 

Other long-term liabilities 

Non-controlling interest 

Cash and cash equivalents (bank indebtedness) at acquisition 

Net assets acquired 

Extraordinary gain 

Consideration given: 

Cash 

Acquisition costs 

Future cash payment 

Issuance of 582,081 Aliant common shares 

Issuance of 19,850,245 CGI 

Class A subordinate shares ⁽¹⁾ 

(1) The value of the CGI shares that were issued as payment was calculated using the weighted average closing share price on the Toronto Stock Exchange for the 10 trading days before the day the terms of the acquisition were agreed on and announced.

Business Disposition

Sale of Certen Inc. (Certen)

On July 2, 2003, Bell Canada sold its 89.9% ownership interest in Certen to a subsidiary of Amdocs Limited for $89 million in cash.
     The carrying value of Certen's net assets was $159 million at the time of the sale. Certen had total assets of $450 million, including $34 million in cash and cash equivalents, and total liabilities of $291 million.
     At the time of the sale, Bell Canada extended the remaining term of its contract with Certen and Amdocs Limited from four years to seven years for the out-sourcing of billing operations and the development of customer care and billing solutions.
     Bell Canada received a perpetual right to use and modify the intellectual property relating to the billing system. It recorded the perpetual right as an intangible asset of $494 million that will be amortized against earnings over the remaining life of the contract.
     Bell Canada recorded a liability of $392 million. This represented its future payments to Certen over the remaining life of the contract for the development of Bell Canada's billing system. This liability will be reduced as Bell Canada makes payments to Certen.
     The future income tax liability relating to the intangible asset and long-term liability was $32 million. The transaction did not result in any gain or loss for Bell Canada. Before the sale, Certen's results of operations were presented in the Other Bell Canada segment.

Note 4: Restructuring and Other Items

Employee departure programs 

Provision for contract loss 

Settlement with MTS 

Write-down of Bell Canada's accounts receivable 

Write-off of deferred costs 

Pay equity settlement 

Other charges 

Restructuring and other items 

2004

Employee Departure Program – Bell Canada

In 2004, we recorded a pre-tax charge of $985 million related to the employee departure program that Bell Canada announced in June 2004. The cost was included in the Other Bell Canada segment. The program consisted of two phases: 

• an early retirement plan; 3,965 employees chose to receive a package that included a cash allowance, immediate pension benefits, an additional guaranteed pension payable up to 65 years of age, career transition services and post-employment benefits
• a departure plan; 1,087 employees chose to receive a special cash allowance.

Almost all of the employees who chose to take advantage of the program left Bell Canada in 2004. The rest will leave during 2005.
     We also recorded a pre-tax charge of $11 million for relocating employees and closing real estate facilities that are no longer needed because of the employee departure program. We expect to spend approximately $65 million in the future for similar costs that will be expensed as incurred.

Employee Departure Program – Aliant

Aliant recorded a pre-tax charge of $67 million. Under the plan, 693 employees chose to receive a cash allowance. The program is expected to be completed by the end of 2005.

The table below provides a summary of the costs recognized in 2004, as well as the corresponding liability at December 31, 2004.

Cash payments 

Pension and other post- retirement benefits applied to: 

Other long-term assets 

Other long-term liabilities 

Balance in accounts payable and accrued liabilities at December 31, 2004 

Provision for Contract Loss

In 2001, we entered into a contract with the Government of Alberta to build a next-generation network to bring high-speed Internet and broadband capabilities to rural communities in Alberta. Mechanical construction of the network was completed in December 2004. We identified cost overruns on the construction contract and recorded an additional provision of $128 million in 2004.

Settlement with MTS

On May 20, 2004, Bell Canada filed a lawsuit against MTS after MTS announced it would purchase Allstream Inc. (Allstream). Bell Canada sought damages and an injunction that would prevent MTS from breaching the terms and conditions of the commercial agreements it had with Bell Canada. On June 3, 2004, Bell Canada also filed a lawsuit against Allstream seeking damages related to the same announcement.
     On June 30, 2004, BCE Inc. reached an agreement with MTS to settle the lawsuits. The terms of the settlement included:

• a payment of $75 million by MTS to Bell Canada for unwinding various commercial agreements. This settlement was recorded in the second quarter of 2004 and received on August 3, 2004.
• the removal of contractual competitive restrictions to allow Bell Canada and MTS to compete freely with each other, effective June 30, 2004 
• the orderly disposition of our interest in MTS. Our voting rights in MTS were waived after receiving the $75 million payment. We sold our interest in MTS in September 2004. See Note 5, Other Income, for more information.
• a premium payment to us by MTS in the event there is a change in control of MTS before 2006. The payment will equal the appreciation in MTS’s share price from the time of our divestiture to the time of any takeover transaction.

Other Charges

During 2004, we recorded other pre-tax charges totalling $108 million. These costs consisted mostly of future lease costs for facilities that were no longer needed, asset write-downs and other provisions, net of a reversal of previously recorded restructuring charges that were no longer necessary because of the introduction of a new employee departure program.

2003

Restructuring of Xwave Solutions Inc.

Aliant recorded a pre-tax restructuring charge of $15 million in 2003. This was a result of a restructuring plan at its subsidiary Xwave Solutions Inc. Costs associated with the restructuring include severance and related benefits, technology lease cancellation penalties and real estate rationalization costs. The restructuring was completed in 2004.

Bell Canada Charges

In 2003, Bell Canada recorded other charges of $65 million that related to various asset write-downs and other provisions. These charges were offset by a credit of $66 million relating to the reversal of the restructuring charges recorded in 2002, which were no longer necessary because fewer employees were terminated than expected. This was because of an increase in the number of employees being transferred to other positions within Bell Canada.

2002

Restructuring and Other Charges at Bell Canada

Bell Canada recorded a pre-tax charge of $302 million in 2002. This included restructuring charges of $232 million and other charges of $70 million.
     The restructuring charges were mainly from streamlining Bell Canada’s management, line and other support functions. They included severance for approximately 1,700 employees, enhanced pension benefits and other employee costs. The restructuring was largely completed in 2003. 
     Other charges consisted mainly of various accounts receivable write-downs relating to billing adjustments and unreconciled balances from previous years that were identified in 2002.

Write-off of Deferred Costs

BCE Inc. recorded a pre-tax charge of $93 million in 2002. This represented a write-off of deferred costs relating to various convergence initiatives after it was determined that these costs would not be recovered.

Pay Equity Settlement

On September 25, 2002, the members of the Canadian Telecommunications Employees’ Association (CTEA) ratified a settlement reached between the CTEA and Bell Canada relating to the 1994 pay equity complaints that the CTEA had filed on behalf of its members before the Canadian Human Rights Commission. The settlement included a cash payout of $128 million and related pension benefits of approximately $50 million.
     As a result of the settlement, Bell Canada recorded a charge of $79 million in the third quarter of 2002. The charge is equal to the $128 million cash payout, less a previously recorded provision. We are deferring and amortizing the related pension benefits into earnings over the estimated average remaining service life of active employees and the estimated average remaining life of retired employees.

Write-down of Bell Canada’s Accounts Receivable

At the same time it was developing its new billing system, Bell Canada adopted a new and more precise method for analyzing receivables by customer and by product. This method allows us to more accurately determine the validity of amounts that customers owe to Bell Canada. The analysis indicated that a write-down of accounts receivable of $272 million was appropriate.
     Since these amounts came from legacy billing systems and processes, Bell Canada carried out a detailed review of billings and adjustments for the period from 1997 to 2002. It determined that these amounts were the cumulative result of a Series of individually immaterial events and transactions relating to its legacy accounts receivable systems dating back to the early 1990s.

Note 5: Other Income 

In 2004, net gains on investments of $319 million included: 

• a gain of $108 million from the sale of Bell Canada’s remaining 3.24% interest in YPG General Partner Inc. for net cash proceeds of $123 million 
• a gain of $217 million realized from the sale of BCE Inc.’s 15.96% interest in MTS for net cash proceeds of $584 million. On August 1, 2004, the MTS shares were transferred from Bell Canada to BCE Inc. as part of a corporate reorganization. The purpose of this reorganization was to ensure that capital loss carryforwards at BCE Inc. would be available to be utilized against the gain on the sale of the MTS shares.
• other net losses on investments of $6 million.

Net gains on investments of $76 million in 2003 were mainly from: 

• a $120 million gain from the sale of a 3.66% interest in YPG General Partner Inc. for net proceeds of $135 million in cash 
• a $44 million loss from the write-down of a number of our cost-accounted investments.

Net gains on investments of $2,401 million in 2002 were mainly from:

• selling the directories business ($2.3 billion)
• selling a 37% interest in each of Télébec and NorthernTel when the Bell Nordiq Income Fund was created ($222 million)
• writing down our cost-accounted investment in Nortel Networks Corporation (Nortel) ($98 million).

Note 6: Impairment Charge

In 2002, we completed our annual impairment test for goodwill for all of our reporting units. As a result, we recognized a charge of $765 million to pre-tax earnings relating to impaired goodwill of reporting units in Bell Globemedia ($715 million) and Aliant ($50 million). In each case, the goodwill was written down to its estimated fair value, which was determined based on estimates of discounted future cash flows and confirmed by market-related values.
     The main factor contributing to the impairment at Bell Globemedia was a revised estimate of future cash flows, which reflected management’s decision to scale back its trials in convergence products and other non-core businesses. Market conditions for the media business also contributed to the impairment.
     The write-down at Aliant was a result of poor market conditions in the information technology business.

Note 7: Interest Expense

Note 8: Income Taxes

The table below is a reconciliation of income tax expense at Canadian statutory rates of 34.3% in 2004, 35.4% in 2003 and 37.4% in 2002, and the amount of reported income tax expense in the statements of operations.

The table below shows the significant components of income tax expense relating to earnings from continuing operations.

Utilization (recognition) of loss carryforwards 

Change in statutory rate 

Change in temporary differences and other 

Future income tax asset – current portion 

Future income tax asset – long-term portion 

Future income tax liability – current portion 

Future income tax liability – long-term portion 

At December 31, 2004, BCE had $3,029 million in non-capital loss carryforwards. We: 

• recognized a future tax asset of $826 million for financial reporting purposes for approximately $2,425  million of the non-capital loss carryforwards. Of the total, $2,319 million expires in varying annual amounts until the end of 2011. The balance expires in varying annual amounts from 2012 to 2024.
• did not recognize a future tax asset for financial reporting purposes for approximately $604 million of the non-capital loss carryforwards. Of the total, $599  million expires in varying annual amounts until the end of 2011. The balance expires in varying annual amounts from 2012 to 2024.

At December 31, 2004, BCE had $4,225 million in capital loss carryforwards, which can be carried forward indefinitely. We:

• recognized a future tax asset of $23 million for financial reporting purposes for approximately $102 million of the capital loss carryforwards 
• did not recognize a future tax asset for financial reporting purposes on the balance.

Note 9: Discontinued Operations

Net gain (loss) from discontinued operations 

The table below is a summarized statement of operations for the discontinued operations.

Operating gain (loss) from discontinued operations, before tax 

Gain (loss) from discontinued operations, before tax 

Income tax recovery (expense) on operating loss (gain) 

Income tax recovery (expense) on loss (gain) 

Non-controlling interest 

Emergis provides e-business solutions to the financial services industry in North America and the health-care industry in Canada. It automates transactions between companies and allows them to interact and transact electronically. Before Emergis sold its Security business it also provided organizations with the related security services. Before Emergis sold its US Health operations, it also operated cost containment networks that process medical claims for health-care payers, including insurance companies and self-insured entities.

Emergis

In May 2004, our board of directors approved the sale of our 63.9% interest in Emergis. In June 2004, BCE completed the sale of its interest in Emergis by way of a secondary public offering.

     In June 2004, Bell Canada paid $49 million to Emergis for:

• the purchase of Emergis’ Security business
• the early termination of the Bell Legacy Contract on June 30, 2004 rather than December 31, 2004
• the transfer of related intellectual property to Bell Canada.

These transactions were recorded on a net basis. The net proceeds from the sale of Emergis were $285 million (net of $22 million of selling costs and a $49 million consideration given to Emergis). The gain on the transaction was $58 million.
     The operating loss includes a future income tax asset impairment charge of $56 million ($36 million after non-controlling interest), which Emergis recorded before the sale as a result of the unwinding of tax loss utilization strategies between Emergis, 4122780 Canada Inc. (a wholly-owned subsidiary of Emergis) and Bell Canada.
     Emergis completed the sale of its US Health operations in March 2004 for US$223 million in cash. The loss on the transaction was $87 million ($160 million after non-controlling interest and BCE Inc.’s incremental goodwill), which was recorded in December 2003.
     Emergis was presented previously as a separate segment.

Teleglobe provided international voice and data telecommunications services. It also provided retail telecommunications services through its investment in the Excel Communications group until the second quarter of 2002. These services included long distance, paging and Internet services to residential and business customers in North America.

BCI developed and operated communications companies in markets outside Canada. Its main focus was on Latin America until July 2002, when it sold its interest in Telecom Américas Ltd. BCI held most of its investments through Telecom Américas Ltd.

Aliant’s emerging business segment consisted mainly of Aliant’s investments in iMagicTV Inc., Prexar LLC and AMI Offshore Inc. iMagicTV Inc. is a software development company that provides broadband TV software and solutions to service providers around the world. Prexar LLC is an Internet services provider. AMI Offshore Inc. provides process and systems control technical services, and contracts manufacturing solutions to offshore oil and gas and other industries.

Aliant’s remote communications segment consisted of Aliant’s 53.2% investment in Stratos. Stratos offers Internet Protocol (IP), data and voice access services through a range of newly emerging and established technologies, including satellite and microwave, to customers in remote locations.

Teleglobe

Effective April 24, 2002, we started presenting the financial results of Teleglobe as discontinued operations. They were previously presented as a separate segment.
     The net gain of $39 million in 2003 relates mainly to the use of available loss carryforwards that were applied against the taxes payable relating to Bell Canada’s sale of a 3.66% interest in the directories business and Aliant’s sale of Stratos Global Corporation (Stratos). The tax benefit associated with the remaining unused capital losses has not been reflected in the financial statements.
     We recorded a loss of $73 million in 2002 for the write-down of our interest in Teleglobe to its net realizable value, which we determined to be zero. This loss was in addition to the transitional goodwill impairment charge to opening retained earnings of $7,516 million as of January 1, 2002, which was required by section 3062 of the CICA Handbook.
     Effective May 15, 2002, we stopped consolidating Teleglobe’s financial results and started accounting for the investment at cost.
     On December 31, 2002, after obtaining court approval, we sold all of our common and preferred shares in Teleglobe to the court-appointed monitor for a nominal amount. The sale triggered approximately $10 billion of capital losses for tax purposes. We recorded a gain of $1,042 million, relating mainly to the tax benefit from: 

• reinstating non-capital loss carryforwards that were previously used to offset gains incurred on the transactions related to the disposition of Nortel common shares in 2001 
• applying a portion of the capital losses against the gain on the sale of the directories business in 2002.

BCI

Effective January 1, 2002, we started presenting the financial results of BCI as discontinued operations. They were previously presented in the BCE Ventures segment.
     Effective June 30, 2002, we stopped consolidating BCI’s financial results and started accounting for our investment in BCI at cost. We recorded a charge of $316 million in 2002, which represented a writedown of the investment to our estimate of its net realizable value.
     BCI will be liquidated once all of its assets have been disposed of and all claims against it have been determined. A final distribution will be made to BCI’s creditors and shareholders with the approval of the court. BCI is publicly traded. BCE Inc. owns a 62.2% interest in BCI.

Aliant’s Emerging Business Segment

Effective May 2003, we started presenting the financial results of Aliant’s emerging business segment as discontinued operations. They were previously presented in the Bell Canada segment.
     Almost all of the assets of Aliant’s emerging business segment were sold at December 31, 2003.

Aliant’s Remote Communications Segment

Effective December 2003, we started presenting the financial results of Aliant’s remote communications segment as discontinued operations. They were previously presented in the Bell Canada segment.
     In December 2003, Aliant completed the sale of Stratos, after receiving the required regulatory approvals. Aliant received $340 million ($320 million net of selling costs) in cash for the sale. The transaction resulted in a gain on sale of $105 million ($48 million after taxes and non-controlling interest).

Note 10: Earnings per Share

The table below is a reconciliation of the numerator and the denominator used in the calculation of basic and diluted earnings per common share from continuing operations.

Earnings from continuing operations (numerator) 

Earnings from continuing operations 

Dividends on preferred shares 

Premium on redemption of preferred shares 

Earnings from continuing operations – basic 

Assumed exercise of put options by CGI shareholders ⁽¹⁾ 

Earnings from continuing operations – diluted 

Weighted average number of common shares outstanding (denominator)
(in millions)

Weighted average number of common shares outstanding – basic 

Assumed exercise of stock options ⁽²⁾ 

Assumed exercise of put options by CGI shareholders ⁽¹⁾ 

Weighted average number of common shares outstanding – diluted 

(1)  On July 24, 2003, BCE and CGI signed a new shareholder agreement. As a result, the put options were cancelled.
(2) The calculation of the assumed exercise of stock options includes the effect of the average unrecognized future compensation cost of dilutive options. It does not include anti-dilutive options. These are options that would not be exercised because their exercise price is higher than the average market value of a BCE Inc. common share for each of the periods shown in the table. Including them would cause our diluted earnings per share to be overstated. The number of excluded options was 26,693,305 in 2004, 22,176,302 in 2003 and 20,770,155 in 2002.

Note 11: Accounts Receivable

Securitization of Accounts Receivable

Bell Canada sold an interest in a pool of accounts receivable to a securitization trust for a total of $1 billion in cash at December 31, 2004 ($900 million at December 31, 2003), under a revolving sales agreement that came into effect on December 12, 2001. The agreement expires on December 12, 2006. Bell Canada had a retained interest of $133 million in the pool of accounts receivable at December 31, 2004 ($128 million at December 31, 2003), which equals the amount of overcollateralization in the receivables it sold.
     Aliant sold an interest in a pool of accounts receivable to a securitization trust for a total of $125 million in cash at December 31, 2004 ($130 million at December 31, 2003), under a revolving sales agreement that came into effect on December 13, 2001. The agreement expires on December 13, 2006. Aliant had a retained interest of $43 million in the pool at December 31, 2004 ($29 million at December 31, 2003).
     Bell Canada and Aliant continue to service these accounts receivable. The buyers’ interest in the collection of these accounts receivable ranks ahead of the interests of Bell Canada and Aliant, which means that Bell Canada and Aliant are exposed to certain risks of default on the amount securitized. They have provided various credit enhancements in the form of overcollateralization and subordination of their retained interests.
     The buyers will reinvest the amounts collected by buying additional interests in the Bell Canada and Aliant accounts receivable until the agreements expire. The buyers and their investors have no claim on Bell Canada’s and Aliant’s other assets if customers do not pay amounts owed on time.
     In 2004, we recognized a pre-tax loss of $26 million on the revolving sale of accounts receivable for the combined securitizations, compared to a pre-tax loss of $33 million in 2003.
     The table below shows balances for the combined securitizations at December 31, 2004 and the assumptions that were used in the model on the date of transfer and at December 31, 2004. A 10% or 20% adverse change in each of these assumptions would have no significant effect on the current fair value of the retained interest.

Securitized interest in accounts receivable 

Retained interest 

Servicing liability 

Average accounts receivable managed 

Assumptions: 

Cost of funds 

Average delinquency ratio 

Average net credit loss ratio 

Weighted average life (days) 

Servicing fee liability 

The table below is a summary of certain cash flows received from and paid to the trusts during the year.

Note 12: Other Current Assets

Note 13: Capital Assets 

Inside plant 

Outside plant 

Station equipment 

Total property, plant and equipment  

Finite-life intangible assets 

Software 

Customer relationships 

Other 

Accrued benefit asset 

Future income taxes 

Investments at cost 

Long-term notes and other receivables 

Investments at equity 

Deferred debt issuance costs 

Deferred development costs 

Other 

Note 15: Indefinite-Life Intangible Assets

Note 16: Goodwill

CONSUMER 

Balance – December 31, 2003 

Additions 

Disposals 

Foreign exchange and other 

Balance – December 31, 2004 

Note 17: Debt Due Within One Year 

N/A: Not applicable. 

Restrictions

Some of the credit agreements:

• require us to meet specific financial ratios
• restrict our acquisition of capital assets
• restrict the payment of dividends.

We are in compliance with all conditions and restrictions.

Note 18: Long-Term Debt

BCE Inc. – Notes ^(a) 

Bell Canada 

Debentures and notes ^(b) 

Subordinated debentures 

Capital leases ^(c) 

Other 

Total – Bell Canada 

Aliant 

Debentures, notes and bonds ^(d) 

Other 

Total – Aliant 

Bell Globemedia 

Revolving reducing term credit agreements ^(e)

Notes 

Total – Bell Globemedia 

Telesat – Notes and other 

Other 

Total debt 

Unamortized premium ^(f) 

Less: Amount due within one year 

Long-term debt 

(a) BCE Inc.

All notes are unsecured. BCE Inc. has the option to redeem $1.7 billion in notes at any time.

(b) Bell Canada

All debentures and notes are unsecured. They include US$200 million maturing in 2006 and US$200 million maturing in 2010, which have both been swapped into Canadian dollars; $125 million of long-term debt includes call options that allow for early repayment of the principal amounts when certain premiums are paid.

(c) Bell Canada

Includes capital leases of $84 million in 2004 and $75 million in 2003, net of loans receivable of $284 million in 2004 and $300 million in 2003. These obligations were from agreements that Bell Canada entered into in 1999 and 2001 to sell and lease back telecommunications equipment for a total of $399 million. Some of the proceeds were invested in interest-bearing loans receivable. The capital lease obligations, net of loans receivable, were originally issued for US$39 million and have been swapped into Canadian dollar obligations.

(d) Aliant

All debentures and notes are unsecured. The bonds ($185 million in 2004 and 2003) are secured by deeds of trust and mortgage, and by supplemental deeds. These instruments contain a first fixed and specific mortgage, a pledge and charge upon all real and tangible property and equipment, which includes inventory and all capital investments except software, and all rights and licences related to that property of Aliant Telecom Inc. The bonds also provide, based on province of issue, a floating charge on all future real and tangible property of Aliant Telecom Inc. and all revenues and proceeds derived from that property. Aliant has a floating interest rate through a swap agreement of $100 million of debt.

(e) Bell Globemedia

Assets of CTV and one of its subsidiaries, CTV Specialty Television Inc. (CTV Specialty), are collateral for these agreements. $95 million of the short-term advances were repaid to BCE Inc. in January 2005 ($450 million were repaid to Bell Canada in January 2004). These were replaced with long-term debt under existing long-term facilities. CTV and CTV Specialty have fixed interest rates through swap agreements on $95 million of bank debt.

(f) Unamortized Premium

Represents the unamortized purchase price allocated to long-term debt resulting from BCE’s repurchase of SBC Communications Inc.’s 20% interest in Bell Canada Holdings Inc.

Restrictions

Some of the debt agreements:

• require us to meet specific financial ratios
• impose covenants, maintenance tests and new issue tests
• restrict the payment of dividends
• restrict how we can dispose of Bell Canada voting shares.

We are in compliance with all conditions and restrictions.

Note 19: Other Long-Term Liabilities

Note 20: Financial Instruments

Using Derivatives

We use derivative instruments to manage our exposure to interest rate risk, foreign currency risk and changes in the price of BCE Inc. common shares. We do not use derivative instruments for speculative purposes. Since we do not trade actively in derivative instruments, we are not exposed to any significant liquidity risks relating to them.
     The following derivative instruments were outstanding at December 31, 2004:

• cross-currency swaps and forward contracts that hedge foreign currency risk on a portion of our long-term debt 
• interest rate swaps that hedge interest rate risk on a portion of our long-term debt 
• forward contracts that hedge foreign currency risk on anticipated transactions 
• foreign debt designated to hedge a net investment in a foreign subsidiary 
• forward contracts on BCE Inc. common shares that hedge the fair value exposure related to SCPs.

Credit Risk

We are exposed to credit risk if counterparties to our derivative instruments are unable to meet their obligations. We expect that they will be able to meet their obligations because we deal with institutions that have strong credit ratings and we regularly monitor our credit risk and credit exposure.
     There was no credit risk relating to derivative instruments at December 31, 2004. We are also exposed to credit risk from our customers, but the concentration of this risk is minimized because we have a large and diverse customer base.

Currency Exposures

We use cross-currency swaps and forward contracts to hedge debt that is denominated in foreign currencies. We also use forward contracts to hedge foreign currency risk on anticipated transactions. Derivatives that qualify for hedge accounting, and the underlying hedged items, are marked to current rates.
     The principal amount to be received under currency contracts was US$675 million at December 31, 2004. The principal amount to be paid under these contracts was $902 million at December 31, 2004.
     During 2004, we designated US$57 million of debt as a hedge of part of our net investment in self-sustaining foreign subsidiaries.

Interest Rate Exposures

We use interest rate swaps to manage the mix of fixed and floating interest rates on our debt. We have entered into interest rate swaps with a notional amount of $195 million, maturing in 2006 and 2011, as follows: 

• on $100 million of swaps we pay interest at a rate equal to a three-month bankers’ acceptance floating interest rate plus 2.1%. We receive interest on these swaps at a rate of 6.8%.
• on $75 million of swaps we pay interest at a rate of 3.2%. We receive interest on these swaps at a rate equal to the three-month bankers’ acceptance floating rate.
• on $20 million of swaps we pay interest at a rate of 4.7%. We receive interest on these swaps at a rate equal to the three-month bankers’ acceptance floating rate.

We have also issued swaptions for the right to enter into interest rate swap transactions for a notional amount of $90 million. If exercised, these swaptions will involve the payment of fixed interest rates of 10.5% and 11.1% in exchange for the receipt of the three-month bankers’ acceptance floating rate from 2006 until maturity in 2013.

Fair Value

Fair value is the amount that willing parties would accept to exchange a financial instrument based on the current market for instruments with the same risk, principal and remaining maturity. We base fair values on estimates using present value and other valuation methods.
     These estimates are affected significantly by our assumptions for the amount and timing of estimated future cash flows and discount rates, which all reflect varying degrees of risk. Potential income taxes and other expenses that would be incurred on disposition of these financial instruments are not reflected in the fair values. As a result, the fair values are not necessarily the net amounts that would be realized if these instruments were actually settled.
     The carrying value of all financial instruments approximates fair value, except for those noted in the table below.

2004

Investment in Nortel ⁽¹⁾ 

Long-term debt due within one year 

Long-term debt 

Derivative financial instruments, net asset (liability) position:

Forward contracts – BCE Inc. shares 

Currency contracts ⁽²⁾ 

Interest rate swaps 

(1) We have designated four million of our approximately 14 million Nortel common shares to manage our exposure to outstanding rights to SCPs.
(2) Currency contracts include cross-currency interest rate swaps and foreign currency forward contracts. Some of the cross-currency interest rate swaps are economic hedges that do not qualify for hedge accounting. We carry these at fair value and all gains or losses are recorded in the statement of operations.

Note 21: Share Capital

Preferred Shares

BCE Inc.’s articles of amalgamation provide for an unlimited number of First Preferred Shares and Second Preferred Shares. The terms set out in the articles authorize BCE Inc.’s directors to issue the shares in one or more Series and to set the number of shares and conditions for each series.
     The table below is a summary of the principal terms of BCE Inc.’s First Preferred Shares. There were no Second Preferred Shares issued and outstanding at December 31, 2004. BCE Inc.’s articles of amalgamation describe the terms and conditions of these shares in detail.

NUMBER OF SHARES

ANNUAL 
DIVIDEND 
RATE 

CONVERT- 
IBLE INTO 

CONVERSION 
DATE 

REDEMPTION 
DATE 

REDEMP- 
TION 
PRICE 

ISSUED 
AND OUT- 
STANDING 

AT 
DECEMBER 31

Voting Rights

All of the issued and outstanding preferred shares at December 31, 2004 were non-voting, except under special circumstances when the holders are entitled to one vote per share.

Entitlement to Dividends

Holders of Series R, Z, AA and AC shares are entitled to fixed cumulative quarterly dividends. The dividend rate on these shares is reset every five years, as set out in BCE Inc.’s articles of amalgamation.
     Holders of Series S and Y shares are entitled to floating adjustable cumulative monthly dividends.
     If Series Q, AB and AD shares are issued, their holders will be entitled to floating adjustable cumulative monthly dividends.
     If Series T shares are issued, their holders will be entitled to fixed cumulative quarterly dividends.

Conversion Features

All of the issued and outstanding preferred shares at December 31, 2004 are convertible at the holder’s option into another associated Series of preferred shares on a one-for-one basis as per the terms set out in BCE Inc.’s articles of amalgamation.

Redemption Features

BCE Inc. may redeem Series R, Z, AA and AC shares on the redemption date and every five years after that date.
     If Series T shares are issued, BCE Inc. may redeem them on the redemption date and every five years after that date.
     BCE Inc. may redeem Series S and Y shares at any time at $25.50 per share (being a 2% premium to the issue price). If Series Q, AB and AD shares are issued, BCE Inc. may redeem them at any time.

Common Shares and Class B Shares

BCE Inc.’s articles of amalgamation provide for an unlimited number of voting common shares and non-voting Class B shares. The common shares and the Class B shares rank equally in the payment of dividends and in the distribution of assets if BCE Inc. is liquidated, dissolved or wound up, after payments due to the holders of preferred shares.

2003

Outstanding, beginning of year 

Shares issued: 

under employee savings plans 

under dividend reinvestment plan 

under employee stock option plans 

Shares purchased for cancellation 

Outstanding, end of year 

Dividend Reinvestment Plan

The dividend reinvestment plan allows eligible common shareholders to use their dividends to buy additional common shares. A trustee buys BCE Inc. common shares for the participants on the open market, by private purchase or from BCE Inc. (where the shares are issued from treasury). BCE Inc. chooses the method the trustee uses to buy the shares.
     A total of 3,198,015 common shares were bought in the open market under this plan for $89 million in 2004. A total of 2,807,899 common shares were bought from treasury for $82 million in 2003.

Note 22: Stock-Based Compensation Plans

Employee Savings Plans (ESPs)

ESPs are designed to encourage employees of BCE Inc. and its participating subsidiaries to own shares of BCE Inc. Each year, employees who participate in the plans can choose to have up to a certain percentage of their annual earnings withheld through regular payroll deductions to buy BCE Inc. common shares. In some cases, the employer may also contribute up to a maximum percentage of the employee’s annual earnings to the plan.
     Each participating company decides on its maximum percentages. For Bell Canada, employees can contribute up to 12% of their annual earnings. Bell Canada contributes up to 2%.
     The trustee of the ESPs buys BCE Inc. common shares for the participants on the open market, by private purchase or from BCE Inc. (where the shares are issued from treasury). BCE Inc. chooses the method the trustee uses to buy the shares.
     There were 37,843 employees participating in the plans at December 31, 2004. The total number of common shares bought for employees was 6,818,079 in 2004 and 6,352,654 in 2003. Compensation expense related to ESPs was $38 million in 2004, $38 million in 2003 and $43 million in 2002. At December 31, 2004, 13,513,812 common shares were reserved for issue under the ESPs.

Stock Options

Under BCE Inc.’s long-term incentive programs, BCE Inc. may grant options to key employees to buy BCE Inc. common shares. The subscription price is usually equal to the market value of the shares on the last trading day before the grant comes into effect. At December 31, 2004, 25,777,551 common shares were authorized for issue under these programs.
     For options granted before January 1, 2004, the right to exercise options generally vests or accrues by 25% a year for four years of continuous employment from the day of grant, unless a special vesting period applies. Options become exercisable when they vest and can be exercised for a period of up to 10 years from the date of grant.
     For most options granted after January 1, 2004, the right to exercise options vests after two to three years of continuous employment from the day of grant, if specific performance targets are met. Options become exercisable when they vest and can be exercised for a period of up to six years from the date of grant. Subject to achieving specific performance targets, 50% of the options will vest after two years and 100% after three years.
     Special vesting provisions may apply if:

• there is a change of control of BCE Inc. and the option holder’s employment ends under certain circumstances
• the option holder is employed by a designated subsidiary of BCE Inc., and BCE Inc.’s ownership interest in that subsidiary falls below the percentage set out in the program.

When the Nortel common shares were distributed in May 2000, each outstanding BCE Inc. stock option was cancelled and replaced by two new stock options. The first option gives the holder the right to buy one BCE Inc. common share. The second option gives the holder the right to buy approximately 1.57 post-split common shares of Nortel (Nortel option) at exercise prices that maintain the holder’s economic position.
     We ensured that exercising the Nortel options would not dilute Nortel shares by: 

• calculating how many BCE Inc. common shares could be issued under options granted under stock option programs immediately before the day of the distribution 
• factoring this number into the calculation that determined how many Nortel common shares were distributed for each BCE Inc. common share held.
  

BCE Inc. may exercise all Nortel options that expire unexercised or are forfeited. The exercise price paid to Nortel is given back to BCE  Inc. We credit an amount to retained earnings that is equal to the market share price of Nortel.

The table below is a summary of the status of BCE Inc.’s stock option programs. 

WEIGHTED
  AVERAGE
EXERCISE
PRICE ($

)

The table below shows you more about BCE Inc.’s stock option programs at December 31, 2004.

EXERCISE PRICES

Assumptions Used in Stock Option Pricing Model 

The table below shows the assumptions used to determine stock-based compensation expense, using the Black-Scholes option pricing model.
 

Compensation expense ($ millions) 

Number of stock options granted 

Weighted average fair value per option granted ($) 

Weighted average assumptions: 

Dividend yield 

Expected volatility 

Risk-free interest rate 

Expected life (years) 

Starting in 2004, most of the stock options granted contain specific performance targets that must be met before the option can be exercised. This is reflected in the calculation of the weighted average fair value per option granted.

Restricted Share Units (RSUs)

In 2004, BCE Inc. granted RSUs to executives and other key employees. The value of an RSU is always equal to the value of one BCE Inc. common share. Dividends in the form of additional RSUs are credited to the participant’s account on each dividend payment date and are equivalent in value to the dividend paid on BCE Inc. common shares. Each executive is granted a specific number of RSUs for a given performance period, based on his or her position and level of contribution. At the end of each given performance period, RSUs will vest if performance objectives are met or will be forfeited. 
     Vested RSUs will be paid in BCE  Inc. common shares purchased on the open market, in cash or through a combination of both, as the holder chooses, as long as individual share ownership requirements are met.

The table below is a summary of the status of RSUs.

For the year ended December 31, 2004, we recorded compensation expense for RSUs of $25 million.

Special Compensation Payments (SCPs)

Before 2000, when BCE Inc. granted options to officers, vice-presidents and other key employees, related rights to SCPs were also often granted. SCPs are cash payments representing the amount that the market value of the shares on the date of exercise of the related options exceeds the exercise price of these options.
     When the distribution of Nortel common shares was made in 2000, the outstanding options were cancelled and replaced with options to buy BCE Inc. common shares and options to buy Nortel common shares. The related SCPs were adjusted accordingly.
     For each right to an SCP held before the distribution, right holders now have rights related to both BCE Inc. and Nortel common shares.
     The number of SCPs outstanding at December 31, 2004 was:

• 1,078,394 relating to BCE Inc. common shares
• 2,443,798 relating to Nortel common shares.

All of the outstanding SCPs cover the same number of shares as the options to which they relate. It is the employer’s responsibility to make the payments under the SCPs. There was income related to SCPs of $14 million in 2004, income of $29 million in 2003 and an expense of $1 million in 2002. The amounts include a recovery of SCP expense previously established at $14 million for 2004, $50 million for 2003, and $59 million for 2002, relating to forfeitures of SCPs.

Note 23: Employee Benefit Plans

We provide pension, other retirement and post-employment benefits for almost all of our employees. These include DB pension plans, plans that provide other employee future benefits and DC pension plans.

Components of Accrued Benefit Asset (Liability)

The table below shows the change in benefit obligations, change in fair value of plan assets and the funded status of the DB plans.
 

Accrued benefit obligation, beginning of year 

Current service cost 

Interest cost on accrued benefit obligation 

Actuarial (gains) losses 

Benefit payments 

Employee contributions 

Special termination costs ⁽¹⁾ 

Plan amendment ⁽²⁾ 

Divestitures and other ⁽³⁾ 

Fair value of plan assets, beginning of year 

Actual return on plan assets 

Benefit payments 

Employer contributions 

Employee contributions 

Divestitures and other ⁽³⁾ 

Fair value of plan assets, end of year 

Plan surplus (deficit) 

Unamortized net actuarial (gains) losses 

Unamortized past service costs 

Unamortized transitional (asset) obligation 

Valuation allowance 

Accrued benefit asset (liability), end of year 

Accrued benefit asset included in other long-term assets 

Accrued benefit liability included in other long-term liabilities 

(1) Costs in 2004 relate to the employee departure programs announced at Bell Canada. See Note 4, Restructuring and Other Items, for more information.
(2) Costs in 2004 mainly relate to DB pension plan amendments at Aliant whereby certain bargaining unit employees and eligible management employees were awarded past service benefits.
(3) Costs in 2003 mainly relate to Bell Canada’s sale of its 89.9% ownership interest in Certen.

For DB pension plans with an accrued benefit obligation that was more than plan assets: 

• the accrued benefit obligation was $14,087 million at December 31, 2004, and $2,732 million at December 31, 2003 
• the fair value of plan assets was $12,630 million at December 31, 2004, and $2,005 million at December 31, 2003.

For DB pension plans with an accrued benefit obligation that was less than plan assets: 

• the accrued benefit obligation was $261 million at December 31, 2004, and $9,773 million at December 31, 2003 
• the fair value of plan assets was $400 million at December 31, 2004, and $10,564 million at December 31, 2003.

Components of Net Benefit Plans Cost (Credit)

The table below shows the net benefit plans cost (credit) before and after recognizing its long-term nature. The recognized net benefit plan cost (credit) reflects the amount reported in our statement of operations and is calculated according to our accounting policy.

FOR THE YEAR ENDED DECEMBER 31 

Current service cost 

Interest cost on accrued benefit obligation 

Actual (return) loss on plan assets 

Past service costs arising during period 

Actuarial loss (gain) on accrued benefit obligation 

Elements of employee future benefit plans cost (credit), before recognizing its long-term nature 

Excess (deficiency) of actual return over expected return ⁽¹⁾ 

Deferral of amounts arising during period: 

Past service costs