Notes to Consolidated Financial Statements

The interim consolidated financial statements should be read in conjunction with BCE Inc.’s annual consolidated financial statements for the year ended December 31, 2004, on pages 82 to 121 of BCE Inc.’s 2004 annual report.

These notes are unaudited.

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

We, us, our and BCE mean BCE Inc., its subsidiaries and joint ventures.

Note 1: Significant accounting policies

We have prepared the consolidated financial statements in accordance with Canadian generally accepted accounting principles (GAAP) using the same basis of presentation and accounting policies as outlined in Note 1 to the annual consolidated financial statements for the year ended December 31, 2004, except as noted below.

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 change in accounting policy for Aliant Inc.’s (Aliant) method of recognizing revenues and expenses in our directory business effective January 2005, as described below 

• the change in classification to discontinued operations for minor business dispositions.

Change in accounting policy

Effective January 1, 2005, we defer and amortize revenues and expenses from Aliant’s directory business over the period of circulation, which is usually 12 months. Prior to January 1, 2005, we recognized revenues and expenses from Aliant’s directory business on the publication date. The impact on our consolidated statements of operations for the three months ended March 31, 2005 and the comparative period was negligible and we did not restate the statements of operations for prior periods. At December 31, 2004, this resulted in:

• a decrease of $23 million in accounts receivable 

• an increase of $1 million in other current assets 

• a decrease of $8 million in accounts payable and accrued liabilities 

• a decrease of $6 million in non-controlling interest

• an increase of $8 million in the deficit.
  
  

Note 2: Segmented information

The table below is a summary of financial information by segment.

Note 3: Employee benefit plans

The table below shows the components of the net benefit plans cost.

                       PENSION BENEFITS

                        OTHER BENEFITS

FOR THE THREE MONTHS ENDED MARCH 31

Current service cost 

Interest cost on accrued benefit obligation 

Expected return on plan assets 

Amortization of past service costs 

Amortization of net actuarial losses 

Amortization of transitional (asset) obligation 

Increase (decrease) in valuation allowance 

Net benefit plans cost 

Comprised of: 

Defined benefit plans cost 

Defined contribution plans cost 

                       PENSION BENEFITS

                        OTHER BENEFITS 

FOR THE THREE MONTHS ENDED MARCH 31

Aliant 

Bell Canada 

Bell Globemedia 

BCE Inc. 

Total 

Comprised of: 

Contributions to defined benefit plans 

Contributions to defined contribution plans 

Note 4: Restructuring and other items

Employee departure programs

The table below provides an update on the liability relating to the employee departure programs which were implemented in 2004.

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

Less:

Cash payments

Reversal of excess provision

Balance in accounts payable and accrued liabilities at March 31, 2005

During the first quarter of 2005, we recorded a pre-tax charge of $21 million primarily for relocating employees and closing real estate facilities that are no longer needed because of the employee departure program. We expect to spend approximately $45 million in the future for similar costs that will be expensed as incurred. These charges were offset by a credit of $25 million relating to the reversal of restructuring provisions that were no longer necessary since the actual payments were lower than estimated.

Note 5: Stock-based compensation plans

Restricted share units (RSUs)

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

For the three months ended March 31, 2005 and March 31, 2004, we recorded compensation expense for RSUs of $9 million and $4 million, respectively.

BCE Inc. stock options

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

Outstanding, January 1, 2005 

Granted 

Exercised 

Expired/forfeited 

Outstanding, March 31, 2005 

Exercisable, March 31, 2005 

Assumptions used in stock option pricing model

The table below shows the assumptions used to determine the 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) 

Note 6: Subsequent events

Bell Canada International Inc. (BCI) loss utilization transaction

On April 15, 2005, 3787915 Canada Inc., a wholly-owned subsidiary of Bell Canada, acquired $17 billion in preferred shares from 3787923 Canada Inc., a wholly-owned subsidiary of BCI. 3787923 Canada Inc. used the proceeds to advance $17 billion to BCI through a subordinated interest-free loan. BCI then advanced $17 billion to 3787915 Canada Inc. by way of a subordinated interest-bearing demand loan, the funds being used to repay a daylight loan granted to 3787915 Canada Inc. to make the initial preferred share investment.
     The dividend rate on the preferred shares is equal to 5.1% which is essentially the same as the interest rate on the loan. This transaction is part of a tax loss consolidation strategy that follows the transaction steps laid out in an advanced tax ruling granted by the Canada Revenue Agency to Bell Canada and BCI. 
     3787915 Canada Inc. has the legal right to offset the demand loan payable to BCI and the investment in preferred shares of 3787923 Canada Inc. Since 3787915 Canada Inc. intends to do this, we will present these items and the related interest expense and dividend income on a net basis. The tax savings resulting from the interest expense will be presented as a reduction of income tax expense.

Teleglobe Lending Syndicate Lawsuit

As indicated in Note 24 to BCE’s audited Consolidated Financial Statements for the year ended December 31, 2004, a lawsuit was filed in the Ontario Superior Court of Justice on July 12, 2002 against BCE Inc. by certain of the members of the Teleglobe and Teleglobe Holdings (U.S.) Corporation lending syndicate. BNP Paribas (Canada), which had advanced approximately US $50M to Teleglobe, notified BCE Inc. that it will shortly file a notice of discontinuance with the Court and will therefore no longer be a plaintiff in this action. Following such discontinuance, the damages sought by the remaining plaintiffs will amount to approximately US $1.04 billion (down from approximately US $1.09 billion), plus interest and costs, representing approximately 83% (down from approximately 87%) of the US $1.25 billion that the members of the lending syndicate advanced to Teleglobe and Teleglobe Holdings (U.S.) Corporation.