BT 1997 Annual Report Download - page 57

NOTES TO THE FINANCIAL STATEMENTS
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22. Pension costs (continued)
In the year ended 31 March 1997, the group made regular contributions of £232m (1996 – £234m) to the scheme. Certain
activities of the scheme are carried out at the company’s pension centre, all costs of which are borne by the company. These
costs have not been apportioned for accounting purposes between those attributable to the scheme and those attributable to
the company as functions maintained for both entities cannot be meaningfully divided between them. At 31 March 1997 the
scheme held 56 million ordinary shares of the company with a market value of £250m (1996 – £221m). The company occupies
eight properties owned by the scheme on which an annual rental of £1.2m is payable.
23. Financial instruments and risk management
The group uses derivative financial instruments primarily to manage its exposure to market risks from changes in interest and
foreign exchange rates. The group does not enter into or issue derivative financial instruments for trading purposes.
The notional amounts of derivatives summarised below do not necessarily represent amounts exchanged by the parties and,
thus, are not a measure of the exposure of the group through its use of derivatives. The amounts exchanged are calculated on
the notional amounts and other terms of the derivatives which relate to interest and exchange rates.
(a) Interest rate risk management
The group has entered into interest rate swap agreements with commercial banks and other institutions to vary the amounts
and periods for which interest rates on borrowings are fixed. By swapping fixed rates on long-term borrowings into floating
rates, the group has obtained lower floating-rate borrowings than those available if borrowing directly at a floating rate. Under
interest rate swaps, the group agrees with other parties to exchange, at specified intervals, the difference between fixed rate
and floating rate interest amounts calculated by reference to an agreed notional principal amount.
At 31 March 1997, the group had outstanding interest rate swap agreements having a total notional principal amount of
£1,247m (1996 – £1,253m).
(b) Foreign exchange risk management
The group has foreign currency swap agreements in place which reduce the impact of changes in currency rates on certain of
its long-term borrowings denominated in US dollars. The group also enters into forward exchange contracts to hedge interest
expense, purchase and sale commitments denominated in foreign currencies (principally US dollars). The terms of the currency
swaps are up to 20 years and the terms of currency forward exchange contracts are typically less than one year. The purpose of
the group’s foreign currency hedging activities is to protect the group from the risk that the eventual net inflows and net
outflows will be adversely affected by changes in exchange rates.
At 31 March 1997, the group had outstanding foreign currency swap agreements and forward exchange contracts having a
total notional principal amount of £2,541m (1996 – £2,377m).
The fair values of foreign currency contracts at 31 March 1997 were £1,071m (1996 – £396m) for purchases of currency and
£683m (1996 – £1,027m) for sales of currency. These fair values have been estimated by calculating their present values using
the market discount rates, appropriate to the terms of the contracts, in effect at the balance sheet dates.
At 31 March 1997, the group had deferred unrealised gains of £21m (1996 – £2m) and losses of £7m (1996 – £15m), based on
dealer-quoted prices, from hedging purchase and sale commitments. At 31 March 1997, the group also had deferred realised
net losses of £36m (1996 – £4m net gains). These are included in the profit and loss account as part of the purchase or sale
transaction when it is recognised, or as gains or losses when a hedged transaction is no longer expected to occur.
(c) Concentrations of credit risk and credit exposures of financial instruments
The group considers that it is not exposed to major concentrations of credit risk. The group, however, is exposed to credit-
related losses in the event of non-performance by counterparties to financial instruments, but does not expect any
counterparties to fail to meet their obligations. Based on interest and exchange rates in effect at 31 March 1997, the group had
a maximum credit exposure of £113m (1996 – £116m) to one counterparty under foreign currency and interest rate swap
agreements. The group limits the amount of credit exposure to any one counterparty. The group does not normally see the need
to seek collateral or other security.
(d) Fair value of financial instruments
The following table shows the carrying amounts and fair values of the group’s financial instruments at 31 March 1997 and 1996.
The carrying amounts are included in the group balance sheet under the indicated headings, with the exception of derivative
amounts related to borrowings, which are included in debtors or other creditors as appropriate. The fair values of the financial
instruments are the amount at which the instruments could be exchanged in a current transaction between willing parties, other
than in a forced or liquidation sale.