BT 2006 Annual Report Download - page 70

premium when the options are exercised. The group has applied
IFRS 2 ‘Share based payment’ retrospectively to all options
granted after 7 November 2002 and not fully vested at
1 January 2005.
(XV) TAXATION
Current tax, including UK corporation tax and foreign tax, is
provided at amounts expected to be paid (or recovered) using
the tax rates and laws that have been enacted or substantially
enacted by the balance sheet date.
Deferred tax is recognised, using the liability method, in
respect of temporary differences between the carrying amount
of the group’s assets and liabilities and their tax base.
Deferred tax liabilities are offset against deferred tax assets
within the same taxable entity or qualifying local tax group. Any
remaining deferred tax asset is recognised only when, on the
basis of all available evidence, it can be regarded as probable
that there will be suitable taxable profits, within the same
jurisdiction, in the foreseeable future against which the
deductible temporary difference can be utilised.
Deferred tax is determined using tax rates that are expected
to apply in the periods in which the asset is realised or liability
settled, based on tax rates and laws that have been enacted or
substantially enacted by the balance sheet date.
Current and deferred tax are recognised in the income
statement, except when the tax relates to items charged or
credited directly in equity, in which case the tax is also
recognised in equity.
(XVI) DIVIDENDS
Final dividends are recognised as a liability in the year in which
they are declared and approved by the company in general
meeting. Interim dividends are recognised when they are paid.
(XVII) PROVISIONS
Provisions are recognised when the group has a present legal or
constructive obligation as a result of past events, it is more
likely than not that an outflow of resources will be required to
settle the obligation and the amount can be reliably estimated.
Provisions are discounted to present value where the effect is
material.
(XVIII) SHARE CAPITAL
Ordinary shares are classified as equity. Shares held in the
parent company, BT Group plc, by employee share ownership
trusts and repurchased shares are recorded in the balance sheet
as a deduction from shareholders’ equity at cost.
(XIX) FINANCIAL INSTRUMENTS (TO 31 MARCH 2005)
The accounting policies adopted in respect of financial
instruments in periods up to, and including 31 March 2005, are
set out below. However, to provide comparability, certain
classification principles have been applied to financial assets
and liabilities for periods up to, and including 31 March 2005.
Financial assets are classified as either financial assets at fair
value through the income statement, loans and receivables or
available-for-sale financial assets (see below). The classification
depends on the purpose for which the investments were
acquired. Management determines the classification of its
investments at initial recognition and re-evaluates this
designation at each reporting date. Up to 31 March 2005,
financial assets in these categories were held at the lower of
cost and net realisable value in accordance with UK GAAP.
Debt instruments are stated at the amount of net proceeds
adjusted to amortise any discount over the term of the debt.
The effect of the currency element of currency swaps acting
as hedges against financial assets and debt is reported
separately in current and non current derivative financial
instruments.
Criteria to qualify for hedge accounting
The group considers its derivative financial instruments to be
hedges when certain criteria are met. For foreign currency
derivatives, the instrument must be related to actual foreign
currency assets or liabilities or a probable commitment whose
characteristics have been identified. It must involve the same
currency or similar currencies as the hedged item and must also
reduce the risk of foreign currency exchange movements on the
group’s operations. For interest rate derivatives, the instrument
must be related to assets or liabilities or a probable
commitment, such as a future bond issue, and must also
change the interest rate or the nature of the interest rate by
converting a fixed rate to a variable rate or vice versa.
Accounting for derivative financial instruments
Principal amounts underlying currency swaps are revalued at
exchange rates ruling at the balance sheet date and are
included in current and non-current derivative financial
instruments.
Interest differentials, under interest rate swap agreements
used to vary the amounts and periods for which interest rates
on borrowings are fixed, are recognised by adjustment of net
finance expense.
The forward exchange contracts used to change the currency
mix of net debt are revalued to balance sheet rates with net
unrealised gains and losses included in current and non-current
derivative financial instruments. The difference between spot
and forward rate for these contracts is recognised as part of net
finance expense over the term of the contract.
The forward exchange contracts hedging transaction
exposures are revalued at the prevailing forward rate on the
balance sheet date with net unrealised gains and losses being
shown as current and non-current derivative financial
instruments.
(XX) FINANCIAL INSTRUMENTS (FROM 1 APRIL 2005)
The following are the key accounting policies used in the
preparation of the restated 1 April 2005 opening balance sheet
and subsequent periods to reflect the adoption of IAS 32,
‘Financial Instruments: Disclosure and Presentation’ and IAS 39,
‘Financial Instruments: Recognition and Measurement’.
Financial assets
Purchases and sales of financial assets
All regular way purchases and sales of financial assets are
recognised on the settlement date, which is the date that the
asset is delivered to or by the group.
Financial assets at fair value through income statement
A financial asset is classified in this category if acquired
principally for the purpose of selling in the short term or if so
designated by management. Financial assets held in this
category are initially recognised and subsequently measured at
fair value, with changes in value recognised in the income
statement in the line which most appropriately reflects the
nature of the item or transaction.
BT Group plc Annual Report and Form 20-F 2006 Accounting policies68