BT 2006 Annual Report Download - page 71

Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market other than:
sthose that the group intends to sell immediately or in the
short term, which are classified as held for trading;
sthose for which the group may not recover substantially all of
its initial investment, other than because of credit
deterioration, which are classified as available for sale.
Loans and receivables are initially recognised at fair value
plus transaction costs and subsequently carried at amortised
cost using the effective interest method, with changes in
carrying value recognised in the income statement in the line
which most appropriately reflects the nature of the item or
transaction.
Available-for-sale financial assets
Non-derivative financial assets classified as available-for-sale are
either specifically designated in this category or not classified in
any of the other categories. Available-for-sale financial assets
are carried at fair value, with unrealised gains and losses (except
for changes in exchange rates for monetary items, interest,
dividends and impairment losses which are recognised in the
income statement) are recognised in equity until the financial
asset is derecognised, at which time the cumulative gain or loss
previously recognised in equity is taken to the income
statement, in the line that most appropriately reflects the
nature of the item or transaction.
Trade receivables
Trade receivables are initially recognised at fair value, which is
usually the original invoiced amount and subsequently carried
at amortised cost using the effective interest method less
provisions made for doubtful receivables.
Provisions are made specifically where there is objective
evidence of a dispute or an inability to pay. An additional
provision is made based on an analysis of balances by age,
previous losses experienced and general economic conditions.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current
balances with banks and similar institutions, which are readily
convertible to known amounts of cash and which are subject to
insignificant risk of changes in value and have an original
maturity of three months or less.
For the purpose of the consolidated cash flow statement,
cash and cash equivalents consist of cash and cash equivalents
as defined above, net of outstanding bank overdrafts. Bank
overdrafts are included within loans and other borrowings in
current liabilities on the balance sheet.
Impairment of financial assets
The group assesses at each balance sheet date whether a
financial asset or group of financial assets are impaired.
Where there is objective evidence that an impairment loss
has arisen on assets carried at amortised cost, the carrying
amount is reduced with the loss being recognised in the income
statement. The impairment loss is measured as the difference
between that asset’s carrying amount and the present value of
estimated future cash flows discounted at the financial asset’s
original effective interest rate. The impairment loss is only
reversed if it can be related objectively to an event after the
impairment was recognised and is reversed to the extent the
carrying value of the asset does not exceed its amortised cost at
the date of reversal.
If an available-for-sale asset is impaired, an amount comprising
the difference between its cost (net of any principal payment
and amortisation) and its fair value is transferred from equity to
the income statement. Reversals of impairment losses on debt
instruments are taken through the income statement if the
increase in fair value of the instrument can be objectively
related to an event occurring after the impairment loss was
recognised in the income statement. Reversals in respect of
equity instruments classified as available-for-sale are not
recognised in the income statement.
If there is objective evidence of an impairment loss on an
unquoted equity instrument that is not carried at fair value
because its fair value cannot be objectively measured, or on a
derivative asset that is linked to and must be settled by delivery
of such an unquoted equity instrument, has been incurred, the
amount of loss is measured as the difference between the
asset’s carrying amount and the present value of estimated
future cash flows discounted at the current market rate of
return for a similar financial asset.
Loans and other borrowings
Loans and other borrowings are initially recognised at fair value
plus directly attributable transaction costs. Where loans and
other borrowings contain a separable embedded derivative, the
fair value of the embedded derivative is the difference between
the fair value of the hybrid instrument and the fair value of the
loan or borrowing. The fair value of the embedded derivative
and the loan or borrowing is recorded separately on initial
recognition. Loans and other borrowings are subsequently
measured at amortised cost using the effective interest method
and if included in a fair value hedge relationship are revalued to
reflect the fair value movements on the hedged risk associated
with the loans and other borrowings.
Derivative financial instruments
The group uses derivative financial instruments mainly to
reduce exposure to foreign exchange risks and interest rate
movements. The group does not hold or issue derivative
financial instruments for financial trading purposes. However,
derivatives that do not qualify for hedge accounting are
accounted for as trading instruments.
Derivative financial instruments are classified as held for
trading and initially recognised at cost. Subsequent to initial
recognition, derivative financial instruments are stated at fair
value. The gain or loss on re-measurement to fair value is
recognised immediately in the income statement in net finance
expense. However, where derivatives qualify for hedge
accounting, recognition of any resultant gain or loss depends on
the nature of the hedge. Derivative financial instruments are
classified as current assets or current liabilities where they are
not designated in a hedging relationship or have a maturity
period within 12 months. Where derivative financial
instruments have a maturity period greater than 12 months and
are designated in a hedge relationship, they are classified within
either non current assets or non current liabilities.
Derivatives embedded in other financial instruments or other
host contracts are treated as separate derivatives when their
risk and characteristics are not closely related to those of host
contracts and host contracts are not carried at fair value.
Changes in the fair value of embedded derivatives are
recognised in the income statement in the line which most
appropriately reflects the nature of the item or transaction.
Accounting policies BT Group plc Annual Report and Form 20-F 2006 69