BT 2013 Annual Report Download - page 117

Cash flow hedges
When a derivative financial instrument is designated as a hedge of the
variability in cash flows of a recognised asset or liability, or a highly
probable transaction, the effective part of any gain or loss on the
derivative financial instrument is recognised directly in equity, in the
cash flow reserve. For cash flow hedges of recognised assets or
liabilities, the associated cumulative gain or loss is removed from equity
and recognised in the same line of the income statement and in the
same period or periods that the hedged transaction affects the income
statement. Any ineffectiveness arising on a cash flow hedge of a
recognised asset or liability is recognised immediately in the same
income statement line as the hedged item. Where ineffectiveness arises
on highly probable transactions, it is recognised in the income
statement line which most appropriately reflects the nature of the item
or transaction.
Fair value hedges
When a derivative financial instrument is designated as a hedge of the
variability in fair value of a recognised asset or liability, or unrecognised
firm commitment, the change in fair value of the derivative that is
designated as a fair value hedge is recorded in the income statement at
each reporting date, together with any changes in fair value of the
hedged asset or liability that is attributable to the hedged risk.
Accounting standards, interpretations and
amendments not yet effective
IAS 19 ‘Employee Benefits’
IAS 19 (Revised 2011) is effective for the accounting period beginning
on 1 April 2013. The amendments set out in this revised accounting
standard are intended to provide a clearer indication of an entity’s
obligations resulting from the provision of defined benefit pension plans
and how those obligations will affect its financial position, financial
performance and cash flow. Compensating adjustments in other
comprehensive income will leave equity unchanged.
The amendments which will impact the consolidated financial
statements include:
—the recognition of plan administration costs in the income
statement
—the replacement of the expected return on pension plan assets and
interest expense on pension plan liabilities with a single net interest
component calculated on the net defined benefit liability or asset
using the discount rate used to determine the defined benefit
obligation
—additional disclosures to explain the characteristics of an entity’s
defined benefit plans, the amounts recognised in the financial
statements and the risks arising from defined benefit plans.
The amendments will not impact the value of the retirement benefit
obligation on the face of the group balance sheet.
Expected impact of adoption of IAS 19 (Revised 2011)
IAS 19 (Revised 2011) requires retrospective adoption and therefore
prior periods will be restated. The impact on the income statement for
2012/13 and 2011/12, had the amendments applied, would have
been to:
—increase operating costs by around £40m (2011/12: £30m)
—reduce net finance income on pensions, reported as a specific item,
by around £150m (2011/12: £295m) resulting in a restated net
finance expense of approximately £120m (2011/12: £100m).
The service cost that will be recognised in the income statement in
2013/14 is estimated to be around £50m higher than the restated cost
for 2012/13 mainly due to the change in discount rate and inflation
assumptions. The net pension interest expense within specific items is
expected to be around £240m for 2013/14, an increase of around
£120m over the 2012/13 restated amount due to the higher net deficit
more than offsetting the lower discount rate.
The sensitivity of the net pension interest expense for 2013/14, under
this revised basis, to an increase of 0.25 percentage points in the
discount rate assumption would be a reduction of £65m. As shown in
note 19, an increase of 0.25 percentage points in the RPI inflation
assumption would increase the retirement benefit obligation at
31 March 2013 by £1.5bn. If this were the case, the net pension
interest expense for 2013/14 would be £65m higher.
3. Significant accounting policies continued
Financial statements
115
Financial statements