BT 2013 Annual Report Download - page 161

Financial statements
159
Financial statements
26. Financial instruments and risk management continued
Fair value hierarchy
Financial instruments measured at fair value at 31 March 2013 consist of derivative financial instruments and investments classified as available-
for-sale or designated at fair value through profit and loss under IAS 39 and are further analysed by the level of valuation input.
The three levels of valuation methodology used are:
—Level 1 – uses quoted prices in active markets for identical assets or liabilities
—Level 2 – uses inputs for the asset or liability other than quoted prices, that are observable either directly or indirectly
—Level 3 – uses inputs for the asset or liability that are not based on observable market data, such as internal models or other valuation methods.
Derivative financial instruments
The fair value of the group’s outstanding derivative financial assets and liabilities consisted of swaps and foreign exchange contracts and were
estimated using discounted cash flow models and market rates of interest and foreign exchange at the balance sheet date. All derivative financial
instruments are categorised at Level 2 of the fair value hierarchy.
Investments
Non-current investments analysed at Level 1 consisted of listed available-for-sale investments of £45m (2011/12: £31m) and listed investments
of £11m (2011/12: £10m) designated at fair value through profit and loss. The group’s listed investments were measured at fair value using quoted
market prices for identical assets.
£530m (2011/12: £505m) of current asset available-for-sale investments were measured using Level 2 valuation methods.
The fair value of £8m (2011/12: £27m) of non-current investments classified as available-for-sale was determined using Level 3 valuation
methods. A reconciliation of the movements in balances measured using Level 3 valuation methods is presented below:
£m
At 1 April 2011 and 1 April 2012 27
Disposals (19)
At 31 March 2013 8
There were no losses recognised in the income statement in respect of Level 3 assets held at 31 March 2013.
Hedging activities
Our hedging policies use derivative financial instruments to manage financial risk. Derivatives that are held as hedging instruments are formally
designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes if they meet the criteria for designation as fair
value hedges or cash flow hedges in accordance with IAS 39.
Fair value hedges
Fair value hedges principally consist of interest rate and cross-currency swaps that are used to protect against changes in the fair value of fixed-rate,
long-term financial instruments due to movements in market interest rates.
Gains and losses arising on fair value hedges are disclosed in note 25.
Cash flow hedges
Cash flow hedges principally consist of interest rate and cross-currency swaps that are used to hedge the variability in future interest and currency
cash flows on assets and liabilities which bear interest at variable rates and/or are in a foreign currency.
Forward foreign currency contracts are used to hedge anticipated and committed future currency cash flows. Where these contracts qualify for
hedge accounting they are designated as cash flow hedges.