BT 2014 Annual Report Download - page 137

134 Financial statements
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
cash and are subject to insignicant risk of changes in value and have
an original maturity of three months or less. For the purpose of the
consolidated cash ow statement, cash and cash equivalents are as
dened above net of outstanding bank overdrafts. Bank overdrafts
are included within loans and other borrowings, in current liabilities on
the balance sheet.
Financial assets and liabilities at fair value through proƬt or loss
All of the group’s derivative nancial instruments are held for trading
and classied as fair value through prot or loss.
Derivative nancial instruments
The group uses derivative nancial instruments mainly to reduce
exposure to foreign exchange and interest rate risks. The group’s
policy is not to use derivatives for trading purposes. However,
derivatives that do not qualify for hedge accounting or are specically
not designated as a hedge where natural oset is more appropriate are
initially recognised and subsequently measured at fair value through
prot and loss. Any direct transaction costs are recognised immediately
in the income statement. Gains and losses on re-measurement are
recognised in the income statement in the line that most appropriately
reects the nature of the item or transaction to which they relate.
Derivative nancial instruments are classied as current assets or
current liabilities where they have a maturity period within 12 months.
Where derivative nancial instruments have a maturity period greater
than 12 months, they are classied within either non-current assets
or non-current liabilities.
Where the fair value of a derivative contract at initial recognition is not
supported by observable market data and diers from the transaction
price, a day one gain or loss will arise which is not recognised in the
income statement. Such gains and losses are deferred and amortised to
the income statement based on the remaining contractual term and as
observable market data becomes available.
Hedge accounting
Where derivatives qualify for hedge accounting, recognition of any
resultant gain or loss depends on the nature of the hedge. To qualify
for hedge accounting, hedge documentation must be prepared at
inception and the hedge must be expected to be highly eective both
prospectively and retrospectively. The hedge is tested for eectiveness
at inception and in subsequent periods in which the hedge remains
in operation. Hedge accounting is discontinued when the hedging
instrument expires, or is sold, terminated or no longer qualies for
hedge accounting or the group chooses to end the hedge relationship.
The group designates certain derivatives as either cash ow hedges
or fair value hedges.
Cash ow hedges
When a derivative nancial instrument is designated as a hedge of
the variability in cash ows of a recognised asset or liability, or a
highly probable transaction, the eective part of any gain or loss on
the derivative nancial instrument is recognised directly in equity,
in the cash ow reserve. For cash ow 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 aects the
income statement. Any ineectiveness arising on a cash ow hedge
of a recognised asset or liability is recognised immediately in the same
income statement line as the hedged item. Where ineectiveness
arises on highly probable transactions, it is recognised in the income
statement line which most appropriately reects the nature of the
item or transaction.
Fair value hedges
When a derivative nancial instrument is designated as a hedge of the
variability in fair value of a recognised asset or liability, or unrecognised
rm 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 eective
IFRS 9 ‘Financial Instruments’
IFRS 9 Financial Instruments’ was re-issued in October 2010 and
amended in November 2013. It is applicable to nancial assets and
nancial liabilities. The standard covers the classication, measurement
and derecognition of nancial assets and nancial liabilities together
with a new hedge accounting model. The IASB intends to expand IFRS 9
to add new requirements for impairment. The mandatory eective date
for IFRS 9 is 1 January 2018. The standard has not yet been endorsed
by the EU. The group will consider the impact of IFRS 9 when the
remaining phases of the IAS 39 Replacement Project are complete.
Amendments to IAS 32 ‘Oƪsetting Financial Assets and Financial
Liabilities’
The amendments clarify existing application issues relating to the
osetting requirements. Specically, the amendments clarify the
meaning of “currently has a legally enforceable right of set-o and
a simultaneous realisation and settlement. The amendments are
eective for the group from 1April2014. The group does not expect
these changes to have a signicant impact on the group’s results or
nancial position.
There are no other standards or interpretations that are not yet eective
that would be expected to have a material impact on the group.
3. SigniƬcant accounting policies continued