BT 2000 Annual Report Download - page 62

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Annual report and Form 20-F 61
XII Taxation
The charge for taxation is based on the pro¢t for the year
and takes into account deferred taxation. Provision is made
for deferred taxation only to the extent that timing
di¡erences are expected to reverse in the foreseeable future,
with the exception of timing di¡erences arising on pension
costs where full provision is made irrespective of whether
they are expected to reverse in the foreseeable future.
XIII Financial instruments
(a) Debt instruments
Debt instruments are stated at the amount of net proceeds
adjusted to amortise any discount evenly over the term of
the debt.
(b) Derivative ®nancial instruments
The group uses derivative ¢nancial instruments to reduce
exposure to foreign exchange risks and interest rate
movements. The group does not hold or issue derivative
¢nancial instruments for ¢nancial trading purposes.
Criteria to qualify for hedge accounting
The group considers its derivative ¢nancial 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 and whose characteristics have been
identi¢ed. 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 ¢xed rate to a variable rate
or vice versa.
Accounting for derivative ®nancial instruments
Principal amounts underlying currency swaps are revalued
at exchange rates ruling at the date of the group balance
sheet and are included in debtors or creditors.
Interest di¡erentials, under interest rate swap
agreements used to vary the amounts and periods for
which interest rates on borrowings are ¢xed, are
recognised by adjustment of interest payable.
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 being shown as
part of debtors or creditors. The di¡erence between spot
and forward rate for these contracts is recognised as part
of net interest payable 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 debtors and creditors.
Instruments that form hedges against future ¢xed-rate
bond issues are marked to market. Gains or losses are
deferred until the bond is issued when they are recognised
evenly over the term of the bond.