BT 2001 Annual Report Download - page 75

BT Annual report and Form 20-F 75
the scheme are carried out as determined by the trustees at
intervals of not more than three years, the rates of contribution
payable and the pension cost being determined on the advice of
the actuaries, having regard to the results of these valuations.
In any intervening years, the actuaries review the continuing
appropriateness of the contribution rates.
The cost of providing pensions is charged against pro¢ts
over employees’ working lives with the group using the
projected unit method. Variations from this regular cost are
allocated on a straight-line basis over the average remaining
service lives of current employees to the extent that these
variations do not relate to the estimated cost of providing
incremental pension bene¢ts in the circumstances described in
XII above.
Interest is accounted for on the provision in the balance
sheet which results from di¡erences between amounts
recognised as pension costs and amounts funded. The regular
pension cost, variations from the regular pension cost,
described above, and interest are all charged within sta¡ costs.
XIV 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.
XV 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, and further adjusted for the e¡ect of currency swaps
acting as hedges.
(b) Derivative financial 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 financial instruments
Principal amounts underlying currency swaps are revalued at
exchange rates ruling at the date of the group balance sheet
and, to the extent that they are not related to debt instruments,
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, creditors, or as part of net debt. 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.