BT 2002 Annual Report Download - page 75

Accounting policies
cost, described above, and interest are all charged within
staff costs.
The group also operates de®ned contribution pension
schemes and the pro®t and loss account is charged with
the contributions payable.
XV Taxation
The group has adopted Financial Reporting Standard 19
``Deferred Taxation'' (FRS 19) during the 2002 ®nancial
year.
Full provision is made for deferred taxation on all timing
differences which have arisen but have not reversed at the
balance sheet date.
Prior to the adoption of FRS 19, the group provided for
deferred taxation only to the extent that timing differences
were expected to reverse in the foreseeable future. The
adoption of the new policy has been made by way of a prior
year adjustment to previously published results as though
the revised policy had always been applied by the group.
XVI 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 effect of currency
swaps acting as hedges.
(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, to the extent that they are not related to debt
instruments, are included in debtors or creditors.
Interest differentials, 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 difference
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.
74 BT Group Annual Report and Form 20-F 2002