BT 2003 Annual Report Download - page 79

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Accounting policies
The group also operates defined contribution pension
schemes and the profit and loss account is charged
with the contributions payable.
XV Taxation
Full provision is made for deferred taxation on all
timing differences which have arisen but have not
reversed at the balance sheet date. Deferred tax assets
are recognised to the extent that it is regarded as more
likely than not that there will be taxable profits from
which the underlying timing differences can be
deducted. No deferred tax is provided in respect of any
future remittance of earnings of foreign subsidiaries
or associates where no commitment has been made
to remit such earnings. The deferred tax balances
are not discounted.
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 financial instruments
The group uses derivative financial instruments
to reduce exposure to foreign exchange risks and
interest rate movements. The group does not hold
or issue derivative financial instruments for financial
trading purposes.
Criteria to qualify for hedge accounting
The group considers its derivative financial 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
identified. 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 fixed
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 differentials, under interest rate swap
agreements used to vary the amounts and periods
for which interest rates on borrowings are fixed,
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
fixed-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.
78 BT Annual Report and Form 20-F 2003