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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 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.
74 BT Group plc Annual Report and Form 20-F 2005 Accounting policies