BT 2006 Annual Report Download - page 107

32. AUDIT SERVICES continued
Total fees paid or payable to PricewaterhouseCoopers LLP in the UK for non audit services in the year ended 31 March 2006 were
£3,015,000 (2005: £5,171,000).
In order to maintain the independence of the external auditors, the Board has determined policies as to what non audit services
can be provided by the company’s external auditors and the approval processes related to them. Under those policies work of a
consultancy nature will not be offered to the external auditors unless there are clear efficiencies and value added benefits to the
company.
BT’s regulatory obligations require it to publish audited regulatory financial statements. The fees for regulatory work principally
reflect the audit fees associated with those regulatory financial statements. The fees for tax services include tax compliance and tax
advisory services.
33. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The group adopted IAS 32, ‘Financial Instruments: Disclosure and Presentation’ and IAS 39, ‘Financial Instruments: Recognition
and Measurement’ with effect from 1 April 2005. Financial information was previously prepared under UK GAAP for the financial
year ended 31 March 2005. Where applicable, information for the comparative period has been separately disclosed below in order
to comply with the previous requirements of UK GAAP.
The group issues or holds financial instruments mainly to finance its operations; for the temporary investment of short-term
funds; and to manage the currency and interest rate risks arising from its operations and from its sources of finance. In addition,
various financial instruments, for example trade receivables and trade payables, arise directly from the group’s operations.
The group finances its operations primarily by a mixture of issued share capital, retained profits, deferred taxation, long-term
loans and short-term loans, principally by issuing commercial paper supported by a committed borrowing facility. The group
borrows in the major long-term debt markets in major currencies. Typically, but not exclusively, the bond markets provide the most
cost-effective means of long-term borrowing. The group uses derivative financial instruments primarily to manage its exposure to
market risks from changes in interest and foreign exchange rates against these borrowings. The derivatives used for this purpose
are principally interest rate swaps, cross currency swaps and forward currency contracts.
The group also uses financial instruments to hedge some of its currency exposures arising from its overseas short-term
investment funds and other non-UK assets, liabilities and forward purchase commitments. The financial instruments used comprise
borrowings in foreign currencies and forward currency contracts and interest and cross currency swaps.
The group does not hold or issue derivative financial instruments for trading purposes. All transactions in derivative financial
instruments are undertaken to manage the risks arising from underlying business activities.
The group’s profile of borrowings and short-term funds is managed with consideration of the cash flow from operations. These
borrowings and short term funds are managed by the centralised treasury operation. The types of financial instrument used for
investment of short-term funds are prescribed in group treasury policies with limits on the exposure to any one organisation. Short-
term investment in financial instruments is partially undertaken on behalf of the group by substantial external fund managers who
are limited to dealing in debt instruments and certain defined derivative instruments and are given strict guidelines on credit,
diversification and maturity profiles.
The group has a centralised treasury operation whose primary role is to manage liquidity, funding, investment and the group’s
financial risk, including risk from volatility in currency and interest rates and counterparty credit risk. The treasury operation is not
a profit centre and the objective is to manage risk at optimum cost.
The Board sets the policy for the group’s centralised treasury operation and its activities are subject to a set of controls
commensurate with the magnitude of the borrowings and investments under its management. Counterparty credit risk is closely
monitored and managed within controls set by the Board.
During the year ended 31 March 2006 the group’s net debt (note 10) reduced from £7.9 billion to £7.5 billion mainly due to
operational and working capital inflows. During the 2006 financial year two substantial notes matured, namely the 2005 US dollar
7.875% notes and 2006 Euro 6.375% notes amounting to £3.8 billion and were primarily funded from current financial assets and
cash and cash equivalents. The group utilised its commercial paper programme during the year, which was supported by a
committed borrowing facility, as well as raising a sterling floating rate borrowing of £1 billion.
During the year ended 31 March 2005, the group’s net debt reduced from £8.5 billion to £7.9 billion mainly from working
capital inflows and proceeds from the sale of investments. During the 2005 financial year, the group restructured some of its
swaps portfolio. As a result, the group terminated cross currency and interest rate swaps with a total nominal of £2.9 billion. A
number of new swaps were transacted which had the same risk management objective as some of those swaps which were
terminated. This resulted in the group paying £107 million in reducing gross debt and receiving a net £14 million of interest
receipts. The interest receipts and payments on restructuring were included within deferred income and other debtors respectively
and were to be amortised to the income statement over the term of the underlying hedged debt. Upon adoption of IAS 32 and
IAS 39 from 1 April 2005, a portion of the interest payments on restructuring was written off to reserves.
There has been no change in the nature of the group’s risk profile between 31 March 2006 and the date of these financial
statements.
Interest rate risk management
The group has interest bearing financial assets and financial liabilities. The group’s policy is to ensure that at least 70% of net debt
is at fixed rates. In order to manage this profile, the group has entered into interest rate swap agreements with commercial banks
and other institutions to vary the amounts and periods for which interest rates on borrowings are fixed. Under interest rate swaps,
the group agrees with other parties to exchange, at specified intervals, the differences between fixed rate and floating rate interest
amounts calculated by reference to an agreed notional principal amount.
Notes to the consolidated financial statements BT Group plc Annual Report and Form 20-F 2006 105