BT 2007 Annual Report Download - page 130

33. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued
Forward currency contracts have been designated as cash flow hedges against currency cash flows associated with the forecast
purchase of fixed assets and invoice cash flows arising on certain dollar denominated supplies. At 31 March 2007, the group had
outstanding forward currency contracts with a total notional principal amount of £2 million (2006: £6 million) for sales of currency
and £165 million (2006: £197 million) for purchases of currency. The fair value of forward currency contracts at the balance sheet
date comprised liabilities of £3 million (2006: £nil) and had a remaining term of less than one month (2006: less than one month)
after which they will be rolled into new contracts. The forecast cash flows are anticipated to arise over a period of one month to six
years (2006: one month to six years) from the balance sheet date.
The group has hedged currency cash flows associated with US dollar denominated investments using forward currency contracts.
At 31 March 2007, the group had outstanding forward currency contracts with a total notional principal amount of £nil (2006:
£759 million). The fair value of the forward foreign currency contracts at the balance sheet date comprised liabilities of £nil (2006:
£5 million with a remaining term of less than one month).
Other derivatives
At 31 March 2007, the group held certain foreign currency forward and interest rate swap contracts that were not in hedging
relationships in accordance with IAS 39. Foreign currency forward contracts were economically hedging operational purchases and
sales and had a notional principal amount of £nil for sales of currency (2006: £16 million) and £167 million for purchases of
currency (2006: £101 million) and had a maturity period of under nine months (2006: under 12 months). Interest rate swaps not in
hedging relationships under IAS 39 had a notional principal amount of £1.9 billion (2006: £1.9 billion) and mature between 2014
and 2030 (2006: 2014 and 2030). The interest receivable under these swap contracts are at a weighted average rate of 6.5%
(2006: 6.1%) and interest payable are at a weighted average rate of 8.1% (2006: 7.7%). The volatility arising from these swaps is
recognised through the income statement but is limited due to a natural offset in their valuation movements.
At 31 March 2006, the group recognised the fair value of an option contained in a supplier contract which required separate
recognition. In addition, two embedded derivatives expired during the year. The first related to an option exercisable on the group’s
US dollar convertible bond (see note 5) and the second related to a put option whose value was based on an underlying interest
differential between sterling fixed and floating interest rates.
Fair value of financial instruments
The following table discloses the carrying amounts and fair values of all of the group’s financial instruments which are not carried at
an amount which approximates to its fair value on the balance sheet at 31 March 2007 and 2006. The carrying amounts are
included in the group balance sheet under the indicated headings. The fair value of the financial instruments are the amounts at
which the instruments could be exchanged in a current transaction between willing parties, other than in a forced liquidation or
sale. In particular, the fair values of listed investments were estimated based on quoted market prices for those investments. The
carrying amount of the short-term deposits and investments approximated to their fair values due to the short maturity of the
investments held. The carrying amount of trade receivables and payables approximated to their fair values due to the short maturity
of the amounts receivable and payable. The fair value of the group’s bonds, debentures, notes, finance leases and other long-term
borrowings has been estimated on the basis of quoted market prices for the same or similar issues with the same maturities where
they existed, and on calculations of the present value of future cash flows using the appropriate discount rates in effect at the
balance sheet dates, where market prices of similar issues did not exist. The fair value of the group’s outstanding swaps and foreign
exchange contracts where the estimated amounts, calculated using discounted cash flow models, that the group would receive or
pay in order to terminate such contracts in an arms length transaction taking into account market rates of interest and foreign
exchange at the balance sheet date.
Carrying amount Fair value
2007 2006 2007 2006
£m £m £m £m
Non-derivatives:
Financial liabilities:
Listed bonds, debentures and notes 6,249 7,140 7,059 7,946
Finance leases 567 845 601 885
Other loans and borrowings 1,774 1,950 1,771 1,976
BT Group plc Annual Report & Form 20-F 129
Financial statements