BT 2007 Annual Report Download - page 83

Recognition and derecognition of financial assets and
financial liabilities
Financial assets and financial liabilities are recognised when the
group becomes party to the contractual provisions of the
instrument. Financial assets are derecognised when the group no
longer has rights to cash flows, the risks and rewards of
ownership or control of the asset. Financial liabilities are
derecognised when the obligation under the liability is
discharged, cancelled or expires. In particular, for all regular way
purchases and sales of financial assets, the group recognises the
financial assets on the settlement date, which is the date on
which the asset is delivered to or by the group.
Financial assets
Financial assets at fair value through income statement
A financial asset is classified in this category if acquired
principally for the purpose of selling in the short term (held for
trading) or if so designated by management. Financial assets
held in this category are initially recognised and subsequently
measured at fair value, with changes in value recognised in the
income statement in the line which most appropriately reflects
the nature of the item or transaction.
Loans and receivables
Loans and receivables are non derivative financial assets with
fixed or determinable payments that are not quoted in an active
market other than:
rthose that the group intends to sell immediately or in the
short term, which are classified as held for trading;
rthose for which the group may not recover substantially all of
its initial investment, other than because of credit
deterioration, which are classified as available-for-sale.
Loans and receivables are initially recognised at fair value plus
transaction costs and subsequently carried at amortised cost
using the effective interest method, with changes in carrying
value recognised in the income statement in the line which most
appropriately reflects the nature of the item or transaction.
Available-for-sale financial assets
Non-derivative financial assets classified as available-for-sale are
either specifically designated in this category or not classified in
any of the other categories. Available-for-sale financial assets
are carried at fair value, with unrealised gains and losses (except
for changes in exchange rates for monetary items, interest,
dividends and impairment losses which are recognised in the
income statement) are recognised in equity until the financial
asset is derecognised, at which time the cumulative gain or loss
previously recognised in equity is taken to the income
statement, in the line that most appropriately reflects the nature
of the item or transaction.
Trade and other receivables
Financial assets within trade and other receivables are initially
recognised at fair value, which is usually the original invoiced
amount and subsequently carried at amortised cost using the
effective interest method less provisions made for doubtful
receivables.
Provisions are made specifically where there is objective
evidence of a dispute or an inability to pay. An additional
provision is made based on an analysis of balances by age,
previous losses experienced and general economic conditions.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current
balances with banks and similar institutions, which are readily
convertible to known amounts of cash and which are subject to
insignificant risk of changes in value and have an original
maturity of three months or less.
For the purpose of the consolidated cash flow statement, cash
and cash equivalents consist of cash and cash equivalents as
defined above, net of outstanding bank overdrafts. Bank
overdrafts are included within loans and other borrowings in
current liabilities on the balance sheet.
Impairment of financial assets
The group assesses at each balance sheet date whether a
financial asset or group of financial assets are impaired.
Where there is objective evidence that an impairment loss has
arisen on assets carried at amortised cost, the carrying amount is
reduced with the loss being recognised in the income statement.
The impairment loss is measured as the difference between that
asset’s carrying amount and the present value of estimated
future cash flows discounted at the financial asset’s original
effective interest rate. The impairment loss is only reversed if it
can be related objectively to an event after the impairment was
recognised and is reversed to the extent the carrying value of
the asset does not exceed its amortised cost at the date of
reversal.
If an available-for-sale asset is impaired, an amount
comprising the difference between its cost (net of any principal
payment and amortisation) and its fair value is transferred from
equity to the income statement. Reversals of impairment losses
on debt instruments are taken through the income statement if
the increase in fair value of the instrument can be objectively
related to an event occurring after the impairment loss was
recognised in the income statement. Reversals in respect of
equity instruments classified as available-for-sale are not
recognised in the income statement.
If there is objective evidence of an impairment loss on an
unquoted equity instrument that is not carried at fair value
because its fair value cannot be objectively measured, or on a
derivative asset that is linked to and must be settled by delivery
of such an unquoted equity instrument, has been incurred, the
amount of loss is measured as the difference between the
asset’s carrying amount and the present value of estimated
future cash flows discounted at the current market rate of return
for a similar financial asset.
Financial liabilities
Trade and other payables
Financial liabilities within trade and other payables are initially
recognised at fair value, which is usually the original invoiced
amount, and subsequently carried at amortised cost using the
effective interest method.
Loans and other borrowings
Loans and other borrowings are initially recognised at fair value
plus directly attributable transaction costs. Where loans and
other borrowings contain a separable embedded derivative, the
fair value of the embedded derivative is the difference between
the fair value of the hybrid instrument and the fair value of the
loan or borrowing. The fair value of the embedded derivative
and the loan or borrowing is recorded separately on initial
recognition. Loans and other borrowings are subsequently
measured at amortised cost using the effective interest method
and if included in a fair value hedge relationship are revalued to
reflect the fair value movements on the hedged risk associated
Consolidated financial statements Accounting policies
82 BT Group plc Annual Report & Form 20-F