BT 2007 Annual Report Download - page 85

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 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
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 net
finance expense.
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 included in current and non current
derivative financial instruments. The difference between spot and
forward rate for these contracts is recognised as part of net
finance expense 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 current and non-current derivative financial
instruments.
CRITICAL ACCOUNTING ESTIMATES AND KEY
JUDGEMENTS
The preparation of financial statements in conformity with IFRSs
requires the use of accounting estimates and assumptions. It
also requires management to exercise its judgement in the
process of applying the group’s accounting policies. We
continually evaluate our estimates, assumptions and judgements
based on available information and experience. As the use of
estimates is inherent in financial reporting, actual results could
differ from these estimates. The areas involving a higher degree
of judgement or complexity are described below.
Interconnect income and payments to other
telecommunications operators
In certain instances, BT relies on other operators to measure the
traffic flows interconnecting with our networks. Estimates are
used in these cases to determine the amount of income
receivable from or payments we need to make to these other
operators. The prices at which these services are charged are
often regulated and are subject to retrospective adjustment and
estimates are used in assessing the likely effect of these
adjustments.
Providing for doubtful debts
BT provide services to around 18 million individuals and
businesses, mainly on credit terms. We know that certain debts
due to us will not be paid through the default of a small
number of our customers. Estimates, based on our historical
experience are used in determining the level of debts that we
believe will not be collected. These estimates include such
factors as the current state of the economy and particular
industry issues.
Goodwill
The recoverable amount of cash generating units has been
determined based on value in use calculations. These calculations
require the use of estimates, including management’s
expectations of future revenue growth, operating costs and
profit margins for each cash generating unit.
Useful lives for property, plant and equipment
The plant and equipment in BT’s networks is long lived with
cables and switching equipment operating for over ten years and
underground ducts being used for decades. The annual
depreciation charge is sensitive to the estimated service lives
allocated to each type of asset. Asset lives are assessed annually
and changed when necessary to reflect current thinking on their
remaining lives in light of technological change, network
investment plans (including the group’s 21CN transformation
programme) prospective economic utilisation and physical
condition of the assets concerned. Changes to service lives of
assets implemented from 1 April 2006 in aggregate had no
significant impact on the results for the year ended 31 March
2007.
Property arrangements
As part of the property rationalisation programme we have
identified a number of surplus properties. Although efforts are
being made to sub-let this space, it is recognised that this may
not be possible immediately in the current economic
environment. Estimates have been made of the cost of vacant
possession and any shortfall arising from the sub lease rental
income being lower than the lease costs being borne by BT. Any
such cost or shortfall has been recognised as a provision.
Long term customer contracts
Long term customer contracts can extend over a number of
financial years. During the contractual period, revenue, costs and
profits may be impacted by estimates of the ultimate
profitability of each contract. If, at any time, these estimates
indicate the contract will be unprofitable, the entire estimated
loss for the contract is recognised immediately. The group
performs ongoing profitability reviews of its contracts in order to
determine whether the latest estimates are appropriate. Key
factors reviewed include transaction volumes, or other inputs for
which we get paid, future staff and third party costs and
anticipated cost productivity, savings and efficiencies.
Pension obligations
BT has a commitment, mainly through the BT Pension Scheme,
to pay pension benefits to approximately 350,000 people over
more than 60 years. The cost of these benefits and the present
value of our pension liabilities depend on such factors as the life
expectancy of the members, the salary progression of our
current employees, the return that the pension fund assets will
generate in the time before they are used to fund the pension
payments and the rate at which the future pension payments
are discounted. We use estimates for all these factors in
determining the pension costs and liabilities incorporated in our
financial statements. The assumptions reflect historical
experience and our judgement regarding future expectations.
Deferred tax
Deferred tax assets and liabilities require management
judgement in determining the amounts to be recognised. In
particular, judgement is used when assessing the extent to which
deferred tax assets should be recognised with consideration
given to the timing and level of future taxable income.
Consolidated financial statements Accounting policies
84 BT Group plc Annual Report & Form 20-F