BT 2008 Annual Report Download - page 135

134 BT Group plc Annual Report & Form 20-F
32. Audit and non audit services continued
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.
33. Financial instruments and risk management
The group issues or holds financial instruments mainly to finance its operations; to finance corporate transactions such as dividends,
share buy backs and acquisitions; 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 and
short-term loans, principally by issuing commercial paper supported by committed borrowing facilities. 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 funding its overseas operations,
acquisitions, overseas assets, liabilities and forward purchase commitments. The financial instruments used comprise borrowings in
foreign currencies and forward currency contracts.
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 has a centralised treasury operation whose primary role is to manage liquidity, funding, investment and counterparty
credit risk and the group’s market risk exposures, including risk from volatility in currency and interest rates. The centralised treasury
operation acts as a central bank to members of the BT Group providing central deposit taking, funding and foreign exchange
management services. Funding and deposit taking is usually provided in the functional currency of the relevant entity. The
centralised 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 and group wide exposures under its management. The Board
has delegated its authority to operate these polices to a series of panels that are responsible for management of key treasury risks
and operations. Appointment to and removal from the key panels requires approval from two of the Chairman, the Chief Executive
or the Group Finance Director. The key policies defined by the Board are highlighted in each of the sections below.
The financial risk management of exposures arising from trading financial instruments, primarily trade receivables and trade
payables, is through a series of policies and procedures set at a group and line of business level. Line of business management apply
such policies and procedures and perform review processes to assess and manage financial risk exposures arising from trading
financial instruments.
During 2008, the group’s net debt (note 10) increased from £7.9 billion to £9.5 billion primarily driven by the group’s share buy
back programme. During 2008, debt amounting to £1.9 billion matured consisting of 2007 US dollar 7% notes, finance leases and
commercial paper. This was more than offset by new issuances of £3.9 billion mainly consisting of issuances through the group’s
European Medium Term Note and US Shelf programmes with maturities ranging between 2013 and 2037 and bank loans
(see note 16).
During 2007, the group’s net debt (note 10) increased from £7.5 billion to £7.9 billion mainly due to outflows arising on
investing activities such as capital expenditure and acquisitions, and from financing activities such as dividend and net interest
payments which more than offset inflows mainly arising from operating activities. During 2007, debt amounting to £1.1 billion
matured consisting of the 2006 Sterling 7.375% notes, finance leases and other Sterling floating rate loans and notes. This was
offset by increased holdings of commercial paper and lower current financial assets and cash and cash equivalent investments.
There has been no change in the nature of the group’s risk profile between 31 March 2008 and the date of these financial
statements.
Interest rate risk management
The group has interest bearing financial assets and financial liabilities which may expose the group to either interest cash flow or fair
value volatility. The group’s policy, as prescribed by the Board, is to ensure that at least 70% of net debt is at fixed rates. Short
term interest rate management is delegated to the centralised treasury operation whilst long-term interest rate management
decisions requires further approval from the Group Finance Director, Director Group Financial Control and Treasury or the Treasurer
who have been delegated such authority by the Board.
In order to manage this profile, the group has entered into swap agreements with commercial banks and other institutions to vary
the amounts and periods for which interest rates on borrowings are fixed. Under cross currency swaps, the group agrees with other
parties to exchange, at specified intervals, US dollar and Euro fixed rates into either fixed or floating Sterling interest amounts
calculated by reference to an agreed notional principal amount. Under Sterling interest rate swaps, the group agrees with other
parties to exchange, at specified intervals, the differences between fixed rate and floating rate Sterling interest amounts calculated
by reference to an agreed notional principal amount. The group uses a combination of these derivatives primarily to fix its interest
rates.
The majority of the group’s long-term borrowings have been, and are, subject to fixed Sterling interest rates after applying the
impact of hedging instruments. At 31 March 2008, the group had outstanding Sterling interest rate swap agreements with notional
principal amounts totalling £4.8 billion (2007: £5.1 billion).
At 31 March 2008, the group’s fixed:floating interest rate profile, after hedging, on net debt was 100:0 (2007: 75:25).
Consolidated financial statements Notes to the consolidated financial statements