BT 2008 Annual Report Download - page 93

92 BT Group plc Annual Report & Form 20-F
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:
"
those that the group intends to sell immediately or in the
short term, which are classified as held for trading;
"
those 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 are as defined above net of outstanding
bank overdrafts. Bank overdrafts are included within loans and
other borrowings in current liabilities on the balance sheet.
In the 2008 financial year, the group reclassified certain
investments within cash equivalents to current available-for-sale
assets as management considered this to be the more
appropriate maturity classification. The reclassification as at
31 March 2007 was £267 million. The equivalent balance at
31 March 2008 reported within available-for-sale assets was
£439 million.
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 that an impairment loss has
been incurred 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, 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
with the loans and other borrowings. The resultant amortisation
of fair value movements are recognised in the income
statement.
Financial guarantees
Financial guarantees are recognised initially at fair value plus
transaction costs and subsequently measured at the higher of
the amount determined in accordance with the accounting
policy relating to provisions and the amount initially determined
less, when appropriate, cumulative amortisation.
Derivative financial instruments
The group uses derivative financial instruments mainly to reduce
exposure to foreign exchange risks and interest rate movements.
The group does not hold or issue derivative financial instruments
for financial trading purposes. However, derivatives that do not
Consolidated financial statements Accounting policies