BT 2008 Annual Report Download - page 94

BT Group plc Annual Report & Form 20-F 93
qualify for hedge accounting are accounted for as trading
instruments.
Derivative financial instruments are classified as held for
trading and initially recognised at cost. Subsequent to initial
recognition, derivative financial instruments are stated at fair
value. The gain or loss on re-measurement to fair value is
recognised immediately in the income statement in net finance
expense. However, where derivatives qualify for hedge
accounting, recognition of any resultant gain or loss depends on
the nature of the hedge. Derivative financial instruments are
classified as current assets or current liabilities where they are
not designated in a hedging relationship or have a maturity
period within 12 months. Where derivative financial instruments
have a maturity period greater than 12 months and are
designated in a hedge relationship, they are classified within
either non current assets or non current liabilities.
Derivatives embedded in other financial instruments or other
host contracts are treated as separate derivatives when their risk
and characteristics are not closely related to those of host
contracts and host contracts are not carried at fair value.
Changes in the fair value of embedded derivatives are
recognised in the income statement in the line which most
appropriately reflects the nature of the item or transaction.
Hedge accounting
To qualify for hedge accounting, hedge documentation must be
prepared at inception and the hedge must be expected to be
highly effective both prospectively and retrospectively. The
hedge is tested for effectiveness at inception and in subsequent
periods in which the hedge remains in operation.
Cash flow hedge
When a financial instrument is designated as a hedge of the
variability in cash flows of a recognised asset or liability, or a
highly probable transaction, the effective part of any gain or loss
on the derivative financial instrument is recognised directly in
equity.
For cash flow hedges of recognised assets or liabilities, the
associated cumulative gain or loss is removed from equity and
recognised in the same line in the income statement in the same
period or periods during which the hedged transaction affects
the income statement.
For highly probable transactions, when the transaction
subsequently results in the recognition of a non-financial asset
or non-financial liability the associated cumulative gain or loss is
removed from equity and included in the initial cost or carrying
amount of the non-financial asset or liability.
If a hedge of a highly probable transaction subsequently
results in the recognition of a financial asset or a financial
liability, then the associated gains and losses that were
recognised directly in equity are reclassified into the income
statement in the same period or periods during which the asset
acquired or liability assumed affects the income statement.
Any ineffectiveness arising on a cash flow hedge of a
recognised asset or liability is recognised immediately in the
same income statement line as the hedged item. Where
ineffectiveness arises on highly probable transactions, it is
recognised in the line which most appropriately reflects the
nature of the item or transaction.
Fair value hedge
When a derivative financial instrument is designated as a hedge
of the variability in fair value of a recognised asset or liability, or
unrecognised firm commitment, the change in fair value of the
derivatives that are designated as fair value hedges are recorded
in the same line in the income statement, together with any
changes in fair value of the hedged asset or liability that is
attributable to the hedged risk.
Hedge of net investment in a foreign operation
Exchange differences arising from the retranslation of currency
instruments designated as hedges of net investments in a
foreign operation are taken to shareholders’ equity on
consolidation to the extent the hedges are deemed effective.
Any ineffectiveness arising on a hedge of a net investment in
a foreign operation is recognised in net finance expense.
Discontinuance of hedge accounting
Discontinuance of hedge accounting may occur when a hedging
instrument expires or is sold, terminated or exercised, the hedge
no longer qualifies for hedge accounting or the group revokes
designation of the hedge relationship but the hedged financial
asset or liability remains or a highly probable transaction is still
expected to occur. Under a cash flow hedge the cumulative gain
or loss at that point remains in equity and is recognised in
accordance with the above policy when the transaction occurs. If
the hedged transaction is no longer expected to take place or
the underlying hedged financial asset or liability no longer exists,
the cumulative unrealised gain or loss recognised in equity is
recognised immediately in the income statement. Under a hedge
of a net investment, the cumulative gain or loss remains in
equity when the hedging instrument expires or is sold,
terminated or exercised, the hedge no longer qualifies for hedge
accounting or the group revokes designation of the hedge
relationship. The cumulative gain or loss is recognised in the
income statement as part of the profit on disposal when the net
investment in the foreign operation is disposed. Under a fair
value hedge the cumulative gain or loss adjustment associated
with the hedged risk is amortised to the income statement using
the effective interest method over the remaining term of the
hedged item.
Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares are shown in equity as a
deduction from the proceeds received. Shares in the parent
company, BT Group plc, held by employee share ownership
trusts and repurchased shares are recorded in the balance sheet
as a deduction from shareholders’ equity at cost.
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.
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
Financial statements