BT 2009 Annual Report Download - page 86

ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS BUSINESS AND FINANCIAL REVIEWS OVERVIEW
FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
84 BT GROUP PLC ANNUAL REPORT & FORM 20-F
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, on
de-designation of the hedge, 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 qualify
for hedge accounting are accounted for as trading instruments.
Derivative financial instruments are classified as held for trading
and are initially recognised and subsequently measured 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 the host
contract and the host contract is 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 that 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, or when 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, or when 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.
FINANCIAL STATEMENTS