BT 2010 Annual Report Download - page 139

FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
137BT GROUP PLC ANNUAL REPORT & FORM 20-F
ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS REVIEW OF THE YEAR OVERVIEW
32. 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.
Funding and exposure management
The group finances its operations primarily by a mixture of issued share capital, retained profits, deferred taxation and long-term and
short-term borrowing. The group borrows in the major long-term bond markets in major currencies and typically, but not exclusively,
these markets provide the most cost effective means of long-term borrowing. The group uses derivative financial instruments primarily to
manage its exposure to 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 forward currency contracts to
hedge some of its currency exposures arising from funding its overseas operations, acquisitions, overseas assets, liabilities and forward
purchase commitments. 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.
Treasury operations
The group has a centralised treasury operation whose primary role is to manage liquidity, funding, investments and counterparty credit risk
arising from transactions with financial institutions. This treasury operation also manages the group’s market risk exposures, including risks
arising from volatility in currency and interest rates. The treasury operation acts as a central bank to members of the 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 treasury operation is not a profit centre and its objective is to manage financial risk at
optimum cost.
Treasury policy
The Board sets the policy for the group’s 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 the 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 related 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 these
policies and procedures and perform review processes to assess and manage financial risk exposures arising from these financial
instruments.
There has been no change in the nature of the group’s risk profile between 31 March 2010 and the date of approval of these financial
statements.
Capital management
The objective of the group’s capital management policy is to reduce net debt whilst investing in the business, supporting the pension
scheme and delivering progressive dividends. In order to meet this objective, the group may issue or repay debt, issue new shares,
repurchase shares, or adjust the amount of dividends paid to shareholders. The group manages the capital structure and makes adjustments
to it in the light of changes in economic conditions and the risk characteristics of the group. The Board regularly reviews the capital
structure. No changes were made to the group’s objectives and processes during 2010 and 2009.
The group’s capital structure consists of net debt, committed facilities and shareholders’ equity (excluding the cash flow reserve). The
following analysis summarises the components which the group manages as capital:
2010 2009 2008
At 31 March £m £m £m
Total parent shareholders’ (deficit) equity (excluding cash flow reserve) (2,797) (421) 5,252
Net debt 9,283 10,361 9,460
Committed facilities 1,500 2,300 2,335
Total capital 7,986 12,240 17,047
Interest rate risk management
Management policy
The group has interest bearing financial assets and financial liabilities which may expose the group to either 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 treasury operation whilst long-term interest rate management decisions require further approval from the Group Finance
Director, Director Treasury, Tax and Risk Management or the Treasurer who have been delegated such authority by the Board.