BT 2010 Annual Report Download - page 141

FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
139BT GROUP PLC ANNUAL REPORT & FORM 20-F
ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS REVIEW OF THE YEAR OVERVIEW
Exposure and hedging
A significant proportion of the group’s current revenue is invoiced in Sterling, and a significant element of its operations and costs arise
within the UK. The group’s overseas operations generally trade and are funded in their functional currency which limits their exposure to
foreign exchange volatility. The group’s foreign currency borrowings, which totalled £9.4bn at 31 March 2010 (2009: £9.9bn), are used to
finance its operations and have been predominantly swapped into Sterling using cross currency swaps. The group also enters into forward
currency contracts to hedge foreign currency investments, interest expense, capital purchases and purchase and sale commitments on a
selective basis. The commitments hedged are principally denominated in US Dollar, Euro and Asia Pacific region currencies. As a result, the
group’s exposure to foreign currency arises mainly on its non UK subsidiary investments and on residual currency trading flows.
Sensitivities
After hedging, with all other factors remaining constant and based on the composition of assets and liabilities at the balance sheet date,
the group’s exposure to foreign exchange volatility in the income statement from a 10% strengthening/weakening in Sterling against
other currencies would result in a credit/charge respectively of approximately £26m (2009: approximately £20m).
The group’s main exposure to foreign exchange volatility within shareholders’ equity (excluding translation exposures) arises from fair
value movements on derivatives held in the cash flow reserve. The majority of foreign exchange fluctuations in the cash flow reserve are
recycled immediately to the income statement to match the hedged item and therefore the group’s exposure to foreign exchange
fluctuations in equity would be insignificant in both 2010 and 2009.
Outstanding cross currency swaps at 31 March 2010 are detailed in the Hedging activities and Other derivatives sections below.
Credit risk management
Treasury management policy
The group’s exposure to credit risk arises from financial assets transacted by the treasury operation (primarily derivatives, investments, cash
and cash equivalents) and from its trading related receivables. For treasury related balances, the Board’s defined policy restricts exposure to
any one counterparty by setting credit limits based on the credit quality as defined by Moody’s and Standard and Poor’s and by defining the
types of financial instruments which may be transacted. The minimum credit ratings permitted with counterparties are A3/A– for long-term
and P1/A1 for short-term investments. The treasury operation continuously reviews the limits applied to counterparties and will adjust the
limit according to the nature and credit standing of the counterparty up to the maximum allowable limit set by the Board. Management
review significant utilisations on a regular basis to determine the adjustments required, if any, and actively manage any exposures which may
arise. Where multiple transactions are undertaken with a single counterparty, or group of related counterparties, the group may enter into
netting arrangements to reduce the group’s exposure to credit risk. The group makes use of standard International Swaps and Derivative
Association (ISDA) documentation. In addition, where possible the group will seek a combination of a legal right of set off and net settlement.
The group also seeks collateral or other security where it is considered necessary. The treasury operation regularly reviews the credit limits
applied when investing with counterparties in response to market conditions and continues to monitor their credit quality and actively
manage any exposures which arise.
Exposures
The maximum credit risk exposure of the group’s financial assets at the balance sheet date are as follows:
2010 2009 2008
At 31 March £m £m £m
Derivative financial assets 1,700 2,700 387
Investments 470 218 471
Trade and other receivablesa2,947 3,101 3,193
Cash and cash equivalents 1,452 1,300 1,435
Total 6,569 7,319 5,486
a The carrying amount excludes £749m (2009: £1,084m, 2008: £1,256m) of current and £336m (2009: £322m, 2008: £854m) of non current trade and other receivables which relate to non financial
assets.
Note 19 discloses the credit concentration and credit quality of derivative financial assets. The majority of these derivatives are in
designated cash flow hedges. With all other factors remaining constant and based on the composition of net derivative financial assets at
31 March 2010, a 100 basis point shift in yield curves across each of the ratings categories within which these derivative financial assets
are classified would change their carrying values and impact equity, before tax, as follows:
Impact of 100 basis Impact of 100 basis
point increase point decrease
At 31 March 2010 £m £m
Moody’s/S&P credit rating
Aa2/AA (3) 4
Aa3/AA– (26) 30
A1/A+ (89) 104
A2/A (102) 122
(220) 260
The credit quality of other treasury related financial assets is disclosed in notes 10 and 14.
32. Financial instruments and risk management continued