BT 2010 Annual Report Download - page 58

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REVIEW OF THE YEAR FINANCIAL REVIEW
56 BT GROUP PLC ANNUAL REPORT & FORM 20-F
believe it is an important indicator of our overall operational
performance as it reflects the cash we generate from operations
after capital expenditure and financing costs, both of which are
significant ongoing cash outflows associated with investing in our
infrastructure and financing our operations. In addition, free cash
flow excludes cash flows that are determined at a corporate level
independently of ongoing trading operations such as dividends,
share buy backs, acquisitions and disposals and repayment of debt.
Our use of the term free cash flow does not mean that this is a
measure of the funds that are available for distribution to
shareholders. A reconciliation of free cash flow to net cash inflow
from operating activities, the most directly comparable IFRS
measure, is included on page 51.
Net debt
Net debt consists of loans and other borrowings (both current and
non current), less current asset investments and cash and cash
equivalents. Loans and other borrowings are measured at the net
proceeds raised, adjusted to amortise any discount over the term of
the debt. For the purpose of this measure, current asset
investments and cash and cash equivalents are measured at the
lower of cost and net realisable value. Currency denominated
balances within net debt are translated to Sterling at swapped rates
where hedged.
This definition of net debt measures balances at the expected
value of future undiscounted cash flows due to arise on maturity of
financial instruments and removes the balance sheet adjustments
made from the re-measurement of hedged risks under fair value
hedges and the use of the effective interest method as required by
IAS 39. In addition, the gross balances are adjusted to take account
of netting arrangements.
Net debt is considered to be an alternative performance measure
as it is not defined in IFRS. The most directly comparable IFRS
measure is the aggregate of loans and other borrowings (current
and non current), current asset investments and cash and cash
equivalents. A reconciliation of net debt to this measure is included
on page 53. It is considered both useful and necessary to disclose
net debt as it is a key measure against which performance against
the group’s strategy is measured. It is a measure of the group’s net
indebtedness that provides an indicator of the overall balance sheet
strength. It is also a single measure that can be used to assess both
the group’s cash position and indebtedness. There are material
limitations in the use of alternative performance measures and the
use of the term net debt does not necessarily mean that the cash
included in the net debt calculation is available to settle the
liabilities included in this measure.