BT 2010 Annual Report Download - page 94

FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
92 BT GROUP PLC ANNUAL REPORT & FORM 20-F
For the purpose of the consolidated cash flow statement, cash and
cash equivalents are as defined above net of outstanding bank
overdrafts. Bank overdrafts are included within loans and other
borrowings, in current liabilities on the balance sheet.
Impairment of financial assets
The group assesses at each balance sheet date whether a financial
asset or group of financial assets are impaired.
Where there is objective evidence that an impairment loss has
arisen on assets carried at amortised cost, the carrying amount is
reduced with the loss being recognised in the income statement.
The impairment loss is measured as the difference between that
asset’s carrying amount and the present value of estimated future
cash flows discounted at the financial asset’s original effective
interest rate. The impairment loss is only reversed if it can be
related objectively to an event after the impairment was recognised
and is reversed to the extent that the carrying value of the asset
does not exceed its amortised cost at the date of reversal.
If an available-for-sale asset is impaired, an amount comprising
the difference between its cost (net of any principal payment and
amortisation) and its fair value is transferred from equity to the
income statement. Reversals of impairment losses on debt
instruments are taken through the income statement if the increase
in fair value of the instrument can be objectively related to an event
occurring after the impairment loss was recognised in the income
statement. Reversals in respect of equity instruments classified as
available-for-sale are recognised directly in equity.
If there is objective evidence that an impairment loss has been
incurred on an unquoted equity instrument that is not carried at
fair value because its fair value cannot be objectively measured, or
on a derivative asset that is linked to and must be settled by
delivery of such an unquoted equity instrument, the amount of loss
is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows discounted at
the current market rate of return for a similar financial asset.
Financial liabilities
Trade and other payables
Financial liabilities within trade and other payables are initially
recognised at fair value, which is usually the original invoiced
amount, and subsequently carried at amortised cost using the
effective interest method.
Loans and other borrowings
Loans and other borrowings are initially recognised at fair value
plus directly attributable transaction costs. Where loans and other
borrowings contain a separable embedded derivative, the fair
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