BT 2011 Annual Report Download - page 100

FINANCIAL STATEMENTS
97BT GROUP PLC ANNUAL REPORT & FORM 20-F 2011
FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
hedge. Derivative financial instruments are classified as current assets
or current liabilities where they have a maturity period within 12
months. Where derivative financial instruments have a maturity
period greater than 12 months, 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 treasury shares are recorded in the balance sheet
as a deduction from shareholders’ equity at cost.
Critical accounting estimates and key judgements
The preparation of financial statements in conformity with IFRSs
requires the use of accounting estimates and assumptions. It also
requires management to exercise its judgement in the process of
applying the group’s accounting policies. We continually evaluate
our estimates, assumptions and judgements based on available
information and experience. As the use of estimates is inherent in
financial reporting, actual results could differ from these estimates.
The areas involving a higher degree of judgement or complexity are
described below.
Long-term customer contracts
Long-term customer contracts can extend over a number of financial
years. During the contractual period recognition of costs and profits
may be impacted by estimates of the ultimate profitability of each
contract. If, at any time, these estimates indicate that any contract
will be unprofitable, the entire estimated loss for the contract is
recognised immediately. If these estimates indicate that any contract
will be less profitable than previously forecast, contract assets may
have to be written down to the extent they are no longer considered
to be fully recoverable. The group performs ongoing profitability
reviews of its contracts in order to determine whether the latest
estimates are appropriate. Key factors reviewed include:
•Transaction volumes or other inputs affecting future revenues
which can vary depending on customer requirements, plans and
market position and other factors such as general economic
conditions;
•Our ability to achieve key contract milestones connected with the
transition, development, transformation and deployment phases
for customer contracts;
•The status of commercial relations with customers and the
implication for future revenue and cost projections; and
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