BT 2011 Annual Report Download - page 149

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FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
29. Financial instruments and risk management continued
Hedging activities
Our hedging policies use derivative financial instruments to manage financial risk. Derivatives that are held as hedging instruments are
formally designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes if they meet the criteria for
designation as fair value hedges or cash flow hedges in accordance with IAS 39.
Fair value hedges
Fair value hedges principally consist of interest rate and cross-currency swaps that are used to protect against changes in the fair value of
fixed-rate, long-term financial instruments due to movements in market interest rates. For qualifying fair value hedges, all changes in the
fair value of the derivative and changes in the fair value of the hedged item in relation to the risk being hedged are recognised in the income
statement. If the hedge relationship no longer meets the criteria for hedge accounting, the fair value adjustment to the hedged item
continues to be reported as part of the basis of the item and is amortised to the income statement as a yield adjustment over the remainder
of the life of the hedged item.
Cash flow hedges
Exposure arises from the variability in future interest and currency cash flows on assets and liabilities which bear interest at variable rates
and/or are in a foreign currency. Interest rate and cross-currency swaps are transacted, and where they qualify, designated as cash flow
hedges, to manage this exposure. Fair value changes on derivatives designated as cash flow hedges are initially recognised directly in the
cash flow hedge reserve, as gains or losses recognised in equity. Amounts are transferred from equity and recognised in the income
statement as the income or expense is recognised on the hedged asset or liability.
Forward foreign currency contracts are used to hedge anticipated and committed future currency cash flows. Where these contracts qualify
for hedge accounting they are designated as cash flow hedges. On recognition of the underlying transaction in the financial statements, the
associated hedge gains and losses, deferred in equity, are transferred and included with the recognition of the underlying transaction.
The gains and losses on ineffective portions of such derivatives are recognised immediately in the income statement.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or
loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income
statement or on the balance sheet. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported
in equity is immediately transferred to the income statement.
The group had outstanding hedging arrangements as at 31 March 2011 as follows:
Derivative fair valueb
Notional Remaining term Weighted average Period over
principal Asset Liability of hedging interest rate on which forecast
Hedged item Hedging instruments Hedge type £m £m £m instruments hedging instruments transaction arises
Euro and US Dollar Interest rate swaps Cash flow 1,014 – 265 20 years Sterling receivable at 1.0%
denominated borrowingsaSterling payable at 6.0%
Cross currency swaps Cash flow 5,451 622 29 2 to 20 years Euro receivable at 6.1%
US Dollar receivable at 6.9%
Sterling payable at 3.2%
Sterling denominated Interest rate swaps Fair value 500 4 2 18 years Sterling receivable at 5.8%
borrowingsaSterling payable at 2.6%
Euro and US Dollar step up Forward currency contracts Cash flow 245 1 4 3 months 20 years
interest on currency
denominated borrowingsa
Euro and US Dollar Forward currency contracts Cash flow 70 1 – 1 to 6 months
commercial paperarolling basis
Currency exposures on Forward currency contracts Cash flow 3 – – 1 month 12 months
overseas purchases principally rolling basis
US Dollar and Asia Pacific
currencies
Purchase of US Dollar Forward currency contracts Cash flow 213 2 2 1 to 6 months
denominated retail devices
Total 630 302
aSee note 20.
bSee note 21.
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