BT 2011 Annual Report Download - page 99

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FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
Financial assets
Financial assets at fair value through income statement
A financial asset is classified in this category if acquired principally
for the purpose of selling in the short-term (held for trading) or if
so designated by management. Financial assets held in this
category are initially recognised and subsequently measured at fair
value, with changes in value recognised in the income statement in
the line which most appropriately reflects the nature of the item or
transaction. The direct transaction costs are recognised immediately
in the income statement.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market
other than those for which the group may not recover substantially
all of its initial investment, other than because of credit
deterioration, which are classified as available-for-sale.
Loans and receivables are initially recognised at fair value plus
transaction costs and subsequently carried at amortised cost using
the effective interest method, with changes in carrying value
recognised in the income statement in the line which most
appropriately reflects the nature of the item or transaction.
Available-for-sale financial assets
Non-derivative financial assets classified as available-for-sale are
either specifically designated in this category or not classified in
any of the other categories. Available-for-sale financial assets are
initially recognised at fair value plus direct transaction costs and
then re-measured at subsequent reporting dates to fair value, with
unrealised gains and losses (except for changes in exchange rates
for monetary items, interest, dividends and impairment losses,
which are recognised in the income statement) recognised in equity
until the financial asset is derecognised, at which time the
cumulative gain or loss previously recognised in equity is taken to
the income statement, in the line that most appropriately reflects
the nature of the item or transaction.
Trade and other receivables
Financial assets within trade and other receivables are initially
recognised at fair value, which is usually the original invoiced amount,
and are subsequently carried at amortised cost using the effective
interest method less provisions made for doubtful receivables.
Provisions are made specifically where there is evidence of a risk of
non payment, taking into account ageing, previous losses
experienced and general economic conditions.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current balances
with banks and similar institutions, which are readily convertible to
cash and which are subject to insignificant risk of changes in value and
have an original maturity of three months or less.
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
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