BT 2012 Annual Report Download - page 111

108 Financial statements
Notes to the consolidated financial statements
Leases where a significant portion of the risks and rewards are held by
the lessor are classified as operating leases. Rentals are charged to the
income statement on a straight line basis over the period of the lease.
Share-based payments
The group operates a number of equity settled share-based payment
arrangements, under which the group receives services from employees
as consideration for equity instruments (share options and shares) of the
group. Equity settled share-based payments are measured at fair value
(excluding the effect of non market-based vesting conditions) at the
date of grant, but including any market-based performance criteria and
the impact of non-vesting conditions (for example the requirement for
employees to save). The fair value determined at the grant date is
recognised on a straight-line basis over the vesting period, based on the
group’s estimate of the options or shares that will eventually vest and
adjusted for the effect of non market-based vesting conditions. Fair
value is measured using either the Binomial options pricing model or
Monte Carlo simulations, whichever is most appropriate to the award.
Service and performance conditions are vesting conditions. Any other
conditions are non-vesting conditions which have to be taken into
account to determine the fair value of equity instruments granted. In
the case that an award or option does not vest as a result of a failure to
meet a non-vesting condition that is within the control of either
counterparty, this is accounted for as a cancellation. Cancellations must
be treated as accelerated vesting and all remaining future charges are
immediately recognised. As the requirement to save under an
employee sharesave arrangement is a non-vesting condition,
employee cancellations must be treated as an accelerated vesting.
Termination benefits
Termination benefits (leaver costs) are payable when employment is
terminated before the normal retirement date, or when an employee
accepts voluntary redundancy in exchange for these benefits. The
group recognises termination benefits when it is demonstrably
committed to the affected employees leaving the group.
Financial instruments
Financial assets
Financial assets at fair value through profit and loss
A financial asset is classified in this category if it is either 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 fair value recognised in the income statement in the line which most
appropriately reflects the nature of the item or transaction. Any 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.
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 the fair value of
amounts received net of transaction costs. 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
re-valued 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.
3. Significant accounting policies continued
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