BT 2012 Annual Report Download - page 158

Financial statements
Notes to the consolidated financial statements
26. Financial instruments and risk management continued
Gains and losses arising on fair value hedges at 31 March were as follows:
2012 2011
Gains (losses) £m £m
On hedging instruments 81 (3)
On hedged items attributable to hedged risk (81) 3
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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. See note 27 for details of
movements in the cash flow hedge reserve.
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 2012 as follows:
Weighted Period
Derivative fair value Remaining average over which
Notional term interest rate on forecast
principal Asset Liability of hedging hedging transaction
Hedged item Hedging instruments Hedge type £m £m £m instruments instruments arises
Euro and US Dollar Interest rate swaps Cash flow 1,014 – 451 19 years Sterling receivable at 1.4%
denominated borrowingsaSterling payable at 6.0%
Cross-currency swaps Cash flow 5,451 769 59 1 to 19 years Euro receivable at 5.8%
US Dollar receivable at 7.3%
Sterling payable at 6.2%
Sterling denominated Interest rate swaps Fair value 500 82 – 17 years Sterling receivable at 5.8%
borrowingsaSterling payable at 2.9%
Euro and US Dollar step up Forward currency Cash flow 189 – 5 3 months 19 years
interest on currency contracts
denominated borrowingsa
Currency exposures on Forward currency Cash flow 93 – 1 1 month 12 months
overseas purchases principally contracts rolling basis
US Dollar and Asia Pacific
currencies
Purchase of US Dollar Forward currency Cash flow 176 – 2 1 to 6
denominated retail devices contracts months
Total 851 518
aSee note 24.
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