BT 2016 Annual Report Download - page 173

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Overview The Strategic Report Governance Financial statements Additional information
an expense 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 share-based payment arrangement.
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 are treated as accelerated vesting
and all remaining future charges are immediately recognised in the
income statement. As the requirement to save under an employee
saveshare arrangement is a non-vesting condition, employee
cancellations are treated as an accelerated vesting.
Awards that lapse or are forfeited result in a credit to the income
statement (reversing all previously recognised charges) in the year
in which they lapse or are forfeited.
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 liabilities at amortised cost
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 resulting amortisation of fair value movements, on de-
designation of the hedge, is recognised in the income statement.
Available-for-sale investments
Liquid and other investments are classified as available‑for‑sale
investments and 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. On disposal or impairment of the investments, any
gains and losses that have been deferred in other comprehensive
income are re-classified to the income statement. Dividends
on equity investments are recognised in the income statement
when the group’s right to receive payment is established. Equity
investments are recorded in non-current assets unless they are
expected to be sold within one year.
Loans and receivables
Trade and other receivables
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 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.
Financial assets and liabilities at fair value through
profit or loss
All of the group’s derivative financial instruments are held for
trading and classified as fair value through profit or loss.
Derivative financial instruments
The group uses derivative financial instruments mainly to reduce
exposure to foreign exchange and interest rate risks. The group’s
policy is not to use derivatives for trading purposes. However,
derivatives that do not qualify for hedge accounting or are
specifically not designated as a hedge where natural offset is more
appropriate are initially recognised and subsequently measured at
fair value through profit and loss. Any direct transaction costs are
recognised immediately in the income statement. Gains and losses
on re-measurement are recognised in the income statement in
the line that most appropriately reflects the nature of the item or
transaction to which they relate. 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.
Where the fair value of a derivative contract at initial recognition
is not supported by observable market data and differs from
the transaction price, a day one gain or loss will arise which is
not recognised in the income statement. Such gains and losses
are deferred and amortised to the income statement based on
the remaining contractual term and as observable market data
becomes available.
Hedge accounting
Where derivatives qualify for hedge accounting, recognition of
any resultant gain or loss depends on the nature of the hedge.
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. Hedge accounting is
discontinued when the hedging instrument expires, or is sold,
terminated or no longer qualifies for hedge accounting or the
group chooses to end the hedge relationship. The group designates
certain derivatives as either cash flow hedges or fair value hedges.
Cash flow hedges
When a derivative 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
3. Signicant accounting policies continued