Annual Report and Accounts 2009

NOTES TO THE ACCOUNTS

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17 FINANCIAL INSTRUMENTS

The “Treasury risk management” section of the Business Review includes a review of all treasury; liquidity; interest rate and foreign currency risks, and provides an explanation of the role that derivative financial instruments have had during the year in creating or changing the risks the Group faces in its activities. The capital structure of the Group is outlined in the Business Review.

The Group’s financial assets consist of trade and other receivables, cash and cash equivalents and derivative financial instruments. The following financial assets form part of the net debt of the Group:

The Directors consider the fair value of financial assets to approximate to their book value. The interest received on cash deposits is at variable rates of interest of up to 2%.          

Of the above cash and cash equivalents, £149.5m is denominated in Sterling, £56.3m in Euros, £10.3m in Polish Zloty and £3.3m in Czech Koruna.

2009 INTEREST RATE AND CURRENCY PROFILE

The interest rate and currency profile of the Group’s financial liabilities at 31 December 2009, after taking account of interest rate and currency derivative financial instruments (including derivative assets of £38.6m as noted above but excluding the short term currency swap noted after the table) was as follows:

In addition to the currency exposures above, the Group has entered into a short term currency derivative financial instrument, being a net investment hedge amounting to an asset of £38.2m and a liability of €42.8m. This derivative financial instrument was entered into on 31 December 2009 at market rates and therefore the fair value is deemed to equate to its book value of £nil. The Group’s net debt at 31 December was £254.5m, of which £160.2m is denominated in Euros.

All of the above finance lease contracts, totalling £9.4m, are secured on the underlying assets.

The Directors consider the fair value of the Group’s floating rate financial liabilities to materially approximate to the book value shown in the table above. The fair value of the Group’s private placement notes approximates to the amount in the value of the financial liabilities above. The remaining fixed rate debt amounts to £10.2m and relates to finance lease contracts and fixed rate loans. The Directors consider the fair value of these remaining fixed rate debts to materially approximate to the book values shown above.

2008 INTEREST RATE AND CURRENCY PROFILE

The interest rate and currency profile of the Group’s financial liabilities at 31 December 2008, after taking account of interest rate and currency derivative financial instruments (including derivative assets of £74.6m as noted in Note 17 of the Group Accounts but excluding short term currency swaps noted after the table) was as follows:

In addition to the currency exposures above, the Group had entered into five short term currency derivative financial instruments as follows:

  • five cash flow hedges which hedged the post tax functional currency cash flows of the Group amounting to an asset of £76.0m and a liability of €75.9m and CZK58.7m.

All of these derivative financial instruments were entered into on 31 December 2008 at market rates and therefore their fair value was deemed to equate to their book value of £nil. The expiry date of these derivative financial instruments was 31 December 2009.

All of the above finance lease contracts, totalling £12.6m, were secured on the underlying assets.

The Directors considered the fair value of the Group’s floating rate financial liabilities to materially approximate to the book value shown in the table above. The fair value of the Group’s private placement notes approximates to the amount in the value of the financial liabilities above. £170.1m of the Sterling “Other borrowings” and £97.0m of the Euro “Other borrowings” related to debt on which the Group had taken out interest rate derivative financial instruments to fix the interest rate and the debt is already carried at approximately its fair value in the table above. The remaining fixed rate debt amounted to £14.7m and related to finance lease contracts and fixed rate loans. The Directors considered the fair value of these remaining fixed rate debts to materially approximate to the book values shown in the table above.

In both 2009 and 2008, the interest rate on floating rate financial liabilities is based upon appropriate local market rates.

HEDGING RELATIONSHIPS

Included within financial assets are derivative financial instruments in designated hedge accounting relationships amounting to £38.6m (2008: £74.6m) and loans and receivables (including cash and cash equivalents) of £605.2m (2008: £541.4m).

Included within financial liabilities are derivative financial instruments in designated hedge accounting relationships amounting to £15.7m (2008: £131.5m) and liabilities (including trade payables) at amortised cost of £708.2m (2008: £909.2m).

The Group does not trade in derivative financial instruments for speculative purposes. Where the Group can demonstrate a hedge relationship under the rules of IAS 32 and IAS 39, movements in the fair values of these derivative financial instruments will be recognised in the Consolidated Statement of Comprehensive Income. Where the Group does not meet these rules, movements in the fair value will be recognised as gains and losses on derivative financial instruments in the Consolidated Income Statement in the column entitled “Other items”.

In order to manage the Group’s exposure to interest rate and exchange rate changes, the Group utilises both currency and interest rate derivative financial instruments. The fair values of these derivative financial instruments are calculated by discounting the associated future cash flows to net present values using appropriate market rates prevailing at the balance sheet date.

The Group is required to analyse financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:

  • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
  • Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
  • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

All of the financial instruments below are categorised as Level 2.

A) NET INVESTMENT HEDGES

As at 31 December 2009, the Group had entered into two (2008: two) cross-currency interest rate derivative financial instruments which form a net investment hedge of the Group’s Euro denominated trade assets.


B) CASH FLOW HEDGES

With regard to cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised in equity and is subsequently removed and included in the Consolidated Income Statement within “Finance costs” in the same period the hedged item affects the Consolidated Income Statement. The cash flow hedges described below are expected to impact both profit and loss and cash flow annually over the life of the hedging instrument and the related debt as interest falls due and upon maturity of the debt and related hedging instrument.

As at 31 December 2009, the Group had entered into five (31 December 2008: five) cross-currency interest rate derivative financial instruments which swap fixed US Dollar denominated debt held in the UK into fixed Sterling denominated debt. In addition, as at 31 December 2009, the Group had entered into one (31 December 2008: one) cross-currency interest rate derivative financial instrument which swaps fixed US Dollar denominated debt held in the UK into variable Sterling denominated debt. These derivative financial instruments form a cash flow hedge as they fix the functional currency cash flows of the Group. All of these derivative financial instruments are designated and effective as cash flow hedges and the fair value movement has therefore been deferred in equity via the Consolidated Statement of Comprehensive Income. At 31 December 2009, the average maturity date of these swaps is 5.4 years (2008: 6.4 years).

During the year ended 31 December 2009, the Group cash settled eleven interest rate derivative financial instruments which swapped variable rate debt into fixed rate debt thereby fixing the functional currency cash flows of the Group. Prior to settlement, all of these interest rate derivative financial instruments were designated and effective as cash flow hedges and the fair value movement was therefore deferred in equity via the Consolidated Statement of Comprehensive Income. At 31 December 2008, the average maturity date of these swaps was 6.2 years.

At the balance sheet date the Group had entered into certain short-term currency forward contracts which were designated and effective as hedges of the Group’s functional currency cash flows.

During the year ended 31 December 2009, the Group cash settled five cross-currency derivative financial instruments which swapped fixed Sterling denominated debt into fixed Euro and Czech Koruna denominated debt. These derivative financial instruments form a cash flow hedge as they fix the functional post tax cash flows of the Group and are therefore fully effective. As these derivative financial instruments were entered into on 31 December 2008 at market rates prevailing at that date, the fair value of these derivative financial instruments at 31 December 2008 was £nil. At 31 December 2008, the average maturity date of these swaps was one year.

C) FAIR VALUE HEDGES

As at 31 December 2009, the Group had entered into three (31 December 2008: three) derivative financial instruments which hedged the interest rate exposure on the private placement debt drawn down on 1 February 2007. All of these interest rate derivative financial instruments are designated and effective as fair value hedges and the fair value movement has therefore been recognised immediately in the Consolidated Income Statement. This is offset by the change in fair value attributable to the hedged item which is also recognised immediately in the Consolidated Income Statement.

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