Carphone Warehouse 2016 Annual Report Download - page 135

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133
26 Financial risk management and derivative financial instruments
Financial instruments that are measured at fair value in the financial statements require disclosure of fair value measurements
by level based on the following fair value measurement hierarchy:
• Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities;
• Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly
(that is, as prices) or indirectly (that is, derived from prices); and
• Level 3 – inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).
Network commission receivables are classified as loans and receivables as defined in IAS 39 and are therefore accounted for at
amortised cost. As the measurement of certain network commission receivables is a key source of estimation uncertainty, an
explanation of the valuation methodology and an analysis of the sensitivity of the carrying value of receivables to the methods,
assumptions and estimates of this methodology has been provided below in note 26(h). The carrying value of such ongoing
network commission receivables is £904 million (2015: £629 million) which is approximately equal to their fair value. If measured
at fair value these receivables would be categorised as level 3 in the fair value hierarchy as the valuation requires the use of
significant unobservable inputs.
An explanation of the valuation methodologies and the inputs to the models are provided below for network commission.
Contingent consideration is categorised as level 3 in the fair value hierarchy as the valuation requires the use of significant
unobservable inputs. An explanation of the valuation methodologies and the inputs to the valuation model is provided in note 17.
The significant inputs required to fair value the Group’s other financial instruments that are measured at fair value on the balance
sheet, primarily comprising currency contracts and interest rate swaps, are observable and are classified as level 2 in the fair
value hierarchy. There have also been no transfers of assets or liabilities between levels of the fair value hierarchy.
Fair values have been arrived at by discounting future cash flows (where the impact of discounting is material), assuming no early
redemption, or by revaluing forward currency contracts and interest rate swaps to period end market rates as appropriate to the
instrument.
The directors consider that the book value of financial assets and liabilities recorded at amortised cost and their fair value are
approximately equal.
The book value and fair value of the Group’s financial assets, liabilities and derivative financial instruments are as follows:
30 April
2016
£million
2 Ma
y
2015
£million
Cash and cash equivalents 233 163
Trade and other receivables excluding derivative financial assets 1,421 1,086
Net derivative financial liabilities (24) (11)
Trade and other payables (2,378) (1,933)
Finance leases (91) (91)
Deferred and contingent consideration (33) (31)
Loans and other borrowings (409) (385)
a) Financial risk management policies
The Group’s activities expose it to certain financial risks including market risk (such as foreign exchange risk and interest rate
risk), credit risk and liquidity risk. The Group’s treasury function, which operates under treasury policies approved by the Board,
uses certain financial instruments to mitigate potentially adverse effects on the Group’s financial performance from these risks.
These financial instruments consist of bank loans and deposits, spot and forward foreign exchange contracts, foreign exchange
swaps and interest rate swaps.
Throughout the period under review, in accordance with Group policy, no speculative use of derivatives, foreign exchange or
other instruments was permitted. No contracts with embedded derivatives have been identified and, accordingly, no such
derivatives have been accounted for separately.
00_DC 2016 Annual Report.pdf 133 11/07/2016 18:34