Marks and Spencer 2006 Annual Report Download - page 82

80 Marks and Spencer Group plc
Notes to the financial statements continued
22 FINANCIAL INSTRUMENTS
The Group has taken advantage of the exemption under IFRS 1 from the requirement to restate comparatives in accordance with
IAS 32 and IAS 39. The comparative figures have therefore been measured and presented in accordance with previously adopted
UK GAAP. The main adjustments that would be required to make the comparative information comply with IAS 32 and IAS 39 are
the inclusion of derivative assets and liabilities on the balance sheet and the reclassification of non-equity B shares from share
capital to debt.
Treasury Policy and Financial Risk Management
Marks and Spencer operates a centralised treasury function to manage the Group’s external/internal funding requirements and
financial risks in line with the Board approved treasury policies and procedures, and delegated authorities therein given.
The Group’s financial instruments, other than derivatives, comprise borrowings, cash and liquid resources and various items, such as
trade debtors and trade creditors, that arise directly from its operations. The main purpose of these financial instruments is to raise
finance for the Group’s operations.
Group Treasury also enters into derivative transactions, principally interest rate and currency swaps and forward currency contracts.
The purpose of these transactions is to manage the interest rate and currency risks arising from the Group’s operations and
financing.
It remains Group policy not to hold or issue financial instruments for trading purposes, except where financial constraints necessitate
the need to liquidate any outstanding investments. The treasury function is managed as a cost centre and does not engage in
speculative trading.
The principal financial risks to which the Group is exposed relate to liquidity/funding, interest rates, foreign exchange rates and
counterparty risk. The policies and strategies for managing these risks are summarised as follows:
(a) Liquidity/funding risk
The Group’s funding strategy is to ensure a mix of financing methods offering flexibility and cost effectiveness to match the
requirements of the Group. Operating subsidiaries are financed by a combination of retained profits, bank borrowings, medium-term
note issuance and securitised loan notes. In addition to the existing borrowings, the Group has a Euro Medium Term Note
programme of £3 billion, of which £1.7 billion was in issuance as at the balance sheet date. Furthermore, short-term borrowings
are backed by a £1.2 billion five-year committed syndicated bank facility, which was undrawn at the balance sheet date.
(b) Interest rate risk
Interest rate risk primarily occurs with the movement of sterling interest rates in relation to the Group’s floating rate financial assets
and liabilities. Group policy for interest rate management is to maintain a mix of fixed and floating rate borrowings. Interest rate risk
in respect of debt on the balance sheet is reviewed on a regular basis against forecast interest costs and covenants. A number of
interest rate swaps have been entered into to redesignate fixed and floating debt. The structure and maturity of these swaps
correspond to the underlying borrowings and are accounted for as fair value or cash flow hedges as appropriate.
At the balance sheet date fixed rate borrowings amounted to £1,137.7m representing the property securitisation, two public bond
issues and finance leases. Based on the financial liabilities and assets as at the balance sheet date a one percentage point
movement in average sterling interest rates will have a £6.2m impact on the Group’s net interest charge.
(c) Foreign currency risk
Transactional foreign currency exposures arise from both the export of goods from the UK to overseas subsidiaries, also from the
import of materials and goods directly sourced from overseas suppliers. Group Treasury hedge these exposures principally using
forward foreign exchange contracts covering between 80% and 100% out to 15 months.
As at the balance sheet date the gross value in Sterling terms of forward foreign exchange sell or buy contracts amounted to £270m
with a weighted average maturity date of six months.
The Group does not use derivatives to hedge balance sheet and profit and loss translation exposures. Where appropriate,
borrowings are arranged in local currencies to provide a natural hedge against overseas assets.
Where funding has been sourced in currencies other than sterling, the Group has swapped these exposures back into sterling debt
through cross currency swaps matching the underlying terms. The gross notional value of cross currency swaps as at the balance
sheet date was £610.8m with a weighted average maturity of 0.6 years.
The Group also hedges foreign currency intercompany loans where these exist. As at the balance sheet date, the gross notional
value of intercompany loan hedges was £109m.