Marks and Spencer 2011 Annual Report Download - page 102

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Marks and Spencer Group plc Annual report and financial statements 2011
100
Notes to the financial statements continued
23 Financial instruments continued
The floating rate sterling and euro borrowings are linked to interest rates related to LIBOR. These rates are for periods between one and
three months.
As at the balance sheet date and excluding finance leases, the fixed rate sterling borrowings are at an average rate of 5.9% (last year
5.9%) and the weighted average time for which the rate is fixed is nine years (last year years).
(d) Interest rate risk
The Group is exposed to interest rate risk in relation to the sterling, US dollar, euro and Hong Kong dollar variable rate financial assets
and liabilities.
The Group’s policy is to use derivative contracts where necessary to maintain a mix of fixed and floating rate borrowings to manage this
risk. The structure and maturity of these derivatives 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 £2,037.2m (last year £2,076.4m) representing the public bond issues and
finance leases, amounting to 81% (last year 76%) of the Group’s gross borrowings.
The effective interest rates at the balance sheet date were as follows:
2011
%
2010
%
Committed and uncommitted borrowings –0.6
Medium-term notes 5.9 5.9
Finance leases 4.6 4.7
Derivative financial instruments
2011 2010
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Current
Options – held for trading 14.4 (14.4) 14.3 (14.3)
Commodity swap – cash flow hedge –– – (2.1)
Forward foreign exchange contracts – cash flow hedges 2.8 (29.9) 30.1 (5.0)
– held for trading 1.2 (2.4) 3.7 (1.4)
– net investment hedges – (2.7) ––
Interest rate swaps – held for trading – (1.3) – (4.3)
18.4 (50.7) 48.1 (27.1)
Non-current
Cross currency swaps – cash flow hedges – (37.5) 132.8 –
Forward foreign exchange contracts – cash flow hedges 0.7 – 0.1 –
Interest rate swaps – fair value hedge 0.8 – –
Embedded derivative (see note 5) 20.3 – ––
21.8 (37.5) 132.9 –
ten
During the year the cross currency swaps held to redesignate the Group’s fixed rate US dollar debt to fixed rate sterling debt were
reset to market values, transferring the asset value of the swaps to the Marks & Spencer UK Pension Scheme as part of the funding
plan. The attributes of the new derivatives match the characteristics of the underlying debt hedged with rates of 6.2197% (2017 bond)
and 6.88% (2037 bond). The amounts reported as options held for trading in derivative assets and liabilities represent the fair value of
the call option with the puttable callable reset notes, mirrored by the fair value of the sold option to have this call assigned. The Group
has entered into a number of interest rate swaps to redesignate sterling fixed debt to floating debt. These swaps are accounted for as
fair value hedges. The ineffective portion recognised in the profit or loss that arises from fair value hedges amounts to £nil (last year
£0.4m loss) as the loss on the hedged item was £0.9m (last year £1.5m gain) and the gain on the hedging instrument was £0.9m (last
year £1.9m loss). There was no ineffectiveness on cash flow hedging or net investment hedging.