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115
ANNUAL REPORT AND FINANCIAL STATEMENTS 2016
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
OUR BUSINESSOUR PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS
21 FINANCIAL INSTRUMENTS CONTINUED
Financial risk management continued
(d) Interest rate risk
The Group is exposed to interest rate risk in relation to sterling, US doll ar and euro variable rate fi nancial assets and liabilities.
The Group’s policy is to use derivative contracts where necessary to maintain a mix of fi xed and fl oating 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
fl ow hedges as appropriate.
At the balance sheet date, fi xed rate borrowings amounted to £1,349.9m (last year £1,321.1m) representing the public bond issues and
fi nance leases, amounting to 65% (last year 66%) of the Group’s gross borrowings.
The e ective interest rates at the balance sheet date were as follows:
2016
%
2015
%
Committed and uncommitted borrowings 1.0 0.9
Medium term notes 5.3 5.3
Finance leases 4.1 4.1
Derivative fi nancial instruments
2016 2015
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Current
Forward foreign exchange contracts – cash fl ow hedges 69.7 (26.7) 114 . 8 ( 7. 2)
– held for trading 1.6 (1.8) 3.1 (0.4)
– net investment hedges 0.8 – – (0.1)
72.1 (28.5) 117.9 (7.7)
Non-current
Cross currency swaps – cash fl ow hedges 27.3 – 6.3 (19.9)
Forward foreign exchange contracts – cash fl ow hedges 5.4 (0.2) 7.3 (0.1)
Interest rate swaps – fair value hedge 41.3 – 38.5 –
Embedded derivative (see notes 5
and 25) ––23.7 –
74.0 (0.2) 75.8 (20.0)
The Group holds a number of interest rate swaps to re-designate its sterling fi xed debt to fl oating debt. These are reported as fair value
hedges. The ine ective portion recognised in the profi t or loss that arises from fair value hedges amounts to a loss of £0.2m (last year £0.3m
gain) as the loss on the hedged items was £3.0m (last year £33.5m loss) and the gain on the hedging instruments was a loss of £2.8m (last
year £33.8m gain). The Group also holds a number of cross currency swaps to re-designate its fi xed rate US dollar debt to fi xed rate sterling
debt. These are reported as cash fl ow hedges.
Sensitivity analysis
The table below illustrates the estimated impact on the income statement and equity as a result of market movements in foreign exchange
and interest rates in relation to the Group’s fi nancial instruments. The directors consider that a 2% +/- (last year 2%) movement in interest and
a 20% +/- (last year 20%) weakening in sterling against the relevant currency represents a reasonably possible change. However this analysis
is for illustrative purposes only.
The table excludes fi nancial instruments that expose the Group to interest rate and foreign exchange risk where such risk is fully hedged
with another fi nancial instrument. Also excluded are trade receivables and payables as these are either sterling denominated or the foreign
exchange risk is hedged.
Interest rates: the impact in the income statement due to changes in interest rates refl ects the e ect on the Group’s fl oating rate debt as at
the balance sheet date. The impact in equity refl ects the fair value movement in relation to the Group’s transactional foreign exchange cash
fl ow hedges and the net investment hedges at the balance sheet date. The impact in equity refl ects the fair value movement in relation to
the Group's cross-currency swaps.
Foreign exchange: the impact from foreign exchange movements refl ects the change in the fair value of the Group’s transactional foreign
exchange cash fl ow hedges and the net investment hedges at the balance sheet date. The equity impact shown for foreign exchange
sensitivity relates to derivative and non-derivative fi nancial instruments hedging net investments. This value is expected to be fully o set
by the re-translation of the hedged foreign currency net assets leaving a net equity impact of zero.
2% decrease in
interest rates
£m
2% increase in
interest rates
£m
20% weakening in
sterling
£m
20% strengthening
in sterling
£m
At 28 March 2015
Impact on income statement: gain/ (loss) 9.2 (12.5) – –
Impact on other comprehensive income: (loss)/gain (15.2) 8.1 169.8 (113.2)
At 2 April 2016
Impact on income statement: gain/ (loss) 9.2 (11.1) – –
Impact on other comprehensive income: (loss)/gain (0.8) 1.0 136.0 (90.7)