National Grid 2008 Annual Report Download - page 678

BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 43737
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-15.1, Doc: 16, Page: 151
Description: EXHIBIT 15.1
0/7347.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/347/7*
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 43737
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-15.1, Doc: 16, Page: 151 Description: EXHIBIT 15.1
0/7347.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/347/7*
Table of Contents
Annual Report and Accounts 2007/08
159
32. Supplementary information on derivative financial instruments
Derivatives are financial instruments that derive their value from the price of an underlying item such as interest rates, foreign
exchange, credit spreads, commodities and equity or other indices. Derivatives enable their users to alter exposure to market
or credit risks. We use derivatives to manage both our treasury and operational market risks. Operational market risks are
managed using commodity contracts which are detailed in note 34.
Treasury financial instruments
Derivatives are used for hed
g
in
g
purposes in the mana
g
ement of exposure to market risks. This enables the optimisation of the
overall cost of accessing debt capital markets, and mitigates the market risk which would otherwise arise from the maturity and
other profiles of its assets and liabilities.
Hedging policies using derivative financial instruments are further explained in note 33. Derivatives that are held as hedging
instruments are formally designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting
purposes if they are fair value hedges, cash flow hedges or net investment hedges. These are described as follows:
Fair value hedges
Fair value hedges principally consist of interest rate and cross-currency swaps that are used to protect against changes in the
fair value of fixed-rate, long-term financial instruments due to movements in market interest rates. For qualifying fair value
hedges, all changes in the fair value of the derivative and changes in the fair value of the item in relation to the risk being
hed
g
ed are reco
g
nised in the income statement. If the hed
g
e relationship is terminated, the fair value adjustment to the hed
g
ed
item continues to be reported as part of the basis of the item and is amortised to the income statement as a yield adjustment
over the remainder of the hedging period.
Cash flow hedges
Exposure arises from the variability in future interest and currency cash flows on assets and liabilities which bear interest at
variable rates or are in a foreign currency which is swapped into fixed sterling rate. Interest rate and cross-currency swaps are
maintained, and designated as cash flow hedges, where they qualify, to manage this exposure. Fair value changes on
designated cash flow hedges are initially recognised directly in the cash flow hedge reserve, as gains or losses recognised in
equity. Amounts are transferred from equity and recognised in the income statement as the income or expense is recognised
on the hedged asset or liability.
Forward foreign currency contracts are used to hedge anticipated and committed future currency cash flows. Where these
contracts qualify for hed
g
e accountin
g
they are desi
g
nated as cash flow hed
g
es. On reco
g
nition of the underlyin
g
transaction in
the financial statements, the associated hedge gains and losses deferred in equity are transferred and included with the
recognition of the underlying transaction.
The gains and losses on ineffective portions of such derivatives are recognised immediately in remeasurements within the
income statement.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any
cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is
ultimately recognised in the income statement or on the balance sheet. When a forecast transaction is no longer expected to
occur, the cumulative gain or loss that was reported in equity is immediately transferred to remeasurements within the income
statement.
Net investment hedges
Borrowings, cross-currency swaps and forward currency contracts are used in the management of the foreign exchange
exposure arising from the investment in non sterling denominated subsidiaries. Where these contracts qualify for hedge
accounting they are designated as net investment hedges.
The cross-currency swaps and forward foreign currency contracts are hedge accounted using the spot to spot method. The
foreign exchange gain or loss on retranslation of the debt and the spot to spot movements on the cross-currency swaps and
forward currency contracts are transferred to equity to offset gains or losses on translation of the net investment in the non
sterling denominated subsidiaries.
Derivatives not in a formal hedge relationship
Our policy is not to use derivatives for trading purposes. However, due to the complex nature of hedge accounting under IAS
39 some derivatives may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is
more appropriate.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in
remeasurements within the income statement.