Tesco 2011 Annual Report Download - page 130

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NOTE 22 FINANCIAL INSTRUMENTS
Derivatives are used to hedge exposure to market risks and those that are held as hedging instruments are formally designated as hedges as defined
in IAS 39. Derivatives may qualify as hedges for accounting purposes and the Group’s hedging policies are further described below.
Finance income of £27m (2010 – £20m) resulted from hedge ineffectiveness.
Fair value hedges
The Group maintains interest rate and cross currency swap contracts as fair value hedges of the interest rate and currency risk on fixed rate debt
issued by the Group. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Group Income
Statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss on the
hedging instrument and hedged item is recognised in the Group Income Statement within finance income or costs. If the hedge no longer meets the
criteria for hedge accounting, the adjustment to the carrying value of the hedged item is amortised to the Group Income Statement under the effective
interest rate method.
A loss of £369m on hedging instruments was recognised during the year, offset by a gain of £396m on hedged items (2010 – a loss of £65m on
hedging instruments was offset by a gain of £85m on hedged items).
Cash flow hedges
The Group uses forward foreign currency contracts to hedge the cost of future purchases of goods for resale, where those purchases are denominated
in a currency other than the functional currency of the purchasing company. Where these contracts qualify for hedge accounting, mark-to-market
gains and losses are deferred in equity. These hedging instruments are primarily used to hedge purchases in Euros and US Dollars. The cash flows
hedged will occur and will affect the Group Income Statement within one year of the balance sheet date.
The Group also uses index-linked swaps to hedge cash flows on index-linked debt, interest rate swaps to hedge interest cash flows on debt and
cross currency swaps to hedge intercompany loan cash flows denominated in South Korean Won (KRW).
Net investment hedges
The Group uses forward foreign currency contracts, currency denominated borrowings and currency swaps to hedge the exposure of a proportion
of its non-Sterling denominated assets against changes in value due to changes in foreign exchange rates.
The Group has a KRW denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Homeplus Co. Limited (formerly
Samsung Tesco Co. Limited). This liability has been designated as a net investment hedge of a proportion of the assets of Homeplus Co. Limited.
Gains and losses accumulated in equity are included in the Group Income Statement on disposal of the overseas operation.
Financial instruments not qualifying for hedge accounting
The Group’s policy is not to use derivatives for trading purposes, however, some derivatives do not qualify for hedge accounting, or are specifically
not designated as a hedge where gains and losses on the hedging instrument and the hedged item naturally offset in the Group Income Statement.
These instruments include caps, interest rate swaps and forward foreign currency contracts. Changes in the fair value of any derivative instruments
that do not qualify for hedge accounting are recognised immediately in the Group Income Statement within finance income or costs.
The Group had a liability relating to the future purchases of the minority shareholding of its subsidiary, dunnhumby Limited, which has been purchased
during the financial year. Changes in the value of that liability were recognised immediately in the Group Income Statement within finance income or
costs.
The fair value of derivative financial instruments have been disclosed in the Group Balance Sheet as follows:
2011 2010
Asset
£m
Liability
£m
Asset
£m
Liability
£m
Current 148 (255) 224 (146)
Non-current 1,139 (600) 1,250 (776)
1,287 (855) 1,474 (922)
FINANCIAL STATEMENTS
126
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TESCO PLC Annual Report and Financial Statements 2011
Notes to the Group financial statements