Tesco 2014 Annual Report Download - page 102

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Note 21 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.
Net finance cost of £22m (2013: £19m) 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.
A loss of £311m on hedging instruments was recognised during the year, offset by a gain of £282m on hedged items (2013: a gain of £52m on hedging
instruments was offset by a loss of £65m on hedged items).
Cash flow hedges
The Group uses forward contracts to hedge the foreign currency 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, fair value 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 cash flows on fixed rate debt denominated in foreign currencies.
Net investment hedges
The Group uses currency denominated borrowings and currency swaps to hedge the exposure of a portion of its net investment in overseas operations
against changes in value due to changes in foreign exchange rates. A net finance income of £7m (2013: a net finance cost of £6m) was recorded resulting
from net investment hedging ineffectiveness.
Gains and losses accumulated in equity are recycled to the Group Income Statement on disposal of overseas operations.
Financial instruments not qualifying for hedge accounting
The Group’s policy does not permit use of 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 cross currency interest rate swaps, index linked 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 fair values of derivative financial instruments have been disclosed in the Group Balance Sheet as follows:
2014 2013
Asset
£m
Liability
£m
Asset
£m
Liability
£m
Current 80 (99) 58 (121)
Non-current 1,496 (770) 1,965 (759)
1,576 (869) 2,023 (880)
Other information
Governance Financial statementsStrategic report
Tesco PLC Annual Report and Financial Statements 2014 99