Tesco 2014 Annual Report Download - page 109

Note 22 Financial risk factors continued
The impact on Group financial statements from foreign currency volatility is shown in the sensitivity analysis below:
Sensitivity analysis
The analysis excludes the impact of movements in market variables on the carrying value of pension and other post-employment obligations and on the
retranslation of overseas net assets as required by IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’. However, it does include the foreign exchange
sensitivity resulting from all local entity non-functional currency financial instruments.
The sensitivity analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives
portfolio, and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 22February
2014. It should be noted that the sensitivity analysis reflects the impact on income and equity due to all financial instruments held at the balance sheet date.
It does not reflect any change in sales or costs that may result from changing interest or exchange rates.
The following assumptions were made in calculating the sensitivity analysis:
• the sensitivity of interest payable to movements in interest rates is calculated on net floating rate exposures on debt, deposits and derivative instruments
with no sensitivity assumed for RPI-linked debt which has been swapped to fixed rates;
• changes in the carrying value of derivative financial instruments designated as fair value hedges from movements in interest rates or foreign exchange rates
have an immaterial effect on the Group Income Statement and equity due to compensating adjustments in the carrying value of debt;
• changes in the carrying value of derivative financial instruments designated as net investment hedges from movements in foreign exchange rates are
recorded directly in the Group Statement of Comprehensive Income;
• changes in the carrying value of derivative financial instruments not designated as hedging instruments only affect the Group Income Statement;
• all other changes in the carrying value of derivative financial instruments designated as hedging instruments are fully effective with no impact
on the Group Income Statement; and
• the floating leg of any swap or any floating rate debt is treated as not having any interest rate already set, therefore a change in interest rates affects a full
12-month period for the interest payable portion of the sensitivity calculations.
Using the above assumptions, the following table shows the illustrative effect on the Group Income Statement and equity that would result, at the balance
sheet date, from changes in UK interest rates and currency exchange rates that are reasonably possible for major currencies where there have recently been
significant movements:
2014 2013
Income
gain/(loss)
£m
Equity
gain/(loss)
£m
Income
gain/(loss)
£m
Equity
gain/(loss)
£m
1% increase in GBP interest rates (2013: 1%) 5 – 8 –
15% appreciation of the Czech Koruna (2013: 5%) –49 (1) 21
5% appreciation of the Euro (2013: 5%) (1) (24) (12) (43)
10% appreciation of the South Korean Won (2013: 5%) –110 –56
10% appreciation of the US Dollar (2013: 5%) (4) 161 (13) 52
5% appreciation of the Polish Zloty (2013: Nil) –19 – –
10% appreciation of the Hong Kong Dollar (2013: Nil) –29 – –
35% appreciation of the Turkish Lira (2013: Nil) –79 – –
A decrease in interest rates and a depreciation of foreign currencies would have the opposite effect to the impact in the table above.
The impact on the Group Statement of Comprehensive Income from changing exchange rates results from the revaluation of financial liabilities used as net
investment hedges. The impact on the Group Statement of Comprehensive Income will largely be offset by the revaluation in equity of the hedged assets.
Capital risk
The Group’s objectives when managing capital (defined as net debt plus equity) are to safeguard the Group’s ability to continue as a going concern in order
to provide returns to shareholders and benefits for other stakeholders, while maintaining a strong credit rating and headroom whilst optimising return to
shareholders through an appropriate balance of debt and equity funding. The Group manages its capital structure and makes adjustments to it, in light of
changes to economic conditions and the strategic objectives of the Group.
To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, buy back shares and cancel them, or issue new shares.
The Group finances its operations by a combination of retained profits, disposals of property assets including sale and leaseback transactions, debt capital
market issues, commercial paper, bank borrowings and leases to ensure continuity of funding. The policy for debt is to ensure a smooth debt maturity profile
with the objective of ensuring continuity of funding. This policy continued during the financial year with bonds redeemed of £208m (2013: £1,285m) and
£844m of new bonds issued (2013: £nil). The Group borrows centrally and locally, using a variety of capital market instruments and borrowing facilities to
meet the Group’s business requirements of each local business.
Refer to Note 30 for the value of the Group’s net debt (£6.6bn; 2013: £6.6bn), and the Group Statement of Changes in Equity for the value of the Group’s
equity (£14.7bn; 2013: £16.7bn).
106 Tesco PLC Annual Report and Financial Statements 2014
Notes to the Group financial statements continued