Vodafone 2005 Annual Report Download - page 107

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Financials |105
20.Financial instruments
Fair values of financial assets and liabilities
The carrying amounts and estimated fair value of the Group’s outstanding financial instruments are set out below:
2005 2005 2004 2004
Net carrying Estimated fair Net carrying Estimated fair
amount value amount value
£m £m £m £m
Fixed asset investments (excluding investments in associated undertakings) 852 1,182 1,049 1,290
Cash at bank and in hand 2,850 2,850 1,409 1,409
Liquid investments 788 788 4,381 4,381
Borrowings:
Short term (392) (390) (1,974) (2,034)
Long term (11,613) (12,023) (12,224) (13,029)
Derivative financial instruments:
Interest rate – 120 – 343
Foreign exchange 28 28 (80) (80)
The Group’s exposure to market risk, which is the sensitivity of the value of financial instruments to changes in related currency and interest rates, is minimised because
gains and losses on the underlying assets and liabilities offset gains and losses on derivative financial instruments.
The following methods and assumptions were used to estimate the fair values shown above.
Fixed asset investments (excluding investments in joint ventures and associated undertakings) – The net book value of fixed asset investments at 31 March
2005 comprises investments recorded at an original cost of £1,803 million (2004: £2,079 million). Listed investments are stated at fair value based on their quoted share
price at 31 March 2005.
Cash at bank and in hand and liquid investments – The carrying values of cash and liquid investments approximate to their fair values because of the short term
maturity of these instruments.
Borrowings (excluding foreign exchange contracts) – The fair value of quoted long term borrowings is based on year end mid-market quoted prices. The book values
stated above exclude accrued interest on borrowings which is recorded separately on the balance sheet within accruals and deferred income. The fair value of other
borrowings is estimated by discounting the future cash flows to net present values using appropriate market interest and foreign currency rates prevailing at the year end.
Foreign exchange contracts, interest rate swaps and futures – The Group enters into foreign exchange contracts, interest rate swaps and futures in order to manage
its foreign currency and interest rate exposure. The book values stated above exclude accrued interest which is recorded separately in the balance sheet. The fair value of
these financial instruments was estimated by discounting the future cash flows to net present values using appropriate market interest and foreign currency rates prevailing at
the year end.
Hedges
The Group’s policy is to use derivative instruments to hedge against exposure to movements in interest rates and exchange rates. Changes in the fair value of instruments
used for hedging are not recognised in the financial statements until the hedged exposure is itself recognised. Unrecognised gains and losses on instruments used for
hedging are set out below: Total net
Gains Losses gains/(losses)
£m £m £m
Unrecognised gains and losses on hedges at 1 April 2004 423 (80) 343
Less: gains and losses arising in previous years that were recognised in the year (91) 23 (68)
Gains and losses arising before 1 April 2004 that were not recognised at 31 March 2005 332 (57) 275
Gains and losses arising in the year that were not recognised at 31 March 2005 (96) (59) (155)
Unrecognised gains and losses on hedges at 31 March 2005 236 (116) 120
Of which:
Gains and losses expected to be recognised in the year ending 31 March 2006 64 (28) 36
In addition to the amounts disclosed above, cumulative aggregate gains of £453 million in respect of terminated interest rate swaps were carried forward in the balance sheet
at 31 March 2005 pending their recognition in the profit and loss account (2004: £607 million). Of these carried forward amounts, gains of £91 million are expected to be
recognised in the profit and loss account in the 2006 financial year. Aggregate related gains of £154 million from previous years were recognised in the profit and loss
account in the 2005 financial year (2004: £90 million).
Currency exposures
Taking into account the effect of forward contracts and other derivative instruments, the Group did not have any material financial exposure to foreign exchange gains or
losses on monetary assets and monetary liabilities denominated in foreign currencies at 31 March 2005.