Carphone Warehouse 2009 Annual Report Download - page 80

76 The Carphone Warehouse Group PLC Annual Report 2009
Notes to the Financial Statements – continued
22 Financial risk management and derivative financial instruments – continued
Forward currency contracts – net investment hedges:
The Group uses forward currency contracts to hedge balance sheet assets and liabilities and also for short-term liquidity
management. The Group currently holds no currency option contracts.
Forward currency contracts – cash flow hedges:
The Group also uses forward currency contracts to hedge transactional exposures. These contracts are mainly denominated
in Euros, South African Rand and US Dollars and primarily cover costs of sales and operating expenses.
At 31 March 2009, the total notional principal amount of outstanding currency contracts was £344m (2008: £333m). Within this
balance, £17m (2008: £31m) is held in relation to cash ow hedges, for which the associated fair value gains and losses will be
transferred to the income statement when the transactions occur over the next 12 months. The remainder of the outstanding
currency contracts relates to investments in and loans to the Group’s non-Sterling operations. An expense of £3m was
transferred to income in respect of forward currency contracts in the year ended 29 March 2008, which was offset by the foreign
exchange movements of the nancial instruments that they hedged. All cash ow hedges will reverse within the next nancial year.
Embedded derivatives:
No contracts with embedded derivatives have been identied and accordingly no such derivatives have been accounted
for separately.
The Group’s activities expose it to a variety of nancial risks including market risk (such as currency risk and interest rate risk),
credit risk and liquidity risk. The Group Treasury function, which operates under approved treasury policies, uses certain
nancial instruments to mitigate potential adverse effects on the Group’s nancial performance from these risks. These nancial
instruments primarily consist of bank loans and deposits, spot and forward foreign exchange contracts, and foreign exchange
swaps. Other products, such as interest rate swaps and currency options, can also be used depending on the risks to be
covered. The Group does not trade or speculate in any nancial instruments.
Foreign exchange risk:
The Group is exposed to limited cross-border transactional commitments and, where signicant, these are hedged at inception
using forward currency contracts. These exposures arise mainly through costs of sales and operating expenses. The Group’s
foreign exchange position is calculated daily and any positions are closed out immediately unless the exposure is immaterial.
In some circumstances, the Group also hedges future currency commitments, which are accounted for as cash ow hedges.
Group policy permits the use of long-term derivative treasury products (such as cross-currency swaps) for the management
of currency risk although none are currently held. The principal currency in which Group exposures arise is the Euro.
Translational currency risk (for example, investments in overseas assets or the funding of subsidiaries) is ordinarily hedged using
foreign exchange swaps or currency borrowings. The translation risk on converting overseas currency prot is not hedged and
such prots are converted into Sterling at average exchange rates throughout the year.
Funding to Group subsidiaries is ordinarily denominated in the functional currency of each subsidiary. As detailed in note 4,
the functional currency of CPW Brands Limited changed during the year from Swiss Francs to Sterling. As a result, foreign
exchange movements arose in CPW Brands Limited on its Swiss Franc borrowings, prior to their redenomination to Sterling.
These movements are reected in the prot and loss account of CPW Brands Limited.
Currency loans and deposits and foreign exchange contracts are sensitive to movements in foreign exchange rates; this
sensitivity can be analysed in comparison to year-end rates (assuming all other variables remain constant) as follows:
2009 2008
Income Income
statement Equity statement Equity
movement movement movement movement
£m £m £m £m
10% movement in the Sterling/Euro exchange rate – 3 – 43
Changes in the value of currency loans and foreign exchange contracts would not be expected to have an impact in the income
statement, as they match currency assets, the value of which would rise or fall correspondingly, with net investment hedges
assumed to remain fully effective.
The impact on equity of revaluations would be partially offset on consolidation by the revaluation of any net assets that are
hedged by these borrowings and derivatives.