Marks and Spencer 2006 Annual Report Download - page 83

81Marks and Spencer Group plc
22 FINANCIAL INSTRUMENTS continued
(d) Counterparty risk
Counterparty risk exists where the Group has the potential to experience loss through default or non-performance by financial
institutions in relation to outstanding financial instruments. Counterparty exposures for these instruments are managed through Board
approved Group Treasury policy that limits the value that can be placed with each approved counterparty to minimise the risk of loss.
These limits are based on a combination of short-term credit ratings of A-1/P-1 and long-term credit ratings of AA-/Aa3 or better. The
monetary limit will apply to the aggregate of investments and the mark to market value of foreign exchange and interest rate derivatives.
Limits are reviewed regularly by senior management. Dealing mandates and derivative agreements are entered into with counterparty
banks prior to deals being arranged.
The maximum exposure to credit risk at 1 April 2006 was as follows: trade receivables £42m, other receivables £33m, cash and
cash equivalents £363m and derivatives £76m. The Group does not have any material exposures to concentrations of credit risk
with any one counterparty.
Derivative financial instruments
2006
Assets Liabilities
Current
Interest rate swaps – fair value hedges 1.6 –
Cross currency – fair value hedges 71.9 (5.3)
Forward foreign exchange contracts – cash flow hedges 1.2 (2.7)
Forward foreign exchange contracts – held for trading 1.7 –
76.4 (8.0)
Non-current
Interest rate swaps – cash flow hedges – (9.5)
The Group has entered into a number of interest rate and currency swaps to redesignate both fixed and floating rate debt to the
Group’s desired interest rate profile. The attributes of these derivatives match the characteristics of the underlying debt hedged.
Derivatives moving floating debt to fixed have been designated as cash flow hedges, and derivatives moving fixed debt to floating
have been designated as fair value hedges in accordance with IAS 39.
As at the balance sheet date gross outstanding interest rate swaps amounted to £754.3m with a weighted average maturity of
3.6 years. The weighted average effective interest rate for floating to fixed interest rate derivatives was 6.3% as at the balance sheet
date. The gross notional outstanding interest rate swaps converting fixed debt to floating was £574.6m with rate fixings being set
using the published one, three, or six month LIBOR, where appropriate.
Forward foreign exchange contracts in relation to the Group’s forecast currency requirements are designated as cash flow hedges
with fair value movements recognised directly in equity. To the extent that these hedges cover actual currency payables or
receivables then associated fair value movements previously recognised in equity are recorded in the income statement in
conjunction with the corresponding asset or liability.
Forward foreign exchange contracts in relation to the hedging of the Group’s foreign currency intercompany loans are designated as
held for trading with fair value movements being recognised in the income statement. The corresponding fair value movement of the
intercompany loan balance results in an overall nil impact on the income statement.
Gains and losses in equity on forward foreign exchange contracts as of 1 April 2006 will be released to the income statement
at various dates over the following 15 months from the balance sheet date.
With the exception of the Group’s fixed rate bond debt, there were no material differences between the carrying value of non-
derivative financial assets and financial liabilities and their fair values as at the balance sheet date.
The carrying value of the Group’s fixed rate bond debt was £915.0m, the fair value of this debt was £940.8m.