Marks and Spencer 2006 Annual Report Download - page 96

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94 Marks and Spencer Group plc
Notes to the financial statements continued
34 FIRST TIME ADOPTION OF IAS 32 AND IAS 39
The adoption of IAS 32 – ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 – ‘Financial Instruments: Recognition and
Measurement’ with effect from 3 April 2005 results in a change in the Group’s accounting policy for financial instruments. The impact
of these standards on the Group’s opening balance sheet is shown below.
The principal impacts of IAS 32 and IAS 39 on the Group’s financial statements relate to the recognition of derivative financial
instruments at fair value and the reclassification of non-equity B shares as debt. Any derivatives that do not qualify for hedge
accounting are held on the balance sheet at fair value with the changes in value reflected through the income statement. The
accounting treatment of derivatives that qualify for hedge accounting depends on how they are designated, as follows:
Fair value hedges
The Group uses interest rate swaps to hedge the exposure to interest rates of its issued debt. Under UK GAAP, derivative financial
instruments were not recognised at fair value in the balance sheet.
Under IAS 39, derivative financial instruments that meet the ‘fair value’ hedging requirements are recognised in the balance sheet
at fair value with corresponding fair value movements recognised in the income statement. For an effective fair value hedge, the
hedged item is adjusted for changes in fair value attributable to the risk being hedged with the corresponding entry in the income
statement. To the extent that the designated hedge relationship is fully effective, the amounts in the income statement offset each
other. As a result, only the ineffective element of any designated hedging relationship impacts the financing line in the income
statement.
Cash flow hedges
Under IAS 39, derivative financial instruments that qualify for cash flow hedging are recognised on the balance sheet at fair value
with corresponding fair value changes deferred in equity. In addition, the Group hedges the foreign currency exposure on inventory
purchases. Under UK GAAP, foreign currency derivatives were held off balance sheet and these are now treated as cash flow
hedges.
The adjustments to the opening balance sheet as at 3 April 2005 are as follows:
Restated
Opening Effect of opening
balance sheet IAS 32 and position at
under IFRS IAS 39 3 Apr 2005
£m £m £m
Non-current assets
Derivative financial instruments – 71.1 71.1
Deferred tax asset 24.6 1.3 25.9
Current assets
Derivative financial instruments – 2.8 2.8
Inventories 338.9 0.4 339.3
Current liabilities
Derivative financial instruments – (1.9) (1.9)
Borrowings (478.8) (66.2) (545.0)
Trade and other payables (717.9) 24.7 (693.2)
Non-current liabilities
Derivative financial instruments – (12.0) (12.0)
Borrowings (1,948.5) (87.8) (2,036.3)
Impact on net assets (67.6)
Non-equity B shares (65.7)
Hedging reserve (1.6)
Retained earnings (0.3)
Impact on shareholders’ funds (67.6)