Marks and Spencer 2008 Annual Report Download - page 85

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22 Financial instruments continued
B Interest rate risk
The Group is exposed to interest rate risk in relation to the sterling, US$, euro and Hong Kong dollar variable rate financial
assets and liabilities. The Group’s policy is to use derivative contracts where necessary to maintain a mix of fixed and floating
rate borrowings to manage this risk. The structure and maturity of these derivatives correspond to the underlying borrowings
and are accounted for as fair value or cash flow hedges as appropriate.
At the balance sheet date, fixed rate borrowings amounted to £2,665.8m (last year £1,735.8m) representing the public bond
issues and finance leases, and amounting to 75% (last year 79%) of the Group’s gross borrowings.
C Foreign currency risk
Transactional foreign currency exposures arise from both the export of goods from the UK to overseas subsidiaries, and from
the import of materials and goods directly sourced from overseas suppliers. Group treasury hedge these exposures principally
using forward foreign exchange contracts progressively covering up to 100% out to 18 months. Where appropriate hedge cover
can be taken out longer than 18 months with Board approval. The Group is primarily exposed to foreign exchange in relation to
sterling against movements in US$ and euro.
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. As at the balance sheet date the gross notional value in sterling terms of
forward foreign exchange sell or buy contracts amounted to £619m (last year £456m) with a weighted average maturity date
of seven months (last year six months).
The Group does not use derivatives to hedge balance sheet and profit and loss translation exposures. However, the translation
exposures arising on the overseas net assets are hedged with foreign currency debt. As at the balance sheet date, €243m
(last year €234m) and HK$107m (last year HK$113m) currency debt was hedging overseas net assets.
The Group also hedges foreign currency intercompany loans where these exist. 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. As at the balance sheet date, the gross notional value of intercompany loan
hedges was £80m (last year £128m).
Gains and losses in equity on forward foreign exchange contracts as of 31 March 2008 will be released to the income statement
at various dates over the following 19 months (last year 14 months) from the balance sheet date.
D Counterparty risk
Counterparty risk exists where the Group can suffer financial loss through default or non-performance by financial institutions.
Exposures are managed through the Group treasury policy which limits the value that can be placed with each approved counterparty
to minimise the risk of loss. The counterparties are limited to the approved institutions with secure long-term credit ratings of A+/A1
or better assigned by Moody’s and Standard & Poor’s respectively. Limits are reviewed regularly by senior management. The credit
risk of these financial instruments is estimated as the fair value of the assets resulting from the contracts.
The Group has very low retail credit risk due to transactions being principally of a high volume, low value and short maturity.
The Group does not have any material exposures to concentrations of credit risk with any one counterparty.
The maximum exposure to credit risk at the balance sheet date was as follows: trade receivables £85m (last year £68m), other
receivables £46m (last year £53m), cash and cash equivalents £318m (last year £180m) and derivatives £37m (last year £2m).
marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 83
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