Marks and Spencer 2009 Annual Report Download - page 108

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Marks and Spencer Group plc Annual report and financial statements 2009 Financial statements
Notes to the financial statements
continued
104
22 Financial instruments continued
(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 risk in relation to sterling against movements in US dollar 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 £768m (last year £619m) with a weighted average maturity date of six months (last year seven months).
The translation exposures arising on the overseas net assets are hedged with foreign currency debt. As at the balance sheet date,
€276m (last year €243m) and HK$178m (last year HK$107m) 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 £108m (last year £80m).
Gains and losses in equity on forward foreign exchange contracts as at 28 March 2009 will be released to the income statement at various
dates over the following 14 months (last year 19 months) from the balance sheet date.
After taking into account the hedging derivatives entered into by the Group, the currency and interest rate exposure of the Group’s financial
liabilities is as set out below excluding short-term payables and the Marks and Spencer Czech Republic a.s. put option:
2009 2008
Fixed
rate
£m
Floating
rate
£m
Total
£m
Fixed
rate
£m
Floating
rate
£m Total
£m
Currency
Sterling 2,252.4 629.9 2,882.3 2,665.9 673.0 3,338.9
Euro 7.6 286.1 293.7 – 192.5 192.5
Hong Kong dollar –16.4 16.4 – 6.9 6.9
Other 0.3 7.9 8.2 – – –
2,260.3 940.3 3,200.6 2,665.9 872.4 3,538.3
The floating rate sterling and euro borrowings are linked to interest rates related to LIBOR. These rates are for periods between one and
three months.
As at the balance sheet date and excluding finance leases but including the partnership liability, the fixed rate sterling borrowings are
at an average rate of 6.0% (last year 6.0%) and the weighted average time for which the rate is fixed is nine years (last year ten years).
(d) Interest rate risk
The Group is exposed to interest rate risk in relation to the sterling, US dollar, 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 £2,260.3m (last year £2,665.9m) representing the public bond issues and
finance leases, and amounting to 71% (last year 75%) of the Group’s gross borrowings.
The effective interest rates at the balance sheet date were as follows:
2009
%
2008
%
Committed and uncommitted borrowings 4.0 5.5
Medium-term notes 6.2 6.2
Finance leases 4.8 5.0
Partnership liability to the Marks & Spencer UK Pension Scheme 5.7 5.7