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Financial statements Marks and Spencer Group plc Annual report and financial statements 2012 101
Overview Strategic review Financial review Governance Financial statements and other information
21 Financial instruments continued
Sensitivity analysis
The table below illustrates the estimated impact on the income statement and equity as a result of market movements in foreign
exchange and interest rates in relation to the Group’s financial instruments. The Directors consider that a 2% +/- (last year 2%)
movement in interest rates and a 20% +/- (last year 20%) weakening in sterling represents a reasonable possible change.
However this analysis is for illustrative purposes only.
The impact in the income statement due to changes in interest rates reflects the effect on the Group’s floating rate debt as at
the balance sheet date. The impact in equity reflects the fair value movement in relation to the Group’s cross currency swaps.
The impact from foreign exchange movements reflects the change in the fair value of the Group’s transactional foreign exchange
cash flow hedges and the net investment hedges at the balance sheet date. The equity impact shown for foreign exchange
sensitivity relates to derivative and non-derivative financial instruments hedging net investments. This value is expected to be
fully offset by the re-translation of the hedged foreign currency net assets leaving a net equity impact of zero.
The table excludes financial instruments that expose the Group to interest rate and foreign exchange risk where such risk is
fully hedged with another financial instrument. Also excluded are trade receivables and payables as these are either sterling
denominated or the foreign exchange risk is hedged.
2% decrease
in interest
rates
£m
2% increase
in interest
rates
£m
20%
weakening
in sterling
£m
20%
strengthening
in sterling
£m
At 2 April 2011
Impact on income statement: gain/(loss) 0.5 2.2 (2.8) 2.4
Impact on other comprehensive income: (loss)/gain (6.7) 6.4 44.3 (29.5)
At 31 March 2012
Impact on income statement: gain 1.5 0.8 – –
Impact on other comprehensive income: (loss)/gain (5.3) 3.0 70.2 (46.8)
Fair value hierarchy
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation
technique:
–Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
–Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either
directly or indirectly; and
–Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on
observable market data. Unlisted equity investments are included in Level 3. The fair value of embedded derivatives is
determined using the present value of the estimated future cash flows based on financial forecasts. The nature of the valuation
techniques and the judgement around the inputs mean that a change in assumptions could result in significant change in the
fair value of the instrument.
As at the end of the reporting period, the Group held the following financial instruments measured at fair value:
2012 2011
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Assets measured at fair value
Financial assets at fair value through
profit and loss
– Trading derivatives – 53.7 – 53.7 – 15.6 – 15.6
Derivatives used for hedging – 37.4 – 37.4 – 4.3 – 4.3
Embedded derivatives (note 5) – – 20.1 20.1 – – 20.3 20.3
Available-for-sale financial assets
– equity securities – – 3.0 3.0 – – 3.0 3.0
Liabilities measured at fair value
Financial liabilities at fair value through
profit and loss
– Trading derivatives – (54.9) – (54.9) – (18.1) – (18.1)
Derivative used for hedging – (32.8) – (32.8) – (70.1) – (70.1)
Put option over non-controlling interest – – – – – – (14.6) (14.6)
There were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value
measurements in the current or prior years.