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Financial statements Marks and Spencer Group plc Annual report and financial statements 2013 104
Notes to the financial statements continued
21 Financial instruments continued
The floating rate sterling and euro borrowings are linked to interest rates related to LIBOR. These rates are for periods between one
and six months.
As at the balance sheet date and excluding finance leases, the fixed rate sterling borrowings are at an average rate of 5.6% (last
year 5.8%) and the weighted average time for which the rate is fixed is eight years (last year nine years).
(d) Interest rate risk
The Group is exposed to interest rate risk in relation to sterling, US dollar and euro 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 £1,933.8m (last year £2,037.2m) representing the public bond issues
and finance leases, amounting to 85% (last year 90%) of the Group’s gross borrowings.
The effective interest rates at the balance sheet date were as follows:
2013
%
2012
%
Committed and uncommitted borrowings 1.2 0.5
Medium-term notes 5.6 5.8
Finance leases 4.3 4.5
Derivative financial instruments
2013 2012
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Current
Options – held for trading – – 53.6 (53.6)
Forward foreign exchange contracts – cash flow hedges 34.0 (12.8) 13.3 (5.1)
– held for trading 3.6 (0.9) 0.1 (1.3)
– net investment hedges 4.9 – – (0.5)
42.5 (13.7) 67.0 (60.5)
Non-current
Cross currency swaps – cash flow hedges 3.2 (12.4) – (26.5)
Forward foreign exchange contracts – cash flow hedges 3.8 (0.7) 0.1 (0.7)
Interest rate swaps – fair value hedge 32.4 – 24.0 –
Embedded derivative (see note 5) 25.9 – 20.1 –
65.3 (13.1) 44.2 (27.2)
Last year, the amounts reported as options held for trading in derivatives assets and liabilities represented the fair value of the call
option with the Puttable Callable reset notes mirrored by the fair value of the sold option to have this call assigned. In January 2013
the Group bought back and cancelled these notes. The Group holds a number of interest rate swaps to re-designate its sterling
fixed debt to floating debt. These are reported as fair value hedges. The ineffective portion recognised in the profit or loss that arises
from fair value hedges amounts to £nil (last year £0.2m loss) as the loss on the hedged item was £8.0m (last year £23.6m loss) and
the gain on the hedging instrument was £8.0m (last year £23.8m gain).The Group also holds a number of cross currency swaps to
re-designate its fixed rate US dollar debt to fixed rate sterling debt. These are reported as cash flow hedges.
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.