Marks and Spencer 2016 Annual Report Download - page 119

117
ANNUAL REPORT AND FINANCIAL STATEMENTS 2016
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
OUR BUSINESSOUR PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS
21 FINANCIAL INSTRUMENTS CONTINUED
Fair Value Hierarchy continued
At the end of the reporting period, the Group held the following fi nancial instruments at fair value:
2016 2015
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
As s et s meas ure d at fai r val u e
Financial assets at fair value through
profi t or loss
– Trading derivatives –1.4 –1.4 – 3.1 – 3.1
Derivatives used for hedging –144.7 –144.7 – 166.9 – 166.9
Embedded derivatives (see note 5) ––––– – 23.7 23.7
Short-term investments –19.1 –19.1 – 11.6 – 11.6
Li abi l iti es me as ure d at fai r v alu e
Financial liabilities at fair value through
profi t or loss
– Trading derivatives –(1.8) –(1.8) – (0.4) – (0.4)
Derivatives used for hedging –(26.9) –(26.9) – (27.3) – (27.3)
There were no transfers between Level 1 and Level 2 fair value measurements. In addition to the above, the Group has £3.0m (last year
£3.0m) in unlisted equity securities measured at cost.
The following table represents the changes in Level 3 instruments:
2016
£m
2015
£m
Opening balance 23.7 22.4
Fair value (loss)/gain recognised in the income statement (2.0) 1.3
Derecognition (21.7) –
Closing balance –23.7
During the year the Group purchased Lima (Bradford) S.à r.l. This resulted in the derecognition of the embedded derivative as the host lease
contract is now between subsidiaries of the Group (see note 25).
The gains recognised in the income statement relate to the valuation of the embedded derivative in a lease contract up until the acquisition
date. The fair value movement of the embedded derivative of £2.0m loss (last year £1.3m gain) and subsequent derecognition of the asset
(£21.7m) is treated as an adjustment to reported profi t (see note 5).
Fair value of fi nancial instruments
With the exception of the Group’s fi xed rate bond debt and the Partnership liability to the Marks & Spencer UK Pension Scheme, there were
no material di erences between the carrying value of non-derivative fi nancial assets and fi nancial liabilities and their fair values as at the
balance sheet date.
The carrying value of the Group’s fi xed rate bond debt (Level 1 equivalent) was £1,726.4m (last year £1,697.7m), the fair value of this debt
was £1,868.3m (last year £1,883.6m). The carrying value of the Partnership liability to the Marks & Spencer UK Pension Scheme (Level 3
equivalent) is £455.7m (last year £512.9m) and the fair value of this liability is £445.3m (last year £501.3m).
Capital policy
The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide optimal returns
for shareholders and to maintain an e cient capital structure to reduce the cost of capital.
In doing so the Group’s strategy is to maintain a capital structure commensurate with an investment grade credit rating and to retain
appropriate levels of liquidity headroom to ensure fi nancial stability and fl exibility. To achieve this strategy the Group regularly monitors
key credit metrics such as the gearing ratio, cash fl ow to net debt (see note 28) and fi xed charge cover to maintain this position. In addition,
the Group ensures a combination of appropriate committed short-term liquidity headroom with a diverse and balanced long-term debt
maturity profi le. As at the balance sheet date the Group’s average debt maturity profi le was seven years (last year eight years). During the
year the Group maintained an investment grade credit rating of Baa3 (stable) with Moody’s and BBB- (stable) with Standard & Poor’s.
In order to maintain or realign the capital structure, the Group may adjust the number of dividends paid to shareholders, return capital to
shareholders, issue new shares or sell assets to reduce debt.