Tesco 2008 Annual Report Download - page 76

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www.tesco.com/annualreport08
Note 20 Financial instruments
Derivatives are used for hedging in the management of exposure to market risks. This enables the optimisation of the overall cost of accessing debt
capital markets, and to mitigate the market riskwhich would otherwise arise from the maturity and other profiles of assets and liabilities.
Hedging policies using derivative financial instruments are further explained below. Derivatives that are held as hedging instruments are formally
designated as hedges as defined in IAS 39. Derivatives may qualify as hedges for accounting purposes as described below.
There is no material impact on the Group Income Statement resulting from hedge ineffectiveness.
Fair value hedges
The Group maintains interest rate and cross-currency swap contracts as fair value hedges of the interest rate and currency risk on fixed rate debt issued by the
Group. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Group Income Statement, together with
any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss on the hedging instrument and hedged
item is recognised in the Group Income Statement within finance income or costs. If the hedge no longer meets the criteria for hedge accounting, the
adjustment to the carrying value of the hedged item is amortised to the Group Income Statement under the effective interest rate method.
A gain of £261m on hedging instruments was recognised during the year, offset by a loss of £261m on hedged items (in 2007, a loss of £13m on hedging
instruments was offset by a gain of £13m on hedged items).
Cash flow hedges
The Group uses forward foreign currency contracts to hedge the cost of future purchases of goods for resale, where those purchases are denominated
in a currency other than the functional currency of the purchasing company. Where these contracts qualify for hedge accounting, mark-to-market gains
and losses are deferred in equity.
The hedging instruments are primarily used to hedge purchases in Euros and US Dollars. The cash flows hedged will occur and will affect the Group
Income Statement within one year of the Balance Sheet date.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing
in equity at that time remains in equity and is recognised when the forecast transaction is recognised in the Group Income Statement. When a forecast
transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the Group Income Statement.
Net investment hedges
The Group uses forward foreign currency contracts, currency denominated borrowings and currency options to hedge the exposure of a proportion of
its non-Sterling denominated assets against changes in value due to changes in foreign exchange rates.
The Group has a South Korean Won denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Samsung Tesco
Co. Limited. This liability has been designated as a net investment hedge of a proportion of the assets of Samsung Tesco Co. Limited.
The Group has a Chinese Yuan denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Hymall. This liability
has been designated as a net investment hedge of a proportion of the assets of Hymall.
Gains and losses accumulated in equity are included in the Group Income Statement on disposal of the overseas operation.
Financial instruments not qualifying for hedge accounting
The Group’s policy is not to use derivatives for trading purposes; however, some derivatives may not qualify for hedge accounting, or are specifically not
designated as a hedge where natural offset is appropriate.
These instruments include caps, collars, interest rate swaps and forward foreign currency contracts. Changes in the fair value of any derivative instruments
that do not qualify for hedge accounting are recognised immediately in the Group Income Statement within finance income or costs.
The Group has a liability relating to the future purchase of the minority shareholding of its subsidiary, dunnhumby Limited. Changes in the value of the
liability are recognised immediately in the Group Income Statement within finance income or costs.
The fair value of derivative financial instruments have been disclosed in the Group Balance Sheet as follows:
2008 2007
Asset Liability Asset Liability
£m £m £m £m
Current 97 (443) 108 (87)
Non-current 216 (322) – (399)
313 (765) 108 (486)
Tesco PLC Annual Report and
Financial Statements 2008
74
Notes to the Group financial statements continued