Notes 21-25

25. Financial instruments

Currency derivatives

The Group utilises currency derivatives to hedge significant future transactions and cash flows and the exchange risk arising on translation of the Group’s investments in foreign operations. The Group is a party to a variety of foreign currency derivatives in the management of its exchange rate exposures. The instruments purchased are primarily denominated in the currencies of the Group’s principal markets.

At 31 December 2008, the fair value of the Group’s currency derivatives is estimated to be a net liability of approximately £14.2 million (2007: £7.2 million). These amounts are based on market values of equivalent instruments at the balance sheet date, comprising £25.8 million (2007: £50.3 million) assets included in trade and other receivables and £40.0 million (2007: £57.5 million) liabilities included in trade and other payables. The fair value movement of currency derivatives during the year that are designated and effective as net investment hedges amounts to £293.3 million (2007: £44.7 million) and has been charged to and deferred in equity.

Changes in the fair value relating to the ineffective portion of the currency derivatives amounted to a gain of £2.7 million (2007: charge of £7.0 million, 2006: charge of £1.3 million) which is included in finance costs for the year. This gain resulted from a £54.7 million loss on hedging instruments and a £57.4 million gain on hedged items.

The Group currently designates its foreign currency-denominated debt and cross-currency swaps as hedging instruments against the currency risk associated with the translation of its foreign operations.

At the balance sheet date, the total nominal amount of outstanding forward foreign exchange contracts not designated as hedges was £965.8 million (2007: £412.6 million). The Group estimates the fair value of these contracts is £1.7 million (2007: £1.5 million).

These arrangements are designed to address significant exchange exposure and are renewed on a revolving basis as required.

Interest rate swaps

The Group uses interest rate swaps as hedging instruments in fair value hedges to manage its exposure to interest rate movements on its borrowings. Contracts with nominal values of €600 million have fixed interest receipts at 4.38% up until December 2013 and have floating interest payments averaging EURIBOR plus 0.56%. Contracts with a nominal value of €500 million have fixed interest receipts of 5.25% up until January 2015 and have floating interest payments averaging EURIBOR plus 0.80%. Contracts with a nominal value of €100 million have fixed interest payments of 5.56% until June 2014 and have floating rate receipts averaging LIBOR plus 0.96%.

Contracts with a nominal value of £200 million have fixed interest receipts of 6.00% up until April 2017 and have floating rate payments averaging LIBOR plus 0.64%. Contracts with a nominal value of £25 million have fixed interest receipts of 6.51% up until July 2017 and floating rate payments averaging LIBOR plus 0.67%.

Contracts with a nominal value of $140 million have fixed interest receipts averaging 6.36% up until September 2014 and have a floating rate payments averaging LIBOR plus 0.62%. Contracts with a nominal value of $30 million have fixed payments averaging 5.48% up until July 2009 and have floating interest receipts of LIBOR plus 1.35%

The fair value of interest rate swaps entered into at 31 December 2008 is estimated to be a net asset of approximately £78.2 million (2007: £0.4 million). These amounts are based on market values of equivalent instruments at the balance sheet date, comprising £124.7 million (2007: £22.7 million) assets included in trade and other receivables and £46.5 million (2007: £22.3 million) liabilities included in trade and other payables.

Changes in the fair value relating to the ineffective portion of interest rate swaps amounted to £13.0 million (2007: £0.1 million, 2006: £1.3 million) which has been charged to finance costs for the year. This charge resulted from a £83.8 million gain on hedging instruments and a £96.8 million loss on hedged items.

An analysis of the Group’s financial assets and liabilities by accounting classification is set out below:


 
 
 
Derivatives in
designated
hedge
relationships

 
Held for
trading

 
Loans &
receivables

 
Available
for sale

 
Amortised
cost

 
Carrying
value
  £m £m £m £m £m £m
2008
Other investments 310.9 310.9
Cash and short–term deposits 2,572.5 2,572.5
Bank overdrafts and loans (1,640.8) (1,640.8)
Bonds and bank loans (3,999.3) (3,999.3)
Trade and other receivables:
amounts falling due within
one year



6,605.8



6,605.8
Trade and other receivables:
amounts falling due after
more than one year



68.3



68.3
Trade and other payables:
amounts falling due within
one year





(7,171.1)

(7,171.1)
Trade and other payables:
amounts falling after more
than one year





(16.7)

(16.7)
Derivative assets 150.5 150.5
Derivative liabilities (86.5) (86.5)
Liabilities in respect of
put options
(122.1) (122.1)
  64.0 (122.1) 9,246.6 310.9 (12,827.9) (3,328.5)

 
 
 
Derivatives in
designated
hedge
relationships

 
Held for
trading

 
Loans &
receivables

 
Available
for sale

 
Amortised
cost

 
Carrying
value
  £m £m £m £m £m £m
2007
Other investments 268.6 268.6
Cash and short-term deposits 2,040.2 2,040.2
Bank overdrafts and loans (1,585.9) (1,585.9)
Bonds and bank loans (1,740.0) (1,740.0)
Trade and other receivables:
amounts falling due within
one year



5,219.1



5,219.1
Trade and other receivables:
amounts falling due after
more than one year



72.6



72.6
Trade and other payables:
amounts falling due within
one year





(5,883.0)

(5,883.0)
Trade and other payables:
amounts falling after
more than one year





(12.6)

(12.6)
Derivative assets 73.0 5.5 78.5
Derivative liabilities (79.8) (79.8)
Share repurchases –
close period commitments
(64.8)       (64.8)
Liabilities in respect of
put options
(82.0) (82.0)
  (6.8) (141.3) 7,331.9 268.6 (9,221.5) (1,769.1)

The fair value of financial assets and liabilities are based on quoted market prices where available. Where the market value is not available, the Group has estimated relevant fair values on the basis of publicly available information from outside sources or on the basis of discounted cashflow models where appropriate.

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