Section image

Cherries
oil on canvas
22 x 20 in
1981

Penny Machines
oil on canvas
23¾ x 29¾ in
1961

Stack of Books
oil on canvas
30 x 24 in
n.d.

Seven Suckers
oil on canvas
19 x 23 in
1970

Twin Jackpots
oil on canvas
30 x 46 in
1962

Ties
oil on canvas
20 x 26 in
1980

Cake Slices
oil on canvas
20 x 16 in
n.d.

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 2009, the fair value of the Group’s currency derivatives is estimated to be a net liability of approximately £3.1 million (2008: £14.2 million). These amounts are based on market values of equivalent instruments at the balance sheet date, comprising £79.6 million (2008: £25.8 million) assets included in trade and other receivables and £82.7 million (2008: £40.0 million) liabilities included in trade and other payables. The amounts charged to and deferred in equity during the year for currency derivatives that are designated and effective hedges amounts of £111.1 million (2008: £293.3 million) for net investment hedges and £60.5 million (2008: £235.9 million) for cash flow hedges.

Changes in the fair value relating to the ineffective portion of the currency derivatives amounted to a gain of £3.3 million (2008: gain of £2.7 million, 2007: charge of £7.0 million) which is included in the revaluation of financial instruments for the year. This gain resulted from a £53.9 million gain on hedging instruments and a £50.6 million loss 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 £309.4 million (2008: £965.8 million). The Group estimates the fair value of these contracts is £4.6 million (2008: £1.7 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 EURIBOR 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%.

A contract with a nominal value of $45 million has fixed interest receipts averaging 6.28% until on average July 2013 and has floating rate payments averaging LIBOR plus 0.59%.

The fair value of interest rate swaps entered into at 31 December 2009 is estimated to be a net asset of approximately £103.0 million (2008: £78.2 million). These amounts are based on market values of equivalent instruments at the balance sheet date, comprising £103.2 million (2008: £124.7 million) assets included in trade and other receivables and £0.2 million (2008: £46.5 million) liabilities included in trade and other payables.

Changes in the fair value relating to the ineffective portion of interest rate swaps amounted to a gain of £11.7 million (2008: charge of £13.0 million, 2007: charge of £0.1 million) which is included in the revaluation of financial instruments for the year. This charge resulted from a £22.1 million loss on hedging instruments and a £33.8 million gain 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 &
receiv-
ables
Available
for sale
Amor-
tised
cost
Carrying
value
  £m £m £m £m £m £m
2009            
Other investments 294.6 294.6
Cash and short-term deposits 1,666.7 1,666.7
Bank overdrafts and loans (720.7) (720.7)
Bonds and bank loans (3,586.4) (3,586.4)
Trade and other receivables: amounts falling due within one year 6,011.3 6,011.3
Trade and other receivables: amounts falling due after more than one year 71.6 71.6
Trade and other payables: amounts falling due within one year (6,482.6) (6,482.6)
Trade and other payables: amounts falling due after more than one year (29.2) (29.2)
Derivative assets 182.8 5.3 188.1
Derivative liabilities (82.9) (0.7) (83.6)
Liabilities in respect of put options (168.2) (168.2)
  99.9 (163.6) 7,749.6 294.6 (10,818.9) (2,838.4)
  Derivatives in
designated
hedge
relationships
Held for
trading
Loans &
receiv-
ables
Available
for sale
Amor-
tised
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 due 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)

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable:

Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);

Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

  Level 1

£m
Level 2

£m
Level 3

£m
Carrying
value
£m
2009        
Derivatives in designated hedge relationships        
Derivative assets 182.8 182.8
Derivative liabilities (82.9) (82.9)
Held for trading        
Derivative assets 5.3 5.3
Derivative liabilities (0.7) (0.7)
Liabilities in respect of put options (168.2) (168.2)
Available for sale        
Other investments 18.4 276.2 294.6
  18.4 104.5 108.0 230.9
Reconciliation of level 3 fair value measurements:
  Liabilities in
respect of
put options
£m
 Other
investments
£m
 Carrying
value
£m
1 January 2009 (122.1) 292.8 170.7
Gains/(losses) recognised in the income statement 15.3 (11.1) 4.2
Losses recognised in other comprehensive income (15.1) (15.1)
Exchange differences 2.5 (26.0) (23.5)
Additions (78.3) 53.7 (24.6)
Disposals (18.1) (18.1)
Settlements 14.4 14.4
31 December 2009 (168.2) 276.2 108.0

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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