Year ended 31 July 2006
20. Derivative financial instruments
| Current assets | 2006
£m |
2005
£m |
|---|---|---|
| Interest rate swaps | 10 | 2 |
| Currency swaps: at fair value through profit and loss | – | 1 |
| Derivative financial assets | 10 | 3 |
| Current liabilities | 2006
£m |
2005
£m |
|---|---|---|
| Interest rate swaps | (27) | (2) |
| Currency swaps: net investment hedge | (2) | (12) |
| Derivative financial liabilities | (29) | (14) |
Interest rate swaps
The Group uses interest rate swaps to manage its exposure to interest rate movements on its borrowings. The fair value of interest rate swaps is estimated on the basis of the market values of equivalent instruments at the balance sheet date.
The Group’s bank borrowings generally attract variable interest rates based on 6 month LIBOR. Certain interest rate swaps are designated and effective as cash flow hedges, with the valuation gains being deferred in equity until realised.
| Hedge of interest rate cash flows | 2006
£m |
2005
£m |
|---|---|---|
| At 1 August | – | (1) |
| Valuation gains on effective hedges credited to equity | 9 | 1 |
| Valuation losses charged to income statement | (1) | – |
| At 31 July | 8 | – |
The Group’s private placement borrowings are at fixed rates. Certain interest rate swaps are designated as hedges of the fair values of these borrowings. The movement in fair value of these interest rate swaps has been analysed into a proportion that is effective as a hedge and a proportion that is ineffective: both portions have been charged to the income statement with the effective portion offsetting the change in fair value of the hedged borrowings. The ineffective portion was less than £1 million.
| Hedge of fair value of fixed interest borrowings | 2006
£m |
2005
£m |
|---|---|---|
| At 1 August | – | – |
| Valuation losses charged to income statement | (26) | – |
| Exchange | 1 | – |
| At 31 July | (25) | – |
Outstanding interest rate swap contracts at 31 July 2006 comprised fixed interest payable on notional principal of US$650 million, €770 million and £7 million (2005: US$575 million and €785 million) and fixed interest receivable on notional principal of US$1,079 million. The contracts expire between September 2006 and November 2020 (2005: August 2005 and August 2009) and the gains deferred in equity will reverse in the income statement over that period. The fixed interest rates vary between 2.313% and 5.415% (2005: 2.0375% and 4.3275%).
Currency swaps
The Group uses currency swaps either to obtain the optimum return on its surplus funds or to hedge cash flows in respect of committed transactions. The fair value of currency swaps has been estimated as the cost of closing out the contracts using market prices at the balance sheet date.
At the balance sheet date the Group had entered into certain short-term currency swaps amounting to assets of US$3 million (2005: assets of €130 million, C$33 million and CHF 22 million) and liabilities of £2 million (2005: £4 million, US$53 million and C$170 million) which were held at fair value through the income statement.
| At fair value through income statement | 2006
£m |
2005
£m |
|---|---|---|
| At 1 August | 1 | – |
| Valuation gains charged to income statement | – | 1 |
| Transferred to ‘net investment in overseas operations’ | (1) | – |
| At 31 July | – | 1 |
At the balance sheet date the Group had entered into certain short-term currency swaps amounting to assets of US$627 million, €222 million and CHF 22 million (2005: asset of £287 million) and liabilities of £419 million and C$169 million (2005: liabilities of US$525 million) which were designated and effective as hedges of net investments in overseas operations. Valuation gains have been deferred in equity.
| Hedge of net investment in overseas operations | 2006
£m |
2005
£m |
|---|---|---|
| At 1 August | (12) | – |
| Transferred from ‘at fair value through income statement’ | 1 | – |
| Cash settlements in the period | 4 | – |
| Valuation gains/(losses) on effective hedges credited/(charged) to equity | 5 | (12) |
| At 31 July | (2) | (12) |
