Annual Report and Accounts 2012 - Scapa

Notes on the Accounts continued
23. Derivative financial instruments
The Group’s activities expose it to a variety of financial risks: foreign exchange risk, interest-rate risk, credit risk, liquidity risk and
capital risk. The Group’s overall risk management procedures focus on the unpredictability of financial markets and seek to minimise
potential adverse effects on the Group’s financial performance. Risk management is carried out by the Group finance department (in
close co-operation with the operating units) under policies approved by the Board of Directors.
– Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with
respect to the US Dollar, Canadian Dollar and the Euro. Foreign exchange risk arises from future commercial transactions, recognised
assets and liabilities and net investments in foreign operations. As the Group has certain investments in foreign operations, these net
assets are exposed to foreign currency translation risk.
To manage its foreign exchange risk the Group uses foreign currency bank balances, and makes some use of foreign currency
forward contracts to avoid short-term fluctuations in currencies. In addition, purchases of large items of capital in foreign currency
are covered by forward contracts at the point of authorisation.
At the year end the Group had forward contracts to sell Canadian Dollars into US Dollars and to sell Euros into Sterling. These
contracts are valued based on year end exchange rate. An analysis of the sensitivity of the year end position relative to these forward
contracts is provided below.
At 31 March 2012, if the Canadian Dollar had closed 10% weaker/stronger against the US Dollar (with all other variables held
constant), pre-tax profit would have been unaffected because of the low value of forward contracts in place at the year end.
At 31 March 2012, if Sterling had closed 10% weaker/stronger against the Euro (with all other variables held constant), pre-tax profit
would have been reduced/increased by £0.2m owing to the effects of forward contracts in place at the year end.
– Forward foreign exchange contracts
It is the policy of the Group to enter into forward foreign exchange contracts to cover specific foreign currency payments and receipts.
The contracts are primarily denominated in the currencies of the Group’s principal markets. Fair value is determined using quoted
forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts.
60 Scapa Group plc Annual Report and Accounts 2012
Notional amount
2012
£m
Fair value
2012
£m
Notional amount
2011
£m
Fair value
2011
£m
Current
Forward foreign exchange contracts 2.9 – 4.0 0.1
Hedge accounting has not been applied to these derivative financial instruments.
– Interest-rate risk
The Group is exposed to interest rate risk as it has borrowings at floating rates. Interest rate risk is evaluated periodically to consider
interest rate views and defined risk appetite; to seek to ensure reasonable economic strategies are applied, by either positioning the
Balance Sheet or protecting interest expense through different interest rate cycles. Deposit risk is managed by spreading deposits
across high credit rated institutions, and capping the maximum deposit with an institution at one time.
The Group entered into an interest rate swap instrument during the year. This instrument enabled the Group to mitigate interest rate
fluctuation risk. Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate
interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing
the cash flow exposures on the issued variable rate debt held. The fair value of the interest rate swaps at the reporting date is
determined by discounting the future cash flows using the curves at the reporting date and the credit risk inherent in the contracts.
The following table details the notional principal amounts and remaining terms of interest rate swap contracts outstanding at the
reporting date:
Trade date Effective date Termination date Currency
Notional amount
2012
£m
Fair value
2012
£m
Fixed rate
%
Outstanding receive fixed
pay floating contracts 25 January 2012 8 March 2012 8 March 2015 USD 18.8 – 0.78%
The fair value of the interest rate swaps at 31 March 2012 was determined by discounting the future cash flows using yield curve data
at the reporting date. The interest rate swaps settle on a quarterly basis. The Group will settle the difference between the fixed and
floating interest rate on a net basis. Hedge accounting has not been applied to these derivative instruments.