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82 Notes to the consolidated fi nancial statements 23 Derivatives The net fair value of derivatives by hedge designation at the balance sheet date is: Kingfi sher plc Annual Report and Accounts 2009/10 £ millions 2009/10 2008/09 Fair value hedges 116 180 Cash fl ow hedges 2 20 Net investment hedges (28) (75) Non-designated hedges (57) 48 33 173 Non-current assets 81 180 Current assets 24 107 Current liabilities (25) (38) Non-current liabilities (47) (76) 33 173 The fair values are calculated by discounting future cash fl ows arising from the instruments and adjusting for credit risk. These fair value measurements are all made using observable market rates of interest, foreign exchange and credit risk and are therefore classifi ed as ‘level 2’ in the IFRS 7, ‘Financial instruments: Disclosures’, fair value hierarchy. At 30 January 2010 net derivative assets included in net debt amount to £20m (2008/09: £135m). Fair value hedges Interest rate swap contracts convert fi xed rate debt issued under the Group’s MTN programme and the US Private Placement to fl oating rate liabilities. At 30 January 2010 the Sterling equivalent amount of such contracts is £984m (2008/09: £1,391m). €307m of a €550m interest rate swap and £65m of a £150m interest rate swap have been cancelled in the year. Cash fl ow hedges Forward foreign exchange contracts hedge currency exposures of forecast inventory purchases. At 30 January 2010 the Sterling equivalent amount of such contracts is £264m (2008/09: £181m). The associated fair value gains and losses will be transferred to inventories when the purchases occur during the next 12 months. Gains of £5m (2008/09: £10m gains) have been transferred to inventories for contracts which matured during the year. Swap contracts to hedge the cost of diesel oil for use in the business were entered into during the prior year. At 30 January 2010 the Sterling equivalent amount of such contracts is £nil (2008/09: £4m). Net investment hedges Cross-currency interest rate swaps hedge currency exposures of overseas investments. At 30 January 2010 the Sterling equivalent amount of such contracts is £138m (2008/09: £373m). Non-designated hedges The Group has entered into certain derivatives to provide a hedge against fl uctuations in the income statement arising from balance sheet positions. At 30 January 2010 the Sterling equivalent amount of such contracts is £1,100m (2008/09: £830m). These have not been accounted for as hedges, since the fair value movements of the derivatives in the income statement offset the retranslation of the balance sheet positions. These include a cross-currrency swap, an interest rate swap and short term foreign exchange contracts. A €330m cross-currency swap has matured in the year. The Group has reviewed all signifi cant contracts for embedded derivatives and none of these contracts has any embedded derivatives which are not closely related to the host contract and therefore the Group is not required to account for these separately.
Kingfi sher plc Annual Report and Accounts 2009/10 83 24 Financial risk management Kingfi sher’s treasury function has primary responsibility for managing certain fi nancial risks to which the Group is exposed. The Board reviews the levels of exposure regularly and approves treasury policies covering the use of fi nancial instruments required to manage these risks. Kingfi sher’s treasury function is not run as a profi t centre and does not enter into any transactions for speculative purposes. In the normal course of business the Group uses fi nancial instruments including derivatives. The main types of fi nancial instruments used are Medium Term Notes and other fi xed term debt, bank loans and deposits, money market funds, interest rate swaps, commodity swaps and foreign exchange contracts. Interest rate risk Borrowings arranged at fl oating rates of interest expose the Group to cash fl ow interest rate risk, whereas those arranged at fi xed rates of interest expose the Group to fair value interest rate risk. The Group manages its interest rate risk by entering into certain interest rate derivative contracts which modify the interest rate payable on the Group’s underlying debt instruments, principally the Medium Term Notes and other fi xed term debt. Currency risk The Group’s principal currency exposures are to the Euro, US Dollar, Polish Zloty and Chinese Renminbi. The Euro, Polish Zloty and Chinese Renminbi exposures are operational and arise through the ownership of retail businesses in France, Spain, Ireland, Poland and China. Balance sheet Euro translation exposure is substantially hedged by maintaining a proportion of the Group’s debt in Euro, whilst Chinese Renminbi balance sheet translation exposure is partly hedged by local debt in China. It is the Group’s policy not to hedge the translation of overseas earnings (primarily Euro) into Sterling. In addition, the Group has signifi cant transaction exposure arising on the purchase of inventories denominated in US Dollars, which it hedges using forward foreign exchange contracts. Under Group policies, the Group companies are required to hedge committed inventory purchases and a proportion of forecast inventory purchases arising in the next 12 months, and this is monitored on an ongoing basis. Kingfi sher’s policy is to manage the interest rate and currency profi le of its issued debt using derivative contracts. The effect of these contracts on the Group’s net debt is as follows: Sterling Euro US Dollar Other £ millions Fixed Floating Fixed Floating Fixed Floating Fixed Floating Total At 30 January 2010 Net debt before fair value adjustments and fi nancing derivatives (371) 357 (541) 536 (289) 32 57 19 (200) Fair value adjustments to net debt (22) – (11) – (37) – – – (70) Financing derivatives 353 (1,249) 394 (31) 327 129 – 97 20 Net debt (40) (892) (158) 505 1 161 57 116 (250) At 31 January 2009 Net debt before fair value adjustments and fi nancing derivatives (438) 313 (977) 472 (321) 42 (137) 13 (1,033) Fair value adjustments to net debt – (7) – (42) – (57) – – (106) Financing derivatives 400 (1,053) 667 (469) 324 121 – 145 135 Net debt (38) (747) (310) (39) 3 106 (137) 158 (1,004) Financial instruments principally affected by interest rate and currency risks, being the signifi cant market risks impacting Kingfi sher, are borrowings, deposits and derivatives. The following analysis illustrates the sensitivity of net fi nance costs (refl ecting the impact on profi t) and derivative cash fl ow hedges (refl ecting the impact on other comprehensive income) to changes in interest rates and foreign exchange rates. 2009/10 2008/09 Net fi nance Net fi nance costs costs Income/ Income/ £ millions (costs) (costs) Effect of 1% rise in interest rates on net fi nance costs Sterling (9) (7) Euro 5 – US Dollar 2 1 Polish Zloty 1 (1) Chinese Renminbi – (1) Due to the Group’s hedging arrangements and offsetting foreign currency assets and liabilities, there is no signifi cant impact on profi t from the retranslation of fi nancial instruments.
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