full_annual_report_2014

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150 Vodafone Group Plc Annual Report 2014 Notes to the consolidated financial statements (continued) 23. Capital and financial risk management (continued) Market risk Interest rate management Under the Group’s interest rate management policy, interest rates on monetary assets and liabilities denominated in euros, US dollars and sterling are maintained on a floating rate basis except for periods up to six years where interest rate fixing has to be undertaken in accordance with treasury policy. Where assets and liabilities are denominated in other currencies interest rates may also be fixed. In addition, fixing is undertaken for longer periods when interest rates are statistically low. For each one hundred basis point fall or rise in market interest rates for all currencies in which the Group had borrowings at 31 March 2014 there would be a reduction or increase in profit before tax by approximately £42 million (2013: increase or reduce by £144 million) including mark-tomarket revaluations of interest rate and other derivatives and the potential interest on outstanding tax issues. There would be no material impact on equity. Foreign exchange management As Vodafone’s primary listing is on the London Stock Exchange its share price is quoted in sterling. Since the sterling share price represents the value of its future multi-currency cash flows, principally in euro, South African rand, Indian rupee and sterling, the Group maintains the currency of debt and interest charges in proportion to its expected future principal multi-currency cash flows and has a policy to hedge external foreign exchange risks on transactions denominated in other currencies above certain de minimis levels. As the Group’s future cash flows are increasingly likely to be derived from emerging markets it is likely that a greater proportion of debt in emerging market currencies will be drawn. The disposal of our US Group in February 2014 necessitated a restructuring of the Group’s outstanding US dollar debt, which was achieved via i) the repayment of certain US dollar debt obligations and ii) the use of cross currency swaps to eliminate the US dollar currency risk on certain remaining US dollar debt items. Prior to the disposal date a significant proportion of the Group’s future value was derived from its US assets. Going forward the Group will only hold US dollar debt to hedge future US dollar receipts, which primarily consist of floating rate notes as issued by Verizon Communications, received as part of the disposal consideration. At 31 March 2014, 164% of net debt was denominated in currencies other than sterling (96% euro, 37% India rupee 19% US dollar and 12% other) while 64% of net debt had been purchased forward in sterling in anticipation of sterling denominated shareholder returns via dividends. This allows euro, US dollar and other debt to be serviced in proportion to expected future cash flows and therefore provides a partial hedge against income statement translation exposure, as interest costs will be denominated in foreign currencies. Under the Group’s foreign exchange management policy, foreign exchange transaction exposure in Group companies is generally maintained at the lower of €5 million per currency per month or €15 million per currency over a six month period. The Group recognises foreign exchange movements in equity for the translation of net investment hedging instruments and balances treated as investments in foreign operations. However, there is no net impact on equity for exchange rate movements on net investment hedging instruments as there would be an offset in the currency translation of the foreign operation. The following table details the Group’s sensitivity of the Group’s adjusted operating profit to a strengthening of the Group’s major currency in which it transacts. The percentage movement applied to the currency is based on the average movements in the previous three annual reporting periods. Amounts are calculated by retranslating the operating profit of each entity whose functional currency is euro. 2014 £m Euro 3% change – Operating profit 1 60 Note: 1 Operating profit before impairment losses and other income and expense. At 31 March 2013, sensitivity of the Group’s operating profit was analysed for a strengthening of the euro by 3% and the US dollar by 4%, which represented movements of £106 million and £257 million respectively. Equity risk The Group has equity investments, which are subject to equity risk. See note 13 “Other investments” for further details.
Overview Strategy review Performance Governance Financials Additional information 151 Fair value of financial instruments The table below sets out the valuation basis 1 of financial instruments held at fair value by the Group at 31 March 2014. Level 1 2 Level 2 3 Total Restated Restated Restated 2014 2013 2014 2013 2014 2013 £m £m £m £m £m £m Financial assets: Fair value through the income statement (held for trading) – – 3,792 4,836 3,792 4,836 Derivative financial instruments: Interest rate swaps – – 1,871 2,625 1,871 2,625 Cross currency interest rate swaps – – 504 319 504 319 Foreign exchange contracts – – 68 88 68 88 Interest rate futures – – 13 52 13 52 – – 6,248 7,920 6,248 7,920 Financial investments available-for-sale: Listed equity securities 4 6 3 – – 6 3 Unlisted equity securities 4 – – 154 498 154 498 6 3 154 498 160 501 6 3 6,402 8,418 6,408 8,421 Financial liabilities: Derivative financial instruments: Interest rate swaps – – 635 1,060 635 1,057 Cross currency interest rate swaps – – 217 – 217 – Foreign exchange contracts – – 29 44 29 44 – – 881 1,104 881 1,101 Notes: 1 There were no changes made during the year to valuation methods or the processes to determine classification and no transfers were made between the levels in the fair value hierarchy. 2 Level 1 classification comprises financial instruments where fair value is determined by unadjusted quoted prices in active markets for identical assets or liabilities. 3 Level 2 classification comprises where fair value is determined from inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Fair values for unlisted equity securities are derived from observable quoted market prices for similar items. Derivative financial instrument fair values are present values determined from future cash flows discounted at rates derived from market sourced data. 4 Details of listed and unlisted equity securities are included in note 13 “Other Investments”. Offsetting of financial assets and financial liabilities Financial assets and liabilities included in the table above do not meet the required criteria to offset in the balance sheet but derivative financial assets at 31 March of up to £678 million (2013: £857 million) would be settled net in certain circumstances under ISDA (International Swaps and Derivatives Association) agreements where each party has the option to settle amounts on a net basis in the event of default from the other. Under the Group’s collateral support agreements described above, under “credit risk” collateral has been posted of £130 million (2013: £117 million) and received of £1,185 million (2013: £1,151 million). Collateral may be offset and net settled against derivative financial instruments in the event of default by either party. The aforementioned collateral balances are recorded in “other short-term investments” or “short-term debt” respectively. 24. Directors and key management compensation This note details the total amounts earned by the Company’s directors and members of the Executive Committee. Directors Aggregate emoluments of the directors of the Company were as follows: £m £m £m Salaries and fees 4 5 5 Incentive schemes 1 2 2 3 Other benefits 2 1 1 1 7 8 9 Notes: 1 Amounts payable under incentive schemes have been restated to exclude £5 million and £1 million of cash in lieu of long-term incentive scheme dividends for the years ended 31 March 2013 and 31 March 2012, respectively. 2 Includes the value of the cash allowance taken by some individuals in lieu of pension contributions. The aggregate gross pre-tax gain made on the exercise of share options in the year ended 31 March 2014 by directors who served during the year was £4 million (2013: £2 million; 2012: £nil). 2014 Restated 2013 Restated 2012
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