Annual Report & Accounts 2012 - Euromoney Institutional Investor ...

Euromoney Institutional Investor PLC Annual Report and Accounts 2012
www.euromoneyplc.com
Notes to the Consolidated
Financial Statements continued
19 Financial instruments and risk management continued
As at September 30 2012, the aggregate amount of unrealised gains under forward foreign exchange contracts deferred in the fair value reserve
relating to future revenue transactions is £2,759,000 (2011: losses £4,003,000). It is anticipated that the transactions will take place over the next
18 months at which stage the amount deferred in equity will be released to the Income Statement.
As at September 30 2012, the aggregate amount of unrealised losses under ineffective cash flow hedges still in place at the year end is £nil (2011:
£332,000), which have been recognised in the Income Statement.
iii) Interest rate risk
The group’s borrowings are in both sterling and US dollars with the related interest tied to LIBOR. This results in the group’s interest charge being at risk
to fluctuations in interest rates. It is the group’s policy to hedge approximately 80% of its interest exposure, converting its floating rate debt into fixed
debt by means of interest rate swaps. The maturity dates are spread in order to avoid interest rate basis risk and also to negate short-term changes in
interest rates. The predictability of interest costs is deemed to be more important than the possible opportunity cost foregone of achieving lower interest
rates and this hedging strategy has the effect of spreading the group’s exposure to fluctuations arising from changes in interest rates and hence protects
the group’s interest charge against sudden increases in rates but also prevents the group from benefiting immediately from falls in rates.
The group’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk section on page 98.
Interest rate sensitivity analysis
The sensitivity analysis below has been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the
balance sheet date. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding at the balance sheet date was
outstanding for the whole year. A 100 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel
and represents the directors’ assessment of a reasonably possible change in interest rates at the reporting date.
If interest rates had been 100 basis points higher or lower and all other variables were held constant, the group’s:
● Profit for the year ended September 30 2012 would decrease or increase by £338,000 (2011: £121,000). This is mainly attributable to the group’s
exposure to interest rates on its variable rate borrowings; and
● Other equity reserves would decrease or increase by £561,000 (2011: £934,000) mainly as a result of the changes in the fair value of interest rate
swaps.
The group’s sensitivity to interest rates has not materially changed during the period due to the group benefiting from similar levels of fixed rates.
Interest rate swap contracts
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 interest rates on the fair value of issued fixed rate debt
and the cash flow exposures on the issued variable rate debt. The fair value of interest rate swaps at the reporting date is determined by discounting
the future cash flows using the yield curves at the reporting date and the credit risk inherent in the contract, and is disclosed below.
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