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

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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. 96
Euromoney Institutional Investor PLC Annual Report and Accounts 2012 www.euromoneyplc.com Our Performance 19 Financial instruments and risk management continued The following table details the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at the reporting date. The average interest rate is based on the outstanding balances at the end of the financial year: Cash flow hedges US dollar: Receive floating pay fixed Average contracted fixed interest rate 2012 % 2011 % Notional principal amount Fair value Less than 1 year 3.25 3.98 18,578 35,306 (389) (827) 1 to 2 years 2.52 3.25 6,193 19,258 (206) (889) 2 to 5 years – 2.52 – 6,419 – (307) GBP: Receive floating pay fixed Average contracted fixed interest rate 2012 % 2011 % 2012 £000 2011 £000 2012 £000 Notional principal amount Fair value Less than 1 year 2.57 4.46 5,000 15,000 (50) (424) 1 to 2 years – 2.57 – 5,000 – (119) The interest rate swaps settle on a quarterly basis. The floating rate on the interest rate swaps is LIBOR. The group will settle the difference between the fixed and floating interest rate on a net basis. All interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts are designated as cash flow hedges in order to reduce the group’s cash flow exposure resulting from variable interest rates on borrowings. The interest rate swaps and the interest payments on the loan occur simultaneously and the amount deferred in equity is recognised in the Income Statement over the period that the floating rate interest payments on debt impact the Income Statement. As at September 30 2012, the aggregate amount of unrealised interest under swap contracts deferred in the fair value reserve relating to future interest payable is £283,000 (2011: £2,259,000). 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 interest under ineffective swaps still in place at the year end is £362,000 (2011: £307,000) which has been recognised in the Income Statement. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the group. The group seeks to limit interest rate and foreign currency risks described above by the use of financial instruments and as a result has a credit risk from the potential non-performance by the counterparties to these financial instruments, which are unsecured. The amount of this credit risk is normally restricted to the amounts of any hedge gain and not the principal amount being hedged. The group also has a credit exposure to counterparties for the full principal amount of cash and cash equivalents. Credit risks are controlled by monitoring the amounts outstanding with, and the credit quality of, these counterparties. For the group’s cash and cash equivalents these are principally licensed commercial banks and investment banks with strong long-term credit ratings, and for derivative financial instruments with DMGT who have treasury policies in place which do not allow concentrations of risk with individual counterparties and do not allow significant treasury exposures with counterparties which are rated lower than AA. 2012 £000 2011 £000 2012 £000 2011 £000 2011 £000 Notes to the Consolidated Financial Statements Company Accounts Group Accounts Our Governance 97
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