G4S Annual Report and Accounts 2011

Governance Financial statements Shareholder information
32 Derivative financial instruments
The carrying values of derivative financial instruments at the balance sheet date are presented below:
Assets
2011
£m
Assets
2010
£m
Liabilities
2011
£m
Cross currency swaps designated as cash flow hedges 40 39 – –
Interest rate swaps designated as cash flow hedges – – 9 16
Interest rate swaps designated as fair value hedges 77 55 – –
Commodity swaps 3 2 – –
Liabilities
2010
£m
120 96 9 16
Less: Non-current portion (106) (85) (4) (7)
Current portion 14 11 5 9
Derivative financial instruments are stated at fair value, measured using techniques consistent with Level 1 of the valuation hierarchy (see Note 3(d)).
The source of the market prices is Bloomberg and in addition the third party relationship counterparty banks. The relevant currency yield curve is used to
forecast the floating rate cash flows anticipated under the instrument which are discounted back to the balance sheet date. This value is compared to the
original transaction value giving a fair value of the instrument at the balance sheet date.
The mark to market valuation of the derivatives has risen by £30m during the year.
The interest rate, cross currency and commodity swaps treated as cash flow hedges have the following maturities:
Assets
2011
£m
Assets
2010
£m
Liabilities
2011
£m
Within one year 2 1 3 3
In the second year 10 1 2 7
In the third year – 10 2 4
In the fourth year 23 – 1 1
In the fifth year or greater 8 29 1 1
Total carrying value 43 41 9 16
Liabilities
2010
£m
Projected settlement of cash flows (including accrued interest) associated with derivatives:
Assets
2011
£m
Assets
2010
£m
Liabilities
2011
£m
Within one year 2 1 7 11
In the second year 10 1 2 5
In the third year – 9 2 1
In the fourth year 24 – – 1
In the fifth year or greater 9 32 1 1
Total cash flows 45 43 12 19
Liabilities
2010
£m
33 Financial risk
Capital management
The group’s capital management objective is to ensure that the businesses within it can continue and develop as going concerns whilst returns
to stakeholders are maximised. The group believes that these returns are maximised when the group’s Weighted Average Cost of Capital (WACC)
is minimised and that this is the case when the group has the characteristics of an investment grade BBB rated entity. The group therefore aims generally
to maintain its net debt expressed as a multiple of cash generated from operations broadly within a range corresponding to those of BBB rated entities.
On 9 March 2009 the group obtained a BBB stable credit rating from Standard & Poor’s, which has been retained.
The group has a range of return on capital targets in respect of potential acquisitions, depending upon their size. Most proposals for “bolt-on” acquisitions
must demonstrate a post-tax return of at least 12.5% on the capital investment within three years. Medium-sized acquisitions are required to return a
minimum of 10% within this timeframe and relatively rare, large, strategic acquisitions a minimum equal to the group’s WACC. The group’s calculation of its
post-tax WACC at 31 December 2011 was 7.3%.
The group monitors the financial performance of acquired businesses during the years following acquisition against the return targets. In addition, the group
monitors the Return on Net Assets (RONA) of all its businesses on a monthly basis. The group regards RONA as a measure of operational performance
and therefore calculates it as EBITA divided by net assets excluding goodwill, tax, dividends payable and retirement benefit obligations.
The group has no current intention to commence a share buy-back plan. The group operates a programme to purchase its own shares on the market
on a regular basis so as to provide a pool of shares from which to satisfy share awards to employees as the awards vest.
The group is not subject to externally-imposed capital requirements and there were no changes in the group’s approach to capital management during
the year.
G4S plc
Annual Report and Accounts 2011
107