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G4S Annual Report and Accounts 2011

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Overview Strategic review Performance<br />

Notes to the parent company financial statements continued<br />

(g) Derivative financial instruments<br />

The carrying values of derivative financial instruments at the balance sheet date are presented below:<br />

Assets<br />

<strong>2011</strong><br />

£m<br />

Assets<br />

2010<br />

£m<br />

Liabilities<br />

<strong>2011</strong><br />

£m<br />

Liabilities<br />

2010<br />

£m<br />

Cross currency swaps designated as cash flow hedges 40 39 – –<br />

Interest rate swaps designated as cash flow hedges – – 6 13<br />

Interest rate swaps designated as fair value hedges 77 55 – –<br />

Commodity swaps 3 2 3 3<br />

120 96 9 16<br />

Amounts falling due after more than one year (106) (85) (4) (6)<br />

Amounts falling due within one year 14 11 5 10<br />

Derivative financial instruments are stated at fair value, based upon market prices where available or otherwise on discounted cash flow valuations.<br />

The mark to market valuation of the derivatives has increased by £30m (2010: increase £29m) during the year.<br />

The interest rate, cross currency <strong>and</strong> commodity swaps treated as cash flow hedges have the following maturities:<br />

Assets<br />

<strong>2011</strong><br />

£m<br />

Assets<br />

2010<br />

£m<br />

Liabilities<br />

<strong>2011</strong><br />

£m<br />

Within one year 2 1 5 4<br />

In the second year 10 1 2 8<br />

In the third year – 10 2 3<br />

In the fourth year 23 – – 1<br />

In the fifth year or greater 8 29 – –<br />

Total carrying value 43 41 9 16<br />

Liabilities<br />

2010<br />

£m<br />

Projected settlement of cash flows (including accrued interest) associated with derivatives:<br />

Assets<br />

<strong>2011</strong><br />

£m<br />

Assets<br />

2010<br />

£m<br />

Liabilities<br />

<strong>2011</strong><br />

£m<br />

Within one year 2 1 7 12<br />

In the second year 10 1 3 6<br />

In the third year – 9 2 1<br />

In the fourth year 24 – – –<br />

In the fifth year or greater 9 32 – –<br />

Total cash flows 45 43 12 19<br />

Liabilities<br />

2010<br />

£m<br />

(h) Financial risk<br />

Currency risk <strong>and</strong> forward foreign exchange contracts<br />

The group conducts business in many currencies. The group presents its consolidated financial statements in sterling <strong>and</strong> it is in consequence subject to<br />

foreign exchange risk due to the translation of the results <strong>and</strong> net assets of its foreign subsidiaries. The company therefore hedges a substantial portion of<br />

the group’s exposure to fluctuations in the translation into sterling of its overseas net assets by holding loans in foreign currencies. Translation adjustments<br />

arising on the translation of foreign currency loans are recognised in the profit <strong>and</strong> loss account.<br />

Cross currency swaps with a nominal value of £134m were arranged to hedge the foreign currency risk on US$265m of the second US Private Placement<br />

notes issued in July 2008, effectively fixing the sterling value on this portion of debt at an exchange rate of 1.9750.<br />

Interest rate risk <strong>and</strong> interest rate swaps<br />

Borrowing at floating rates as described in note 29 to the consolidated financial statements exposes the group to cash flow interest rate risk, which the<br />

company manages within policy limits approved by the directors. Interest rate swaps <strong>and</strong>, to a limited extent, forward rate agreements are utilised to fix the<br />

interest rate on a proportion of borrowings on a reducing scale over forward periods up to a maximum of five years. At 31 December <strong>2011</strong> the nominal<br />

value of such contracts was £71m (in respect of US dollar) (2010: £134m) <strong>and</strong> £121m (in respect of euro) (2010: £167m), their weighted average interest<br />

rate was 4.8% (US dollar) (2010: 5.0%) <strong>and</strong> 3.6% (euro) (2010: 3.7 %), <strong>and</strong> their weighted average period to maturity was one year <strong>and</strong> two months. All the<br />

interest rate hedging instruments are designated <strong>and</strong> fully effective as cash flow hedges <strong>and</strong> movements in their fair value have been deferred in equity.<br />

130<br />

<strong>G4S</strong> plc<br />

<strong>Annual</strong> <strong>Report</strong> <strong>and</strong> <strong>Accounts</strong> <strong>2011</strong>

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