G4S Annual Report and Accounts 2011

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Overview Strategic review Performance Notes to the parent company financial statements continued (g) 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 Liabilities 2010 £m Cross currency swaps designated as cash flow hedges 40 39 – – Interest rate swaps designated as cash flow hedges – – 6 13 Interest rate swaps designated as fair value hedges 77 55 – – Commodity swaps 3 2 3 3 120 96 9 16 Amounts falling due after more than one year (106) (85) (4) (6) Amounts falling due within one year 14 11 5 10 Derivative financial instruments are stated at fair value, based upon market prices where available or otherwise on discounted cash flow valuations. The mark to market valuation of the derivatives has increased by £30m (2010: increase £29m) 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 5 4 In the second year 10 1 2 8 In the third year – 10 2 3 In the fourth year 23 – – 1 In the fifth year or greater 8 29 – – 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 12 In the second year 10 1 3 6 In the third year – 9 2 1 In the fourth year 24 – – – In the fifth year or greater 9 32 – – Total cash flows 45 43 12 19 Liabilities 2010 £m (h) Financial risk Currency risk and forward foreign exchange contracts The group conducts business in many currencies. The group presents its consolidated financial statements in sterling and it is in consequence subject to foreign exchange risk due to the translation of the results and net assets of its foreign subsidiaries. The company therefore hedges a substantial portion of the group’s exposure to fluctuations in the translation into sterling of its overseas net assets by holding loans in foreign currencies. Translation adjustments arising on the translation of foreign currency loans are recognised in the profit and loss account. 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 notes issued in July 2008, effectively fixing the sterling value on this portion of debt at an exchange rate of 1.9750. Interest rate risk and interest rate swaps 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 company manages within policy limits approved by the directors. Interest rate swaps and, to a limited extent, forward rate agreements are utilised to fix the interest rate on a proportion of borrowings on a reducing scale over forward periods up to a maximum of five years. At 31 December 2011 the nominal value of such contracts was £71m (in respect of US dollar) (2010: £134m) and £121m (in respect of euro) (2010: £167m), their weighted average interest rate was 4.8% (US dollar) (2010: 5.0%) and 3.6% (euro) (2010: 3.7 %), and their weighted average period to maturity was one year and two months. All the interest rate hedging instruments are designated and fully effective as cash flow hedges and movements in their fair value have been deferred in equity. 130 G4S plc Annual Report and Accounts 2011
Governance Financial statements Shareholder information (h) Financial risk continued Interest rate risk and interest rate swaps continued The US Private Placement market is predominantly a fixed rate market, with investors looking for a fixed rate return over the life of the loan notes. At the time of the first issue in March 2007, the company was comfortable with the proportion of floating rate exposure not hedged by interest rate swaps and therefore rather than take on a higher proportion of fixed rate debt arranged fixed to floating swaps effectively converting the fixed coupon on the Private Placement to a floating rate. Following the swaps the resulting average coupon on the US Private Placement is Libor + 60bps. These swaps have been documented as fair value hedges of the US Private Placement fixed interest loan notes, with the movements in their fair value posted to profit and loss at the same time as the movement in the fair value of the hedged item. The interest on the US Private Placement notes issued in July 2008 and on the GBP Public Bond issued in May 2009 was kept at fixed rate. Commodity risk and commodity swaps The group’s principal commodity risk relates to the fluctuating level of diesel prices, particularly affecting its cash solutions businesses. The company acts as a market intermediary, arranging commodity swaps and commodity options with its relationship banks with back to back deals on identical terms with its subsidiaries to fix synthetically part of the exposure and reduce the associated cost volatility. Counterparty credit risk The company’s strategy for credit risk management is to set minimum credit ratings for counterparties and monitor these on a regular basis. For treasury-related transactions, the policy limits the aggregate credit risk assigned to a counterparty. The utilisation of a credit limit is calculated by applying a weighting to the notional value of each transaction outstanding with each counterparty based on the type and duration of the transaction. The total mark to market value outstanding with each counterparty is closely monitored against policy limits assigned to each counterparty. For short-term transactions (under one year), at inception of the transaction, the financial counterparty must be investment grade rated by either the Standard & Poor’s or Moody’s rating agencies. For long-term transactions, at inception of the transaction, the financial counterparty must have a minimum rating of A+/A1 from Standard & Poor’s or Moody’s. Treasury transactions are dealt with the company’s relationship banks, all of which have a strong investment grade rating. At 31 December 2011 the largest two counterparty exposures related to treasury transactions were £45m and £32m and both were held with institutions with long-term Standard & Poor’s credit ratings of A. These exposures represent 38% (2010: 39%) and 27% (2010: 21%) of the carrying values of derivative financial instruments, with a fair value gain at the balance sheet date. Both of these banks had significant loans outstanding to G4S plc at 31 December 2011. The company participates in the group’s multi-currency notional pooling cash management system with a wholly-owned subsidiary of an Aa3 rated bank. There is legal right of set off under the pooling agreement. (i) Provisions for liabilities and charges Onerous contracts £m At 1 January 2011 1 Utilisation of provisions (1) At 31 December 2011 – The onerous contracts provision comprises a provision against future liabilities for all properties sub-let at a shortfall and for long-term idle properties. The provision is based on the value of future net cash outflows relating to rent, rates, service charges and costs of marketing the properties. (j) Share premium and reserves Share premium £m Profit and loss account £m At 1 January 2011 258 438 (12) 684 Retained profit – 1,120 – 1,120 Changes in fair value of hedging derivatives – 7 – 7 Dividends declared – (114) – (114) Own shares purchased – – (13) (13) Own shares awarded – (9) 9 – Equity-settled transactions – 1 – 1 Tax on equity movements – (2) – (2) At 31 December 2011 258 1,441 (16) 1,683 Own shares £m Total £m G4S plc Annual Report and Accounts 2011 131
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G4S Annual Report and Accounts 2011

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