REUTERS GROUP PLC ANNUAL REPORT AND ACCOUNTS 1999

Operating and financial review continued90% confidenceinterval onunhedged profit123 52 0 52 123Change in profit (£m)Operating profit sensitivity to currencybased on VAR analysisunhedged hedgedReuters estimates that at 31 December 1999there is a 5% chance that profits forecast forthe coming 12 months will deteriorate bymore than £52 million as a result of currencyfluctuations before hedging and £27 millionafter hedging (1998: £70 million beforehedging and £37 million after hedging).These figures represent the value at risk andare illustrated graphically above.During 1999 the average value at risk onforecast profits for the coming 12 months wasas follows:Value at risk Before After£m hedging hedging1999 Average 60 33High 72 40Low 52 271998 Average 64 35The gains on currency hedging activities forthe three years to December 1999 aresummarised below:Recognised gains/(losses)£m 1999 1998 1997Currency hedging 9 45 56Interest rate hedging (1) 2 2Recognised currency hedging gains werelower in 1999 compared with 1998 duemainly to the relative strength of sterlingversus other European currencies whenhedging for 1999 was undertaken. Of thecurrency gains recognised in 1999, £6 millionrelated to contracts in place at the end of 1998.Gains and losses on instruments used forhedging are not recognised until the exposurethat is being hedged is itself recognised.Unrecognised gains and losses on instrumentsused for hedging, and the movements are setout below:Currency hedging£m Gains (Losses) NetUnrecognisedat 1 January 1999 7 (13) (6)Arising in previous years– recognised in 1999 7 (10) (3)– not recognised in 1999 0 (3) (3)Arising in 1999– not recognisedin 1999 16 (9) 7Unrecognisedat 31 December 1999 16 (12) 4Of which:– expected to berecognised in 2000 15 (10) 5– expected to berecognised in2001 or later 1 (2) (1)Unrecognised gains of £4 million at 31December 1999 compare with unrecognisedlosses of £6 million at 31 December 1998.The improvement reflects the strength ofsterling at the end of 1999 compared with theend of 1998.Net cash flows are mainly converted intosterling and either applied to reduce debt orinvested in money market instruments withfinancial institutions holding strong creditratings. The maturity of investments and debtare matched to minimise interest rate risk.Interest rates are managed using a mix offinancial instruments which commence andmature at various dates through to November2004. Most interest rate hedging relates to theuse of interest rate swaps to shorten theinterest rate profile on medium term fixedrate notes issued.Interest rate hedging£m Gains (Losses) NetUnrecognisedat 1 January 1999 0 (1) (1)Arising in previous years– recognised in 1999 0 (1) (1)Arising in 1999– not recognised in 1999 0 (17) (17)Unrecognisedat 31 December 1999 0 (17) (17)Of which:– expected to berecognisedin 2000 0 (7) (7)– expected to berecognisedin 2001 or later 0 (10) (10)Unrecognised losses of £17 million oninterest rate hedging at 31 December 1999are a result of the increase in sterling interestrates since interest rate swaps were put inplace and are offset by compensatingadjustments to the fair value of the fixed ratenotes issued.In broad terms, using the average net fundsposition, a 1% increase in global interestrates would have reduced profit before tax in1999 by approximately £1 million (1998: £1million) excluding the impact of hedging.8. US GAAPReconciliations of net income andshareholders’ equity under UK and US GAAPare set out on pages 76–77. A discussion ofthe relevant US accounting policies whichdiffer materially from UK GAAP is given onpage 75.Under UK GAAP certain quoted investmentssuch as those made by the Greenhouse Fund,are reflected on the balance sheet at cost asfixed assets, whereas under US GAAP suchinvestments are marked to market andadjusted through the US statement ofcomprehensive income. The market value ofquoted technology companies can changesignificantly. On a portfolio basis, a 10%move in the market price of the quotedinvestments in the Greenhouse Fund at 31December 1999 would increase/decrease thevalue of the Fund by £44 million. Quotedinvestments are also exposed to exchange ratefluctuations. A strengthening of sterlingagainst the US dollar would reduce the40 Reuters Group PLC Annual Report 1999