Annual Report and Accounts 2006 - DCC plc

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66notes to the financial statements1. Summary of significant accounting policies - continuedShare capitalTreasury sharesWhere the Company purchases the Company’s equity share capital, the consideration paid is deducted from totalshareholders’ equity and classified as treasury shares until they are cancelled. Where such shares are subsequently soldor reissued, any consideration received is included in total shareholders’ equity.DividendsDividends on Ordinary Shares are recognised as a liability in the Group’s financial statements in the period in which theyare approved by the shareholders of the Company. Dividends declared after the balance sheet date are disclosed in thedividends note.2. Financial risk managementFinancial risk factorsThe Group uses derivative financial instruments (principally interest rate, currency and cross currency interest rate swapsand forward foreign exchange and commodity contracts) to hedge certain risk exposures, as detailed below, arising fromoperational, financing and investment activities. The Group does not trade in financial instruments nor does it enter intoany leveraged derivative transactions.Financial risk management within the Group is governed by policies and guidelines reviewed and approved annually by theBoard of Directors. These policies and guidelines primarily cover foreign exchange risk, commodity price risk, credit risk,liquidity risk and interest rate risk. Monitoring of compliance with the policies and guidelines is managed by the EnterpriseRisk Management function.(i) Market riskForeign exchange riskThe Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures,primarily with respect to sterling and the US dollar. Foreign exchange risk arises from future commercial transactions,recognised assets and liabilities and net investments in foreign operations.Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in acurrency that is not the entity’s functional currency. Divisional and subsidiary management, in conjunction with GroupTreasury, manage foreign currency exposures within approved policies and guidelines using forward currency contracts.The Group generally hedges between 50% and 90% of transactions in each major currency for the subsequent 2 months.The Group also hedges approximately 50% of anticipated transactions in certain subsidiaries generally for periods up to 6months with such transactions qualifying as ‘highly probable’ forecast transactions for IAS 39 hedge accounting purposes.The Group has investments in sterling operations which are highly cash generative. The Group seeks to manage theresultant foreign currency translation risk through borrowings denominated in or swapped (utilising currency swaps orcross currency interest rate swaps) into sterling, although this is more than offset by the strong cumulative cash flowfrom the Group’s sterling operations.Price riskThe Group is exposed to commodity price risk in its LPG and oil distribution businesses. The Group generally hedgesapproximately 50% of its anticipated LPG commodity price exposure for the subsequent month with such transactionsqualifying as ‘highly probable’ forecast transactions for IAS 39 hedge accounting purposes.Certain customers occasionally require fixed price oil supply contracts generally for periods less than six months. In suchcircumstances, the Group enters into matching forward commodity contracts, not designated as hedges under IAS 39.The Group is not exposed to equity securities price risk.(ii) Credit riskThe Group has no significant concentrations of credit risk. The Group primarily sells to business customers and haspolicies in place to ensure that customers have an appropriate credit history. Sales, principally comprising home heatingfuels, to non-business customers are made in cash, by direct debit or via major credit cards. Derivative counterparties andcash transactions are limited to high credit quality financial institutions. The Group has policies that limit the amount ofcredit exposure to any financial institution.
notes to the financial statements672. Financial risk management - continued(iii) Liquidity riskThe Group maintains a strong balance sheet with long term debt funding and cash balances with deposit maturities up tosix months. In addition, the Group maintains significant uncommitted credit lines with its relationship banks.(iv) Cash flow and fair value interest rate riskThe Group borrows at both fixed and floating rates of interest. The Group has swapped its fixed rate borrowings tofloating interest rates, using interest rate and cross currency interest rate swaps which qualify for fair value hedgeaccounting under IAS 39. The Group mitigates interest rate risk on its borrowings by matching, to the extent possible, thematurity of its cash balances with the interest rate reset periods on the swaps related to its borrowings.The Group also utilises interest rate swaps to swap certain floating rate sterling assets and liabilities into fixed rate sterlingassets and liabilities. The notional principal amounts on these swaps offset.Fair value estimationThe fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date.The quoted market price used for financial assets held by the Group is the current bid price.The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) isdetermined by using valuation techniques. The Group uses a variety of techniques and makes assumptions that are basedon market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instrumentsare used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair valuefor the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of theestimated future cash flows. The fair value of forward foreign exchange contracts is determined using quoted forwardexchange rates at the balance sheet date.The nominal value less impairment provision of trade receivables and payables are assumed to approximate their fair values.
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Annual Reportand Accounts2006
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Group at a Glance 2Board of Directo
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3Market positionGrowth focusGrowth
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6board of directors
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8senior managementgroup and divisio
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10chairman’s statement“ Over th
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12chief executive’s review“ The
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peopleWe recognise that our employe
Page 19 and 20: 17Performance for the year to 31 Ma
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Page 30 and 31: 28financial reviewOverview of resul
Page 32 and 33: 30financial reviewgenerated from op
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Page 41 and 42: corporate governance39written terms
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Page 46 and 47: 44report of the remuneration commit
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Page 52 and 53: 50 report of the independent audito
Page 54 and 55: 52financial statementsgroup stateme
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Page 58 and 59: 56financial statementscompany state
Page 60 and 61: 58notes to the financial statements
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116group directory>DCC Environmenta
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118corporate informationAuditorsPri
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120indexpageReceivables, Trade and
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DCC plcDCC House, Brewery Road,Stil
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Annual Report and Accounts 2006 - DCC plc

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