bat plc annual report 2007 - Key Group risk factors (4 of 4)

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Financial

The Group’s subsidiary undertakings operate over 160 retirement benefit arrangements worldwide. These arrangements have been developed in accordance with local practices in the countries concerned. The majority of employees belong to defined benefit schemes, most of which are funded externally, although the Group operates a number of defined contribution schemes. The contributions to the Group’s defined benefit schemes and their valuations are determined in accordance with the advice of independent, professionally qualified actuaries. Changes in asset returns, salary increases, inflation, long term interest rates and other actuarial assumptions could have an adverse impact on the Group.

Funding and liquidity risks expose the Group to shortages of cash and cash equivalents needed in the Group’s operations and for refinancing of existing debt. The Group cannot be certain that it will at all times have access to the bank and capital markets and that the failure to achieve such access will not have an adverse effect on the Group’s funding and liquidity position and on its credit ratings.

The Group is exposed to changes in currency rates on the translation of the net assets of overseas subsidiaries into the Group’s reporting currency, sterling. The Group is also exposed to currency changes from the translation of profits earned in overseas subsidiaries; these exposures are not normally hedged. Exposures also arise from the foreign currency denominated trading transactions undertaken by subsidiaries and dividend flows. The Group maintains both floating and fixed rate debt. Where appropriate, the Group also uses derivatives, primarily interest rate swaps, to vary the fixed to floating mix. Changes in currency values and interest rates could have an adverse impact on the financial condition or operations of the Group.

Cash deposits and other financial instruments give rise to credit risk on the amounts due from counterparties. The failure of any counterparty to meet its obligations to the Group could have an adverse effect on the financial condition or operations of the Group.

Further details on the Group’s financial management and treasury operations can be found within the Financial review.

Litigation

Group companies are involved in a number of legal and regulatory court proceedings in a number of countries. These proceedings may be characterised as covering smoking and health issues and include claims for personal injury and claims for economic loss arising from the treatment of smoking and health-related diseases. Regulatory proceedings may result in a challenge to new regulations. In addition, there are legal proceedings and a governmental investigation in Canada arising from alleged past smuggling activities with consequent claims for unpaid excise tax. A fuller analysis of current legal proceedings to which the Group is subject is set out in note 30.

While it is impossible to be certain of the outcome of any particular case or of the amount of any possible adverse verdict, the Company believes that the defences of the Group companies to all these various claims are meritorious both on the law and the facts. Nevertheless, it is not impossible that the results of operations or cash flows of the Group could be materially affected by the final outcome of any particular litigation.

Information technology

The Group is increasingly reliant on information technology systems for its internal communications, controls, reporting and relations with customers and suppliers. A significant disruption due to computer viruses, malicious intrusions, the setting up of shared services centres or the installation of new systems could affect the Group’s communications and operations.