bat plc annual report 2007 - Notes on the accounts: Note 16

 
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Annual Report and Accounts 2007

16 Derivative financial instruments

The fair values of derivatives are determined based on market data (primarily yield curves, implied volatilities and exchange rates) to calculate the present value of all estimated flows associated with each derivative at the balance sheet date. In the absence of sufficient market data, fair values would be based on the quoted market price of similar derivatives.

 20072006
 Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Fair value hedges    
– interest rate swaps14 14 25 19
– cross-currency swaps85 31 24 4
Cash flow hedges    
– cross-currency swaps29    
– forward foreign currency contracts6 6 20 1
Net investment hedges    
– cross-currency swaps57  53  
– forward foreign currency contracts5 50 31 10
Trading    
– cross-currency swaps 53  43
– forward foreign currency contracts7 85 29 13
– others32 35 18 23
 235 274 200 113
Current82 225 124 84
Non-current153 49 76 29
 235 274 200 113
Current assets and liabilities include    
– trading derivatives that mature beyond one year1 10  37
Derivatives    
– in respect of net debt188 179 125 79
– other47 95 75 34
 235 274 200 113

Some derivative financial instruments are not designated as hedges and have been classified as trading derivatives.

The maturity dates of all derivative financial instruments as recognised in the Balance Sheet are as follows:

 20072006
restated
 Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Within one year81 215 124 47
Between one and two years81 3 5 29
Between two and three years  46 3
Between three and four years5    
Between four and five years64  4  
Beyond five years4 56 21 34
 235 274 200 113

The above maturity analysis for 2006 has been restated to enhance consistency of presentation with other financial instrument maturity analyses.

For cash flow hedges, the timing of expected cash flows is as follows:

 20072006
 Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Within one year3 6 11 1
Between one and two years32  2  
Between two and three years  7  
 35 6 20 1

The Group’s cash flow hedges are in respect of sales or purchases of inventory and certain debt instruments. The timing of expected cash flows in respect of derivatives designated as cash flow hedges is broadly expected to be comparable to the timing of when the hedged item will affect profit or loss.

The tables below set out the maturities of the Group’s derivative financial instruments on an undiscounted contractual basis, based on spot rates.

The maturity dates of all gross settled derivative financial instruments are as follows:

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 20072006
 AssetsLiabilitiesAssetsLiabilities
 Inflow
£m
Outflow
£m
Inflow
£m
Outflow
£m
Inflow
£m
Outflow
£m
Inflow
£m
Outflow
£m
Within one year         
– forward contracts 1,108 (1,095)4,266 (4,394)3,293 (3,212)1,943 (1,969)
– cross-currency swaps 66 (70)249 (310)59 (71)73 (88)
– other 1,450 (1,396)1,395 (1,451)1,320 (1,281)1,280 (1,321)
Between one and two years         
– forward contracts 62 (61)70 (73)66 (57)17 (17)
– cross-currency swaps 876 (774)18 (18)59 (69)254 (285)
Between two and three years         
– forward contracts       3 (3)
– cross-currency swaps 21 (22)21 (22)736 (688)124 (122)
Between three and four years         
– forward contracts       3 (3)
– cross-currency swaps 21 (24)18 (18)19 (27)18 (16)
Between four and five years         
– cross-currency swaps 572 (468)18 (19)19 (27)18 (16)
Beyond five years         
– cross-currency swaps 19 (15)397 (421)542 (493)414 (396)
 4,195 (3,925)6,452 (6,726)6,113 (5,925)4,147 (4,236)

The maturity dates of net settled derivative financial instruments are as follows:

 20072006
 Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Within one year(4)6 3 5
Between one and two years14 3  5
Between two and three years1 3 13 5
Between three and four years6 4 1 4
Between four and five years 3 5 3
Beyond five years11 3 18 6
 28 22 40 28

The above analysis of derivatives settled on a net basis primarily relates to the Group’s interest rate swaps.

In summary by type, the fair value of derivative financial instruments is as follows:

 20072006
 Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Interest rate swaps14 14 25 19
Cross-currency swaps171 84 77 47
Forward foreign currency contracts18 141 80 24
Others32 35 18 23
 235 274 200 113
a) Interest rate swaps

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     Interest rate %2007
 Maturity
date
Principal
currency
m £m Original Swapped Assets
£m
Liabilities
£m
Fixed to floating2009EUR 550 404 4.9 note (a) 7  
 2009EUR 250 184 4.1 note (a) 2  
 2013EUR 400 294 5.1 note (a)   
 2013GBP 350 350 5.8 note (a)  14
 2019GBP 250 250 6.4 note (a) 5  
       14 14
     Interest rate %2006
 Maturity
date
Principal
currency
m £m Original Swapped Assets
£m
Liabilities
£m
Fixed to floating2009EUR 550 371 4.9 note (a) 10  
 2009EUR 250 168 4.1 note (a) 4  
 2013EUR 400 270 5.1 note (a) 7  
 2013GBP 350 350 5.8 note (a)  19
 2019GBP 250 250 6.4 note (a) 4  
Floating to fixed2007AUD 50 20 note (a) 5.5   
       25 19

Note (a): The floating rate interest rates are based on LIBOR (or local equivalent) plus a margin ranging between nil and 137 basis points.

The fixed to floating swaps have been used to manage the interest rate profile of external borrowings and are reflected in the repricing table in note 21. The floating to fixed swaps have been used to manage the interest rate profile of both internal and external financing arrangements, and those relating to external borrowings are also reflected in the repricing table in note 21.

b) Cross-currency swaps
  

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          2007
 Maturity
date
Original
currency
Interest
rate
%
Principal
original
currency
m
£m Swapped
currency
Interest rate
%
Principal
swapped
currency
m
£m Assets
£m
Liabilities
£m
Fixed to fixed2009EUR 4.9 500 367 USD 6.5 564 283 86  
Fixed to floating2008GBP 6.5 217 217 AUD note (b) 607 268  53
 2009EUR 4.9 150 110 GBP note (b) 104 104 8  
 2012EUR 3.6 750 551 USD note (b) 907 456 74  
 2016GBP 5.5 325 325 EUR note (b) 473 347  31
 2019EUR 4.6 20 15 USD note (b) 22 11 3  
          171 84
          2006
 Maturity
date
Original
currency
Interest
rate
%
Principal
original
currency
m
£m Swapped
currency
Interest rate
%
Principal
swapped
currency
m
£m Assets
£m
Liabilities
£m
Fixed to fixed2007USD 5.8 70 36 KRW 7.5 85,876 47  13
 2009EUR 4.9 500 337 USD 6.5 564 288 53  
Fixed to floating2008GBP 6.5 217 217 AUD note (b) 607 244  30
 2009EUR 4.9 150 101 GBP note (b) 104 104  1
 2012EUR 3.6 750 505 USD note (b) 907 463 22  
 2016GBP 5.5 325 325 EUR note (b) 473 319  3
 2019EUR 4.6 20 13 USD note (b) 22 11 2  
          77 47

Note (b): The floating rate interest rates are based on LIBOR plus a margin ranging between 66 and 127 basis points.

In 2006, the US dollar/South Korean won swaps were used to manage internal financing arrangements. The remaining swaps were used to manage the currency profile of external borrowings and are reflected in the currency table in note 21. The fixed to floating swaps are also reflected in the repricing table in note 21.

c) Forward foreign currency contracts

Forward foreign currency contracts are denominated in the following currencies:

Fair values of assets

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 2007
Currencies purchased forward
2006
Currencies purchased forward
 EUR
£m
GBP
£m
USD
£m
CHF
£m
SGD
£m
PLN
£m
Total
£m
EUR
£m
GBP
£m
USD
£m
CHF
£m
CAD
£m
AUD
£m
Total
£m
Currencies sold forward              
AUD 1     1  1     1
CAD        15     15
CHF1      1  5     5
CYP        1     1
EUR        19     19
GBP2   2  1 5        
KRW2      2        
JPY  4    4   20    20
USD 3   1  4  18     18
RUR1      1        
ZAR        1     1
 6 4 4 2 1 1 18  60 20    80

Fair values of liabilities

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 2007
Currencies purchased forward
2006
Currencies purchased forward
 EUR
£m
GBP
£m
USD
£m
CHF
£m
SGD
£m
PLN
£m
Total
£m
EUR
£m
GBP
£m
USD
£m
CHF
£m
CAD
£m
AUD
£m
Total
£m
Currencies sold forward              
AUD 17     17  3 1    4
CAD 25 1    26        
CHF 14     14        
EUR 43 5    48  1 2    3
CZK 1     1        
DKK 1     1        
GBP          2 6  8
HKD 6     6        
HUF 1     1        
PLN 2     2        
NZD            2 2
SGD 1     1        
JPY  4    4        
USD1 11     12  1     1
RUR  2    2   1    1
ZAR 6     6 1 4     5
 1 128 12    141 1 9 4 2 6 2 24

Forward foreign currency contracts have been used to hedge both internal and external forecast transactions as well as the hedging of internal and external assets and liabilities. Certain contracts were used to manage the currency profile of external borrowings and are reflected in the currency table in note 21, and their nominal values are as follows:

 20072006
 £m£m£m£m
Forward contracts to purchase GBP, sell CHF(115)122 (74)73
Forward contracts to purchase GBP, sell CAD(338)356 (308)307
Forward contracts to purchase GBP, sell AUD(569)579 (525)529
d) Others
 20072006
 Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Others: Bund forwards note i27 28 15 16
Interest derivative note ii 7  7
Sinking fund policy note iii5  3  
 32 35 18 23

Notes:

(i) Forward contracts to purchase and sell German government securities with a nominal value of €1.91 billion (2006: €1.86 billion) taken out to manage internal financing arrangements and maturing within one year.

(ii) Remaining impact of an interest derivative with a nominal value of €1 billion maturing in 2013.

(iii) Investment in sinking fund policy with a nominal value of ZAR73 million (2006: ZAR51 million).

© British American Tobacco