directors report and accounts 2006 - Notes 16-18

 
 

 Notes 16-18

 16 Derivative financial instruments

 20062005
 Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Fair value hedges    
- interest rate swaps25 19 80  
- cross-currency swaps24 4 7 10
Cash flow hedges    
- interest rate swaps   1
- cross-currency swaps  10 1
- forward foreign currency contracts20 1 29 8
Net investment hedges    
- cross-currency swaps53  21  
- forward foreign currency contracts31 10 3 29
Trading    
- interest rate swaps   1
- cross-currency swaps 43  57
- forward foreign currency contracts29 13 16 38
- others18 23 7 17
 200 113 173 162
Current124 84 86 143
Non-current76 29 87 19
 200 113 173 162
Current assets and liabilities include    
- net interest receivable35 (5)30 (8)
- trading derivatives that mature beyond one year 37  59
Derivatives     
- in respect of net debt125 79 133 116
- other75 34 40 46
 200 113 173 162

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

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 have been based on the quoted market price of similar derivatives.

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

 20062005
 AssetsLiabilitiesAssetsLiabilities
 £m£m£m£m
Within one year11 1 31 10
Between one and two years2  7  
Between two and three years7  1  
 20 1 39 10

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

 20062005
 Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Within one year89 52 56 92
Between one and two years5 30 7 11
Between two and three years67 1 1 41
Between three and four years  61  
Between four and five years4    
Beyond five years35 30 48 18
 200 113 173 162

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

 20062005
 Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Interest rate swaps25 19 80 2
Cross-currency swaps77 47 38 68
Forward foreign currency contracts80 24 48 75
Others18 23 7 17
 200 113 173 162

a) Interest rate swaps
     Interest rate %2006
 Maturity
Date
Principal
currency
m£mOriginalSwappedAssets
£m
Liabilities
£m
Fixed to floating2009EUR550 371 4.9 note (a)10  
 2009EUR250 168 4.1 note (a)4  
 2013EUR400 270 5.1 note (a)7  
 2013GBP350 350 5.8 note (a) 19
 2019GBP250 250 6.4 note (a)4  
Floating to fixed2007AUD50 20 note (a)5.5   
       25 19
     Interest rate %2005
 Maturity
Date
Principal
currency
m£mOriginalSwappedAssets
£m
Liabilities
£m
Fixed to floating2009EUR550 378 4.9 note (a)23  
 2009EUR250 172 4.1 note (a)10  
 2013EUR400 275 5.1 note (a)23  
 2013GBP350 350 5.8 note (a)  
 2019GBP250 250 6.4 note (a)24  
Floating to fixed2006CHF50 22 note (a)4.8  1
 2006CAD350 175 note (a)4.6  1
 2006AUD175 75 note (a)5.7   
 2007AUD50 21 note (a)5.5   
       80 2

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
          2006
 Maturity
Date
Original
currency
Interest rate
%
Principal
original
currency
m
£mSwapped
currency
Interest rate
%
Principal
swapped
currency
m
£mAssets
£m
Liabilities
£m
Fixed to fixed2007USD5.8 70 36 KRW7.5 85,876 47  13
 2009EUR4.9 500 337 USD6.5 564 288 53  
Fixed to floating2008GBP6.5 217 217 AUDnote (b)607 244  30
 2009EUR4.9 150 101 GBPnote (b)104 104  1
 2012EUR3.6 750 505 USDnote (b)907 463 22  
 2016GBP5.5 325 325 EURnote (b)473 319  3
 2019EUR4.6 20 13 USDnote (b)22 11 2  
          77 47
          2005
 Maturity
Date
Original
currency
Interest rate
%
Principal
original
currency
m
£mSwapped
currency
Interest rate
%
Principal
swapped
currency
m
£mAssets
£m
Liabilities
£m
Fixed to fixed2006DEM5.4 250 88 USD6.7 137 80 8  
 2006USD4.4 45 26 KRW6.5 52,785 30  5
 2007USD5.8 70 41 KRW7.5 85,876 49  11
 2009EUR4.9 500 344 USD6.5 564 329 23  
Fixed to floating2006EUR5.1 500 344 CADnote (b)699 349  2
 2008GBP6.5 217 217 AUDnote (b)607 259  41
 2009EUR4.9 150 103 GBPnote (b)104 104 5  
 2012EUR3.6 750 515 USDnote (b)907 528  9
 2019EUR4.6 20 14 USDnote (b)22 13 2  
          38 68

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

The US dollar/Korean won swaps have been used to manage internal financing arrangements. The remaining swaps have been 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
 2006
Currencies purchased forward
2005
Currencies purchased forward
 EUR
£m
GBP
£m
USD
£m
CHF
£m
CAD
£m
AUD
£m
Total
£m
 EUR
£m
GBP
£m
USD
£m
ZAR
£m
Total
£m
Currencies sold forward             
AUD 1     1       
CAD 15     15       
CHF 5     5   1 1  2
CYP 1     1       
EUR 19     19   1 5  6
GBP        8  3 1 12
JPY  20    20    27  27
USD 18     18   1   1
ZAR 1     1       
  60 20    80  8 3 36 1 48
Fair values of liabilities
 2006
Currencies purchased forward
2005
Currencies purchased forward
 EUR
£m
GBP
£m
USD
£m
CHF
£m
CAD
£m
AUD
£m
Total
£m
EUR
£m
GBP
£m
USD
£m
ZAR
£m
Total
£m
Currencies sold forward            
AUD 3 1    4  7   7
CAD        7 1  8
CHF        1   1
EUR 1 2    3  4   4
GBP   2 6  8      
HKD        7   7
HUF        2   2
KRW         1  1
NZD     2 2  1   1
SGD        1   1
USD 1     1 13 21   34
RUR  1    1      
ZAR1 4     5  9   9
 1 9 4 2 6 2 24 13 60 2  75

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:

 20062005
 £m£m£m£m
Forward contracts to purchase GBP, sell CHF(74)73 (78)77
Forward contracts to purchase GBP, sell CAD(308)307   
Forward contracts to purchase GBP, sell AUD(525)529   
d) Others
 20062005
 Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Others: Bund forwards note i15 16 7 8
Interest derivative note ii 7  9
Sinking fund policy note iii3    
 18 23 7 17

Notes:

  1. Forward contracts to purchase and sell German government securities with a nominal value of €1.86 billion (2005: €1.87 billion) taken out to manage internal financing arrangements and maturing within one year.
  2. Remaining impact of an interest derivative with a nominal value of €1 billion maturing in 2013.
  3. Investment in sinking fund policy with a nominal value of ZAR 51 million.

 17 Inventories

 2006
£m
2005
£m
Raw materials and consumables1,182 1,280
Finished goods and work in progress721 836
Goods purchased for resale153 158
 2,056 2,274

Inventories pledged as security for liabilities amount to £11 million (2005: £4 million). Write offs taken to other operating expenses in the income statement comprised £26 million (2005: £35 million) including amounts relating to restructuring costs.

 18 Income tax receivable and payable

Income tax balances shown on the Group balance sheet as current assets and current liabilities are expected to be received or paid within 12 months of the balance sheet date for both 2006 and 2005.