Full Annual Report - Inchcape
Full Annual Report - Inchcape
Full Annual Report - Inchcape
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Financial statements<br />
Notes to the accounts continued<br />
23 Financial instruments continued<br />
d. Foreign currency risk<br />
The Group publishes its consolidated Financial statements in Sterling and faces currency risk on the translation of its earnings and net<br />
assets, a significant proportion of which are in currencies other than Sterling.<br />
Hedge of foreign currency operating profit<br />
During the year the Group sought to partially hedge the retranslation of the Group’s forecast foreign currency operating profit by putting<br />
in place 50 currency put options with a total nominal value of £136.3m, at a cost of £8.6m. The primary objective was to hedge against<br />
Sterling appreciating during the year and therefore adversely affecting the retranslation of foreign currency operating profit. The 50<br />
options were equally split across five currencies, Australian Dollar, Hong Kong Dollar, Euro, Singapore Dollar and US Dollar, with each<br />
option hedging one month’s operating profit. At the end of the year all contracts had matured and a gain of £0.1m (2008 – nil) was<br />
recognised in the consolidated income statement, net of the option costs. The nominal principal amount of outstanding contracts<br />
at the year end was £nil.<br />
Transaction exposure hedging<br />
The Group has transactional currency exposures, where sales or purchases by an operating unit are in currencies other than in that<br />
unit’s reporting currency. For a significant proportion of the Group these exposures are removed as trading is denominated in the<br />
relevant local currency. In particular, local billing arrangements are in place for many of our businesses with our brand partners.<br />
The principal exception is for our business in Australia which purchases vehicles in Japanese Yen.<br />
In this instance, the Group seeks to hedge forecast transactional foreign exchange rate risk using forward foreign currency exchange<br />
contracts. The effective portion of the gain or loss on the hedge is recognised in the consolidated statement of comprehensive income<br />
to the extent it is effective and recycled into the consolidated income statement at the same time as the underlying hedged transaction<br />
affects the consolidated income statement. Under IAS 39 hedges are documented and tested for the hedge effectiveness on an<br />
ongoing basis.<br />
Hedge of foreign currency debt<br />
The Group uses cross currency interest rate swaps to hedge the forward foreign currency risk associated with US$475m of the US$550m<br />
Private Placement. The effective portion on the gain or loss of the hedge is recognised in the consolidated income statement at the<br />
same time as the underlying hedged transaction affects the consolidated income statement. In May 2009, US$114.2m of the US$550m<br />
Private Placement was repaid, of which US$75m relates to the net investment hedge of US$ assets. The remaining US$39m of repaid<br />
debt was replaced with a new US$39m cross currency interest rate swap and under IAS 39 the US$475m fair value hedge relationship<br />
was de-designated and re-designated as a US$436m fair value hedge. A gain of £3.9m was recognised on the de-designation of the<br />
hedge relationship. In accordance with IAS 39, these hedges are documented and tested for hedge effectiveness on an ongoing basis.<br />
The remaining US$39.2m cross currency interest rate swaps are fair valued through the consolidated income statement and therefore<br />
not tested for hedge effectiveness.<br />
Net investment hedging<br />
Consideration is given to the currency mix of debt with the primary objective that interest on such borrowings acts as a hedge on<br />
foreign currency earnings. In accordance with IAS 39 the Group designated US$75m of the Private Placement as a hedge against<br />
US Dollar related assets in Hong Kong, Saipan and Guam. This relationship was de-designated in May 2009 when the US$75m of<br />
debt designated as a net investment hedge was repaid.<br />
Foreign currency risk table<br />
The following table shows the Group sensitivity to a reasonably possible change in foreign exchange rates on its Japanese Yen<br />
(2008 – Japanese Yen and US Dollar) financial instruments. In this table, financial instruments are only considered sensitive to foreign<br />
exchange rates when they are not in the functional currency of the entity that holds them.<br />
Increase/<br />
(decrease)<br />
in exchange<br />
rate<br />
Effect on<br />
equity<br />
£m<br />
2009<br />
Yen +10% (1.0)<br />
Yen -10% (0.9)<br />
2008<br />
Yen +10% (2.6)<br />
Yen -10% 2.0<br />
US Dollar +10% 2.8<br />
US Dollar -10% (2.3)<br />
122<br />
<strong>Inchcape</strong> plc ¦ <strong>Annual</strong> <strong>Report</strong> and Accounts 2009