Full Annual Report - Inchcape
Full Annual Report - Inchcape Full Annual Report - Inchcape
Financial statements Notes to the accounts continued 23 Financial instruments continued d. Foreign currency risk The Group publishes its consolidated Financial statements in Sterling and faces currency risk on the translation of its earnings and net assets, a significant proportion of which are in currencies other than Sterling. Hedge of foreign currency operating profit During the year the Group sought to partially hedge the retranslation of the Group’s forecast foreign currency operating profit by putting 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 Sterling appreciating during the year and therefore adversely affecting the retranslation of foreign currency operating profit. The 50 options were equally split across five currencies, Australian Dollar, Hong Kong Dollar, Euro, Singapore Dollar and US Dollar, with each 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 recognised in the consolidated income statement, net of the option costs. The nominal principal amount of outstanding contracts at the year end was £nil. Transaction exposure hedging The Group has transactional currency exposures, where sales or purchases by an operating unit are in currencies other than in that unit’s reporting currency. For a significant proportion of the Group these exposures are removed as trading is denominated in the relevant local currency. In particular, local billing arrangements are in place for many of our businesses with our brand partners. The principal exception is for our business in Australia which purchases vehicles in Japanese Yen. In this instance, the Group seeks to hedge forecast transactional foreign exchange rate risk using forward foreign currency exchange contracts. The effective portion of the gain or loss on the hedge is recognised in the consolidated statement of comprehensive income to the extent it is effective and recycled into the consolidated income statement at the same time as the underlying hedged transaction affects the consolidated income statement. Under IAS 39 hedges are documented and tested for the hedge effectiveness on an ongoing basis. Hedge of foreign currency debt The Group uses cross currency interest rate swaps to hedge the forward foreign currency risk associated with US$475m of the US$550m Private Placement. The effective portion on the gain or loss of the hedge is recognised in the consolidated income statement at the same time as the underlying hedged transaction affects the consolidated income statement. In May 2009, US$114.2m of the US$550m Private Placement was repaid, of which US$75m relates to the net investment hedge of US$ assets. The remaining US$39m of repaid debt was replaced with a new US$39m cross currency interest rate swap and under IAS 39 the US$475m fair value hedge relationship 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 hedge relationship. In accordance with IAS 39, these hedges are documented and tested for hedge effectiveness on an ongoing basis. The remaining US$39.2m cross currency interest rate swaps are fair valued through the consolidated income statement and therefore not tested for hedge effectiveness. Net investment hedging Consideration is given to the currency mix of debt with the primary objective that interest on such borrowings acts as a hedge on foreign currency earnings. In accordance with IAS 39 the Group designated US$75m of the Private Placement as a hedge against US Dollar related assets in Hong Kong, Saipan and Guam. This relationship was de-designated in May 2009 when the US$75m of debt designated as a net investment hedge was repaid. Foreign currency risk table The following table shows the Group sensitivity to a reasonably possible change in foreign exchange rates on its Japanese Yen (2008 – Japanese Yen and US Dollar) financial instruments. In this table, financial instruments are only considered sensitive to foreign exchange rates when they are not in the functional currency of the entity that holds them. Increase/ (decrease) in exchange rate Effect on equity £m 2009 Yen +10% (1.0) Yen -10% (0.9) 2008 Yen +10% (2.6) Yen -10% 2.0 US Dollar +10% 2.8 US Dollar -10% (2.3) 122 Inchcape plc ¦ Annual Report and Accounts 2009
Section Three Financial statements 23 Financial instruments continued e. Credit risk The amount due from counterparties arising from cash deposits and the use of financial instruments creates credit risk. The Group monitors its credit exposure to its counterparties via their credit ratings (where applicable) and through its policy of limiting its exposure to any one party to ensure that they are within Board approved limits and that there are no significant concentrations of credit risk. Group policy is to deposit cash and use financial instruments with counterparties with a long-term credit rating of A or better, where available. The notional amounts of financial instruments used in interest rate and foreign exchange management do not represent the credit risk arising through the use of these instruments. The immediate credit risk of these instruments is generally estimated by the fair value of contracts with a positive value. The maximum exposure to credit risk for receivables and other financial assets is represented by their carrying amount. Credit limits are reviewed regularly. The table below shows the credit rating and balances held with major counterparties at the end of the reporting period: Counterparty Derivative assets £m Cash £m Credit Rating 2009 2008 Derivative assets £m Cash £m Credit Rating HSBC Bank plc 44 89 AA/A-1+ 122 97 A-1+ Lloyds TSB Bank 43 – A+/A-1 89 13 A-1+ Royal Bank of Scotland 3 30 A+/A-1 38 – A-1 Fidelity – 25 Aaa – – – Commercial Bank of Ethiopia – 13 n/a – 15 n/a No credit limits were exceeded during the reporting period and management does not expect any losses from non-performance by these counterparties. At 31 December 2009, total derivative asset balances included £90m which was held with three counterparties and total cash balances included £157m which was held with four counterparties. Total cash balances of £381m include cash in the Group’s regional pooling arrangements which are offset against borrowings for interest purposes. Netting of cash and overdraft balances in the consolidated statement of financial position only occurs to the extent that there is the legal ability and intention to settle net. As such, overdrafts are presented in current liabilities to the extent that there is no intention to offset with the cash balance. Concentration of credit risk with respect to trade receivables is very limited due to the Group’s broad customer base. Trade receivables include amounts due from a number of finance houses in respect of vehicles sold to customers on finance arranged through the Group. An independent credit rating agency is used to assess the credit standing of each finance house. Limits for the maximum outstanding with each finance house are set accordingly. Title to the vehicles sold on finance resides with the Group until cleared funds are received from the finance house in respect of a given vehicle. www.inchcape.com 123
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Section<br />
Three<br />
Financial<br />
statements<br />
23 Financial instruments continued<br />
e. Credit risk<br />
The amount due from counterparties arising from cash deposits and the use of financial instruments creates credit risk. The Group<br />
monitors its credit exposure to its counterparties via their credit ratings (where applicable) and through its policy of limiting its exposure<br />
to any one party to ensure that they are within Board approved limits and that there are no significant concentrations of credit risk.<br />
Group policy is to deposit cash and use financial instruments with counterparties with a long-term credit rating of A or better, where<br />
available. The notional amounts of financial instruments used in interest rate and foreign exchange management do not represent the<br />
credit risk arising through the use of these instruments. The immediate credit risk of these instruments is generally estimated by the fair<br />
value of contracts with a positive value. The maximum exposure to credit risk for receivables and other financial assets is represented<br />
by their carrying amount.<br />
Credit limits are reviewed regularly.<br />
The table below shows the credit rating and balances held with major counterparties at the end of the reporting period:<br />
Counterparty<br />
Derivative<br />
assets<br />
£m<br />
Cash<br />
£m Credit Rating<br />
2009 2008<br />
Derivative<br />
assets<br />
£m<br />
Cash<br />
£m Credit Rating<br />
HSBC Bank plc 44 89 AA/A-1+ 122 97 A-1+<br />
Lloyds TSB Bank 43 – A+/A-1 89 13 A-1+<br />
Royal Bank of Scotland 3 30 A+/A-1 38 – A-1<br />
Fidelity – 25 Aaa – – –<br />
Commercial Bank of Ethiopia – 13 n/a – 15 n/a<br />
No credit limits were exceeded during the reporting period and management does not expect any losses from non-performance by<br />
these counterparties.<br />
At 31 December 2009, total derivative asset balances included £90m which was held with three counterparties and total cash balances<br />
included £157m which was held with four counterparties. Total cash balances of £381m include cash in the Group’s regional pooling<br />
arrangements which are offset against borrowings for interest purposes. Netting of cash and overdraft balances in the consolidated<br />
statement of financial position only occurs to the extent that there is the legal ability and intention to settle net. As such, overdrafts are<br />
presented in current liabilities to the extent that there is no intention to offset with the cash balance.<br />
Concentration of credit risk with respect to trade receivables is very limited due to the Group’s broad customer base. Trade receivables<br />
include amounts due from a number of finance houses in respect of vehicles sold to customers on finance arranged through the<br />
Group. An independent credit rating agency is used to assess the credit standing of each finance house. Limits for the maximum<br />
outstanding with each finance house are set accordingly. Title to the vehicles sold on finance resides with the Group until cleared funds<br />
are received from the finance house in respect of a given vehicle.<br />
www.inchcape.com 123
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