Notes to the financial statements continued
Note 20 Financial instruments continued
Financial instruments under IFRS (including IAS 32 and IAS 39) Analysis of interest rate exposure of financial assets and liabilities
The interest rate exposure of financial assets and liabilities of the Group as at 25 February 2006, after taking into account the effect of interest rate swaps, was:
Within More than
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
£m £m £m £m £m £m £m
Fixed rate
Finance lease receivables 6 6 5 – – – 17
Bank and other loans (147) (161) – (98) (153) (861) (1,420)
Finance lease payables (20) (11) (8) (3) (3) (59) (104)
Floating rate
Cash and cash equivalents 1,325 – – – – – 1,325
Bank and other loans (1,479) (386) (662) (355) (555) (427) (3,864)
Hedging activities Fair value hedges
The Group uses interest rate swaps and cross-currency swaps to hedge the fair value of fixed rate bonds, this means the fixed rate bonds are hedged against changes to their fair value resulting from changes in interest rates and foreign exchange rates. The fair value of swaps used for fair value hedging at the Balance Sheet date was a liability of £100m.
Cash flow hedges
The Group uses forward foreign exchange contracts and currency options to hedge the cost of future purchases of goods for resale, where those purchases are denominated in a currency other than that of the purchasing company. The hedging instruments are primarily used to hedge purchases in Euros and US Dollars. The cashflows hedged will occur within one year of the Balance Sheet date.
At the Balance Sheet date, the total notional amount of outstanding forward foreign exchange contracts to which the Group has committed was £548m.
The fair value of currency derivatives that are designated as effective cash flow hedges was an asset of £4m. This amount has been deferred as a component of equity.
Net investment hedges
The Group uses forward foreign exchange contracts, currency denominated borrowings and currency options to hedge the exposure of a proportion of its non-Sterling denominated assets against changes in value due to changes in foreign exchange rates.
The fair value of these instruments at the Balance Sheet date was a liability of £150m.
The Group has a Korean Won denominated liability relating to the future purchase of the minority shareholding of its subsidiary, Samsung Tesco Co. Limited. This liability has been designated as a net investment hedge on a proportion of the assets of Samsung Tesco Co. Limited. The carrying value of the liability at the Balance Sheet date was £246m.
Financial instruments not qualifying for hedge accounting
The Group has a number of financial instruments which do not meet the criteria for hedge accounting.
These instruments include forward foreign exchange contracts, currency options, caps, collars and interest rate swaps. The fair value of these instruments at the Balance Sheet date was a liability of £5m.
Note 20 Financial instruments continued
Financial instruments under UK GAAP FRS 13 ‘Derivatives and other financial instruments: disclosures’ (relating to the comparative period ended 26 February 2005)
An explanation of the objectives and policies for holding and issuing financial instruments is set out in the Operating and financial review on page 16. Other than where these items have been included in the currency risk disclosures, short-term receivables and payables have been excluded from the following analysis.
Analysis of interest rate exposure and currency of financial liabilities
The interest rate exposure and currency profile of the financial liabilities of the Group as at 26 February 2005, after taking into account the effect of interest rate and currency swaps, were:
2005
Floating rate Fixed rate
liabilities liabilities Total
£m £m £m Currency Sterling – 2,203 2,203 Euro 577 24 601 Thai Baht 550 – 550 Czech Krona 335 139 474 Slovak Krona 13 31 44 Japanese Yen 23 141 164 Korean Won 654 – 654 Chinese Yuan 127 – 127 Other 149 22 171 Gross liabilities 2,428 2,560 4,988
Fixed rate financial liabilities 2005
Weighted Weighted
average average time
interest rate for which
26 Feb 2005 rate is fixed
% Years Currency Sterling 5.7 7 Euro 5.4 1 Japanese Yen 1.3 5 Czech Krona 3.9 3 Slovak Krona 4.3 3 Malaysian Ringgit 7.9 12 Taiwanese Dollar 4.5 – Weighted average 5.5 6
Floating rate liabilities as at 26 February 2005 bore interest at rates based on relevant national LIBOR equivalents. The interest rate profile of the Group was further managed by the purchase of Euro interest rate collars with an aggregate notional principal of £145m. The average strike rate of the interest rate caps purchased was 6.76%, while the average strike rate of the interest rate floors sold was 2.98%. The average maturity of the collars as at 26 February 2005 was two and a half years. The value of these contracts as at 26 February 2005, if realised, would have resulted in a loss of £1.7m.
Sterling interest rate caps with an aggregate notional principal of £600m were purchased during the year ended 26 February 2005. The strike rate on these caps was 6% and the average maturity was five years. The value as at 26 February 2005 of these contracts, if realised, would have been £3.5m.
Retail Price Index funding of £226m, maturing in 2016, was outstanding as at 26 February 2005 and was classified as fixed rate debt. The interest rate payable on this debt was 4% and the principal was linked to the Retail Price Index. Limited Price Index funding, of £228m, maturing in 2025, was outstanding as at 26 February 2005 and was classified as fixed rate debt. The interest rate payable on this debt was 3.322% and the principal was linked to the Retail Price Index. The maximum indexation of the principal in any one year is 5.0% and the minimum is 0.0%.
Notes to the financial statements continued
Note 20 Financial instruments continued
Financial instruments under UK GAAP FRS 13 (relating to the comparative period ended 26 February 2005) continued Analysis of interest rate exposure and currency profile of financial assets
The interest rate exposure and currency profile of the financial assets of the Group as at 26 February 2005 were:
2005 Cash at
bank and Short-term
in hand deposits Other Total
£m £m £m £m
Sterling 411 231 104 746
Other currencies 389 115 4 508
Total financial assets 800 346 108 1,254
An investment in collateralised Deutsche Bank preference shares of £150m was held at 26 February 2005, paying fixed interest of 4.3%.
Other financial assets, in respect of amounts owed by undertakings in which the Company has a participating interest, attracted a rate of interest of 5.7% (being LIBOR plus a margin). Surplus funds as at 26 February 2005 were invested in accordance with approved limits on security and liquidity and bore rates of interest based on relevant LIBOR equivalents. Cash at bank and in hand included non-interest bearing cash and cash in transit.
Currency exposures
Within the Group, the principal differences on exchange arising, which are taken to the Income Statement, relate to purchases made by Group companies in currencies other than their reporting currencies. After taking account of forward currency purchases used to hedge these transactions, there were no significant balances on these exposures as at 26 February 2005. Also, rolling hedges of up to 18 months duration were maintained against the value of investments in, and long-term intercompany loans to, overseas subsidiaries and, to the extent permitted in IAS 21, differences on exchange were taken to the Statement of Recognised Income and Expense.
Fair values of financial assets and financial liabilities
2005