Notes 16-20
- 16 Financial risk management objectives and policies
- 17 Financial instruments
- 18 Trade and other payables
- 19 Provisions for liabilities and charges
- 20 Statement of changes in equity
17 FINANCIAL INSTRUMENTS
Fair values of financial assets and financial liabilities
Set out below is a comparison by category of carrying values and fair values of all the Group’s financial assets and financial liabilities as at 31 December 2007, 31 December 2006 and 31 December 2005. None of the financial assets or financial liabilities have been reclassified during the year.
| Designated at fair value $m |
Derivatives and other items at fair value $m |
Available for sale $m |
Held for trading $m |
Amortised cost $m |
Total carrying value $m |
Fair value $m |
|
|---|---|---|---|---|---|---|---|
| 2007 | |||||||
| Cash and cash equivalents | – | – | – | – | 5,867 | 5,867 | 5,867 |
| Overdrafts | – | – | – | – | (140) | (140) | (140) |
| Loans due within one year | – | – | – | – | (4,140) | (4,140) | (4,140) |
| Loans due after more than one year | (1,090) | (1,544) | – | – | (8,242) | (10,876) | (11,235) |
| Derivative assets | 67 | 19 | – | – | – | 86 | 86 |
| Other investments | – | – | 182 | 31 | 60 | 273 | 273 |
| Other financial assets | – | – | – | – | 5,973 | 5,973 | 5,973 |
| Other financial liabilities | – | – | – | – | (8,070) | (8,070) | (8,070) |
| 2006 | |||||||
| Cash and cash equivalents | – | – | – | – | 7,103 | 7,103 | 7,103 |
| Overdrafts | – | – | – | – | (114) | (114) | (114) |
| Loans due within one year | – | – | – | – | (22) | (22) | (22) |
| Loans due after more than one year | (1,087) | – | – | – | – | (1,087) | (1,087) |
| Derivative assets | 27 | 45 | – | – | – | 72 | 72 |
| Other investments | 37 | – | 82 | 26 | 559 | 704 | 704 |
| Other financial assets | – | – | – | – | 4,794 | 4,794 | 4,794 |
| Other financial liabilities | – | – | – | – | (6,729) | (6,729) | (6,729) |
| 2005 | |||||||
| Cash and cash equivalents | – | – | – | – | 4,979 | 4,979 | 4,979 |
| Overdrafts | – | – | – | – | (84) | (84) | (84) |
| Loans due within one year | – | – | – | – | (6) | (6) | (6) |
| Loans due after more than one year | (1,111) | – | – | – | – | (1,111) | (1,111) |
| Derivative assets | 49 | 10 | – | – | – | 59 | 59 |
| Other investments | 100 | – | 156 | 16 | 1,549 | 1,821 | 1,821 |
| Other financial assets | – | – | – | – | 4,134 | 4,134 | 4,134 |
| Other financial liabilities | – | – | – | – | (5,847) | (5,847) | (5,847) |
Credit risk increased the fair value of the bonds designated as fair value through profit and loss by $23m for the year and by $21m since designation. Changes in credit risk had no material effect on any other financial assets and liabilities recognised at fair value in the financial statements. The change in fair value attributable to changes in credit risk is calculated as the change in fair value not attributable to market risk.
The methods and assumptions used to estimate the fair values of financial instruments are as follows:
- Current investments – the fair value of listed investments is based on year end quoted market prices. For unlisted investments, carrying values approximate fair value.
- Non-current investments (excluding equity investments in joint ventures and associates) – the fair value of listed investments is based on year end quoted market prices. For unlisted investments, carrying values approximate fair value.
- Loans – the fair value of fixed rate publicly traded debt is based on year end quoted market prices; the fair value of floating rate debt is nominal value, as mark to market differences would be minimal given frequency of resets.
- Forward foreign exchange contracts – the Group has forward foreign exchange contracts to sell currency for the purpose of hedging non-dollar commercial transaction exposures which existed at the date of the balance sheet. The majority of the contracts for existing transactions had a maturity of six months or less from year end. The fair value of forward foreign exchange contracts is based on market forward foreign exchange rates at year end.
- Foreign currency option contracts – the Group may use foreign currency option contracts to hedge anticipated, but not firmly committed, non-dollar commercial transactions. The fair value of option contracts is estimated using Black-Scholes valuation techniques.
- Interest rate swaps – the Group uses interest rate swaps to hedge the Group’s exposure to fluctuations in interest rates, in accordance with a formal risk management strategy. The fair value is estimated using appropriate zero coupon curve valuation techniques based on rates current at year end.
Net gains and losses on financial assets and financial liabilities
| 2007 $m |
2006 $m |
2005 $m |
|
|---|---|---|---|
| Included in operating profit | |||
| (Losses)/gains on forward foreign exchange contracts | (59) | 168 | (61) |
| Gains/(losses) on receivables and payables | 108 | (179) | 85 |
| (Losses)/gains on investments designated at fair value through profit and loss | (1) | (13) | 34 |
| (Losses)/gains on available for sale financial assets | (21) | 5 | (15) |
| 27 | (19) | 43 | |
| Included in finance income and expense | |||
| Interest and fair value adjustments in respect of debt designated at fair value through profit and loss, net of derivatives |
(22) | (59) | (48) |
| Interest and changes in carrying values of debt designated as hedged items, net of derivatives | (28) | – | – |
| Interest and fair value changes on fixed and short-term deposits and equity securities | 344 | 368 | 212 |
| Interest on debt, overdrafts and commercial paper held at amortised cost | (436) | (11) | (19) |
| Exchange (losses)/gains on financial assets and liabilities | (3) | (14) | 5 |
| (145) | 284 | 150 | |
$49m fair value gains on hedging instruments and $52m fair value losses on the hedged items have been included within interest and changes in carrying values of debt designated as hedged items, net of derivatives.
$70m of losses on financial assets and liabilities have been taken directly to equity (2006 $20m, 2005 $10m).
Liquidity risk
The maturity profile of the anticipated future cash flows including interest in relation to the Group’s non-derivative financial liabilities, on an undiscounted basis and which, therefore, differs from both the carrying value and fair value, is as follows:
| Bank overdrafts and other loans $m |
Bonds $m |
Trade, other payables and provisions $m |
Total $m |
|
|---|---|---|---|---|
| Within one year | 4,305 | 619 | 7,355 | 12,279 |
| In one to two years | – | 1,259 | 715 | 1,974 |
| In two to three years | – | 1,679 | – | 1,679 |
| In three to four years | – | 532 | – | 532 |
| In four to five years | – | 2,255 | – | 2,255 |
| In more than five years | – | 13,356 | – | 13,356 |
| 4,305 | 19,700 | 8,070 | 32,075 | |
| Effect of interest | (25) | (8,857) | – | (8,882) |
| Effect of discounting, fair values and issue costs | – | 33 | – | 33 |
| 31 December 2007 | 4,280 | 10,876 | 8,070 | 23,226 |
Market risk
Interest rate risk
The interest rate profile of the Group’s interest bearing financial instruments, as at 31 December 2007 and at 31 December 2006 are set out below. In the case of non-current financial liabilities, the classification includes the impact of interest rate swaps which convert the debt to floating rate.
| 2007 | 2006 | |||||
|---|---|---|---|---|---|---|
| Total $m |
Fixed rate $m |
Floating rate $m |
Total $m |
Fixed rate $m |
Floating rate $m |
|
| Financial liabilities | ||||||
| Interest bearing loans and borrowings | ||||||
| Current | 4,280 | – | 4,280 | 136 | – | 136 |
| Non-current | 10,876 | 7,594 | 3,282 | 1,087 | – | 1,087 |
| 15,156 | 7,594 | 7,562 | 1,223 | – | 1,223 | |
| Financial assets | ||||||
| Fixed deposits | 60 | – | 60 | 559 | – | 559 |
| Cash and cash equivalents | 5,867 | – | 5,867 | 7,103 | – | 7,103 |
| 5,927 | – | 5,927 | 7,662 | – | 7,662 | |
In addition to the financial assets above, there are $6,272m (2006 $5,011m) of other current and non-current asset investments and other financial assets on which no interest is received.
Foreign currency risk
Transactional exposure
100% of the Group’s major transactional currency exposures on working capital balances, which typically extend for up to three months, are hedged, where practicable, using forward foreign exchange contracts. As a result, as at 31 December 2007 and 31 December 2006, there were no material monetary assets or liabilities in currencies other than the functional currencies of the Group companies concerned, having taken into account the effect of forward exchange currency contracts that have been used to match foreign currency exposures.
Translational exposure
During the year there was no significant change in our risk position in relation to the cash flows of the Group’s principal six currency exposures (sterling, Swedish krona, euro, Australian dollar, Japanese yen and Canadian dollar). During the year, foreign currency loans have been designated as hedges on retranslation of net investments in foreign operations.
Sensitivity analysis
The sensitivity analysis set out below summarises the sensitivity of the market value of our financial instruments to hypothetical changes in market rates and prices. The range of variables chosen for the sensitivity analysis reflects our view of changes which are reasonably possible over a one year period. Market values are the present value of future cash flows based on market rates and prices at the valuation date. For long term debt, an increase in interest rates results in a decline in the fair value of debt.
The sensitivity analysis assumes an instantaneous 100 basis point change in interest rates in all currencies from their levels at 31 December 2007, with all other variables held constant. Based on the composition of our long term debt portfolio as at 31 December 2007, a 1% increase in interest rates would result in an additional $75m in interest expense being incurred per year. The exchange rate sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from their levels at 31 December 2007, with all other variables held constant. The +10% case assumes a 10% strengthening of the US dollar against all other currencies and the -10% case assumes a 10% weakening of the US dollar.
31 December 2007
| +1% | Interest rates -1% |
+10% | Exchange rates -10% |
|
|---|---|---|---|---|
| Increase/(decrease) in fair value of financial instruments | 666 | (779) | 165 | (165) |
| Impact on income statement: gain/(loss) | – | – | (37) | 37 |
| Impact on equity: gain/(loss) | – | – | 202 | (202) |
31 December 2006
| +1% | Interest rates -1% |
+10% | Exchange rates -10% |
|
|---|---|---|---|---|
| Increase/(decrease) in fair value of financial instruments | – | – | (185) | 185 |
| Impact on income statement: gain/(loss) | – | – | (104) | 104 |
| Impact on equity: gain/(loss) | – | – | (81) | 81 |
31 December 2005
| +1% | Interest rates -1% |
+10% | Exchange rates -10% |
|
|---|---|---|---|---|
| Increase/(decrease) in fair value of financial instruments | – | – | (113) | 113 |
| Impact on income statement: gain/(loss) | – | – | (67) | 67 |
| Impact on equity: gain/(loss) | – | – | (46) | 46 |
Credit risk
The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:
| 2007 $m |
2006 $m |
2005 $m |
|
|---|---|---|---|
| US | 1,961 | 1,491 | 1,305 |
| United Kingdom | 425 | 397 | 320 |
| Sweden | 260 | 242 | 176 |
| Euro-zone countries | 901 | 771 | 633 |
| Other European countries | 247 | 171 | 143 |
| Japan | 771 | 647 | 621 |
| Other countries | 761 | 569 | 566 |
| 5,326 | 4,288 | 3,764 |
The aging of trade receivables at the reporting date was:
| 2007 $m |
2006 $m |
2005 $m |
|
|---|---|---|---|
| Not past due | 4,930 | 3,966 | 3,481 |
| Overdue but renegotiated | 120 | 86 | 58 |
| Past due 0-90 days | 79 | 83 | 50 |
| Past due 90-180 days | 99 | 62 | 37 |
| Past due > 180 days | 98 | 91 | 138 |
| 5,326 | 4,288 | 3,764 |
The allowance for doubtful debts has been calculated based on past experience and is in relation to specific customers. Given the profile of our customers, including large wholesalers and government backed agencies, no further credit risk has been identified with the trade receivables not past due other than those balances for which an allowance has been made.
