Notes to the Financial Statements (Group)
- 16 Financial instruments
- 17 Trade and other payables
- 18 Provisions for liabilities and charges
- 19 Capital and reserves
- 20 Share capital of parent company
16 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 2008, 31 December 2007 and 31 December 2006. None of the financial assets or financial liabilities have been reclassified during the year.
Other financial assets represent trade and other receivables (Note 12) excluding prepayments and accrued income. Other financial liabilities represent trade and other payables (Note 17) and provisions (Note 18) excluding deferred income.
| |
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 |
|---|---|---|---|---|---|---|---|
| 2008 | |||||||
| Cash and cash equivalents | – | – | – | – | 4,286 | 4,286 | 4,286 |
| Overdrafts | – | – | – | – | (163) | (163) | (163) |
| Loans due within one year | – | – | – | – | (830) | (830) | (830) |
| Loans due after more than one year | (1,113) | (1,727) | – | – | (8,015) | (10,855) | (11,238) |
| Derivative financial instruments | 221 | 63 | – | – | – | 284 | 284 |
| Other investments | – | – | 156 | 50 | 54 | 260 | 260 |
| Other financial assets | – | – | – | – | 6,580 | 6,580 | 6,580 |
| Other financial liabilities | – | – | – | – | (8,381) | (8,381) | (8,381) |
| 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 financial instruments | 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 financial instruments | 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) |
Credit risk increased the fair value of the bonds designated as fair value through profit or loss by $113m for the year and by $134m 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 together with their carrying values are as follows:
- Cash and overdrafts – held on the balance sheet at amortised costs. Fair value approximates to carrying value.
- Loans due within one year and after more than one year – 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 the frequency of resets. The carrying value of loans designated at fair value through profit or loss is the fair value. For loans designated as other items at fair value, carrying value is initially measured at fair value and remeasured for fair value changes in respect of the hedged risk at each balance sheet date. All other loans are held at amortised cost.
- Derivative financial instruments – consists of interest rate swaps (included in designated as fair value through profit or loss upon initial recognition or as a fair value hedge), forward foreign exchange contracts and foreign currency option contracts (included in derivatives and other items at fair value).
- Interest rate swaps – the fair value is estimated using appropriate zero coupon curve valuation techniques based on rates current at year end.
- Forward foreign exchange contracts – the majority of contracts for existing transactions had 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 the year end.
- Foreign currency option contracts – the fair value of option contracts is estimated using Black-Scholes valuation techniques.
- Other investments – includes equity securities held on the balance sheet as other investments (Note 10). The fair value of listed investments is based on year end quoted market prices. For unlisted investments, carrying values approximate fair value.
- Other financial assets and other financial liabilities – held on the balance sheet at amortised costs with carrying value being a reasonable approximation of fair value.
The interest rates used to discount future cash flows, where applicable, are based on market swap curves at the reporting date, and were as follows:
| 2008 | 2007 | 2006 | |
|---|---|---|---|
| Derivatives | 3.8% to 4.6% | 4.3% to 5.1% | 4.9% to 5.3% |
| Loans and borrowings | 3.8% to 4.6% | 4.3% to 5.1% | 4.9% to 5.3% |
Net gains and losses on financial assets and financial liabilities
| 2008 $m |
2007 $m |
2006 $m |
|
|---|---|---|---|
| Included in operating profit (Losses)/gains on forward foreign exchange contracts |
(399) | (59) | 168 |
| Gains/(losses) on receivables and payables | 391 | 74 | (183) |
| Losses on investments designated at fair value through profit or loss | – | (1) | (13) |
| (Losses)/gains on available for sale current investments | (25) | (21) | 5 |
| (33) | (7) | (23) | |
| Included in finance income and expense Interest and fair value adjustments in respect of debt designated at fair value through profit or loss, net of derivatives |
87 | (22) | (59) |
| Interest and changes in carrying values of debt designated as hedged items, net of derivatives | (64) | (28) | – |
| Interest and fair value changes on fixed and short-term deposits and equity securities | 140 | 344 | 368 |
| Interest on debt, overdrafts and commercial paper held at amortised cost | (609) | (436) | (11) |
| Exchange losses on financial assets and liabilities | (12) | (3) | (14) |
| (458) | (145) | 284 |
$180m fair value gains on hedging instruments and $183m 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. $153m fair value gains on hedging instruments and $23m fair value losses on the hedged items have been included within interest and fair value adjustments in respect of debt designated at fair value through profit or loss, net of derivatives.
$294m of gains on financial assets and liabilities have been taken directly to equity (2007: losses $70m; 2006: losses $20m).
Ineffectiveness on the net investment hedge taken to the income statement was $nil (2007: $nil; 2006: $nil).
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:
| 31 December 2008 |
Bank overdrafts and other loans $m |
Bonds $m |
Trade, other payables and provisions $m |
Total $m |
|---|---|---|---|---|
| Within one year | 345 | 1,271 | 7,778 | 9,394 |
| In one to two years | – | 2,335 | 601 | 2,936 |
| In two to three years | – | 465 | – | 465 |
| In three to four years | – | 2,241 | – | 2,241 |
| In four to five years | – | 424 | – | 424 |
| In more than five years | – | 12,478 | – | 12,478 |
| 345 | 19,214 | 8,379 | 27,938 | |
| Effect of interest | (2) | (7,956) | – | (7,958) |
| Effect of discounting, fair values and issue costs | – | 247 | – | 247 |
| 31 December 2008 | 343 | 11,505 | 8,379 | 20,227 |
| 31 December 2007 |
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 2008, 31 December 2007 and 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.
| 2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Total $m |
Fixed rate $m |
Floating rate $m |
Total $m |
Fixed rate $m |
Floating rate $m |
Total $m |
Fixed rate $m |
Floating rate $m |
|
| Financial liabilities Interest bearing loans and borrowings Current |
993 | – | 993 | 4,280 | – | 4,280 | 136 | – | 136 |
| Non-current | 10,855 | 8,015 | 2,840 | 10,876 | 7,594 | 3,282 | 1,087 | – | 1,087 |
| 11,848 | 8,015 | 3,833 | 15,156 | 7,594 | 7,562 | 1,223 | – | 1,223 | |
| Financial assets | |||||||||
| Fixed deposits | 54 | – | 54 | 60 | – | 60 | 559 | – | 559 |
| Cash and cash equivalents | 4,286 | – | 4,286 | 5,867 | – | 5,867 | 7,103 | – | 7,103 |
| 4,340 | – | 4,340 | 5,927 | – | 5,927 | 7,662 | – | 7,662 | |
In addition to the financial assets above, there are $7,070m (2007: $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
Translational
During the year there has been a significant movement in exchange rates for the Group’s principal six currency exposures: sterling (GBP), Swedish krona (SEK), euro (EUR), Australian dollar (AUD), Japanese yen (JPY) and Canadian dollar (CAD). The weakness of our cost currencies sterling and Swedish krona relative to euro which is our main non-US dollars income currency has resulted in a net benefit for the Group. No hedges were outstanding as at 31 December 2008.
Transactional
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 against individual Group companies’ reporting currency.
The table below sets out the principal foreign exchange contracts outstanding at 31 December 2008, 31 December 2007 and 31 December 2006 along with the underlying gross exposure as defined above.
| 2008 | GBP $m |
SEK $m |
EUR $m |
AUD $m |
JPY $m |
CAD $m |
|---|---|---|---|---|---|---|
| Gross exposure | (676) | (444) | 505 | 57 | 166 | 49 |
| Forward exchange contracts | 690 | 445 | (512) | (52) | (166) | (24) |
| Net exposure | 14 | 1 | (7) | 5 | – | 25 |
| 2007 | GBP $m |
SEK $m |
EUR $m |
AUD $m |
JPY $m |
CAD $m |
|---|---|---|---|---|---|---|
| Gross exposure | (536) | (476) | 627 | 24 | 168 | 57 |
| Forward exchange contracts | 530 | 494 | (627) | (24) | (168) | (57) |
| Net exposure | (6) | 18 | – | – | – | – |
| 2006 | GBP $m |
SEK $m |
EUR $m |
AUD $m |
JPY $m |
CAD $m |
|---|---|---|---|---|---|---|
| Gross exposure | (429) | (697) | 625 | 37 | 169 | 61 |
| Forward exchange contracts | 653 | 1,104 | (938) | (57) | (279) | (43) |
| Net exposure | 224 | 407 | (313) | (20) | (110) | 18 |
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 2008, with all other variables held constant. Based on the composition of our long-term debt portfolio as at 31 December 2008, a 1% increase in interest rates would result in an additional $38m 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 2008, 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.
Each incremental 10% movement in foreign currency exchange rates would have approximately the same effect as the initial 10% detailed in the table below.
31 December 2008
| +1% | Interest rates -1% |
+10% | Exchange rates -10% |
|
|---|---|---|---|---|
| Increase/(decrease) in fair value of financial instruments | 587 | (706) | 217 | (217) |
| Impact on income statement: gain/(loss) | – | – | (57) | 57 |
| Impact on equity: gain/(loss) | – | – | 274 | (274) |
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 |
There has been no change in the methods and assumptions used in preparing the above sensitivity analysis over the three year period.
Credit risk
The carrying amount of financial assets, being cash and cash equivalents, derivative assets, other investments and other financial assets (consisting of trade and other receivables) represent the maximum credit exposure.
The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:
| 2008 $m |
2007 $m |
2006 $m |
|
|---|---|---|---|
| US | 2,032 | 1,961 | 1,491 |
| United Kingdom | 459 | 425 | 397 |
| Sweden | 226 | 260 | 242 |
| Euro-zone countries | 833 | 901 | 771 |
| Other European countries | 257 | 247 | 171 |
| Japan | 955 | 771 | 647 |
| Other countries | 796 | 761 | 569 |
| 5,558 | 5,326 | 4,288 |
In the US, sales to three wholesalers accounted for approximately 81% of US sales (2007: three wholesalers accounted for approximately 82%; 2006 three wholesalers accounted for approximately 80%).
The ageing of trade receivables at the reporting date was:
| 2008 $m |
2007 $m |
2006 $m |
|
|---|---|---|---|
| Not past due | 5,262 | 4,930 | 3,966 |
| Overdue but renegotiated | 3 | 120 | 86 |
| Past due 0-90 days | 106 | 79 | 83 |
| Past due 90-180 days | 60 | 99 | 62 |
| Past due > 180 days | 127 | 98 | 91 |
| 5,558 | 5,326 | 4,288 |
| 2008 $m |
2007 $m |
2006 $m |
|
|---|---|---|---|
| Movements in provisions for trade receivable impairments Balance at beginning of year |
89 | 52 | 45 |
| Income statement charge | 23 | 34 | 4 |
| Amounts utilised, exchange and other movements | (13) | 3 | 3 |
| Balance at end of year | 99 | 89 | 52 |
The allowance for impairment 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.
