Hedge of net investment in overseas operations
2011 £m
2010 £m
At 1 August 2 1
Valuation (losses)/gains on effective hedges (charged)/credited to equity (2) 1
At 31 July – 2
Notes to the consolidated financial statements continued
Year ended 31 July 2011
40. Additional information continued
Additional information about financial instruments continued
The Group also uses forward contracts and currency swaps to hedge cash flows in respect of committed transactions. At the balance sheet date the Group had entered into the following short-term forward contracts which were classified as fair value through profit or loss:
2011 2010 Currency million £m Currency million £m Bought/(sold) forward DKK 1,360 (160) DKK 1,418 (157) SEK 1,415 137 SEK 1,700 150 EUR 25 22 NOK 60 6 USD 1 1 EUR 5 4 – 3 The changes in value of these forward contracts during the year can be analysed as follows:
At fair value through profit and loss
2011 £m
2010 £m
At 1 August 3 7
Valuation losses charged to income statement (3) (4)
At 31 July – 3
Interest rate risk
To manage the Group’s exposure to interest rate fluctuations, the Group’s policy is that between 0 per cent and 50 per cent of projected borrowings required during the next two years should be at fixed rates. However, this percentage is regularly reviewed and may be overridden by the Board. It is the Group’s current intention to fix a greater percentage of its borrowings. The Group borrows in the desired currencies principally at rates determined by reference to short-term benchmark rates applicable to the relevant currency or market, such as LIBOR. Rates which reset at least every 12 months are regarded as floating rates, and the Group then uses interest rate swaps to generate the desired interest rate profile.
The Group reviews deposits and borrowings by currency at both Treasury Committee and Board meetings. The Treasury Committee gives prior approval to any variations from floating rate arrangements.
Interest rate swap contracts comprising fixed interest payable on notional principal of €100 million (2010: €300 million) were held at fair value through profit and loss at 31 July 2011 and expired on 13 August 2011. These swap contracts were
designated as cash flow hedges until 31 January 2010. As the cash flows which were the subject of the hedge relationship are still forecast to occur, valuation losses deferred in equity are being recycled over the duration of the previous hedge relationship.
At fair value through profit and loss
2011 £m
2010 £m
At 1 August (8) –
Transfer from hedge of interest rate cash flows – (12)
Settled 3 –
Valuation gains credited to income statement 3 4
40. Additional information continued
Additional information about financial instruments continued
The Group’s private placement borrowings are at fixed rates. Interest rate swap contracts comprising fixed interest receivable on notional principal of $729 million (2010: $729 million) are designated as hedges of the fair values of these borrowings. The movement in fair value of these interest rate swaps has been analysed into a proportion that is effective as a hedge, and a proportion that is ineffective; both portions have been charged to the income statement with the effective portion offsetting the change in fair value of the hedged borrowings (see note 6). The contracts expire between November 2012 and November 2020 and the fixed interest rates range between 4.93 per cent and 5.32 per cent (2010: 4.93 per cent and 5.32 per cent).
Hedge of fair value of fixed interest borrowings
2011 £m
2010 £m
At 1 August 71 38
Valuation (losses)/gains (charged)/credited to income statement (4) 30
Exchange (3) 3
At 31 July 64 71
Credit risk
Wolseley provides sales on credit terms to many of its customers. There is an associated risk that customers may not be able to pay outstanding balances. The Group’s construction loan business also provides loans to finance the construction of properties. There is an associated risk that customers may not be able to pay outstanding loan balances. At 31 July 2011 the maximum exposure to credit risk was £1,872 million (2010: £1,863 million) of which £33 million (2010: £80 million) is secured against properties under construction or completed properties awaiting sale.
Each of the businesses have established procedures in place to review and collect outstanding receivables. Significant outstanding and overdue balances are reviewed on a regular basis and resulting actions are put in place on a timely basis. In many cases, protection is provided through lien rights on projects, or through credit insurance arrangements. All of the major businesses use professional, dedicated credit teams, in some cases field-based. Appropriate provisions are made for debts that may be impaired on a timely basis. Concentration of credit risk in trade receivables is limited as the Group’s customer base is large and unrelated. Accordingly, management consider that there is no further credit risk provision required above the current provision for impairment.
The Group’s construction loans are secured on the related properties and are managed by a dedicated lending team within that business. Policies are also applied to provide further protection and KPIs are monitored regularly by management outside the business.
The Group has cash balances deposited for short periods with financial institutions, and enters into certain contracts (such as interest rate swaps) which entitle the Group to receive future cash flows from financial institutions. These transactions give rise to credit risk on amounts due from counterparties with a maximum exposure of £470 million (2010: £744 million). This risk is managed by setting credit and settlement limits for a panel of approved counterparties, all of which have credit ratings equivalent to Standard & Poor’s A or higher. In exceptional circumstances the Treasury Committee will allow deposits with relationship banks with other investment grade ratings, subject to close monitoring of the exposure. The limits are approved by the Treasury Committee and ratings are monitored regularly.
Market price risk
The Group monitors its interest rate and currency risk by reviewing the effect on financial instruments over various periods of a range of possible changes in interest rates and exchange rates. The Group does not consider it has a material exposure to changes in interest rates. The Group has estimated that a weakening of sterling by ten per cent against all the currencies in which the Group does business would result in a charge to equity of £66 million (2010: £62 million), arising from the translation of borrowings denominated in foreign currency, and would have no material effect on the income statement.
The Group does not require operating businesses to adhere to a formalised risk management policy in respect of trade credit risk or commodity price risk, and does not consider that there is a useful way of quantifying the Group’s exposure to any of the macro-economic variables that might affect the collectability of receivables or the prices of commodities.
Notes to the consolidated financial statements continued
Year ended 31 July 2011