Annual report and accounts 2023 - Flipbook - Page 169
Strategic Report
Corporate Governance
Accounts
(iv) Extension and termination options
Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise operational flexibility in terms
of managing the assets used in the Group’s operations. The majority of extension and termination options are exercisable only by the Group and not by the respective lessor.
(v)
Residual value guarantees
To optimise lease costs during the contract period, the Group sometimes provides residual value guarantees in relation to equipment leases.
The Group initially estimates and recognises amounts expected to be paid under residual value guarantee as part of the lease liability. Typically, the expected residual value
at lease commencement is equal to or higher than the guaranteed amount, so the Group does not expect to pay anything under the guarantees.
14.
Financial instruments
2023
£m
2022
£m
Derivative financial assets – current
Derivatives that are designated and effective as hedging instruments carried at fair value:
Foreign currency forward contracts
0.1
–
Derivative financial liabilities – current
Derivatives that are designated and effective as hedging instruments carried at fair value:
Foreign currency forward contracts
0.1
0.2
It is the policy of the Group to enter into foreign exchange forward contracts to manage the foreign currency risk associated with anticipated purchase transactions out to
18 months. This is hedged on a sliding scale basis where the nearer the time of the purchase, the greater the amount hedged will be.
For the hedges of highly probable forecast purchases, as the critical terms (i.e. the notional amount, life and underlying contracts) of the foreign exchange forward contracts
and their corresponding hedged items are the same, the Group performs a qualitative assessment of effectiveness and it is expected that the value of the forward contracts
and the value of the corresponding hedged items will systematically change in opposite direction in response to movements in the underlying exchange rates. The Group
assesses the ineffectiveness by comparing past changes in the fair value of the foreign exchange forward contracts with changes in the fair value of a hypothetical derivative.
The main sources of hedge ineffectiveness in these hedging relationships are foreign currency basis spread and the effect of the counterparty and the Group’s own credit risk
on the fair value of the forward contracts, which is not reflected in the fair value of the hedged item attributable to changes in foreign exchange rates. Both items are not
material to the Group. No other sources of ineffectiveness emerged from these hedge relationships.
The cumulative amount of gains and losses on effective hedging instruments are held within the cashflow reserve in ‘Other reserves’.
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