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Note 31: Financial instruments

a  Fair values of financial assets and financial liabilities

The fair values of the Group’s financial instruments are disclosed in hierarchy levels depending on the nature of the inputs used in determining the fair values as follows:

Level 1:  Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:  Inputs other than quoted prices included within level 1, that are observable for the asset or liability,                either directly or indirectly.

Level 3:  Inputs for the asset or liability that are not based on observable market data.

The carrying amounts and fair values of the Group’s financial assets and liabilities at 31 March 2010 are set out below:

  Group
Fair value   Carrying value
£ million Level 1 Level 2 Level 3 Total   Total
Financial assets:
Available-for-sale financial assets 14 62 76 76
Forward currency contracts* 21 21 21
Fuel derivatives*   80   80   80
Financial liabilities:
Interest-bearing loans and borrowings:
Finance lease and hire purchase obligations 2,599 2,599 2,518
Fixed rate borrowings 535 443 978 856
Floating rate borrowings 628 628 628
Cross currency swaps** 5 5 5
Forward currency contracts** 3 3 3
Fuel derivatives**   9   9   9

*Current portion of derivative financial assets is £74 million.

**Current portion of derivative financial liabilities is £12 million.

The fair values of the Group’s financial assets and liabilities at 31 March 2009 are set out below:

  Group
Fair value   Carrying value
£ million Level 1 Level 2 Level 3 Total   Total
Financial assets:
Available-for-sale financial assets 8 57 65 65
Forward currency contracts*   43   43   43
Financial liabilities:
Interest-bearing loans and borrowings:
Finance lease and hire purchase obligations 3,030 3,030 2,915
Fixed rate borrowings 386 386 442
Floating rate borrowings 406 406 406
Cross currency swaps** 7 7 7
Forward currency contracts** 18 18 18
Fuel derivatives**   569   569   569

*Current portion of derivative financial assets is £40 million.

**Current portion of derivative financial liabilities is £471 million.

The fair values of the Company’s financial assets and liabilities at 31 March 2010 are set out below:

  Company
Fair value   Carrying value
£ million Level 1 Level 2 Level 3 Total   Total
Financial assets:
Available-for-sale financial assets 21 21 21
Forward currency contracts* 21 21 21
Fuel derivatives*   80   80   80
Financial liabilities:
Interest-bearing loans and borrowings:
Finance lease and hire purchase obligations 2,796 2,796 2,698
Fixed rate borrowings 535 536 1,071 969
Floating rate borrowings 585 585 585
Cross currency swaps** 5 5 5
Forward currency contracts** 4 4 4
Fuel derivatives**   9   9   9

*Current portion of derivative financial assets is £74 million.

**Current portion of derivative financial liabilities is £13 million.

The fair values of the Company’s financial assets and liabilities at 31 March 2009 are set out below:

  Company
Fair value   Carrying value
£ million Level 1 Level 2 Level 3 Total   Total
Financial assets:
Available-for-sale financial assets 27 27 27
Forward currency contracts*   43   43   43
Financial liabilities:
Interest-bearing loans and borrowings:
Finance lease and hire purchase obligations 3,239 3,239 3,104
Fixed rate borrowings 490 490 556
Floating rate borrowings 362 362 362
Cross currency swaps** 7 7 7
Forward currency contracts** 18 18 18
Fuel derivatives**   569   569   569

*Current portion of derivative financial assets is £40 million.

**Current portion of derivative financial liabilities is £471 million.

The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments:

Available-for-sale financial assets and loan notes

Listed fixed asset investments (level 1) are stated at market value as at 31 March 2010. For other investments (level 3) the fair value cannot be measured reliably, as such these assets are stated at historic cost less accumulated impairment losses.

Bank and other loans, finance leases, hire purchase arrangements and the non-Japanese yen denominated portions of hire purchase arrangements carrying fixed rates of interest

The repayments that the Group is committed to make have been discounted at the relevant market interest rates applicable at 31 March 2010 (level 2).

Japanese yen denominated portions of hire purchase arrangements carrying fixed rates of interest

These amounts relate to the tax equity portions of Japanese leveraged leases which are personal to the Group, cannot be assigned and could not be refinanced or replaced in the same cross-border market on a marked-to-market basis. The carrying value of £276 million (2009: £722 million) is determined with reference to the effective interest rate (level 2).

Euro-sterling notes and Euro-sterling bond 2016

These are stated at quoted market value (level 1).

Convertible bond 2014

These are stated at quoted market value (level 1).

Forward currency transactions and over-the-counter (OTC) fuel derivatives

These are stated at the market value of instruments with similar terms and conditions at the balance sheet date (level 2).

b  Level 3 financial assets reconciliation

The following table summarises key movements in level 3 financial assets:

  Group   Company
£ million 2010 2009   2010 2009
At 1 April 57 67 27  24
Write-up/(impairment) of available-for-sale financial assets (note 20) 11 (13)
Repayment of loan notes (classified as available-for-sale financial assets) (7) (7)
Interest accrued on loan notes (classified as available-for-sale financial assets) 1 3   1 3
At 31 March 62 57   21 27

c  Hedges

i  Cash flow hedges

At 31 March 2010 the Group and Company held four principal risk management activities that were designated as hedges of future forecast transactions. These were:

  • A hedge of a proportion of future long-term revenue receipts by future debt repayments in foreign currency hedging future foreign exchange risk;
  • A hedge of certain short-term revenue receipts by foreign exchange contracts hedging future foreign exchange risk;
  • A hedge of certain short-term foreign currency operational payments by forward exchange contracts hedging future foreign exchange risk; and
  • A hedge of future jet fuel purchases by forward crude, gas oil and jet kerosene derivative contracts hedging future fuel price risk.

To the extent that the hedges were assessed as highly effective, a summary of the amounts included in equity and the periods in which the related cash flows are expected to occur are summarised below:

  Group
£ million Within
6 months
6-12
months
1-2 years 2-5 years More than
5 years
Total
2010
Debt repayments to hedge future revenue 24 22 48 148 92 334
Forward contracts to hedge future payments (15) (5) (20)
Hedges of future fuel purchases (8) (18) (24)     (50)
1 (1) 24 148 92 264
Related deferred tax charge           (74)
Total amount included within equity           190

Notional value of financial instruments used as cash flow hedging instruments:

  Group   Company
million Notional
amount
  Notional
amount
To hedge future currency revenues against US dollars $289   $289
To hedge future currency revenues against sterling   £27
To hedge future operating payments against US dollars $185   $185
To hedge future Brazilian real capital payments against US dollars $12   $12
Hedges of future fuel purchases $2,922   $2,922
Debt repayments to hedge future revenue
– US dollars $1,926   $1,926
– euro €188   €188
– Japanese yen ¥73,568   ¥73,568
  Group
£ million Within
6 months
6-12
months
1-2 years 2-5 years More than
5 years
Total
2009
Debt repayments to hedge future revenue 30 30 69 178 150 457
Forward contracts to hedge future payments (10) (6) (1) (17)
Hedges of future fuel purchases 361 178 97 2   638
381 202 165 180 150 1,078
Related deferred tax charge           (301)
Total amount included within equity           777

Notional value of financial instruments used as cash flow hedging instruments:

  Group   Company
million Notional
amount
  Notional
amount
To hedge future currency revenues against US dollars $118   $118
To hedge future currency revenues against sterling £60   £60
To hedge future operating payments against US dollars $365   $365
To hedge future Brazilian real capital payments against US dollars $67   $67
Hedges of future fuel purchases $2,612   $2,612
Debt repayments to hedge future revenue
– US dollars $1,570   $1,570
– euro €77   €77
– Japanese yen ¥95,358   ¥95,358

The ineffective portion recognised in the income statement that arose from hedges of future fuel purchases amounts to a gain of £14 million (2009: £7 million loss). There was no ineffective portion of cash flow hedges other than hedges of future fuel purchases. In the current year, £21 million (2009: £5 million) of cash flow hedging losses previously recognised in equity were transferred to the income statement, relating to forecast transactions (future revenue) that are no longer expected to occur.

ii  Fair value hedges

The Group has no hedges designated as fair value hedges.

iii  Net investments in foreign operations

The Group has no hedges designated as hedges of net investments in foreign operations.

Company

The Company undertakes hedging activities on behalf of other companies within the Group and performs the treasury activities of the Group centrally. As a result, the disclosures above apply to the Company as for the Group.

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