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Details of the Group's policies on the use of financial instruments are given in note 28 and in the accounting policies.
In accordance with the option allowed by IFRS 1 'First time adoption of International Financial Reporting Standards', the Group has implemented IAS 32 and IAS 39 Financial Instruments prospectively from January 1, 2005 (see note 33).
The values of other financial assets and liabilities held by the Group are as follows:
| Foreign exchange contracts £m |
Commodity contracts £m |
Interest rate contracts £m |
Financial RRSPs £m |
B Shares £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Assets | 364 | 31 | 69 | — | — | 464 |
| Liabilities | (136) | — | (7) | (423) | (7) | (573) |
| 228 | 31 | 62 | (423) | (7) | (109) | |
Other financial liabilities are analysed as follows: |
||||||
| Current liabilities | (234) | |||||
| Non-current liabilities | (339) | |||||
| (573) | ||||||
The Group uses various financial instruments to manage its exposure to movements in foreign exchange rates. The Group uses commodity swaps to manage its exposure to movements in the price of jet fuel. From January 1, 2005, the Group does not include foreign exchange or commodity financial instruments in any cash flow hedging relationships for accounting purposes. To hedge the currency risk associated with a borrowing denominated in US$, the Group has currency derivatives designated as part of a fair value hedge.
Movements in the fair values of foreign exchange and commodity financial instruments were as follows:
| Total £m |
Included in transition hedging reserve £m |
Included in income statement £m |
|
|---|---|---|---|
| Fair value at January 1, 2005 on implementation of IAS 39 | 986 | 9861 | |
| Fair value changes to derivative contracts not in accounting hedging relationships |
(399) | — | (399) |
| Fair value changes to fair value hedges | 5 | — | 5 |
| Fair value of contracts utilised | (364) | — | — |
| Transferred to income statement | — | (448)1 | 448 |
| Fair value at December 31, 2005 | 228 | 538 |
- 1 Additionallly £10m relating to derivatives settled prior to transition to IFRS was included in the transition hedging reserve and transferred to the income statement for the year.
| Total £m |
Included in transition hedging reserve £m |
Included in income statement £m |
|
|---|---|---|---|
| Fair value at January 1, 2005 on implementation of IAS 39 | 9 | 9 | |
| Fair value changes to derivative contracts not in accounting hedging relationships |
54 | — | 54 |
| Fair value of contracts utilised | (32) | — | — |
| Transferred to income statement | — | (4) | 4 |
| Fair value at December 31, 2005 | 31 | 5 |
Where applicable, market values have been used to determine fair values. Where market values are not available, fair values have been calculated by discounting expected future cash flows at prevailing interest and exchange rates.
The Group uses interest rate swaps, forward rate agreements and interest rate caps to manage its exposure to movements in interest rates. Where the effectiveness of the hedge relationship in a cash flow hedge is demonstrated, changes in the fair value are included in the hedging reserve and released to match actual payments on the hedged item.
Movements in the fair values of interest rate financial instruments were as follows:
| Total £m |
Included in fair value hedging relationships £m |
Other interest rate financial instruments £m |
Included in cash flow hedging reserve £m |
Included in income statement £m |
|
|---|---|---|---|---|---|
| Fair value at January 1, 2005 on implementation of IAS 39 |
110 | 121 | (11) | (3) | |
| Changes deemed effective for cash flow hedge accounting purposes |
— | — | — | — | — |
| Changes deemed ineffective for cash flow hedge accounting purposes |
4 | — | 4 | — | 4 |
| Other changes | (52) | (52) | — | — | (52) |
| Transferred to income statement | — | — | — | 3 | (3) |
| Fair value at December 31, 2005 | 62 | 69 | (7) | — |
Financial risk and revenue sharing partnerships (RRSPs)
The Group has financial liabilities arising from financial RRSPs. These financial liabilities are valued at each reporting date using the amortised cost method. This involves calculating the present value of the forecast cash flows of the arrangements using the internal rate of return at the inception of the arrangements as the discount rate.
Movements in the amortised cost values of RRSPs were as follows:
| £m | £m | |
|---|---|---|
| On implementation of IAS 32 and IAS 39 at January 1, 2005 | 468 | |
| Cash paid to partners | (58) | |
| Amount included in the income statement: | ||
| Financing charge | 43 | |
| Excluded from underlying profit: | ||
| Exchange adjustments | 56 | |
| Restructuring of RRSP agreements and forecast adjustments | (86) | 13 |
| At December 31, 2005 | 423 |
Own share total return swaps
The Group entered into forward contracts to purchase its own shares for the purposes of meeting obligations to issue shares under employee share schemes. Under IAS 32, these contracts were categorised as financial liabilities and accounted for on the amortised cost basis. These contracts have been settled during the year.
| £m | |
|---|---|
| At January 1, 2005 on implementation of IAS 39 | 142 |
| On settlement of forward purchase contracts | (141) |
| Transferred to income statement | (1) |
| Fair value at December 31, 2005 | — |
B Shares
Since July 2004, the Company has issued non-cumulative redeemable convertible preference shares (B Shares) as an alternative to paying a cash dividend. Shareholders are able to redeem any number of their B Shares for cash or convert them into ordinary shares. Any B Shares retained, attract a dividend of 75 per cent of LIBOR on the 0.1p nominal value of each share, paid on a twice-yearly basis, and have limited voting rights. In certain circumstances the Company has the option to compulsorily redeem the B Shares, at any time if the aggregate number of B Shares in issue is less than ten per cent of the aggregate number of B Shares issued, or on the acquisition or capital restructuring of the Company.
On a return of capital on a winding-up, the holders of B Shares shall be entitled, in priority to any payment to the holders of ordinary shares, to the repayment of the nominal capital paid-up or credited as paid-up on the B Shares held by them, together with a sum equal to the outstanding preferential dividend which will have been accrued but not been paid until the date of return of capital.
Movements in the B Shares during the year were as follows:
| B Shares of 0.01p |
Nominal value £m |
|
|---|---|---|
| Authorised | ||
| At January 1, and December 31, 2005 | 1,000,000,000,000 | 1,000 |
| Issued and fully paid | ||
| At January 1, 20051 | 4,600,710,064 | 5 |
| Shares issued | 141,013,817,330 | 141 |
| Shares converted into ordinary shares | (87,425,228,890) | (87) |
| Shares redeemed | (51,638,258,304) | (52) |
| At December 31, 2005 | 6,551,040,200 | 7 |
- The adoption of IAS 32 and IAS 39 from January 1, 2005 has led to the reclassification of B Shares from equity to other financial liabilities.