Currency movements can have a material effect on the Group’s reported financial performance that does not reflect the underlying trading performance of the Group for the period.
In particular, the GBP exchange rates against the USD, EUR and the NOK influence the reported income statement, the cash flow and the closing net cash position (as set out in the cash flow statement). The principal spot rates during the first half were as follows:
|30 June||31 Dec|
|£1 ~ USD||$1.61||$1.57|
|£1 ~ Euro||€1.11||€1.17|
|£1 ~ NOK||NOK8.61||NOK9.10|
|H1 2011||H1 2010|
|£1 ~ USD||$1.62||$1.52|
|£1 ~ Euro||€1.15||€1.15|
|£1 ~ NOK||NOK9.01||NOK9.21|
The movements affected the reported performance in two main ways:
Foreign exchange and commodity derivatives are held to hedge future transactions. IAS 39 requires that these derivatives are reported at market value at the balance sheet date. The Group has chosen not to hedge account for these derivatives and consequently gains or losses arising from changes in market value are included in the reported income statement. The non-cash unrealised gain/loss arising in the period is excluded from underlying profit. The value of the derivative hedge book is recognised in underlying profit when the derivatives are actually settled (i.e. utilised by matching with cash flows in the period).
The Group’s financial instruments mainly comprise forward contracts for foreign exchange and swap contracts for interest rates, commodities and jet fuel. Due to the significant net USD income of the Group, the principal mark-to-market adjustments relate to the GBP~USD hedge book which, together with the value of the other instruments, is included within net financing income in the income statement of £421m (£1,069m expense in H1 2010), contributing to a reported profit before tax of £1,137m (H1 2010 loss of £475m).
Excluding the mark-to-market adjustments, the underlying profit before tax of £595m included £23m of foreign exchange benefits compared with H1 2010. The achieved exchange rate on selling net USD income was around nine cents better in the first half than for the same period in 2010, contributing £36m of transactional benefits, partially offset by a £13m translational loss related to lower average USD rates. For the full year, the achieved USD exchange rate is expected to improve by around eight cents compared with 2010.
The Group maintains a number of currency cash balances which vary throughout the period. These were impacted by the movements in exchange rates during the period, causing a small improvement of £18m in the periodic cash flow and hence the closing balance sheet net cash position.