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20. Derivative financial instruments

  2008 2007
  Current Non-current Current
  Assets
£m
Liabilities
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Forward currency contracts          
  not hedge accounted 13 (171) 23 (6)
  hedge accounted (6) (2) 1
Commodity contracts — not hedge accounted (2) (1)
Embedded derivatives 49 (11) 1 (6)
Net investment hedges (17)
  62 (190) (2) 25 (30)

The amounts in respect of embedded derivatives primarily represent the movement between 1 January 2008 and 31 December 2008 or date of maturity in the value of the embedded derivatives in commercial contracts between European Aerospace subsidiaries and customers and suppliers outside the USA which are denominated in US dollars.

Forward foreign exchange contracts, commodity contracts and embedded derivatives are marked to market using published prices, with forward foreign exchange contracts and commodity contracts being settled on a net basis.

Hedge accounting

Cash flow hedges

The Group manages exposure to foreign currency fluctuations on outstanding purchase and sale agreements using forward foreign currency contracts. The Group has adopted transactional foreign exchange hedge accounting in a limited number of contracts. The value of forward foreign exchange contracts subject to hedge accounting was £8 million liability (2007 – £1 million asset). The net cash flows and profit impact will occur during 2009 to 2012 (2007 – during 2008). A £7 million loss was recognised in equity during the year (2007 – £1 million gain) in respect of contracts outstanding at 31 December. An accumulated gain of £1 million was removed from equity during the year and included in the income statement as a £1 million gain in cost of sales. Cash flow hedging was 100% effective during 2008 and 2007.

Net investment hedging

See note 19 . For the purposes of hedge accounting, net investment hedging was 100% effective during 2008 and 2007. 

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