4.4 Derivative financial instruments

Accounting policies

Derivative financial instruments

Derivative financial instruments are initially recognised at fair value on the contract date and are subsequently measured at their fair value at each balance sheet date. The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the item being hedged. At 27 November 2011 the Group's derivative financial instruments consist of interest rate swaps which are designated as cash flow hedges of the future interest payments, and forward foreign exchange contracts which are designated as cash flow hedges of highly probable forecast transactions.

The Group documents at the inception of the hedge the relationship between hedging instruments and hedged items, the risk management objectives and strategy and its assessment of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

This assessment is performed retrospectively at each financial reporting period. Movements on the hedging reserve within shareholders' equity are shown in the consolidated statement of comprehensive income. The full fair value of hedging derivatives are classified as current when the remaining maturity of the hedged item is less than 12 months.

Cash flow hedging

The effective portion of changes in the fair value of derivatives that are designated as cash flow hedges and qualify for hedge accounting is recognised in equity. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects profit or loss. When the hedged forecast transaction results in the recognition of property, plant and equipment the gains or losses previously deferred in equity are included in the initial cost of the asset and are ultimately recognised in profit or loss within the depreciation expense. During the period all the Group's cash flow hedges were 100% effective and there is therefore no ineffective portion recognised in profit or loss.

4.4.1 Derivative financial instruments

27 November
28 November
Derivative asset

Forward foreign exchange contracts (cash flow hedges) 11 472

Derivative liability

Forward foreign exchange contracts (cash flow hedges) (266)
Interest rate swaps (cash flow hedges) (52)


Forward foreign exchange contracts

The notional principal amounts of the outstanding forward foreign exchange contracts at 27 November 2011 were €31.6 million (2010: €17.6 million). The corresponding amounts in sterling at 27 November 2011 were £27.4 million (2010: £14.1 million).

The hedged highly probable forecast transactions denominated in foreign currency are expected to occur at various dates during the next ten months. Cumulative gains and losses recognised in the hedging reserve within other comprehensive income are £1.4 million (2010: £0.8 million). These gains are recognised in the income statement in periods during which the hedged forecast transaction affects the income statement, which for property, plant and equipment is over the useful life of the asset (three to 25 years).

Interest rate swaps

The Group has entered into interest rate swaps to convert interest payable on certain floating rate debt from a variable to a fixed interest rate. As at 27 November 2011 the notional amount of interest rate swaps was £25.4 million (2010: £nil), representing 50.25% (2010: nil) of gross Group borrowings.

The swaps have been accounted for as cash flow hedges with interest payable on non-current borrowings designated as the hedged item. The hedged item and the hedging interest have the same critical terms and thus all hedges were highly effective for the period.