41061 Unite AR22 HI-RES WEB-READY - Flipbook - Page 217
STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
215
OTHER INFORMATION
4.2 Interest rate swaps
The Group uses interest rate swaps to manage the Group’s exposure to interest rate fluctuations. In accordance with the
Group’s Treasury Policy, the Group does not hold or issue interest rate swaps for trading purposes and only holds swaps
which are considered to be commercially effective. The derivatives of the Company are the same as those of the Group,
and the hedge accounting disclosures in note 4.5a are also relevant for the Company.
Accounting policies
Interest rate swaps are recognised initially and subsequently at fair value, with mark to market movements recognised
in the income statement unless cash flow hedge accounting is applied.
The Group designates certain interest rate derivatives as hedging instruments. The interest rate swap is designated
as the hedging instrument in a hedge of the variability in cash flows attributable to the interest risk of borrowings. At
inception the Group documents the relationship between the hedging instrument and the hedged item, along with the
risk management objectives and its strategy for undertaking various hedge transactions.
Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging
instrument is effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged
risk, which is when the hedging relationships meet all of the following hedge effectiveness requirements:
•
there is an economic relationship between the hedged item and the hedging instrument;
•
the effect of credit risk does not dominate the value changes that result from that economic relationship; and
•
the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that
the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that
quantity of hedged item.
The effective portion of changes in fair value of the interest rate swap is recognised in Other Comprehensive Income
and presented under the heading of Hedging reserve in equity, limited to the cumulative change in fair value of the
hedged item from inception of the hedge. Any ineffective portion of changes in the fair value of the interest rate
swap is recognised immediately in profit or loss. Amounts previously recognised in other comprehensive income and
accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the
same line as the recognised hedged item. If the Group expects that some or all of the loss accumulated in the hedging
reserve will not be recovered in the future, that amount is immediately reclassified to profit or loss.
The Group discontinues hedge accounting only when the hedging relationship (or a part thereof) ceases to meet the
qualifying criteria. This includes instances when the hedging instrument expires or is sold, terminated or exercised.
The discontinuation is accounted for prospectively. Any gain or loss recognised in Other Comprehensive Income and
accumulated in the hedging reserve at that time remains in equity and is reclassified to profit or loss when the forecast
transaction occurs. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in the
hedging reserve is reclassified immediately to profit or loss.
The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the
swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the
swap counterparties.
The following table shows the fair value of interest rate swaps which at 31 December 2022 are not designated in
accounting hedge relationships:
Current
2022
£m
2021
£m
–
(2.5)
Non-current
(73.2)
Fair value of interest rate swaps
(73.2)
–
(2.5)
The fair value of interest rate swaps (a debit balance in 2022 and 2021) have been calculated by a third party expert,
discounting estimated future cash flows on the basis of market expectations of future interest rates, representing Level
2 in the IFRS 13 fair value hierarchy. At 31 December 2022 the net asset fair value above comprises non-current assets of
£73.2 million (2021: assets of £6.1 million and liabilities of £3.6 million).
