Rolls-Royce Annual Report 2000

Financial statements

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Note 23

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23 Financial instruments

Details of the Group's policies on the use of financial instruments are given in the Finance Director's review on pages 18 to 23 and in the accounting policies on pages 43 and 44. The following disclosures provide additional information regarding the effect of these instruments on the financial assets and liabilities of the Group excluding short-term debtors and creditors, where permitted by FRS 13.

Funding and interest rates
					2000

	Sterling £m	US Dollar £m	Euro £m	Other £m	Total £m

Financial assets
Cash at bank and in hand ¹	474	14	6	4	498
Short-term deposits²	10	32	10	54	106
Government securities and corporate bonds ³	34	2	—	—	36
Unlisted fixed asset investments ⁴	—	13	—	10	23
Debtors – amounts falling due after one year ⁴	60	26	23	15	124

	578	87	39	83	787

Financial liabilities ⁵
Floating-rate borrowings ⁶	—	(15)	(59)	(164)	(238)
Fixed-rate borrowings	(976)	(83)	—	(29)	(1,088)
Borrowings on which no interest is paid ⁷	—	—	—	(4)	(4)
Other creditors – amounts falling due after one year ⁴	(50)	(1)	—	(6)	(57)
Provisions ⁴	(11)	—	—	(3)	(14)

	(1,037)	(99)	(59)	(206)	(1,401)


					1999

	Sterling £m	US Dollar £m	Euro £m	Other £m	Total £m

Financial assets
Cash at bank and in hand ¹	366	72	17	66	521
Short-term deposits²	370	16	23	22	431
Government securities and corporate bonds ³	21	1	9	2	33
Unlisted fixed asset investments ⁴	—	10	—	11	21
Debtors – amounts falling due after one year ⁴	132	24	—	—	156

	889	123	49	101	1,162


Financial liabilities ⁵
Floating-rate borrowings ⁶	(505)	(123)	(143)	(131)	(902)
Fixed-rate borrowings	(673)	(76)	—	(23	(772)
Borrowings on which no interest is paid ⁷	—	—	—	(5)	(5)
Other creditors – amounts falling due after one year ⁴	—	(2)	—	(16)	(18)
Provisions ⁴	(19)	—	—	(7)	(26)

	(1,197)	(201)	(143)	(182)	(1,723)

Notes

¹Cash at bank and in hand comprises deposits placed on money markets overnight and bank balances.

²The short-term deposits are deposits placed on money markets for periods ranging from two nights up to one month.

³The interest on the securities and bonds are at fixed rates. The weighted average interest rate on the sterling securities is 6.7% (1999 6.8%) and the weighted average interest rate on the US Dollar securities is 9.0% (1999 6.0%). The weighted average time for these securities is 2.5 years (1999 1.5 years).

⁴These amounts do not incur or accrue interest.

⁵Financial liabilities are stated after taking into account the various interest rate and currency swaps entered into by the Group.

⁶The floating-rate financial liabilities comprise bank borrowings bearing interest at rates fixed in advance for periods ranging from one to six months based on the applicable LIBOR rate.

⁷The weighted average period for borrowings on which no interest is paid is nine years (1999 ten years).

The analysis of fixed-rate borrowings is as follows:

			2000			1999

	Total £m	Weighted average interest rate at which fixed %	Weighted average period for which rate is fixed Months	Total £m	Weighted average interest rate at which fixed %	Weighted average period for which rate is fixed Months

Currency
Sterling	976	6.2	23	673	5.8	96
US Dollar	83	7.1	59	76	6.4	61
Other	29	5.4	72	23	5.0	79

The maturity profile of the Group's financial liabilities is as follows:

	2000 £m	1999 £m

In one year or less, or on demand	286	434
In more than one year but not more than two years	57	778
In more than two years but not more than five years	441	255
In more than five years	617	256

	1,401	1,723

Borrowing facilities

The Group has various borrowing facilities available to it. The undrawn committed facilities available at December 31, 2000 were as follows:

	2000 £m	1999 £m

Expiring within one year	15	20
Expiring in one to two years	238	100
Expiring thereafter	790	395

	1,043	515

Exchange risk management

The table below shows the Group's currency exposures at December 31, 2000 on currency transactions that give rise to the net currency gain and losses recognised in the profit and loss account. Such exposures comprise the net monetary assets and liabilities at December 31, 2000 of the Group that are not denominated in the functional currency of the operating company involved. The exposures are stated after taking into account the effects of currency swaps and forward foreign exchange contracts.

					2000					1999
	Net foreign currency monetary assets/(liabilities)						Net foreign currency monetary assets/(liabilities)

Functional currency of Group operation		Sterling £m	US Dollar £m	Euro £m		Other £m	Sterling £m	US Dollar £m	Euro £m	Other £m

Sterling		—	7	(8)		2	—	(4	(7)	5
US Dollar		—	—	—		—	1	—	—	—
Euro		—	1	—		1	—	—	—	—
Other		(2)	—	3		6	(1)	27	9	(2)

Fair values of financial assets and financial liabilities

The estimated fair value of the Group's financial instruments are summarised below:

Where available, market values have been used to determine current values. Where market values are not available, fair values have been calculated by discounting expected future cashflows at prevailing interest and exchange rates.

		2000		1999

	Book value £m	Fair value £m	Book value £m	Fair value £m

Unlisted fixed asset investments	23	23	21	21
Cash at bank and in hand	498	498	521	521
Short-term deposits and investments	142	140	464	462
Short-term debt	(272)	(273)	(408)	(409)
Long-term debt	(1,058)	(1,121)	(1,271)	(1,283)
Other creditors – amounts falling due after one year	(57)	(54)	(18)	(16)
Debtors – amounts falling due after one year	124	117	156	132
Provisions	(14)	(14)	(26)	(25)


Derivatives used to hedge the interest, currency and commodity exposure of the business:
Jet fuel swaps	—	4	—	3
Interest rate swaps	(17)	(55)	(10)	(8)
Currency options	—	(5)	(6)	(3)
Forward foreign currency contracts	(20)	(273)	(4 )	32
Forward purchase of shares to meet share option commitments	—	(1)	—	—

Cash at bank and in hand, short-term deposits and short-term borrowings
The book value approximates to fair value either due to the short-term maturity of the instruments or because the interest rate of investments is reset after periods not greater than six months.

Derivatives
The fair value of derivatives is the estimated amount which the Group would expect to pay or receive were it to terminate the derivatives at the balance sheet date.
This is based on current market rates.

Hedges of future transactions

As described in the Finance Director's review on pages 18 to 23 the Group's policy is to hedge the following exposures:
–    interest rate risk – using interest swaps
–    currency exposures on future forecast sales – using forward foreign currency contracts, currency swaps and currency options
–    commodity price risk – using jet fuel swaps

Gains and losses on instruments used for hedging are as outlined in the accounting policies on pages 43 and 44.

Unrecognised gains and losses on instruments used for hedging, and the movements therein, are as follows:

2000

1999

Gains
£m

(Losses)
£m

Total net
gains/
(losses)
£m

Gains
£m

(Losses)
£m

Total net
gains/
(losses)
£m

Unrecognised gains and losses on hedges at January 1, 2000

(20)

169

(24)

145

Gains and losses arising in previous year that were recognised in 2000

(27)

(25)

(62)

(44)

Gains and losses arising in previous year that were not recognised in 2000

(18)

107

(6)

101

Gains and losses arising as a result of acquisitions

—

(4)

(1)

Gains and losses arising in 2000 that were not recognised in 2000

(371)

(312)

(46)

(10)

(56)

Unrecognised gains and losses on hedges at December 31, 2000 of which:

(389)

(293)

(20)

Gains and losses expected to be recognised in 2001

(116)

(62)

(2)

Gains and losses expected to be recognised thereafter

(273)

(231)

(18)