values of cash and cash equivalents bank overdrafts other assets and other

Values of cash and cash equivalents bank overdrafts

This preview shows page 209 - 210 out of 256 pages.

values of cash and cash equivalents, bank overdrafts, other assets and other liabilities were considered to approximate fair values. Fair value hedging relationships Certain borrowings due within and after one year are part of qualifying fair value interest rate hedging relationships. Accordingly, there is a fair value adjustment for these liabilities with respect to the hedged interest rate risk, with changes being recognised in the income statement, as disclosed in note 23(f). Diageo has not designated any non-derivative financial assets or liabilities at fair value. (f) Hedging instruments Diageo designates derivatives which qualify as hedges for accounting purposes as either: (i) a hedge of the fair value of a recognised asset or liability (fair value hedge); (ii) a hedge of a forecast transaction or the cash flow risk from a change in interest rates or foreign exchange rates (cash flow hedge); or (iii) a hedge of a net investment in foreign operations. The accounting treatment for hedges is disclosed in ‘Accounting policies of the group’. Diageo tests effectiveness on a prospective and retrospective basis. Methods for testing effectiveness include dollar offset, critical terms, regression analysis, hypothetical derivative method and volatility reduction. All fair value hedging relationships were effective during the year. The gain on hedging instruments for the year was £163 million (2009 – £92 million gain) and the loss on the hedged items attributable to the hedged risks was £163 million (2009 – £102 million loss). All cash flow hedges were effective in the year and losses of £27 million (2009 – £90 million gains) have been recognised in other comprehensive income due to changes in fair value. A loss of £47 million and a gain of £73 million have been transferred out of other comprehensive income to other operating expenses and to other finance income, respectively, in the year (2009 – £53 million loss and a gain of £124 million have been transferred out of other comprehensive income to other operating expenses and to other finance income, respectively). With respect to hedges of forecast transactions and the cash flow risk from a change in interest rates, based on year end interest and foreign exchange rates, balances related to cash flow hedged items at 30 June 2010 will affect the income statement in 2011 and 2012 by £51 million and £12 million, respectively. With respect to hedges of the cash flow risk from a change in forward foreign exchange rates using cross currency interest rate swaps, the retranslation of the related bond principal to closing foreign exchange rates and recognition of interest on the related bonds will affect the income statement in each year until the related bonds mature in 2016 and 2036. Foreign exchange retranslation and the interest on the hedged bonds taken to the income statement is expected to offset against the foreign exchange retranslation and the interest on the cross currency swaps in each of the years.
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