Note 28: Financial instruments
The Group’s financial instruments, other than derivatives, comprise cash in hand and at bank, bank borrowings,
consideration for acquisitions and various items such as trade debtors and trade creditors that arise directly from its
operations. As permitted by FRS13 - “Derivatives and other financial instruments”, short-term debtors and creditors have been excluded from all financial instrument disclosures other than currency exposure disclosures.
The Group also enters into derivative transactions (principally cap and collar contracts). The purpose of such
transactions is to protect profits and surplus funds arising in principal markets from currency fluctuations. It is, and
has been throughout the period under review, the Group’s policy that no trading in financial instruments shall be
undertaken.
The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, foreign currency risk and credit risk.
Interest rate risk During 2007 and 2006 the Group financed its operations by a mixture of retained profits, proceeds
from share sales to employees and bank loans. The interest on bank loans is at a floating rate but the loans are
denominated in Sterling, US dollar and Euro, which helps mitigate the overall interest rate risk.
Liquidity risk During the year the Group entered into a further bank loan facility (see “borrowing facilities” section). In
order to maintain flexibility, the Group also continues to operate some overdraft facilities and lines of credit.
Currency risk The Group has overseas subsidiaries that operate in North America, Continental Europe, Africa and the Asia Pacific region. Their revenues and expenses are denominated substantially in their functional currency, however some subsidiaries invoice in a currency other than their functional currency. Where this billing is significant, the Group enters into forward currency contracts to eliminate the currency exposure on these sales. In addition, some intra-group recharges are not denominated in functional currency. Group policy is that intra-group recharges should be settled, where possible, within one month of invoice to minimise the foreign exchange exposure.
Credit risk The Group’s principal financial assets are bank balances and cash, trade and other receivables which
represent the Group’s maximum exposure to credit risk in relation to financial assets. The Group’s credit risk is primarily due to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic environment.
The credit risk on liquid funds is limited because the counterparties are reputable banks with high credit ratings
assigned by international credit-rating agencies.
Maturity profile of financial liabilities
| |
2007 |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Currency |
Bank
loans
£'000 |
|
Finance
loans
£'000 |
|
Consideration
for
acquisitions
£'000 |
|
Total
£'000 |
|
Bank
loans
£'000 |
|
Finance
leases
£'000 |
|
Consideration
for
acquisitions
£'000 |
|
Total
£'000 |
|
|
| Within one year |
320 |
|
392 |
|
576 |
|
1,288 |
|
320 |
|
268 |
|
435 |
|
1,023 |
|
Between one and
two years |
17 |
|
20 |
|
856 |
|
893 |
|
326 |
|
11 |
|
426 |
|
763 |
|
Between two and
five years |
5,153 |
|
- |
|
806 |
|
5,959 |
|
4,305 |
|
- |
|
1,766 |
|
6,071 |
|
|
|
5,490 |
|
412 |
|
2,238 |
|
8,140 |
|
4,951 |
|
279 |
|
2,627 |
|
7,857 |
|
|
Borrowing facilities The Group had undrawn committed facilities of £7,500,000 available at 31 July 2007 (2006:
£695,000). These facilities consist of a £4,653,000 revolving five-year loan facility available in a combination of Sterling, US Dollar and Euro at an interest rate of 1.25% above Barclays Bank’s call-loan rate of which £4,653,000 had been drawn at the 31 July 2007, an £8,000,000 revolving three-year facility at an interest rate of 1.0% above Barclays Bank’s call-loan rate of which £500,000 had been drawn at 31 July 2007, and an overdraft facility of £1,500,000 at a rate of 1.2% above Barclays Bank’s base rate, available in Sterling, US Dollar and Euro, and an overdraft facility of £984,000 ($2,000,000) at a rate of 2.5% above Wells Fargo’s prime rate, available in US Dollars. Barclays’ overdraft facility expires in November 2007, and Wells Fargo’s facility expires in December 2007. Both facilities are reviewed on an annual basis. Panther Communications Group Limited has a loan of £337,000 at an interest rate of 2% above the Bank of Scotland base rate. The loan is secured with a floating charge over the assets of Lexis Public Relations Limited.
Interest rate risk profile of financial liabilities
|
|
|
|
|
Fixed rate financial liabilities |
|
|
|
|
|
|
|
|
| Currency |
Total
£'000 |
Financial
liabilities on
which no
interest
is paid
£'000 |
Floating rate
financial
liabilities
£'000 |
Fixed rate
financial
liabilities
£'000 |
Weighted
average
interest
rate % |
Weighted
average time
for which
rate is
fixed Years |
|
|
|
|
|
|
|
|
|
| As at 31 July 2007 |
|
|
|
|
|
|
|
| Sterling |
1,631 |
- |
1,219 |
412 |
7.3 |
3 |
|
| US Dollar |
6,173 |
2,238 |
3,935 |
- |
- |
- |
|
| Euro |
336 |
- |
336 |
- |
- |
- |
|
|
|
|
|
|
|
|
|
| Gross financial liabilities |
8,140 |
2,238 |
5,490 |
412 |
7.3 |
3 |
|
|
|
|
|
|
|
|
|
| As at 31 July 2006 |
|
|
|
|
|
|
|
| Sterling |
1,005 |
80 |
646 |
279 |
7.3 |
3 |
|
| US Dollar |
6,946 |
2,983 |
3,963 |
- |
- |
- |
|
| Euro |
342 |
- |
342 |
- |
- |
- |
|
|
|
|
|
|
|
|
|
| Gross financial liabilities |
8,293 |
3,063 |
4,951 |
279 |
7.3 |
3 |
|
|
|
|
|
|
|
|
|
Interest rate risk profile of financial assets
| Currency |
Total
£'000 |
Fixed rate
financial
assets
£'000 |
Other
non-interest
bearing
financial
assets
£'000 |
|
|
| At 31 July 2007 |
|
|
|
|
| Sterling |
3,110 |
25 |
3,085 |
|
| US Dollar |
1,843 |
73 |
1,770 |
|
| Euro |
393 |
- |
393 |
|
| Indian Rupee |
294 |
30 |
264 |
|
| Swedish Krona |
376 |
- |
376 |
|
| Australian Dollar |
68 |
- |
68 |
|
| South African Rand |
174 |
- |
174 |
|
| Other currencies |
573 |
- |
573 |
|
|
| Gross financial assets |
6,831 |
128 |
6,703 |
|
|
| Currency |
Total
£'000 |
Fixed
rate
financial
assets
£'000 |
Other
non-interest
bearing
financial
assets
£'000 |
|
|
| At 31 July 2006 |
|
|
|
|
| Sterling |
1,310 |
1 |
1,309 |
|
| US Dollar |
1,385 |
80 |
1,305 |
|
| Euro |
534 |
- |
534 |
|
| Indian Rupee |
262 |
25 |
237 |
|
| Swedish Krona |
129 |
- |
129 |
|
| Australian Dollar |
169 |
36 |
133 |
|
| South African Rand |
53 |
- |
53 |
|
| Other currencies |
511 |
- |
511 |
|
|
| Gross financial assets |
4,353 |
142 |
4,211 |
|
|
Financial assets comprise cash at bank and in hand of £5,834,000 (2006: £4,018,000) and rent deposits of £397,000 (2006: £335,000). Non-interest bearing assets (other than rent deposits) are fully liquid and have no maturity period.
Interest on floating rate bank deposits is based on the base rate in the relevant country and these deposits are fully
liquid. The weighted average rate and period for fixed rate deposits are 8.16% and 8 months (2006: 5.98% and 19
months).
Fair values of financial assets and liabilities
The directors believe that the fair value of financial assets and liabilities approximates to their book value.
The Group has entered into reset cap and collar agreements and forward contracts for the year ending 31 July 2008
to hedge against the weakening of the US Dollar and Euro. With respect to the US Dollar there are three cap and collar
contracts protecting in total $575,000 per month ($6,900,000 for the year), with the following obligations; (1) if the spot rate at any time in the month is less than or equal to the “trigger” rates for each contract of 1.799, 1.799 or 1.967 the Group is obliged to sell $250,000, $125,000 and $200,000 at a “reset” rate of 1.9475, 1.9125 or 2.05 respectively, for that month only, (2) if condition 1 is not fulfilled, and the spot rate on any of twelve monthly reference dates is (a) between 1.799 and 1.9475, between 1.799 and 1.9125 or between 1.967 and 2.05 respectively no obligation exists to sell US Dollars, (b) greater than the “protection” rate of 1.9475, 1.9125 or 2.05 respectively, the Group can sell US Dollars in that month only at the respective “protection” rate. If at 23 July 2008 the spot rate is less than 1.9475 and/or 1.9125 the Group is obliged to extend two of the contracts with the same rates but a revised protection level of $125,000 per month for each contract, until 23 July 2009.
In addition to the reset cap and collar agreements, the Group has placed two forward contracts relating to the US Dollar for the year ended 31 July 2008; one in September 2007 and one in January 2008, each protecting $500,000 at 1.9836 and 1.9812 respectively.
With respect to the Euro, the Group has hedged 350,000 Euros per month (4,200,000 Euros for the year), to which the following obligations apply; (1) if the spot rate at any time in the month is less than or equal to the “trigger” rate of 1.3705 the Group is obliged to sell Euros at the “protection” rate of 1.48, for that month only, (2) if condition 1 is not fulfilled and the spot rate on any of the twelve monthly reference dates is (a) between 1.3705 and 1.48, no obligation exists to sell Euros, (b) greater than the protection rate of 1.48, the Group can sell Euros at 1.48. If at 23 October 2008 the spot rate is less than 1.46 the Group is obliged to extend the contract with the same rates, but a reduced protection level of 250,000 Euros per month until 23 October 2009.
The total book value of these financial instruments is £nil and the fair value is £69,000. These instruments replace cap and collar US Dollar and Euro contracts in the year ended 31 July 2007 with a total book value of £13,000 and a fair value of £nil. In the year ended 31 July 2007 a gain of £143,000 (2006: £70,000) was recognised by the Group on these contracts.
Currency exposures
The following analysis of the net monetary assets and liabilities shows the Group’s currency exposures at 31 July 2007 after the effects of cap and collar contracts and other derivatives used to manage currency exposures. The amounts shown represent exposures which give rise to net current gains and losses recognised in the profit and loss account. Such exposures comprise the monetary assets and liabilities of the Group that are not denominated in the functional currency of the operating unit involved.
| As at 31 July 2007 |
Sterling
£'000 |
|
US Dollar
£'000 |
|
Euro
£'000 |
|
SEK
£'000 |
|
AUD
£'000 |
|
Total
£'000 |
|
|
| Functional currency of Group operation |
|
|
|
|
|
|
|
|
|
|
|
|
| Sterling |
- |
|
(4,321 |
) |
(72 |
) |
(302 |
) |
1,791 |
|
(2,904 |
) |
| Indian Rupee |
(51 |
) |
(26 |
) |
29 |
|
- |
|
(159 |
) |
(207 |
) |
| Australian Dollar |
(15 |
) |
(39 |
) |
- |
|
- |
|
- |
|
(54 |
) |
| Japanese Yen |
(3 |
) |
(12 |
) |
- |
|
- |
|
- |
|
(15 |
) |
| Singapore Dollar |
(41 |
) |
(42 |
) |
- |
|
- |
|
(58 |
) |
(141 |
) |
| Chinese Renminbi |
(11 |
) |
(290 |
) |
- |
|
- |
|
(551 |
) |
(852 |
) |
|
| Total |
(121 |
) |
(4,730 |
) |
(43 |
) |
(302 |
) |
1,023 |
|
(4,173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As at 31 July 2006 |
Sterling
£'000 |
|
US Dollar
£'000 |
|
Euro
£'000 |
|
SEK
£'000 |
|
AUD
£'000 |
|
Total
£'000 |
|
|
| Functional currency of Group operation |
|
|
|
|
|
|
|
|
|
|
|
|
| Sterling |
- |
|
(318 |
) |
125 |
|
(397 |
) |
1,813 |
|
1,223 |
|
| US Dollar |
(195 |
) |
- |
|
(10 |
) |
- |
|
(58 |
) |
(263 |
) |
| Euro |
(168 |
) |
(30 |
) |
- |
|
- |
|
(12 |
) |
(210 |
) |
| Indian Rupee |
27 |
|
(34 |
) |
3 |
|
- |
|
(28 |
) |
(32 |
) |
| Australian Dollar |
(30 |
) |
115 |
|
- |
|
- |
|
- |
|
85 |
|
| South African Rand |
(1 |
) |
(3 |
) |
- |
|
- |
|
(1 |
) |
(5 |
) |
| Japanese Yen |
(5 |
) |
(17 |
) |
- |
|
- |
|
(98 |
) |
(120 |
) |
| Singapore Dollar |
(7 |
) |
(52 |
) |
- |
|
- |
|
(22 |
) |
(81 |
) |
| Chinese Renminbi |
(22 |
) |
(323 |
) |
- |
|
- |
|
(534 |
) |
(879 |
) |
|
| Total |
(401 |
) |
(662 |
) |
118 |
|
(397 |
) |
1,060 |
|
(282 |
) |
|