REG - ITV PLC - Half-year Report <Origin Href="QuoteRef">ITV.L</Origin> - Part 4
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interest rates and is entered into for a fixed
period. A hedge is where a derivative is used to manage exposure in an
underlying variable.
The Group is exposed to certain market risks. In accordance with Board
approved policies, which are set out in this note, the Group manages these
risks by using derivative financial instruments to hedge the underlying
exposures.
Why do we need them?
The key market risks facing the Group are:
• Currency risk arising from:
i. translation risk, that is, the risk in the period of adverse
currency fluctuations in the translation of foreign currency profits, assets
and liabilities ('balance sheet risk') and non-functional currency monetary
assets and liabilities ('income statement risk') and
ii. transaction risk, that is, the risk that currency fluctuations
will have a negative effect on the value of the Group's non-functional
currency trading cash flows. A non-functional currency transaction is a
transaction in any currency other than the reporting currency of the
subsidiary.
• Interest rate risk to the Group arises from significant changes in
interest rates on borrowings issued at or swapped to floating rates.
How do we use them?
The Group mainly employs three types of derivative financial instruments when
managing its currency and interest rate risk:
• Foreign exchange swap contracts are derivative instruments used to hedge
income statement translation risk arising from short term intercompany loans
denominated in a foreign currency
• Forward foreign exchange contracts are derivative instruments used to
hedge transaction risk so they enable the sale or purchase of foreign currency
at a known fixed rate on an agreed future date and
• Interest rate swaps are derivative instruments that exchange a fixed
rate of interest for a floating rate, or vice versa, or one type of floating
rate for another, and are used to manage interest rate risk
The Group's policy on the various methods used to calculate their respective
fair values is detailed in the 31 December 2015 financial statements and
summarised below.
Currency risk
As the Group expands its international operations, the performance of the
business becomes increasingly sensitive to movements in foreign exchange
rates, primarily with respect to the US dollar and the euro.
The Group's foreign exchange policy is to use forward foreign exchange
contracts to hedge material non-functional currency denominated costs or
revenue at the time of commitment for up to five years forward. The Group also
hedges a proportion of highly probable non-functional currency denominated
costs or revenue on a rolling 18 month basis.
The Group ensures that its net exposure to foreign currency denominated cash
balances is kept to a minimal level by using foreign currency swaps to
exchange balances back into sterling or by buying or selling foreign
currencies at spot rates when necessary.
The Group also utilises foreign exchange swaps both to manage foreign currency
cash flow timing differences and to hedge foreign currency denominated
monetary items.
The Group's net investments in overseas subsidiaries may be hedged where the
currency exposure is considered to be material. In 2015 the Group designated a
portion of its euro borrowings into a net investment hedge against its euro
denominated assets following the acquisition of Talpa Media.
Interest rate risk
The Group's interest rate policy is to allow fixed rate gross debt to vary
between 20% and 100% of total gross debt to accommodate floating rate
borrowings under the revolving credit facility. At 30 June 2016 the Group's
fixed rate debt represented 68% (December 2015: 99%) of total debt.
Consequently a 1% movement in interest rates would have a £1 million impact on
the post-tax profit for the year.
Interest rate swaps
On issuing the 2017 Eurobond, the Group entered into and then subsequently
overlaid a portfolio of interest rate swaps with the result that it is now
100% fixed on these borrowings. The timing of entering into these swaps locked
in an interest benefit for the Group, resulting in a net mark-to-market gain
on the portfolio.
Cash flow hedges
The Group applies hedge accounting for certain foreign currency firm
commitments and highly probable cash flows where the underlying cash flows are
payable within the next two years. In order to fix the sterling cash outflow
associated with the commitments which are mainly denominated in AUD and euros
- the Group has taken out forward foreign exchange contracts for the same
foreign currency amounts and maturity dates as the expected foreign currency
outflow. The amount recognised in other comprehensive income during the period
all relates to the effective portion of the revaluation loss associated with
these contracts. There was less than £1 million (2015: £1 million)
ineffectiveness taken to the income statement and £1 million cumulative loss
(2015: £6 million) recycled to the income statement in the year.
Net investment hedges
The Group uses euro denominated debt to partially hedge against the change in
the sterling value of its euro denominated net assets due to movements in
foreign exchange rates. The fair value of debt in a net investment hedge was
£158 million (2015: £141 million). A foreign exchange loss of £18 million
(2015: £2 million ) relating to the net investment hedges has been netted off
within exchange differences on translation of foreign operations as presented
on the consolidated statement of comprehensive income in the period.
The following table shows the fair value of derivative financial instruments
analysed by type of contract. Interest rate swap fair values exclude accrued
interest.
June 2016 Assets £m Liabilities£m
Current
Cash flow hedges 3 -
Forward foreign exchange contracts and swaps - fair value through profit and loss 5 (3)
Interest rate swaps - fair value through profit and loss 6 (3)
Non-current
Cash flow hedges 1 -
December 2015 Assets £m Liabilities£m
Current
Cash flow hedges - (4)
Forward foreign exchange contracts and swaps - fair value through profit and loss 1 (1)
Non-current
Interest rate swaps - fair value through profit or loss 8 (6)
9 (11)
4.4 Fair value hierarchy
The financial instruments included on the ITV statement of financial position
are measured at either fair value or amortised cost. The measurement of this
fair value can in some cases be subjective, and can depend on the inputs used
in the calculations. ITV generally uses external valuations using market
inputs or market values (e.g. external share prices). The different valuation
methods are called 'hierarchies' and are described below.
Level 1
Fair values are measured using quoted prices (unadjusted) in active markets
for identical assets or liabilities.
Level 2
Fair values are measured using inputs, other than quoted prices included
within Level 1, that are observable for the asset or liability either directly
or indirectly.
Interest rate swaps and options are accounted for at their fair value based
upon termination prices. Forward foreign exchange contracts are accounted for
at the difference between the contract exchange rate and the quoted forward
exchange rate at the reporting date.
Level 3
Fair values are measured using inputs for the asset or liability that are not
based on observable market data.
The tables below set out the financial instruments included on the Group
Statement of Financial Position at 'fair value'.
Assets measured at fair value Fair value 30 June 2016£m Level 130 June 2016£m Level 230 June 2016£m Level 3 30 June 2016£m
Available for sale financial instruments
Available for sale gilts (see note 4.1) 41 41 - -
Available for sale investments 12 - - 12
Financial assets at fair value through profit or loss
Foreign exchange forward contracts and swaps 5 - 5 -
Interest rate swaps 6 - 6 -
Financial assets at fair value through reserves
Cash flow hedges 4 - 4 -
Liabilities measured at fair value Fair value 30 June 2016£m Level 130 June 2016£m Level 230 June 2016£m Level 3 30 June 2016£m
Financial liabilities at fair value through profit and loss
Contingent consideration (1) - - (1)
Foreign exchange forward contracts and swaps (3) - (3) -
Interest rate swaps (3) - (3) -
Available for sale investments and contingent consideration are the Group's
only financial instruments classified as level 3 in the fair value hierarchy.
As noted in the accounting policy disclosed in the December 2015 financial
statements, the key assumptions taken into consideration when measuring this
acquisition related liability are the performance expectations of the
acquisition and a discount rate that reflects the size and nature of the new
business. There is no reasonable change in discount rate or performance
targets that would give rise to a material change in the liability at the half
year.
Section 5: Other Notes
5.1 Related party transactions
The related parties identified by the Directors include joint ventures,
associated undertakings, available for sale investments and key management
personnel.
To enable users of our financial statements to form a view about the effects
of related party relationships on the Group, we disclose the Group's
transactions with those related parties during the year and any associated
period end trading balances.
Related party transactions
Transactions with joint ventures and associated undertaking during the period
were:
Related Party Transactions
2016£m 2015£m
Sales to joint ventures 4 4
Sales to associated undertakings 2 4
Purchases from joint ventures 13 13
Purchases from associated undertakings 33 35
There have been no significant changes to the nature of related parties
disclosed in the full consolidated financial statements for the Group as at
and for the year ended 31 December 2015.
The transactions with joint ventures primarily relate to sales and purchases
of digital multiplex services with Digital 3&4 Limited.
The purchases from associated undertakings primarily relate to the purchase of
news services from ITN.
All transactions arose in the normal course of business on an arm's length
basis. None of the balances are secured.
There have been no other significant related party transactions in the six
month period ended 30 June 2016.
The amounts owed by and to these related parties at the period end were:
For the six month period to 30 June 2016£m 2015£m
Amounts owed by joint ventures 4 3
Amounts owed by associated undertakings 58 41
Amounts owed to joint ventures 2 -
Amounts owed to associated undertakings - 5
Amounts owed by pension scheme 1 1
Balances owed by associated undertakings largely relate to production funding
advanced to Tomorrow ITV Studios.
Transactions with key management personnel
Key management consists of ITV plc Executive and Non-executive Directors and
the ITV Management Board. Key management personnel compensation for the period
is as follows:
For the six month period to 30 June 2016£m 2015£m
Short-term employee benefits 4 4
Share-based compensation 3 3
7 7
5.2 Contingent liabilities
A contingent liability is a liability that is not sufficiently certain to
qualify for recognition as a provision where uncertainty may exist regarding
the outcome of future events.
There has been no material change in the Group's contingent liabilities since
31 December 2015 and the disclosures in those annual financial statements
remain appropriate at 30 June 2016.
Responsibility Statement of the Directors in Respect of the Half-Yearly
Financial Report
We confirm that to the best of our knowledge:
• the condensed set of consolidated financial statements has been prepared in
accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU;
• the interim management report includes a fair review of the information
required by:
a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of
important events that have occurred during the first six months of the
financial year and their impact on the condensed set of consolidated financial
statements; and a description of the principal risks and uncertainties for the
remaining six months of the year; and
b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year that have materially affected the financial position or
performance of the entity during that period; and any changes in the related
party transactions described in the last Annual Report that could do so.
Sir Peter Bazalgette was appointed non-executive Chairman on 12 May 2016
following the resignation of Archie Norman. Anna Manz was appointed as
non-executive Director from 1 February 2016. Further details were included in
the ITV plc 2015 Annual Report. A list of current Directors is maintained on
the ITV plc website: www.itvplc.com
For and on behalf of the Board:
Ian Griffiths
Group Finance Director
27 July 2016
Independent Review Report to ITV plc
Introduction
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
June 2016 which comprises Condensed Consolidated Income Statement, Condensed
Consolidated Statement of Comprehensive Income, Condensed Consolidated
Statement of Financial Position, Condensed Consolidated Statement of Changes
in Equity, Condensed Consolidated Statement of Cash Flows and the related
explanatory notes. We have read the other information contained in the
half-yearly financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the
condensed set of financial statements.
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the Disclosure
and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority
("the UK FCA"). Our review has been undertaken so that we might state to the
company those matters we are required to state to it in this report and for no
other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the company for our review work,
for this report, or for the conclusions we have reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 1, annual financial statements of the group are prepared
in accordance with IFRSs as adopted by the EU. The condensed set of financial
statements included in this half-yearly financial report has been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board for use in the UK. A review of interim financial information
consists of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK and Ireland) and consequently
does not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2016 is not prepared, in all
material respects, in accordance with IAS 34 as adopted by the EU and the DTR
of the UK FCA.
Paul Sawdon
For and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
27 July 2016
This information is provided by RNS
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