REG - ITV PLC - ITV Preliminary Results 2016 <Origin Href="QuoteRef">ITV.L</Origin> - Part 7
01/03/2017 07:07
- Part 7: For the preceding part double click ID:nRSA1335Yf
the scheme. Schemes can be funded, where regular cash contributions are made by the employer into
a fund which is invested, or unfunded, where no regular money or assets are required to be put aside to cover future
payments.
Accounting policies
Defined contribution scheme
Obligations under the Group's defined contribution schemes are recognised as an operating cost in the income statement as
incurred. For 2016, total contributions expensed were £16 million (2015: £16 million).
Defined benefit scheme
The Group's obligation in respect of the Defined Benefit Scheme (the 'Scheme') is calculated by estimating the amount of
future retirement benefit that eligible employees ('members') have earned in return for their services. That benefit
payable in the future is discounted to today's value and then the fair value of scheme assets is deducted to measure the
defined benefit pension deficit.
The liabilities of the Scheme are measured by discounting the best estimate of future cash flows to be paid using the
'projected unit' method. This method is an accrued benefits valuation method that makes allowance for projected earnings of
members in the future up to retirement.
These calculations are complex and are performed by a qualified actuary. There are many judgements and estimates necessary
to calculate the Group's estimated liabilities, the main assumptions are set out later in this section. Movements in
assumptions during the year are called 'actuarial gains and losses' and these are recognised in the period in which they
arise through the statement of comprehensive income.
The latest triennial valuation of the Scheme was undertaken as at 1 January 2014 by an independent actuary appointed by the
Trustee of the Scheme and agreed in early 2016. The next triennial valuation will be as at 1 January 2017 and is expected
to be agreed in late 2017 or early 2018. This will drive subsequent contribution rates.
An unfunded scheme in relation to four former Granada executives is accounted for under IAS 19 and the Group is responsible
for meeting the pension obligations as they fall due. The unfunded scheme has additional security compared to the ITV main
scheme, in the form of a charge over gilts held by the Group. The current Directors of ITV plc recognise the legacy pension
obligations should be honoured, but believe the additional security for the scheme is inappropriate compared to the
security provided to the members of the ITV Pension Scheme. Following the Group's unsuccessful attempt to remove the
charge, the £39 million securitised gilts have been classified as other pension assets, rather than cash/cash equivalents,
to more fairly reflect the Group's net pension deficit.
In December 2016, following a member consultation, the Group decided to close the ITV Pension Scheme to future benefit
accrual with effect from 28 February 2017. Members' benefits are no longer subject to a capped pensionable salary, the
benefits will be linked to statutory revaluation until retirement. This decision gave rise to a one off, non-cash £19
million curtailment charge recognised in the year.
On 29 February 2016 the Group acquired 100% of the assets and liabilities of UTV Limited, including responsibility for a
defined benefit pension scheme. At acquisition the UTV Scheme had neither surplus nor deficit on an IAS 19 basis, and had a
surplus of £1 million as of 31 December 2016. Due to the size of the surplus the Directors present the results and position
of the UTV Scheme together with the existing ITV Schemes. The next triennial valuation will be as at 30 June 2017 and is
expected to be agreed in 2018.
Unless otherwise stated, references to 'the Schemes' within this note refer to the ITV Pension Scheme, the unfunded scheme
and the UTV Scheme combined.
The defined benefit pension deficit
Net pension deficit of £328 million at 31 December 2016 (2015: £176 million) is stated after including the unfunded scheme
security asset of £39 million (2015: £nil).
The totals recognised in the current and previous years are:
2016 2015
£m £m
Total defined benefit scheme obligations (4,200) (3,446)
Total defined benefit scheme assets 3,833 3,270
Defined benefit pension deficit (IAS 19) (367) (176)
Other pension asset 39 -
Net pension deficit (328) (176)
The remaining sections provide further detail of the value of the Scheme's assets and liabilities, how these are accounted
for and the impact on the income statement.
Defined benefit scheme obligations
Keeping it simple
What cause movements in the defined benefit pension obligations?
The areas that impact the defined benefit obligation (the pension scheme liabilities) position at the year end are as
follows:
• Current service cost - the cost to the Group of the future benefits earned by members that relates to the members'
service in the current year. This is charged to operating costs in the income statement.
• Past service cost - is a change in present value of the benefits built up by the members in the prior periods; can be
positive or negative resulting from changes to the existing plan as a result of an agreement between ITV and employees or
as a result of significant reduction by ITV in the number of employees covered by the plan (curtailment).
• Interest cost - the pension obligations payable in the future are discounted to the present value at year end. A
discount factor is used to determine the current value today of the future cost. The interest cost is the unwinding of one
year's movement in the present value of the obligation. It is broadly determined by multiplying the discount rate at the
beginning of the period by the updated present value of the obligation during the period. The discount rate is a key
assumption explained later in this section. This interest cost is recognised through net financing costs in the income
statement (see note 4.4).
• Actuarial gains or losses - there are broadly two causes of actuarial movements. 'Experience' adjustments, which arise
when comparing assumptions made when estimating the liabilities and what has actually occurred, and adjustments resulting
from changes in actuarial assumptions e.g. movements in corporate bond yields. Key assumptions are explained in detail
later in this section. Actuarial gains or losses are recognised through other comprehensive income.
• Benefits paid - any cash benefits paid out by the Scheme will reduce the obligation.
• One-off events - for example the acquisition of UTV Limited set out above.
The movement in the present value of the Group's defined benefit obligation is analysed below:
2016 2015
£m £m
Defined benefit obligation at 1 January 3,446 3,687
Current service cost 7 8
Curtailment charge 19 -
Interest cost 131 126
Actuarial loss/(gain) 664 (217)
UTV acquisition 98 -
Benefits paid (165) (158)
Defined benefit obligation at 31 December 4,200 3,446
Of the above total defined benefit obligation at 31 December 2016, £51 million relates to unfunded schemes (2015: £46
million), including the scheme in relation to the four former Granada executives.
Assumptions used to estimate the Scheme obligations
Keeping it simple
What are the main assumptions used to estimate the Scheme obligations?
The main assumptions are:
• future salary levels
• future pensionable salary levels
• an estimate of increases in pension payments
• the life expectancy of members
• the effect of inflation on all these factors
• the discount rate used to estimate the present day fair value of these obligations
How do we determine the appropriate assumptions?
The Group takes independent actuarial advice relating to the appropriateness of the assumptions used.
IFRS requires that we estimate a discount rate by reference to high-quality fixed income investments in the UK that match
the estimated term of the pension obligations.
The inflation assumption has been set by looking at the difference between the yields on fixed and index-linked Government
bonds. The inflation assumption is used as a basis for the remaining financial assumptions, except where caps have been
implemented.
The discount rate has therefore been obtained using the yields available on AA rated corporate bonds which match projected
cash flows. The Group's estimate of the weighted average term of the liabilities is 17 years (2015: 15 years).
The principal assumptions used in the Scheme's valuations at the year end were:
2016 2015
Discount rate for:
Past service liabilities 2.60% 3.80%
Future service liabilities 2.70% 4.00%
Inflation assumption for:
Past service liabilities 3.25% 3.00%
Future service liabilities 3.20% 3.10%
Rate of pensionable salary increases
ITV Pension Schemes N/A 0.90%
UTV Pension Scheme 3.75% N/A
Rate of increase in pension payment (LPI1 5% pension increases) 3.15% 2.90%
Rate of increase to deferred pensions (CPI) 2.25% 2.00%
1. Limited Price Index.
The table below reflects published mortality investigation data in conjunction with the results of investigations into the
mortality experience of Scheme members. The assumed life expectations on retirement are:
2016 2016 2015 2015
Retiring today at age 60 65 60 65
Males 27.1 22.4 28.0 23.2
Females 29.3 24.5 30.6 25.7
Retiring in 20 years at age 60 65 60 65
Males 28.8 23.9 30.0 25.0
Females 31.0 26.1 32.6 27.6
During 2016 a review of the longevity of the Scheme pensioners was conducted and revealed lower life expectancy than
previously assumed. The net pension deficit is sensitive to changes in assumptions. Those are disclosed further in this
section.
Total defined benefit scheme assets
Keeping it simple
The Scheme holds assets across a number of different classes which are managed by the Trustee, who consults with the Group
on changes to its investment policy.
What are the pension Scheme assets?
At 31 December 2016 the Scheme's assets were invested in a diversified portfolio that consisted primarily of equity and
debt securities. The tables below set out the major categories of assets.
Financial instruments are in place in order to provide protection against changes in market factors (interest rates and
inflation) which could act to increase the defined benefit pension deficit. These financial instruments are classified as
Scheme assets.
One such instrument is the longevity swap which the Scheme transacted in 2011 to obtain protection against the effect of
increases in the life expectation of the majority of pensioner members at that date. Under the swap, the Trustee agreed to
make pre-determined payments in return for payments to meet the specified pension obligations as they fall due,
irrespective of how long the members and their dependants live. The difference in the present values of these two streams
of payments is reflected in the Scheme assets. The swap had a nil valuation at inception and, using market-based
assumptions, is subsequently adjusted for changes in the market life expectancy and market discount rates, in line with its
fair value.
How do we measure the pension Scheme assets?
Defined benefit scheme assets are measured at their fair value and can change due to the following:
• Interest income on scheme assets - this is determined by multiplying the fair value of the Scheme assets by the discount
rate, both taken as of the beginning of the year. This is recognised through net financing costs in the income statement.
• Return on assets arise from differences between the actual return and interest income on Scheme assets and are
recognised through other comprehensive income.
• Employer's contributions are paid into the Scheme to be managed and invested.
• Benefits and administrative expenses paid out by the Schemes will lower the fair value of the Scheme's assets.
The movement in the fair value of the defined benefit scheme's assets is analysed below:
2016 2015
£m £m
Fair value of Scheme assets at 1 January 3,270 3,341
Interest income on Scheme assets 126 116
Return/(loss) on assets, excluding interest income 416 (126)
Employer contributions 93 102
UTV acquisition 98 -
Benefits paid (165) (158)
Administrative expenses paid (5) (5)
Fair value of Scheme assets at 31 December 3,833 3,270
The actual return on the Scheme's assets, being the sum of the interest income on Scheme assets and return on Scheme
assets, for the year ended 31 December 2016 was an increase of £542 million (2015: decrease of £10 million).
How are the Scheme's assets invested?
At 31 December 2016 the Scheme's assets were invested in a diversified portfolio that consisted primarily of equity and
debt securities. The Trustee is responsible for deciding the investment strategy for the scheme's assets, although changes
in investment policies require consultation with the Group. The assets are invested in different classes to hedge against
unfavourable movements in the funding obligation. When selecting the mix of assets to hold, and considering their related
risks and returns, the Trustee will weigh up the variability of returns against the target long-term rate of return on the
overall portfolio.
The fair value of the Scheme's assets are shown in the following table by major category:
Market value Market value
2016 2015
£m £m
Liability hedging assets
Fixed interest gilts 678 532
Index-linked interest gilts 1,135 914
Interest rate and inflation hedging derivatives (swaps and repos) 270 59
2,083 54% 1,505 46%
Other bonds 784 20% 733 22%
Return seeking investments
Quoted equities 633 653
Infrastructure 95 68
Property 62 54
Hedge funds/alternatives 222 196
1,012 27% 971 30%
Other investments
Cash and cash equivalents 183 86
Insurance policies 42 40
Longevity swap fair value (271) (65)
(46) (1%) 61 2%
Total Scheme assets 3,833 100% 3,270 100%
Included in the above are overseas assets of £1,304 million (2015: £1,198 million), comprised of quoted equities of £565
million (2015: £564 million) and bonds of £739 million (2015: £634 million).
The Trustee entered a longevity swap in 2011 which provides cash flow certainty by hedging the risk of increasing life
expectancy over the next 70 years for 11,700 of current pensioners covering £1.7bn of the pension obligation. The fair
value of the longevity swap equals the discounted value of the projected net cash flows resulting from the contract and has
changed substantially over the year due to two key factors:
• A review of the longevity of pensioners covered by the swap which revealed lower life expectancy than previously
expected. This reduced the asset value by £127 million.
• A reduction in the yields used to value the swap as falling yields adversely impact the fair value. This reduced the
asset value by £79 million.
Defined pension deficit sensitivities
Keeping it simple
Which assumptions have the biggest impact on the Scheme?
It is important to note that comparatively small changes in the assumptions used may have a significant effect on the
consolidated income statement and statement of financial position. This 'sensitivity' to change is analysed below to
demonstrate how small changes in assumptions can have a large impact on the estimation of the defined benefit pension
deficit.
The Trustee manages the investment, mortality and inflation risks to ensure the pension obligations are met as they fall
due. The investment strategy is aimed at the valuation obligation rather than IAS19 defined pension deficit value. As such
the effectiveness of the risk hedging strategies on a valuation basis will not be the same as on an accounting basis. Those
hedging strategies have significant impact on the movement in the net pension deficit as assumptions change, offsetting the
impacts on the obligation disclosed below.
In practice, changes in one assumption may be accompanied by offsetting changes in another assumption (although this is not
always the case). Changes in the assumptions may occur at the same time as changes in the market value of Scheme assets,
which may or may not offset the changes in assumptions.
Changes in assumptions have a different level of impact as the value of the net pension deficit fluctuates, because the
relationship between them is not linear.
The analysis below considers the impact of a single change in principal assumptions on the defined benefit obligation while
keeping the other assumptions unchanged and does not take into account any risk hedging strategies:
Assumption Change in assumption Impact on defined benefit obligation
Discount rate Increase by 0.1% Decrease by £65 million
Decrease by 0.1% Increase by £75 million
Rate of inflation (Retail Price Index) Increase by 0.1% Increase by £15 million
Decrease by 0.1% Decrease by £15 million
Rate of inflation (Consumer Price Index) Increase by 0.1% Increase by £10 million
Decrease by 0.1% Decrease by £10 million
Life expectations Increase by one year Increase by £130 million
The sensitivity analysis has been determined by extrapolating the impact on the defined benefit obligation at the year end
with changes in key assumptions that might reasonably occur.
While the Scheme's risk hedging strategy is aimed at a valuation basis, the Directors estimate that on an accounting basis
it would significantly reduce the above impact on the defined benefit obligation.
In particular, an increase in assumption of life expectations by one year would benefit from an estimated increase of the
value of the longevity swap by £100 million, reducing the net impact on the defined pension deficit to £30 million.
Further, the ITV Pension Scheme invests in UK Government bonds and interest rate and inflation swap contracts and therefore
movements in the defined benefit obligation are typically offset, to an extent, by asset movements. This occurred during
2016 when both corporate and UK government bond yields fell significantly and the market expectation of future inflation
rose. However, as corporate bond yields fell further than UK Government Bond yields, the impact on the defined benefit
obligation exceeded the impact on the assets.
Keeping it simple
What was the impact of movements on the Scheme's assets and liabilities?
The sections above describe how the Scheme obligations and assets are comprised and measured. The following section sets
out the impact of various movements and expenses on the Scheme on the Group's financial statements.
Amounts recognised through the income statement
Amounts recognised through the income statement are as follows:
2016 2015
£m £m
Amount charged to operating costs:
Current service cost (7) (8)
Scheme administration expenses (5) (5)
(12) (13)
Amount charged to net financing costs:
Net interest on defined benefit obligation (5) (10)
Amount charged to exceptional costs:
Curtailment cost (19) -
Total charged in the consolidated income statement (36) (23)
Amounts recognised through the consolidated statement of comprehensive income
The amounts recognised through the consolidated statement of comprehensive income/(cost) are:
2016 2015
£m £m
Remeasurement gains / (losses):
(Loss)/Return on scheme assets excluding interest income 416 (126)
Actuarial gains / (losses) on liabilities arising from change in:
- inflation experience 31 48
- financial assumptions (868) 169
- mortality assumptions 173 -
(664) 217
Total recognised in the consolidated statement of comprehensive income (248) 91
The £664 million actuarial loss on the Scheme's liabilities was principally due to a decrease in bond yields over the year,
which has resulted in an increase in the liabilities. The £416 million gain on the Scheme's assets primarily results from
increases in the market values of gilts and swaps, which has led to assets outperforming expectations.
Addressing the defined benefit pension deficit
Keeping it simple
The Group works closely with the Trustee to agree appropriate levels of funding for the Scheme. This involves agreeing a
Schedule of Contributions at each triennial valuation, which specifies the contribution rates for the employer and scheme
members and the date these contributions are due. A recovery plan setting out the steps that will be taken to address a
funding shortfall is also agreed.
In the event that the Group's defined benefit scheme is in a net liability position, the Directors must take steps to
manage the size of the deficit. Apart from the funding agreements mentioned above, this could involve pledging additional
assets to the Scheme, as was the case in the SDN and London Television Centre ('LTVC') pension funding partnerships
(explained below).
The levels of ongoing contributions to the Scheme are based on the current service costs (as assessed by the Scheme
Trustee) and the expected future cash flows of the Scheme. Normal employer contributions in 2017 for current service
(including administration expenses) are expected to be in the region of £6 million (2016: £12 million) and deficit funding
contributions in 2017 are expected to be £66 million (2016: £66 million), assuming current contribution rates continue as
agreed with the Trustee. The reduction in normal employer contributions for current service is as a result of the closure
of the ITV Pension Scheme to future benefit accrual.
The Group has two asset-backed pension funding agreements with the Trustee and makes annual payments of £11 million for 12
years from 2011 and £2.5 million, increasing by 5% per annum until 2038. In 2017 a payment of £14 million is expected as a
result of those agreements.
IFRIC 14 clarifies how the asset ceiling should be applied, and in particular, how local minimum funding rules work. The
Group has determined that it has an unconditional right to a refund of surplus assets if the Schemes are run off until the
last member dies, on which basis IFRIC 14 does not cause any change in the balance sheet disclosures before tax.
Section 4: Capital Structure and Financing Costs
In this section
This section outlines how the Group manages its capital structure and related financing costs, including its balance sheet
liquidity and access to capital markets.
The Directors determine the appropriate capital structure of ITV, specifically, how much is raised from shareholders
(equity) and how much is borrowed from financial institutions (debt) in order to finance the Group's activities both now
and in the future. Maintaining capital discipline and balance sheet efficiency remains important to the Group, as seen
through the issuance of a new Eurobond during the year. Any potential courses of action will take into account the Group's
liquidity needs, flexibility to invest in the business, pension deficit initiatives and impact on credit ratings.
The Directors consider the Group's capital structure and dividend policy at least twice a year ahead of announcing results
and do so in the context of its ability to continue as a going concern, to execute the strategy and to invest in
opportunities to grow the business and enhance shareholder value.
A Tax and Treasury committee acting under delegated authority from the Board, approves certain financial transactions and
monitors compliance with the Group's tax and treasury policies.
4.1 Net debt
Keeping it simple
Net cash / (debt) is the Group's key measure used to evaluate total cash resources net of the current outstanding debt.
Adjusted net debt is also monitored by the Group and more closely reflects how credit agencies see the Group's gearing. To
arrive at the adjusted net debt amount, we add our total undiscounted expected contingent payments on acquisitions, our net
pension deficit and our undiscounted operating lease commitments. A full analysis and discussion of adjusted net debt is
included in the Financial and Performance Review.
The tables below analyse movements in the components of net cash during the year:
1 January Net cash flow Reclassifications£m Currency and 31 December
2016 and non-cash 2016
£m acquisitions movements £m
£m £m
Cash 238 304 - 7 549
Cash equivalents 56 (6) (39) 1 12
Total cash and cash equivalents 294 298 (39) 8 561
Loans and facilities due within one year (5) 5 - (161) (161)
Finance leases due within one year (6) 6 - (4) (4)
Loans and facilities due after one year (598) (525) - 88 (1,035)
Finance leases due after one year (4) - - 4 -
Total debt (613) (514) - (73) (1,200)
Currency component of swaps held against euro denominated bonds - - - 2 2
Net cash/(debt) (319) (216) (39) (63) (637)
1 January Net cash flow Currency and 31 December
2015 and non-cash 2015
£m acquisitions movements £m
£m £m
Cash 234 3 1 238
Cash equivalents 63 (6) (1) 56
Total cash and cash equivalents 297 (3) - 294
Loans and facilities due within one year (78) 73 - (5)
Finance leases due within one year (7) 7 (6) (6)
Loans and facilities due after one year (161) (433) (4) (598)
Finance leases due after one year (10) - 6 (4)
Total debt (256) (353) (4) (613)
Net cash/(debt) 41 (356) (4) (319)
Cash and cash equivalents
Included within cash equivalents is £4 million (2015: £10 million), the use of which is restricted to meeting finance lease
commitments under programme sale and leasebacks (see note 4.2). During 2016 gilts of £39 million (2015: £39 million) were
reclassified to other pension assets. This was as a result of the outcome of legal action attempting to remove the charging
deed executed on these gilts in respect of the unfunded pension commitments of four former Granada executives. Refer to
Note 3.7 for further details.
Loans and facilities due within one year
At various periods during the year the Group drew down on the Revolving Credit Facility ('RCF') to meet short-term funding
requirements. All short-term drawings were repaid by the end of the year (2015: no outstanding short-term funding). The
maximum draw down of the RCF during the year was £500 million in May. The maximum draw down on the RCF during 2015 was £362
million.
The Group also had an unsecured £161 million Eurobond which matured in January 2017 and had a coupon of 6.125%.
Loans and loan notes due after one year
The Group has two bilateral loan facilities maturing in March 2017; both loans can be extended until 2018 at ITV's option.
The two facilities are a £100 million bilateral loan that is fully drawn down as of 31 December 2016, and a £150 million
bilateral loan with an unconditional right to set off with cash on deposit with the counterparty. The £150 million
arrangement is in a net £nil position.
In December 2016 the Group issued a seven-year E500 million Eurobond at a fixed coupon of 2.0% which will mature in
December 2023. The bond has been swapped back to sterling using a cross currency interest swap. The resulting fixed rate
payable is c. 3.5%. The proceeds of the bond were for general corporate purposes including the repayment of the £161
million sterling bond which matured in January 2017 and settling the acquisition related liabilities due in 2017.
In September 2015 the Group issued a seven-year E600 million Eurobond at a fixed coupon of 2.125% which will mature in
September 2022. The bond refinanced the 12-month bridge loan facility of E500 million used for the purchase of Talpa Media
in April 2015.
4.2 Borrowings and finance leases
Keeping it simple
The Group borrows money from financial institutions in the form of bonds, bank facilities and other financial instruments.
The interest payable on these instruments is shown in the net financing costs note in note 4.4.
There are Board-approved policies in place to manage the Group's financial risks. Macroeconomic market risks, which impact
currency transactions and interest rates, are discussed in note 4.3. Credit and liquidity risks are discussed below.
• Credit risk: the risk of financial loss to the Group if a customer or counterparty fails to meet its contractual
obligations and
• Liquidity risk: the risk that the Group will not be able to meet its financial obligations as they fall due
The Group is required to disclose the fair value of its debt instruments. The fair value is the amount the Group would pay
a third party to transfer the liability. It is calculated based on the present value of future principal and interest cash
flows, discounted at the market rate of interest at the reporting date. This calculation of fair value is consistent with
instruments valued under level 2 in note 4.5.
Accounting policies
Borrowings
Borrowings are recognised initially at fair value less directly attributable transaction costs, with subsequent measurement
at amortised cost using the effective interest rate method. Under the amortised cost method the difference between the
amount initially recognised and the redemption value is recorded in the income statement over the period of the borrowing
on an effective interest rate basis.
Finance leases
Historically, ITV has entered into sale and leaseback agreements in relation to certain programme titles. Related
outstanding sale and leaseback obligations, which comprise the principal and accrued interest, are included within
borrowings. The finance related element of the agreement is charged to the income statement over the term of the lease on
an effective interest basis. Sale and leaseback obligations are secured against an equivalent cash balance held within cash
and cash equivalents.
Managing credit and liquidity risk
Credit risk
The Group's maximum exposure to credit risk is represented by the carrying amount of derivative financial assets (see note
4.3), trade receivables (see note 3.1.3), and cash and cash equivalents (note 4.1).
Trade and other receivables
The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The majority
of trade receivables relate to airtime sales contracts with advertising agencies and advertisers. Credit insurance has been
taken out against these companies to minimise the impact on the Group in the event of a possible default and is also taken
out for other significant receivables. In December 2016 the Group signed a new £100 million non-recourse receivables
purchase agreement to replace the £75 million invoice discount facility. In December 2016 £35 million invoices were sold
under the agreement (2015: £nil). The receivables in relation to those were derecognised and the Group collected cash on
behalf of the counterparty.
Cash
The Group operates investment guidelines with respect to surplus cash that emphasise preservation of capital. The
guidelines set out procedures and limits on counterparty risk and maturity profile of cash placed. Counterparty limits for
cash deposits are largely based upon long-term ratings published by the major credit rating agencies and perceived state
support. Deposits longer than 12 months require the approval of the Board.
Borrowings
ITV is rated as investment grade by Moody's and S&P. ITV's credit ratings, the cost of credit default swap hedging and the
absolute level of interest rates are key determinants in the cost of new borrowings for ITV.
Liquidity risk
The Group's financing policy is to fund itself for the medium to long-term by using debt instruments with a range of
maturities and to ensure access to appropriate short-term borrowing facilities with a minimum of £250 million of undrawn
facilities available at all times.
Long-term funding comes from the UK and European Capital markets, while any short to medium-term debt requirements are
provided through bank credit facilities totalling £930 million (see below). Management monitors rolling forecasts of the
Group's liquidity reserve (comprising undrawn bank facilities and cash and cash equivalents) on the basis of expected cash
flows. This monitoring includes financial ratios to assess any possible future impact on credit ratings and headroom and
takes into account the accessibility of cash and cash equivalents.
The Group has £630 million available funds through a Revolving Credit Facility ('RCF') with a group of relationship banks.
This £630 million facility was amended and extended in December 2016, matures in 2021 and is committed with leverage and
interest cover financial covenants. In addition, the Group has £300 million of financial covenant free financing which runs
to 2021. Both of these facilities were undrawn at 31 December 2016 (2015: no drawings).
Fair value versus book value
The tables below provide fair value information for the Group's borrowings:
Book value Fair value
Maturity 2016 2015 2016 2015
£m £m £m £m
Loans due within one year
Other short-term loans Various - 5 - 5
£161 million Eurobond Jan 2017 161 161 162 168
Loans due in more than one year
Bilateral loan facility Jun 2018 100 - 100 -
E600 million Eurobond Sept 2022 508 437 529 445
E500 million Eurobond Dec 2023 427 - 431 -
1,196 603 1,222 618
Finance leases
The following table analyses when finance lease liabilities are due for payment:
Minimum Interest 2016 Minimum Interest 2015
lease £m Principal lease £m Principal
payments £m payments £m
£m £m
In one year or less 4 - 4 6 - 6
In more than one year but not more than five years - - - 4 - 4
4 - 4 10 - 10
Finance leases principally comprise programmes under sale and leaseback arrangements. The net book value of tangible assets
held under finance leases at 31 December 2016 was £nil (2015: £1 million).
4.3 Managing market risks: derivative financial instruments
Keeping it simple
What is a derivative?
A derivative is a type of financial instrument typically used to manage risk. A derivative's value changes over time in
response to underlying variables such as exchange rates or 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 four 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 ;
• 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; and
• Cross-currency interest rate swaps are derivative instruments used to exchange the principal and interest coupons in a
debt instrument from one currency to another.
Analysis of the derivatives used by the Group to hedge its exposure and the various methods used to calculate their
respective fair values are detailed in this section.
Accounting policies
Derivative financial instruments are initially recognised at fair value and are subsequently remeasured at fair value with
the movement recorded in the income statement, except where derivatives qualify for cash flow hedge accounting. In this
case, the effective portion of a cash flow hedge is recognised in other comprehensive income and presented in the hedging
reserve within equity. The cumulative gain or loss is later reclassified to the income statement in the same period as the
relevant hedged transaction is realised. Derivatives with positive fair values are recorded as assets and negative fair
values as liabilities.
Determining Fair Value
The fair value of forward foreign exchange contracts is determined by using the difference between the contract exchange
rate and the quoted forward exchange rate at the reporting date. The fair value of interest rate swaps is the estimated
amount that the Group would receive or pay to terminate the swap at the reporting date, taking into account current
interest rates and our current creditworthiness, as well as that of our swap counterparties.
Third-party valuations are used to fair value the Group's interest rate derivatives. The valuation techniques use inputs
such as interest rate yield curves and currency prices/yields, volatilities of underlying instruments and correlations
between inputs.
How do we manage our currency and interest rate risk?
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 (see 'Keeping it simple
box' for explanation of non-functional currency transactions).
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 and cross-currency interest rate 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.
The following table highlights the Group's sensitivity to translation risk resulting from a 10% strengthening/weakening in
sterling against the US dollar and euro, assuming all other variables are held constant:
2016 - post- 2016 - equity 2015 - post- 2015 - equity
tax profit tax profit
US dollar £3 million £32 million £10 million £63 million
Euro £10 million £11 million £8 million £41 million
The Group's sensitivity to translation risk for revenue and adjusted EBITA is disclosed in the Financial and Performance
Review on the previous pages. The key difference between the foreign currency sensitivity for adjusted EBITA and profit
after tax is the impact on the US dollar and euro denominated exceptional costs, including acquisition related costs,
acquired intangible amortisation and net financing cost.
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 31 December 2016 the Group's fixed rate debt represented 92% of total gross debt (2015: 99%). Consequently a 1% movement
in interest rates on floating rate debt would impact the 2016 post-tax profit for the year by £2m (2015: £nil).
For financial assets and liabilities classified at fair value through profit or loss, the movements in the year relating to
changes in fair value and interest are not separated.
What is the value of our derivative financial instruments?
The following table shows the fair value of derivative financial instruments analysed by type of contract. Interest rate
swap fair values exclude accrued interest.
At 31 December 2016 Assets Liabilities
£m £m
Current
Foreign exchange forward contracts and swaps - cash flow hedges 6 (1)
Foreign exchange forward contracts and swaps - fair value through profit or loss 2 (2)
Non-current
Cross currency interest swaps - cash flow hedges - (6)
Foreign exchange forward contracts and swaps - cash flow hedges 1 (3)
9 (12)
At 31 December 2015 Assets Liabilities
£m £m
Current
Foreign exchange forward contracts and swaps - cash flow hedges - (4)
Foreign exchange forward contracts and swaps - fair value through profit or loss 1 (1)
Non-current
Interest rate swaps - fair value through profit or loss 8 (6)
9 (11)
Cash flow hedges
The Group applies hedge accounting for certain foreign currency firm commitments and highly probably cash flows where the
underlying cash flows are payable within the next two to seven years. In order to fix the sterling cash outflows associated
with the commitments and interest payments - which are mainly denominated in AUD or euros - the Group has taken out forward
foreign exchange contracts and cross currency interest swaps for the same foreign currency amount and maturity date 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 £5 million cumulative gain (2015: £6 million loss) recycled to the income statement in the
year.
On issuing the 2023 Eurobond, the Group entered into a portfolio of cross-currency interest rate swaps, which swapped the
euro principal and fixed rate coupons into sterling. As a result the Group makes sterling interest payments at a fixed
rate.
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 £168 million
(2015: £141 million). A foreign exchange loss of £21 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.
Interest rate swaps
On issuing the 2017 Eurobond, the Group entered into a portfolio of fixed to floating interest rate swaps and then
subsequently overlaid a portfolio of floating to fixed interest rate swaps with the result that interest was 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.
Undiscounted financial liabilities
Keeping it simple
The Group is required to disclose the expected timings of cash outflows for each of its financial liabilities (including
derivatives). The amounts disclosed in the table are the contractual undiscounted cash flows (including interest), so will
not always reconcile with the amounts disclosed on the statement of financial position.
At 31 December 2016 Carrying value Total Less than Between Between Over
£m contractual 1 year 1 and 2 years 2 and 5 years 5 years
cash flows £m £m £m £m
£m
Non-derivative financial liabilities
Borrowings (1,196) (1,338) (194) (119) (58) (967)
Trade and other payables (912) (912) (855) (48) (8) (1)
Other payables - non-current (11) (11) - (6) (4) (1)
Other payables - commitments on acquisitions (158) (328) * (122) (56) (150) -
Derivative financial instruments
Foreign exchange forward contracts and swaps - cash flow hedges
Inflow 7 213 127 86 - -
Outflow (4) (210) (123) (87) - -
Cross currency swaps - cash flow hedges
Inflow - 497 10 10 30 447
Outflow (6) (542) (17) (17) (51) (457)
Foreign exchange forward contracts and swaps - fair value through profit or loss
Inflow 263 263 258 5 - -
Outflow (263) (263) (258) (5) - -
Interest rate swaps - fair value through profit or loss
Inflow - 13 13 - - -
Outflow - (6) (6) - - -
(2,280) (2,624) (1,167) (237) (241) (979)
At 31 December 2015 Carrying value Total Less than Between Between Over
£m contractual 1 year 1 and 2 years 2 and 5 years 5 years
cash flows £m £m £m £m
£m
Non-derivative financial liabilities
Borrowings (613) (703) (30) (184) (28) (461)
Trade and other payables (834) (834) (786) (34) (14) -
Other payables - non-current (4) (4) - (1) (2) (1)
Other payables - commitments on acquisitions (85) (303) * (12) (108) (183) -
Derivative financial instruments
Cash flow hedges
Inflow 66 66 49 17 - -
Outflow (70) (70) (53) (17) - -
Foreign exchange forward contracts and swaps
Inflow 147 147 144 3 - -
Outflow (147) (147) (144) (3) - -
Interest rate swaps
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