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Derivative financial instruments | 12 Months Ended
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Dec. 31, 2024
Derivative financial instruments |
Derivative financial instruments | C5. Derivative financial instruments Accounting for derivative financial instruments and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value at the balance sheet date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. At the inception of the transaction, the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values of hedged items. ​ Certain financial instruments are not designated or do not qualify for hedge accounting. Typically the Group will not designate financial instruments for hedge accounting where a perfect or near perfect offset is expected between the change in value of assets and liabilities. Changes in the fair value of any derivative instruments in this category are immediately recognised in the income statement. Where financial instruments are designated for hedge accounting they are designated as either fair value hedge, net investment hedge, or cash flow hedge. When designating cross-currency swaps, the cost of hedging has been excluded from the relationship and any movement in the fair value related to the cost of hedging is deferred in equity and amortised over the life of the hedged item. (a) Fair value hedge These instruments are used to hedge exposure to changes in the fair value of recognised assets or liabilities. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. There were no fair value hedges as at the year-end date. (b) Net investment hedge These instruments are used to hedge exposure on translation of net investments in foreign operations. Any gain or loss on the hedging instrument related to the effective portion of the hedge is recognised in other comprehensive income; the gain or loss related to the ineffective portion is recognised immediately in the income statement. In the event of disposal of a foreign operation, the gains and losses accumulated in other comprehensive income are recycled through the income statement. All currencies are directly hedged, therefore the hedge ratio is considered to be 1:1. The Group expects that the values of the hedged item and hedging instrument will move in opposite directions in response to movements in the same hedged risk. Where there are sufficient levels of denominated net assets, the critical terms are deemed to match. The following net investment hedges were in place at 31 December 2024: US dollar net investment hedge relationship: $1,627m (2023: $2,091m) cross-currency swaps notional, $546m (2023: $459m) loan notional, and $137m (2023: $206m) cross-currency swaps future interest cash flows have been used to hedge $2,310m (2023: $2,756m) of the net assets of the US operating subsidiaries. The movement in the cross-currency swaps due to changes in $/£ exchange rates are in the opposite direction of the changes due to $/£ in the subsidiaries assets. As the critical terms match, their values will systematically change in the opposite direction of each other. Thus we consider that this demonstrates the existence of an economic relationship. Euro net investment hedge relationship: €315m (2023: €343m) bonds are used to hedge the net assets of the euro operating subsidiaries totalling €315m (2023: €343m). The movement in the bonds due to changes in €/£ exchange rates are in the opposite direction of the changes due to €/£ in the subsidiaries assets. As the critical terms match, their values will systematically change in the opposite direction of each other. Thus we consider that this demonstrates the existence of an economic relationship. Japanese yen (JPY) net investment hedge relationship: JPY2,000m (2023: JPY1,925m) cross-currency swap notional and JPY55m (2023: JPY27m) cross-currency swaps future interest cash outflows have been used to hedge JPY2,055m (2023: JPY1,898m) of the net assets of the Japanese associate. The movement in the cross-currency swaps due to changes in JPY/GBP exchange rates are in the opposite direction of the changes due to JPY/GBP in the associate’s assets. As the critical terms match, their values will systematically change in the opposite direction of each other. Thus we consider that this demonstrates the existence of an economic relationship. During the year, there was no gain or loss (2023: £nil) relating to ineffectiveness of net investment in foreign entity hedges. The main source of ineffectiveness of the net investment hedge is the off-market value of the cross-currency swaps used to hedge US dollar net assets at the hedge designation date. Ineffectiveness due to changes in the counterparty credit risk was not material in the year and is expected to remain so due to the Group’s policy of only using counterparties with a credit rating of A- and above. For the year ended 31 December 2024, the amount in other comprehensive income related to net investment hedge accounting was a loss of £17m (2023: £109m gain; 2022: £68m loss). The effect of the foreign currency-related hedging instruments on the Group’s financial position and performance is shown in the table below: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 2024
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Weighted
​ | ​ | ​ | ​ | Carrying | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Change in | ​ | ​ | ​ | ​ | ​ | average
​ | ​ | ​ | ​ | amount | ​ | ​ | ​ | ​ | ​ | ​ | ​ | fair value of | ​ | Change in | ​ | ​ | ​ | foreign
​ | ​ | ​ | ​ | at year | ​ | Notional | ​ | ​ | ​ | ​ | ​ | outstanding | ​ | fair value of | ​ | ​ | ​ | exchange
​ | ​ | ​ | ​ | end date | ​ | amount | ​ | ​ | ​ | Hedge | ​ | instrument | ​ | hedged item | ​ | Ineffectiveness | ​ | rate for the
Hedging instruments |  | Currency |  | £m |  | £m |  | Maturity date |  | ratio |  | £m |  | £m |  | £m |  | year
Cross-currency swaps | ​ | USD | ​ | 4 | ​ | (1,300) | ​ | May 2026 – October 2028 | ​ | 1:1 | ​ | (5) | ​ | (5) | ​ | — | ​ | 1.241
Cross-currency swaps | ​ | JPY | ​ | — | ​ | (10) | ​ | June 2027 | ​ | 1:1 | ​ | (1) | ​ | (1) | ​ | — | ​ | 169.747
Bonds |  | EUR |  | (261) |  | (261) |  | June 2027 – June 2030 |  | 1:1 |  | 16 |  | 16 |  | — |  | 1.162
Term loan |  | USD |  | (436) |  | (436) |  | October 2025 |  | 1:1 |  | 6 |  | 6 |  | — |  | 1.110
​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 2023
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Weighted
​ | ​ | ​ | ​ | Carrying | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Change in | ​ | ​ | ​ | ​ | ​ | average
​ | ​ | ​ | ​ | amount | ​ | ​ | ​ | ​ | ​ | ​ | ​ | fair value of | ​ | Change in | ​ | ​ | ​ | foreign
​ | ​ | ​ | ​ | at year | ​ | Notional | ​ | ​ | ​ | ​ | ​ | outstanding | ​ | fair value of | ​ | ​ | ​ | exchange
​ | ​ | ​ | ​ | end date | ​ | amount | ​ | ​ | ​ | Hedge | ​ | instrument | ​ | hedged item | ​ | Ineffectiveness | ​ | rate for the
Hedging instruments |  | Currency |  | £m |  | £m |  | Maturity date |  | ratio |  | £m |  | £m |  | £m |  | year
Cross-currency swaps | ​ | USD | ​ | 9 | ​ | (1,641) | ​ | November 2024 – October 2028 | ​ | 1:1 | ​ | 114 | ​ | 114 | ​ | — | ​ | 1.250
Cross-currency swaps |  | JPY |  | 1 |  | (11) |  | November 2024 |  | 1:1 |  | 1 |  | 1 |  | — |  | 167.269
Bonds |  | EUR |  | (298) |  | (298) |  | November 2024 – October 2028 |  | 1:1 |  | 6 |  | 6 |  | — |  | 1.162
Term loan |  | USD |  | (360) |  | (360) |  | October 2025 |  | 1:1 |  | 9 |  | 9 |  | — |  | 1.110
​ The amount in net investment hedge reserves related to continuing hedges is a gain of £6m (2023: £16m gain; 2022: £91m loss), and the amount related to discontinued hedges is a loss of £7m (2023: £nil; 2022: £nil). The change in fair value of the outstanding hedging instrument differs from the amount recognised in other comprehensive income during the year due to the impact of currency basis (excluded from the hedge relationship) and the foreign exchange impact of realised interest on the hedging instrument (not reflected in the fair value change). (c) Cash flow hedge These instruments are used to hedge a highly probable forecast transaction, or a change in the cash flows of a recognised asset or liability. The portion of the gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income. Any ineffective portion is immediately recognised in the income statement. The gains or losses that are recognised in other comprehensive income are transferred to the income statement in the same period in which the hedged cash flows affect the income statement. In the event that the hedged item occurs or is no longer expected to occur, accumulated gains or losses held in the cash flow hedge reserve are immediately recognised in the income statement. In the event that the hedged item is expected to occur but no longer meets the requirements of hedge accounting, accumulated gains or losses remain in other comprehensive income and are only recognised in the income statement when the forecast transaction occurs or is no longer expected to occur. All cash flow hedge relationships are hedges of a foreign currency risk and all currencies were directly hedged, therefore the hedge ratio is considered to be 1:1. Cash flow hedge accounting has been applied to derivatives (marked as ‘cash flow hedge’) in the table on page 203 in accordance with IFRS 9. Where no hedge accounting has been applied, related derivatives have been marked as ‘non-hedge’. The hedged item, a euro bond, creates an exposure to pay interest annually and the principal at maturity. By receiving the same amount at the same dates through a cross-currency swap, this exposure is eliminated. Since the critical terms of the derivative and the hedged debt match (i.e. matching currencies, payment dates, and interest rate on the leg of the swap offsetting the bond), the change in value of the derivative, excluding any basis risk, will be considered to completely offset the changes in the hedged cash flow. Any ineffectiveness on the cash flow hedge is taken directly to finance costs. During the year, there was a loss of £2m (2023: £1m gain) from those derivatives in a cash flow hedge relationship. Ineffectiveness due to changes in the counterparty credit risk was not material in the year and is expected to remain the same because the Group’s counterparties credit rating is A- and above. Cash flow hedge accounting has been applied to €500m (2023: €500m) of the €500m 2026 bond, €421m (2023: €421m) of the €850m 2027 bond, and €600m (2023: €600m) of the €600m 2028 bond. The cross-currency interest rate swaps are used as hedging instruments to hedge the volatility in the £/€ exchange rate of the bonds. For the year ended 31 December 2024, the amount in other comprehensive income related to cash flow hedge accounting was a gain of £27m (2023: £3m gain; 2022: £6m loss). The effect of the foreign currency related hedging instruments on the Group’s financial position and performance is shown in the table below: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 2024
​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | Weighted
​ | ​ | ​ | ​ | Carrying | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Change in | ​ | Change in | ​ | ​ | ​ | average
​ | ​ | ​ | ​ | amount | ​ | ​ | ​ | ​ | ​ | ​ | ​ | fair value of | ​ | fair value of | ​ | ​ | ​ | foreign
​ | ​ | ​ | ​ | at year | ​ | Notional | ​ | ​ | ​ | ​ | ​ | outstanding | ​ | hedged | ​ | ​ | ​ | exchange
​ | ​ | ​ | ​ | end date | ​ | amount | ​ | ​ | ​ | ​ | ​ | instrument | ​ | item | ​ | Ineffectiveness | ​ | rate for the
Hedging instruments | ​ | Currency | ​ | £m | ​ | £m | ​ | Maturity date | ​ | Hedge ratio | ​ | £m | ​ | £m | ​ | £m | ​ | year
Cross-currency swaps | ​ | EUR | ​ | (27) | ​ | 1,257 | ​ | May 2026 – October 2028 | ​ | 1:1 | ​ | (40) | ​ | (38) | ​ | (2) | ​ | 1.133
​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | 2023
​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | ​ |  | Weighted
​ | ​ | ​ | ​ | Carrying | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Change in | ​ | Change in | ​ | ​ | ​ | average
​ | ​ | ​ | ​ | amount | ​ | ​ | ​ | ​ | ​ | ​ | ​ | fair value of | ​ | fair value of | ​ | ​ | ​ | foreign
​ | ​ | ​ | ​ | at year | ​ | Notional | ​ | ​ | ​ | ​ | ​ | outstanding | ​ | hedged | ​ | ​ | ​ | exchange
​ | ​ | ​ | ​ | end date | ​ | amount | ​ | ​ | ​ | ​ | ​ | instrument | ​ | item | ​ | Ineffectiveness | ​ | rate for the
Hedging instruments | ​ | Currency | ​ | £m | ​ | £m | ​ | Maturity date | ​ | Hedge ratio | ​ | £m | ​ | £m | ​ | £m | ​ | year
Cross-currency swaps | ​ | EUR | ​ | 13 | ​ | 1,668 | ​ | November 2024 – October 2028 | ​ | 1:1 | ​ | (21) | ​ | (21) | ​ | — | ​ | 1.150
Interest rate swaps | ​ | USD | ​ | 1 | ​ | 275 | ​ | September 2024 | ​ | 1:1 | ​ | 1 | ​ | — | ​ | 1 | ​ | —
​ Amount in cash flow hedge reserves related to continuing hedges is a gain of £34m (2023: £6m gain; 2022: £3m gain), and the amount related to discontinued hedges is £nil (2023: £nil; 2022: £nil). The change in fair value of the outstanding hedging instrument differs from the amount recognised in other comprehensive income during the year due to the impact of currency basis (excluded from the hedge relationship) and the spot retranslation element of the fair value movement (which offsets the hedged item in the income statement).

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- Definition The disclosure of derivative financial instruments. [Refer: Derivatives [member]] + References Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef -Name IAS -Number 1 -IssueDate 2024-01-01 -Paragraph 10 -Subparagraph e -URI https://taxonomy.ifrs.org/xifrs-link?type=IAS&num=1&code=ifrs-tx-2024-en-r&anchor=para_10_e&doctype=Standard -URIDate 2024-03-27 + Details
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