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ia l sta - 1 Chairman’s statement 3 Directors’ report – Business review

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21. DERIVATIVES AND OTHER FINANCIAL INSTRUmENTS
Set out below are the derivative financial instruments entered into by the Group to manage its interest rate and foreign exchange risks.
2013
2012
Asset
Liability
Asset
Liability
Fair Value
£m
Notional
£m
Fair Value
£m
Notional
£m
Fair Value
£m
Notional
£m
Fair Value
£m
Notional
£m
Fair value hedges
Interest rate swaps
108
851


141
833


Cash flow hedges
Cross-currency swaps
166
1,117

47
186
661


Forward foreign exchange contracts
37
1,146
(26)
973
28
880
(3)
223
Currency options (collars)




2
13

13
Derivatives not in a formal hedge relationship
Cross-currency swaps
67
353
(15)
390
57
353
(28)
390
Forward foreign exchange contracts
1
114
(1)
49

25
(1)
127
Interest rate swaps
1
260



140

120
Total
380
3,841
(42)
1,459
414
2,905
(32)
873
The maturity of the derivative financial instruments is as follows:
2013
2012
Asset
£m
Liability
£m
Asset
£m
Liability
£m
In one year or less
15
(13)
23
(2)
Between one and two years
15
(6)
6
(1)
Between two and five years
251
(8)
101
(1)
In more than five years
99
(15)
284
(28)
Total
380
(42)
414
(32)
The fair value of the Group’s debt-related derivative portfolio at 30 June 2013 was a £327 million net asset (2012: net asset of £356 million) with 
net notional principal amounts totalling £1,957 million (2012: £1,454 million). This comprised: net assets of £166 million designated as cash flow 
hedges (2012: net assets of £186 million), net assets of £108 million designated as fair value hedges (2012: net assets of £141 million) and net 
assets of £53 million not designated in a formal hedge relationship (2012: net assets of £29 million).
At 30 June 2013, the carrying value of financial assets that were, upon initial recognition, designated as financial assets at fair value through 
profit or loss was nil (2012: nil).

Hedge accounting classification and impact


The Group has designated certain interest rate swaps as fair value hedges of interest rate risk, representing 30% (2012: 37%) of the Group’s 
debt portfolio. Movements in the fair value of the hedged items are taken to the income statement and are offset by movements in the fair 
value of the hedging instruments, to the extent that hedge accounting is achieved.
The Group has designated certain fixed rate cross-currency swaps as cash flow hedges of 47% (2012: 34%) of the Group’s debt portfolio. As 
such, the effective portion of the gain or loss on these contracts is reported as a separate component of the hedging reserve, and is then 
reclassified to the income statement in the same periods that the forecast transactions affect the income statement. During the current year, 
gains of £40 million were removed from the hedging reserve and credited to finance costs in the income statement to offset the currency 
translation movements in the underlying hedged debt (2012: gains of £22 million).
The Group designates certain forward foreign exchange contracts and the intrinsic element of options (collars) as cash flow hedges of forecast 
foreign currency sales and purchases. Gains or losses are released from the hedging reserve and recycled to the income statement in the same 
period as the hedged item is recognised. If forecast transactions are no longer expected to occur, any amounts included in the hedging reserve 
related to that forecast transaction would be recognised directly in the income statement. During the current year, gains of £2 million were 
removed from the hedging reserve and credited to operating expense in the income statement (2012: gains of £3 million). Gains of £8 million 
were removed from the hedging reserve and credited to revenue in the income statement (2012: gains of £5 million).

Annual Report 2013: Notes to the consolidated financial statements

Notes to the consolidated financial statements


continued

88

  
British Sky Broadcasting Group plc  
Hedge effectiveness testing is performed quarterly using the dollar-offset approach. The actual movement in the hedging items is compared 
with the movement in the valuation of the hypothetically perfect hedge of the underlying risk at inception, and any ineffectiveness is 
recognised directly in the income statement. Ineffectiveness of £2 million was recognised in the income statement during the current year 
(2012: £1 million).
A hedge relationship is deemed to be effective if the ratio of changes in valuation of the underlying hedged item and the hedging instrument is 
within the range of 80% to 125%. Any relationship which has a ratio outside this range is deemed to be ineffective, at which point hedge 
accounting is suspended. During the year ended 30 June 2013, there were no instances in which the hedge relationship was not highly effective 
(2012: no instances).

Financial instruments


(a) Carrying value and fair value


The accounting classification of each class of the Group’s financial assets and financial liabilities, together with their fair values,  
is as follows:
Held to
maturity
investments
£m
Available-
for-sale
£m
Derivatives
deemed held
for trading
£m
Derivatives in
hedging
relationships
£m
Loans and
receivables
£m
Other
liabilities
£m
Total 
carrying
value
£m
Total fair
value
£m
At 30 June 2013
Quoted bond debt





(2,843)
(2,843)
(3,185)
Derivative financial instruments


53
285


338
338
Trade and other payables





(1,567)
(1,567)
(1,567)
Provisions





(74)
(74)
(74)
Obligations under finance leases
and other borrowings





(77)
(77)
(77)
Available-for-sale investments

422




422
422
Trade and other receivables




278

278
278
Short-term deposits
595





595
595
Cash and cash equivalents
65



750

815
815
At 30 June 2012
Quoted bond debt





(2,338)
(2,338)
(2,674)
Derivative financial instruments


28
354


382
382
Trade and other payables





(1,378)
(1,378)
(1,378)
Provisions





(12)
(12)
(12)
Obligations under finance leases
and other borrowings





(68)
(68)
(68)
Available-for-sale investments

228




228
228
Trade and other receivables




278

278
278
Short-term deposits
710





710
710
Cash and cash equivalents




464

464
464
The fair values of financial assets and financial liabilities are determined as follows:
  The fair value of financial assets and financial liabilities with standard terms and conditions and which are traded on active liquid markets is 
determined with reference to quoted market prices;
  The fair value of other financial assets and financial liabilities (excluding derivative instruments) is determined in accordance with generally 
accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer 
quotes for similar instruments;
  Foreign currency forward contracts and options are measured using quoted forward exchange rates and yield curves derived from quoted 
interest rates matching maturities of the contracts;
  Interest rate and cross-currency swaps are measured at the present value of future cash flows estimated and discounted based on the 
applicable yield curves derived from quoted interest rates; and
  The fair value of obligations under finance leases and other borrowings is estimated by discounting the future cash flows to net present 
value. The fair value of short-term deposits and cash and cash equivalents is equivalent to carrying value due to the short-term nature of 
these instruments.
21. DERIVATIVES AND OTHER FINANCIAL INSTRUmENTS continued

Annual Report 2013: Notes to the consolidated financial statements
British Sky Broadcasting Group plc  

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The differences between carrying values and fair values reflect unrealised gains or losses inherent in the financial instruments, based on 
valuations as at 30 June 2013 and 30 June 2012. The volatile nature of the markets means that values at any subsequent date could be 
significantly different from the values reported above.
Cash and cash equivalents classified as held to maturity investments comprise money market deposits which have maturity dates of less than 
three months from inception. Money market deposits, enhanced return investments and tri-party repurchase agreements which have maturity 
greater than three months from inception are classified as short-term deposits.
Cash and cash equivalents classified as loans and receivables mainly comprise investments in AAAm rated money market funds which can be 
withdrawn without notice.

(b) Fair value hierarchy


The following table categorises the Group’s financial instruments which are held at fair value into 1 of 3 levels to reflect the degree to which 
observable inputs are used in determining their fair values:
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
At 30 June 2013
Assets measured at fair value
Available-for-sale financial instruments
ITV investment
409
409


Other investments at cost
13


13
Financial assets at fair value through profit or loss
Interest rate swaps
109

109

Cross-currency swaps
233

233

Forward foreign exchange and option contracts
38

38

Total
802
409
380
13
Liabilities measured at fair value
Financial liabilities at fair value through profit or loss
Cross-currency swaps
(15)

(15)

Forward foreign exchange and option contracts
(27)

(27)

Total
(42)

(42)

At 30 June 2012
Assets measured at fair value
Available-for-sale financial instruments
ITV investment
223
223


Other investments at cost
5


5
Financial assets at fair value through profit or loss
Interest rate swaps
141

141

Cross-currency swaps
243

243

Forward foreign exchange and option contracts
30

30

Total
642
223
414
5
Liabilities measured at fair value
Financial liabilities at fair value through profit or loss
Cross-currency swaps
(28)

(28)

Forward foreign exchange and option contracts
(4)

(4)

Total
(32)

(32)

Level 1
Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
Fair values measured using inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly 
or indirectly.
Level 3
Fair values measured using inputs for the asset or liability that are not based on observable market data.

Annual Report 2013: Notes to the consolidated financial statements

Notes to the consolidated financial statements


continued

90

  
British Sky Broadcasting Group plc  
22. FINANCIAL RISK mANAGEmENT

Group Treasury activity


The Group’s Treasury function is responsible for raising finance for 
the Group’s operations, together with associated liquidity 
management and management of foreign exchange, interest rate and 
credit risks. Treasury operations are conducted within a framework of 
policies and guidelines authorised and reviewed by both the Audit 
Committee and the Board, which receive regular updates of Treasury 
activity. Derivative instruments are transacted for risk management 
purposes only. It is the Group’s policy that all hedging is to cover 
known risks and no speculative trading is undertaken. Regular and 
frequent reporting to management is required for all transactions 
and exposures, and the internal control environment is subject to 
periodic review by the Group’s internal audit team.
The Group’s principal market risks are exposures to changes in 
interest rates and foreign exchange rates, which arise both from the 
Group’s sources of finance and its operations. Following evaluation of 
those market risks, the Group selectively enters into derivative 
financial instruments to manage these exposures. The principal 
instruments currently used are interest rate swaps to hedge interest 
rate risks, and cross-currency swaps, forward foreign exchange 
contracts and currency options (collars) to hedge transactional and 
translational currency exposures.

Interest rate risk


The Group has financial exposures to both UK and US interest rates, 
arising primarily from the Group’s long-term bonds and other 
borrowings. The Group’s hedging policy requires that between 50% 
and 85% of borrowings are held at fixed rates. This is achieved by 
issuing fixed rate bonds and then using interest rate swaps to adjust 
the balance between fixed and floating rate debt. The Group’s bank 
debt is at floating rates, and, when drawn, means that the mix of fixed 
and floating rate debt fluctuates and is therefore managed to ensure 
compliance with the Group’s hedging policy. At 30 June 2013, 80% of 
borrowings were held at fixed rates after hedging (2012: 75%).
The Group uses derivatives to convert all of its US dollar-denominated 
debt and associated interest rate obligations to pounds sterling (see 
section on foreign exchange risk for further detail). At 30 June 2013, 
the Group had no net US dollar denominated interest rate exposure 
on its borrowings.
The Group designates its interest rate swaps as fair value hedges of 
interest rate risk. Movements in the fair value of the hedged exposure 
are taken to the income statement and are offset by movements in 
the fair value of the hedging instruments, which are also taken to the 
income statement. Any hedge ineffectiveness is recognised directly in 
the income statement. In the year ended 30 June 2013, this 
amounted to £2 million (2012: £1 million).
At 30 June 2013 and 30 June 2012, the Group’s annual finance costs 
would be unaffected by any change to the Group’s credit rating in 
either direction.

Interest rate sensitivity


The sensitivity analyses below have been determined based on the 
exposure to interest rates for both derivatives and non-derivative 
financial instruments at the balance sheet date. For floating rate 
liabilities, the analysis is prepared assuming the amount of liability 
outstanding at the balance sheet date is outstanding for the whole 
year.
For each one hundred basis point rise or fall in interest rates at 30 
June 2013, and if all other variables were held constant:
  The Group’s profit for the year ended 30 June 2013 would increase 
or decrease by £9 million (2012: profit for the year would increase or 
decrease by £4 million). The year on year increase is driven by an 
increase in the cash balance held and by the fixing of £260 million 
of debt.
  Other equity reserves would decrease or increase by £15 million 
(2012: decrease or increase by £14 million), arising from movements 
in cash flow hedges.
A one hundred basis point rise or fall in interest rates represents a 
large but realistic movement which can easily be multiplied to give 
sensitivities at different interest rates.
The sensitivity analyses provided are hypothetical only and should be 
used with caution as the impacts provided are not necessarily 
indicative of the actual impacts that would be experienced because 
the Group’s actual exposure to market rates changes as the Group’s 
portfolio of debt, cash and foreign currency contracts changes. In 
addition, the effect of a change in a particular market variable on fair 
values or cash flows is calculated without considering 
interrelationships between the various market rates or mitigating 
actions that would be taken by the Group. The changes in valuations 
are estimates of the impact of changes in market variables and are 
not a prediction of future events or anticipated gains or losses.

Foreign exchange risk


A combination of cross-currency and interest rate swap 
arrangements is used to convert the Group’s US dollar denominated 
debt and associated interest rate obligations to pounds sterling, at 
fixed exchange rates. At 30 June 2013, the split of the Group’s 
aggregate borrowings into their core currencies was US dollar 73% 
and pounds sterling 27% (2012: US dollar 67% and pounds sterling 
33%). At 30 June 2013, 100% of the Group’s long-term borrowings, 
after the impact of derivatives, are denominated in pounds sterling.
The Group’s revenues and operating expenses are substantially 
denominated in pounds sterling. A small proportion of operating 
expenses is denominated in US dollars, while a small proportion of 
revenues is denominated in euros. In the current year, approximately 
10% of operating expenses (£614 million) was denominated in US 
dollars (2012: approximately 10% (£532 million)) and 5% of revenues 
(£392 million) was denominated in euros (2012: 6% (£382 million)).
The US dollar expense relates mainly to the Group’s programming 
contracts with US suppliers, together with US dollar-denominated 
set-top box costs. The euro revenues primarily relate to subscribers 
located in Ireland. The Group’s exposure to euro-denominated 
revenue is offset to a certain extent by euro-denominated costs, 
related mainly to certain transponder costs; the net position being a 
euro surplus (2012: surplus).
The Group has some exposure to the European financial crisis 
although the Group’s net euro cash flows are approximately 3% of 
total group revenues and the Group’s practice is to hold less than 
£10 million on deposit in euros. Whilst some of the Group’s syndicate 
banks are headquartered in Europe, the Group does not currently 
anticipate drawing the RCF. To mitigate remaining risks, counterparty 
credit and sovereign ratings are closely monitored, and no more than 
10% of cash deposits are held with a single bank counterparty (with 
the exception of overnight deposits which are invested in a spread of 
AAAm rated liquidity funds).

Annual Report 2013: Notes to the consolidated financial statements
British Sky Broadcasting Group plc  

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The Group hedges currency exposures on US dollar and euro-
denominated highly probable cash flows by using forward foreign 
exchange contracts and options (collars) purchased up to five years 
ahead of the cash flow.
It is the Group’s policy that all anticipated foreign currency exposures 
are substantially hedged in advance of the year in which they occur.
At 30 June 2013, the Group had purchased forward foreign exchange 
contracts and collars representing up to:
 Approximately 90% of US dollar-denominated costs falling due 
within one year (2012: 85%), and approximately 80% of US dollar-
denominated costs falling due within five years (2012: 
approximately 80%) which are hedged via:
  Outstanding commitments to purchase, in aggregate, US$1,926 
million (2012: US$1,298 million) at an average rate of US$1.56 to 
£1.00 (2012: US$1.58 to £1.00).
  Collars relating to the purchase of a total of US$nil (2012: US$20 
million) in aggregate.
 Approximately 95% of net euro-denominated revenues falling due 
within one year (2012: approximately 75%), and approximately 80% 
of net euro-denominated revenues falling due within four years 
(2012: nil) which are hedged via:
  Outstanding commitments to sell, in aggregate, €1,039 million 
(2012: €400 million) at an average rate of €1.19 to £1.00 (2012: 
€1.18 to £1.00).
  Outstanding commitments to purchase, in aggregate, €119 million 
(2012: €88 million) at an average rate of €1.16 to £1.00 (2012: €1.22 
to £1.00).
No forward foreign exchange contracts or collars fall due beyond five 
years (2012: none).
The Group designates the following as cash flow hedges for hedge 
accounting purposes:
  Forward foreign exchange contracts.
  The intrinsic value of collars (all other fair value movements are 
recognised directly in the income statement).
  Cross-currency swaps where interest on both legs is at a fixed 
interest rate.
As such, the effective portion of the gain or loss on these contracts is 
reported as a component of the hedging reserve, outside the income 
statement, and is then reclassified to the income statement in the 
same periods that the forecast transactions affect the income 
statement. Ineffectiveness of £1 million was recognised in the income 
statement during the year (2012: less than £1 million).
A combination of US dollar denominated interest rate and US dollar/
pound sterling cross-currency swaps is used to convert fixed dollar 
denominated debt to floating sterling denominated debt. The 
interest rate swaps are designated as fair value hedges. The 
associated cross-currency swaps are not designated as hedging 
instruments for hedge accounting purposes and, as such, movements 
in their value are recorded directly in the income statement.

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