20 Derivative financial instruments
Amounts included in operating profit comprise:
|
|
2007
£m |
2006
£m |
| Forward currency and commodity contracts |
(10) |
38 |
| Embedded derivatives |
— |
(5) |
|
|
(10) |
33 |
Amounts included in the balance sheet comprise:
|
|
2007 |
2006 |
|
|
Assets
£m |
Liabilities
£m |
Assets
£m |
Liabilities
£m |
| Forward currency and commodity contracts—not hedge accounted |
23 |
(7) |
28 |
(2) |
| Forward currency contracts—hedge accounted |
1 |
— |
1 |
— |
| Embedded derivatives |
1 |
(6) |
2 |
(7) |
| Net investment hedges |
— |
(17) |
1 |
(2) |
|
|
25 |
(30) |
32 |
(11) |
The amounts in respect of embedded derivatives primarily represent the movement between 1 January 2007 and 31 December 2007 or date of maturity in the value of the embedded derivatives in commercial contracts between European Aerospace subsidiaries and customers and suppliers outside the USA which are denominated in US dollars.
Forward foreign exchange contracts, commodity contracts and embedded derivatives are marked to market using published prices, with forward foreign exchange contracts and commodity contracts being settled on a net basis.
Hedge accounting
Cash flow hedges
The Group manages exposure to foreign currency fluctuations on outstanding purchase and sale agreements using forward foreign currency contracts. In 2007 the Group adopted transactional foreign exchange hedge accounting in a limited number of contracts. The value of forward foreign exchange contracts subject to hedge accounting was £1 million asset (2006 – £1 million asset). The net cash flows and profit impact will occur during 2008 2006 – during 2007). A £1 million gain was recognised in equity during the year (2006 – £1 million gain). An accumulated gain of £1 million was removed from equity during the year and included in the income statement as a £1 million gain in Cost of Sales. Cash flow hedging was 100% effective during 2007 and 2006.
Net investment hedging
See note 19. Net investment hedging was 100% effective during 2007 and 2006.