Notes to the Financial Statements continued for the year ended 31 May 2021
25 Financial instruments continued Currency risk continued A change in exchange rate of 10% would have an impact of £15.2m (2020: £14.8m) on revenue, £2.7m (2020: £1.9m) on operating profit, £8.1m (2020: £7.9m) on net assets and £0.3m (2020: £4.9m) on borrowings. The Group’s risk management policy is to hedge foreign currency exposure in respect of significant material transactions that may arise from time to time. At 31 May 2021, the Group had entered into one cash flow hedge in respect of funds to be used as part of the acquisition of the IPM Software Resilience business. The Group uses forward exchange contracts to hedge its currency risk, which are short term in nature to match the maturity of the hedged item. These contracts are generally designated as cash flow hedges. The Group designates the spot element of forward foreign exchange contracts to hedge its currency risk and applies a hedge ratio of 1:1. The forward elements of forward exchange contracts are excluded from the designation of the hedging instrument and are separately accounted for as a cost of hedging, which is recognised in equity in a cost of hedging reserve. The Group’s policy is for the critical terms of the forward exchange contracts to align with the hedged item. The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the currency, amount and timing of their respective cash flows. Given the short-term nature of these hedges there is limited risk of ineffectiveness. At 31 May 2021, the Group held the following instruments to hedge exposures to changes in foreign currency rates, all of which were due to mature within one month of the Balance Sheet date.
2021 £m
2020 £m
Forward exchange contracts
70.7
Net exposure (£m)
– –
1.402205
Average GBP:USD forward contract rate
Interest rate risk The Group and Company finance their operations through a combination of retained profits and bank borrowings. The Group borrows and invests surplus cash at floating rates of interest based upon bank base rate. The cash and cash equivalents of the Group and Company at the end of the financial year were as follows:
2021 £m 85.0 16.1
2020 £m 30.3 17.7 40.0
Group
Sterling denominated financial assets Euro denominated financial assets US Dollar denominated financial assets Other denominated financial assets
7.3 8.1
7.0
Total
116.5
95.0
The financial assets and liabilities of the Company at the end of the financial year were as follows:
2021 £m
2020 £m
Company
Financial assets Sterling denominated financial assets Amounts owed by Group undertakings
0.6
6.8
162.6
142.0
Total
163.2
148.8
Financial liabilities Amounts owed to Group undertakings
13.5
13.0
Total
13.5
13.0
A change of 100 basis points in interest rates would result in a difference in annual pre-tax profit of £0.3m (2020: £1.0m). The Directors do not consider that the LIBOR reform will impact the Group significantly in the medium term, apart from a change in the benchmark used within the Group’s borrowing facilities.
176
NCC Group plc — Annual report and accounts for the year ended 31 May 2021
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