Notes
Forming part of the financial statements

21. ANALYSIS OF NET DEBT

  1 March
2010
€m
Translation
adjustment
€m
Cash
flow
€m
Non-cash
changes
€m
28 February
2011
€m
           
Group          
Interest bearing loans & borrowings 478.4 3.3 (348.2) 1.5 135.0
Cash & cash equivalents (113.5) (0.7) (14.5) - (128.7)
  364.9 2.6 (362.7) 1.5 6.3
           
Interest rate swaps (note 24) 4.9 - 3.0 (5.9) 2.0
           
  369.8 2.6 (359.7) (4.4) 8.3

  1 March
2009
€m
Translation
adjustment
€m
Cash
flow
€m
Non-cash
changes
€m
28 February
2010
€m
           
Group          
Interest bearing loans & borrowings 309.2 (0.8) 169.6 0.4 478.4
Cash & cash equivalents (83.0) 0.2 (30.7) - (113.5)
  226.2 (0.6) 138.9 0.4 364.9
           
Interest rate swaps (note 24) 6.3 - 4.3 (5.7) 4.9
           
  232.5 (0.6) 143.2 (5.3) 369.8

The non-cash changes relate to the amortisation of issue costs and movements in the fair value of interest rate swaps.

  1 March
2010
€m
Translation
adjustment
€m
Cash
flow
€m
Non-cash
changes
€m
28 February
2011
€m
           
Company 478.4 3.3 (348.2) 1.5 135.0
Interest bearing loans & borrowings          
Interest rate swaps (note 24) 4.9 - 3.0 (5.9) 2.0
           
  483.3 3.3 (345.2) (4.4) 137.0

  1 March
2009
€m
Translation
adjustment
€m
Cash
flow
€m
Non-cash
changes
€m
28 February
2010
€m
           
Company          
Interest bearing loans & borrowings 309.2 (0.8) 169.6 0.4 478.4
Interest rate swaps (note 24) 6.3 - 4.3 (5.7) 4.9
           
  315.5 (0.8) 173.9 (5.3) 483.3

The non-cash changes relate to the amortisation of issue costs and movements in the fair value of interest rate swaps.

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22. RECOGNISED DEFERRED TAX ASSETS AND LIABILITIES

               2011              2010
  Assets
€m
Liabilities
€m
Net assets/
liabilities
€m
Assets
€m
Liabilities
€m
Net assets/
liabilities
€m
Group            
Property, plant & equipment 5.9 - 5.9 7.6 - 7.6
Provision for ROI trade related items 0.6 - 0.6 1.2   1.2
Provision for UK trade related items - (5.9) (5.9) - (4.6) (4.6)
Retirement benefit obligations 2.0 - 2.0 2.8 - 2.8
Derivative financial instruments 0.2 - 0.2 0.7 - 0.7
             
  8.7 (5.9) 2.8 12.3 (4.6) 7.7

               2011              2010
  Assets
€m
Liabilities
€m
Net assets/
liabilities
€m
Assets
€m
Liabilities
€m
Net assets/
liabilities
€m
             
Company            
Derivative financial instruments 0.2 - 0.2 0.5 - 0.5
Interest free loans fair value adjustment 0.4 - 0.4 8.0 - 8.0
             
  0.6 - 0.6 8.5 - 8.5

Analysis of movement in net deferred tax assets/liabilities

  1 March
2010
€m
Recognised
in income
statement
€m
Translation
adjustment
€m
Recognised
in other
comprehensive
income
€m
28 February
2011
€m
Group          
Property, plant & equipment 7.6 (1.7) - - 5.9
Provision for ROI trade related items 1.2 (0.6) - - 0.6
Provision for UK trade related items (4.6) (1.1) (0.2)   (5.9)
Retirement benefit obligations 2.8 (0.8) - - 2.0
Derivative financial instruments 0.7 - - (0.5) 0.2
           
  7.7 (4.2) (0.2) (0.5) 2.8

  1 March
2009
€m
Recognised
in income
statement
€m
Recognised
on
acquisition
€m
Translation
adjustment
€m
Recognised
in other
comprehensive
income
€m
28 February
2010
€m
             
Group            
Property, plant & equipment 7.3 0.3 - - - 7.6
Provision for ROI trade related items 1.8 (0.6) - - - 1.2
Provision for UK trade related items - (0.7) (4.0) 0.1 - (4.6)
Retirement benefit obligations 5.8 (0.9) - - (2.1) 2.8
Derivative financial instruments 0.1 - - - 0.6 0.7
             
  15.0 (1.9) (4.0) 0.1 (1.5) 7.7

  1 March
2010
€m
Recognised
in income
statement
€m
Recognised
in other
comprehensive
income
€m
28 February
2011
€m
Company        
Derivative financial instruments 0.5 - (0.3) 0.2
Interest free loans fair value adjustment 8.0 (7.6) - 0.4
         
  8.5 (7.6) (0.3) 0.6

  1 March
2010
€m
Recognised
in income
statement
€m
Recognised
in other
comprehensive
income
€m
28 February
2010
€m
Company        
Derivative financial instruments 0.7 - (0.2) 0.5
Interest free loans fair value adjustment 8.0 - - 8.0
         
  8.7 - (0.2) 8.5

There are no unrecognised deferred tax assets or liabilities.

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23. RETIREMENT BENEFIT OBLIGATIONS
The Group operates a number of defined benefit pension schemes for employees in the Republic of Ireland and in Northern Ireland, all of which provide pension benefits based on final salary and the assets of which are held in separate trustee administered funds. The Group provides permanent health insurance cover for the benefit of its employees and separately charges this to the income statement.

The pension scheme assets are held in separate trustee administered funds to meet long-term pension liabilities to past and present employees. The trustees of the funds are required to act in the best interest of the funds’ beneficiaries. The appointment of trustees to the funds is determined by the schemes’ trust documentation. The Group has a policy in relation to its principal staff pension fund that members of the fund should nominate half of all fund trustees.

All schemes are now closed to new members and the Executive Scheme is closed to future accrual.

Actuarial valuations – funding requirements
Independent actuarial valuations of the defined benefit schemes are carried out on a triennial basis using the projected unit credit method. The funding requirements in relation to the Group’s defined benefit schemes are assessed at each valuation date and are implemented in accordance with the advice of the actuaries. The most recently completed actuarial valuations of the main schemes were carried out on 1 January 2009 and the actuary, Mercer Human Consulting, submitted Actuarial Funding Certificates to the Pensions Board confirming that the Schemes did not satisfy the Minimum Funding Standard at that date. The actuarial valuations are not available for public inspection; however the results of the valuations are advised to members of the various schemes.

As a result of the schemes’ failure to meet the Minimum Funding Standard, the Group is obliged and committed to presenting a Funding Proposal to the Pensions Board outlining the actions the Trustee and Group have agreed to take with the objective of putting the Scheme in a position to satisfy the funding standard over an agreed term. The Group is currently undertaking a consultation process with members and Trustees to achieve defined benefit pension reform.

Independent actuaries, Mercer Human Resource Consulting, have employed the projected unit credit method to determine the present value of the defined benefit obligations arising, the related current service cost and the future funding requirements.

Assumptions
The financial assumptions that have the most significant impact on the results of the actuarial valuations are those relating to the discount rate used to convert future pension liabilities to current values and the rate of increase in salaries. These and other assumptions used are set out below.

Mortality rates also have a significant impact on the actuarial valuations, and as the number of deaths within the scheme have been too small to analyse and produce any meaningful scheme-specific estimates of future levels of mortality, the rates used have been based on the most up-to-date mortality tables, which in the case of Non Pensioners are PNL00 62% (males) and PNL00 70% (females) and in the case of Pensioners are PNL00 62% (males) and PNL00 70% (females). These tables conform to best practice. The growing trend for people to live longer and the expectation that this will continue has been reflected in the mortality assumptions used for this valuation as indicated below. This assumption will continue to be monitored in the light of general trends in mortality experience. Based on these tables, the assumed life expectations on retirement are:

Future life expectations at age 65  
2011
No of years
2010
No of years
       
Current retirees – no allowance for future improvements Male 19.5 18.5
  Female 21.8 21.5
       
Current retirees – with allowance for future improvements Male 22.6 21.6
  Female 24.3 24.7
       
Future retirements – with allowance for future improvements Male 24.3 22.8
  Female 26.3 25.7

Scheme liabilities:
The average age of active members is 42 and 47 years for the ROI Staff and the UK defined benefit pension schemes respectively (the executive defined benefit pension scheme has no active members), while the average duration of liabilities ranges from 15 to 28 years.

The principal long-term financial assumptions used by the Group’s actuaries in the computation of the defined benefit liabilities arising on pension schemes as at 28 February 2011 and 28 February 2010 are as follows:

                     2011                  2010
  ROI UK ROI UK
         
Salary increases 0.0% - 3.0% 4.2% 0.0% - 3.0% 4.45%
Increases to pensions in payment 3.0% 2.5% 3.0% 2.50%
Discount rate 5.3% - 5.5% 5.5% 5.4% 5.75%
Inflation rate 2.0% 3.5% 2.0% 3.50%

Scheme assets:
The long-term rates of return expected at 28 February 2011 and 28 February 2010, determined in conjunction with the Group’s actuaries and based on market expectations at the beginning of the financial year for investment returns over the entire life of the related obligation, analysed by the class of investments in which the schemes’ assets are invested, are as follows:

                     2011                  2010
  ROI UK ROI UK
         
Equity 7.00% 7.43% 7.60% 7.75%
Bonds 4.50% 4.43% 4.40% 4.75%
Property 6.00% - 6.10% -
Cash 2.50% 0.50% 2.50% 0.50%

The assumption used is the average of the above assumptions appropriate to the individual asset classes weighted by the proportion of the assets in the particular asset class. The investment return on bonds has been based on market yield of the bond fund’s benchmark index at the balance sheet date. The assumed investment return on equities allows for a 3.1% ‘equity risk premium’ over the 30 year government bond yield.

a. Impact on Group income statement

                    2011                  2010
  ROI
€m
UK
€m
Total
€m
ROI
€m
UK
€m
Total
€m
Analysis of defined benefit pension expense:            
Current service cost 1.0 0.2 1.2 1.5 0.2 1.7
Past service cost - - - 0.2 0.1 0.3
Curtailment gains (1.9) (0.1) (2.0) (3.4) - (3.4)
Interest on scheme liabilities 8.2 0.2 8.4 8.3 0.2 8.5
Expected return on scheme assets (6.6) (0.2) (6.8) (6.8) (0.1) (6.9)
             
Total expense/(income) recognised as operating costs 0.7 0.1 0.8 (0.2) 0.4 0.2

Analysis of amount recognised in other comprehensive income

       2011      2010      2009      2008      2007
  ROI
€m
UK
€m
Total
€m
ROI
€m
UK
€m
Total
€m
ROI
€m
UK
€m
Total
€m
ROI
€m
UK
€m
Total
€m
ROI
€m
UK
€m
Total
€m
Actual return less expected return on scheme assets (0.9) 0.2 (0.7) 15.3 0.6 15.9 (44.0) (0.8) (44.8) (26.9) (1.1) (28.0) 3.8 - 3.8
Experience gains and losses on scheme liabilities 1.1 - 1.1 3.2 0.4 3.6 0.1 (0.2) (0.1) 4.4 (0.4) 4.0 (2.7) - (2.7)
Effect of changesin assumptions on value of liabilities (0.1) (0.1) (0.2) (2.0) (0.8) (2.8) 3.2 0.1 3.3 22.6 3.4 26.0 3.6 (3.2) 0.4
Total pension gain/(cost)recognised in other comprehensive income 0.1 0.1 0.2 16.5 0.2 16.7 (40.7) (0.9) (41.6) 0.1 1.9 2.0 4.7 (3.2) 1.5
                               
Scheme assets 136.9 4.3 141.2 131.5 3.1 134.6 107.3 2.2 109.5 123.8 3.3 127.1 182.7 22.4 205.1
Scheme liabilities (151.9) (4.6) (156.5) (151.9) (3.9) (155.8) (151.8) (3.2) (155.0) (150.6) (3.7) (154.3) (216.6) (40.0) (256.6)
                               
Deficit in the scheme (15.0) (0.3) (15.3) (20.4) (0.8) (21.2) (44.5) (1.0) (45.5) (26.8) (0.4) (27.2) (33.9) (17.6) (51.5)

b. Impact on Group balance sheet
The net pension liability at 28 February 2011 is analysed as follows:

Analysis of net pension deficit

                    2011                  2010
  ROI
€m
UK
€m
Total
€m
ROI
€m
UK
€m
Total
€m
             
Bid value of assets at end of year:            
Equity(i) 51.7 2.1 53.8 43.9 1.6 45.5
Bonds 61.7 2.1 63.8 56.3 1.5 57.8
Property 5.1 - 5.1 4.6 - 4.6
Cash 18.4 0.1 18.5 26.7 - 26.7
             
  136.9 4.3 141.2 131.5 3.1 134.6
             
Actuarial value of scheme liabilities (151.9) (4.6) (156.5) (151.9) (3.9) (155.8)
             
Deficit in the scheme (15.0) (0.3) (15.3) (20.4) (0.8) (21.2)
             
Related deferred tax asset 1.9 0.1 2.0 2.6 0.2 2.8
             
Net pension liabilities (13.1) (0.2) (13.3) (17.8) (0.6) (18.4)

(i) The defined benefit pension schemes have a passive self investment in C&C Group plc of €16,000 (2010: €nil).

Reconciliation of scheme assets (bid values)

                    2011                  2010
  ROI
€m
UK
€m
Total
€m
ROI
€m
UK
€m
Total
€m
             
Assets at beginning of year 131.5 3.1 134.6 107.3 2.2 109.5
             
Movement in year            
Translation adjustment - 0.2 0.2 - - -
Expected return on assets 6.6 0.2 6.8 6.8 0.1 6.9
Actual return less expected return on scheme assets (0.9) 0.2 (0.7) 15.3 0.6 15.9
Employer contributions 6.0 0.6 6.6 7.4 0.4 7.8
Member contributions 0.2 0.1 0.3 0.4 - 0.4
Premiums paid - - - (0.2) - (0.2)
Benefit payments (6.5) (0.1) (6.6) (5.5) (0.2) (5.7)
             
Assets at end of year 136.9 4.3 141.2 131.5 3.1 134.6

The expected employer contributions to defined benefit schemes for year ending 29 February 2012 is €6.2m.

The scheme assets had the following investment profile at the year end:

                     2011
                   2010
  ROI NI ROI NI
         
Equities 38% 50% 30% 51%
Bonds 45% 48% 44% 47%
Property 4% - 3% -
Cash 13% 2% 23% 2%
         
  100% 100% 100% 100%

Reconciliation of actuarial value of liabilities

                    2011                   2010
  ROI
€m
UK
€m
Total
€m
ROI
€m
UK
€m
Total
€m
             
Liabilities at beginning of year 151.9 3.9 155.8 151.8 3.2 155.0
             
Movement in year            
Translation adjustment - 0.3 0.3 - - -
Current service cost 1.0 0.2 1.2 1.5 0.2 1.7
Past service cost - - - 0.2 0.1 0.3
Curt ailment gains (1.9) (0.1) (2.0) (3.4) - (3.4)
Interest cost on scheme liabilities 8.2 0.2 8.4 8.3 0.2 8.5
Member contributions 0.2 0.1 0.3 0.4 - 0.4
Actuarial (gain)/loss immediately recognised in equity (1.0) 0.1 (0.9) (1.2) 0.4 (0.8)
Premiums paid - - - (0.2) - (0.2)
Benefit payments (6.5) (0.1) (6.6) (5.5) (0.2) (5.7)
             
Liabilities at end of year 151.9 4.6 156.5 151.9 3.9 155.8

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24. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
(a) Overview of risk exposures and risk management strategy
The Group’s multinational operations expose it to various financial risks in the ordinary course of business that include credit risk, liquidity risk, commodity price risk, currency risk and interest rate risk. The most significant exposures relate to changes in foreign exchange rates and interest rates as well as the creditworthiness of its counterparties. There has been no significant change during the financial year to either the financial risks faced by the Group or the Board’s approach to the management of these risks. The Group has a risk management programme in place that seeks to limit the impact of these risks on the financial performance of the Group and it is the policy of the Group to manage these risks in a non-speculative manner at a reasonable cost.

The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. This is executed through various committees to which the Board has delegated appropriate levels of authority.

The Board, through its Committees, has reviewed the process for identifying and evaluating the significant risks affecting the business and the policies and procedures by which these risks will be managed effectively. The Board has embedded these structures and procedures throughout the Group and considers these to be a robust and efficient mechanism for creating a culture of risk awareness at every level of management.

As discussed above, the Group’s overall risk management programme seeks to minimise potential adverse effects on the Group’s financial performance from fluctuations in financial markets when economically viable. The Group achieves the management of these risks in part through the use of derivative financial instruments, where appropriate. All derivative contracts entered into are in liquid markets with credit rated parties. Treasury activities are performed within strict terms of reference that have been approved by the Board.

This note presents information about the Group’s exposure to each of the financial risks to which the Group is exposed; the Group’s objectives, policies and processes for measuring and managing these risks; and the Groups’ management of liquid resources.

(b) Financial assets and liabilities
Fair Value
The Group’s accounting policies require the determination of fair value, for both financial and non-financial assets and liabilities. Set out below are the major methods and assumptions used in estimating the fair values of the Group’s financial assets and liabilities. There is no material difference between the fair value of financial assets and liabilities falling due within one year and their carrying amount as due to the short term maturity of these financial assets and liabilities their carrying amount is deemed to approximate fair value.

Short term bank deposits and cash & cash equivalents
The nominal amount of all short-term bank deposits and cash & cash equivalents is deemed to reflect fair value at the balance sheet date.

Advances to customers
The nominal amount of all advances to customers, after provision for impairment, is considered to reflect fair value. The commercial rationale for such advances is to develop good customer relations rather than to make financial investments.

Trade & other receivables/payables
The nominal amount of all trade & other receivables/payables after provision for impairment is deemed to reflect fair value at the balance sheet date with the exception of provisions and amounts due from Group undertakings which are discounted to fair value.

Derivatives (interest rate swaps and forward currency contracts)
The fair values of forward currency contracts and interest rate swaps are based on market price calculations using financial models.

The Group has adopted the following fair value measurement hierarchy for financial derivatives that are measured in the balance sheet at fair value:

• Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities
• Level 2: other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly
• Level 3: techniques that use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

In determining fair values of these assets and liabilities that differ from the carrying values level 2 techniques only have been used.

Interest bearing loans & borrowings
The fair value of all interest bearing loans & borrowings has been calculated by discounting all future cash flows to their present value using a market rate reflecting the Group’s cost of borrowing at the balance sheet date. All loans bear interest at floating rates.

The carrying and fair values of financial assets and liabilities by category were as follows:

  Cash flow
hedges
€m
Trade &
other
receivables
€m
Liabilities
€m
Carrying
value
€m
Fair
value
€m
Group          
           
28 February 2011          
Financial assets:          
Cash & cash equivalents - 128.7 - 128.7 128.7
Derivative financial assets 0.4 - - 0.4 0.4
Trade receivables - 91.0 - 91.0 91.0
Advances to customers - 24.4 - 24.4 24.4
           
Financial liabilities:          
Interest bearing loans & borrowings - - (135.0) (135.0) (129.0)
Derivative financial liabilities (2.1) - - (2.1) (2.1)
Trade payables & accruals - - (139.1) (139.1) (139.1)
Provisions - - (15.7) (15.7) (15.7)
           
  (1.7) 244.1 (289.8) (47.4) (41.4)

  Cash flow
hedges
€m
Trade &
other
receivables
€m
Liabilities
€m
Carrying
value
€m
Fair
value
€m
Group          
           
28 February 2010          
Financial assets:          
Cash & cash equivalents - 113.5 - 113.5 113.5
Trade receivables - 81.7 - 81.7 81.7
Advances to customers - 23.6 - 23.6 23.6
           
Financial liabilities:          
Interest bearing loans & borrowings - - (478.4) (478.4) (452.2)
Derivative financial liabilities (6.8) - - (6.8) (6.8)
Trade payables & accruals - - (139.4) (139.4) (139.4)
Provisions - - (12.6) (12.6) (12.6)
           
  (6.8) 218.8 (630.4) (418.4) (392.2)

  Cash flow
hedges
€m
Trade &
other
receivables
€m
Liabilities
€m
Carrying
value
€m
Fair
value
€m
Company          
           
28 February 2011          
Financial assets:          
Amounts due from Group undertakings - 24.9 - 24.9 24.9
           
Financial liabilities:          
Interest bearing loans & borrowings - - (135.0) (135.0) (129.0)
Derivative financial liabilities (2.0) - - (2.0) (2.0)
Accruals - - (0.4) (0.4) (0.4)
           
  (2.0) 24.9 (135.4) (112.5) (106.5)

  Cash flow
hedges
€m
Trade &
other
receivables
€m
Liabilities
€m
Carrying
value
€m
Fair
value
€m
Company          
           
28 February 2010          
Financial assets:          
Amounts due from Group undertakings - 377.2 - 377.2 377.2
           
Financial liabilities:          
Interest bearing loans & borrowings - - (478.4) (478.4) (452.2)
Derivative financial liabilities (4.9) - - (4.9) (4.9)
Accruals - - (0.4) (0.4) (0.4)
           
  (4.9) 377.2 (478.8) (106.5) (80.3)

The carrying values of all derivative financial assets and liabilities held by the Group at 28 February 2011 and 28 February 2010 were based on fair values arrived at using Level 2 techniques exclusively.

(c) Accounting for derivative financial instruments and hedging activities

  2011
€m
2010
€m
2011
€m
2010
€m
Group        
         
Financial assets: current        
Forward exchange contracts 0.4 - - -
         
  0.4 - - -
         
Financial liabilities: current        
Interest rate swaps (1.3) (2.7) (1.3) (2.7)
Forward exchange contracts (0.1) (1.9) - -
         
  (1.4) (4.6) (1.3) (2.7)
         
Financial liabilities: non-current        
Interest rate swaps (0.7) (2.2) (0.7) (2.2)
         
  (0.7) (2.2) (0.7) (2.2)

Derivatives are initially recorded at fair value on the date the contract is entered into and subsequently re-measured to fair value at reporting dates. The gain or loss arising on re-measurement is recognised in the income statement except where the instrument is a designated hedging instrument under the cash flow hedging model.

In order to qualify for hedge accounting, the Group is required to document the relationship between the item being hedged and the hedging instrument and demonstrate, at inception, that the hedge relationship will be highly effective on an ongoing basis. The hedge relationship must also be tested for effectiveness retrospectively and prospectively on subsequent reporting dates.

Gains and losses on cash flow hedges that are determined to be highly effective are recognised in other comprehensive income and then reflected in a cash flow hedging reserve within equity to the extent that they are actually effective. When the related forecasted transaction occurs, the deferred gains or losses are reclassified from other comprehensive income to the income statement. Ineffective portions of the gain or loss on the hedging instrument are recognised immediately in the income statement.

All interest rate swaps entered into by the Group and Company are designated as cash flow hedges in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The Group has tested these hedging relationships and determined them to be highly effective, both prospectively and retrospectively. The actual level of ineffectiveness arising in such relationships is not material.

The Group ordinarily seeks to apply the hedge accounting model to all forward currency contracts. A shortfall identified during the financial year ended 28 February 2009 in expected sterling revenues compared to the forecast transactions originally hedged resulted in the Group having surplus contracts to sell sterling. The Group ceased the application of hedge accounting in respect of the surplus contracts once the hedged forecast transactions could no longer be regarded as highly probable. Forward currency contracts entered into to purchase sterling to offset these contracts were not designated. All gains and losses arising on the de-designated contracts were recognised in the income statement from the date of de-designation, and the balance remaining in the cashflow hedge reserve is recognised in the income statement when the forecast transaction occurred. All fair value movements on contracts for which hedge accounting has not been applied were accounted for within the income statement. No contracts were de-designated in the current financial year.

At 28 February 2011, the effective portion of gains and losses arising on derivative contracts have been deferred in other comprehensive income only to the extent that they relate to highly probable forecast transactions and where all the hedge accounting criteria in IAS 39 have been met.

(d) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers, its cash advances to customers and deposits and derivative contracts with banks. In the context of the Group’s operations, credit risk is mainly influenced by the individual characteristics of individual counterparties and is not deemed significant.

The Group has detailed procedures for monitoring and managing the credit risk related to its trade receivables and advances to customers based on experience, customer track records and historic default rates. Generally, individual ‘risk limits’ are set by customer and risk is only accepted above such limits in defined circumstances. A strict credit assessment is made of all new applicants who request credit-trading terms. The utilisation and revision, where appropriate, of credit limits is regularly monitored. Impairment provision accounts are used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible. At that point, the amount is considered irrecoverable and is written off directly against the trade receivable.

Advances to customers are generally secured by, amongst others, rights over property or intangible assets, such as the right to take possession of the premises of the customer. Interest rates calculated on repayment/annuity advances are generally based on the risk-free rate plus a margin, which takes into account the risk profile of the customer and value of security given. In some circumstances the interest rate charged may be reduced to reflect the margins earned by the Group from trading activity with that customer. The Group establishes an allowance for impairment of advances that represents its estimate of incurred losses.

From time to time, the Group holds significant cash balances, which are invested on a short-term basis and disclosed under cash & cash equivalents in the balance sheet. Risk of counterparty default arising on short term cash deposits is controlled within a framework of dealing with banks who are members of the Group’s banking syndicate, and by limiting the credit exposure to any one of these banks or institutions. Management does not anticipate any counterparty to fail to meet its obligations.

The Company also bears credit risk in relation to amounts owed by Group undertakings and from guarantees provided in respect of the liabilities of wholly owned subsidiaries as disclosed in note 28.

The carrying amount of financial assets, net of impairment provisions represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:-

                 Group
               Company
  2011
€m
2010
€m
2011
€m
2010
€m
         
Trade receivables 91.0 81.7 - -
Advances to customers 24.4 23.6 - -
Amounts due from Group undertakings - - 24.9 377.2
Cash & cash equivalents 128.7 113.5 - -
Forward exchange contracts 0.4 - - -
         
  244.5 218.8 24.9 377.2

The ageing of trade receivables and advances to customers together with an analysis of movement in the Group impairment provisions against these receivables are disclosed in note 17. The Group does not have any significant concentrations of risk.

(e) Liquidity risk
Liquidity risk is the risk that the Group or Company will not be able to meet its financial obligations as they fall due. Liquid resources are defined as the total of cash & cash equivalents. The Group does not use off-balance sheet special purpose entities as a source of liquidity or financing. The Group’s main liquidity risk relates to maturing debt. The strong cash generative nature of the business and the disposal, during the financial year, of the Group’s Spirits and Liqueurs business for a gross consideration of €300.0m significantly reduced this risk. The Group ended the year in a strong cash position reporting a net debt:EBITDA ratio of 0.07 times (calculated in accordance with the facility agreements) which will allow the Group to repay the sterling facility which matures in June 2011 from existing cash resources.

The Group’s policy is to ensure that sufficient resources are available either from cash balances, cash flows or committed bank facilities to meet all debt obligations as they fall due. To achieve this the Group (a) maintains adequate cash or cash equivalent balances; (b) prepares detailed 3 year cash projections; and (c) keeps refinancing options under review. In addition, the Group maintains an overdraft facility that is unsecured. Undrawn borrowings available to the Group at the balance sheet date amounted to €85.0m. Compliance with the Group’s bi-annual debt covenants (net debt:EBITDA and interest cover) is monitored continuously.

The following are the contractual maturities of financial liabilities, including interest payments and derivatives and excluding the impact of netting arrangements:-

Group

2011
Carrying
amount
€m
Contractual
cash flows
€m
6 mths
or less
€m
6-12
months
€m
1-2 years
€m
>2 years
€m
             
Interest bearing loans & borrowings (135.0) (137.8) (36.6) (0.9) (100.3) -
Interest rate swaps – net cash outflows (2.0) (2.4) (0.8) (0.8) (0.8) -
FX forward contracts – gross cash outflows (0.1) (23.6) (11.8) (11.8) - -
FX forward contracts – gross cash inflows - 23.8 12.2 11.6 - -
Trade payables & accruals (139.1) (139.1) (139.1) - - -
Provisions (15.7) (24.4) (3.2) (0.6) (1.7) (18.9)
             
Total contracted outflows (291.9) (303.5) (179.3) (2.5) (102.8) (18.9)

2010            
             
Interest bearing loans & borrowings (478.4) (489.2) (2.5) (19.1) (37.0) (430.6)
Interest rate swaps – net cash outflows (4.9) (6.6) (1.6) (1.9) (2.1) (1.0)
FX forward contracts – gross cash outflows (1.9) (55.3) (25.8) (29.5) - -
FX forward contracts – gross cash inflows - 53.5 25.0 28.5 - -
Trade payables & accruals (139.4) (139.4) (139.4) - - -
Provisions (12.6) (23.9) (5.6) (0.6) (1.8) (15.9)
             
Total contracted outflows (637.2) (660.9) (149.9) (22.6) (40.9) (447.5)

Company

2011
Carrying
amount
€m
Contractual
cash flows
€m
6 mths
or less
€m
6-12
months
€m
1-2 years
€m
>2 years
€m
             
Interest bearing loans & borrowings (135.0) (137.8) (36.6) (0.9) (100.3) -
Interest rate swaps – net cash outflows (2.0) (2.4) (0.8) (0.8) (0.8) -
Trade payables & accruals (0.4) (0.4) (0.4) - - -
             
Total contracted outflows (137.4) (140.6) (37.8) (1.7) (101.1) -

2010            
             
Interest bearing loans & borrowings (478.4) (489.2) (2.5) (19.1) (37.0) (430.6)
Interest rate swaps – net cash outflows (4.9) (6.6) (1.6) (1.9) (2.1) (1.0)
Trade payables & accruals (0.4) (0.4) (0.4) - - -
             
Total contracted outflows (483.7) (496.2) (4.5) (21.0) (39.1) (431.6)

(f) Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

The Group enters into derivative contracts to mitigate risks arising in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks. The Group carries out all such transactions within the Treasury policy as set down by the Board of Directors. Generally the Group seeks to apply hedge accounting in order to manage volatility in the income statement.

Currency risk
The Company’s presentation currency and that of its share capital is euro. The euro is also used for planning and budgetary purposes. The Group’s primary currency exposures relate to sales transactions by Group companies in currencies other than their functional currencies (transaction risk), and fluctuations in the euro value of the Group’s net investment in sterling denominated subsidiary undertakings (translation risk). The Group seeks to minimise its foreign currency transaction exposure when economically viable by maximising the value of its foreign currency input costs and creating a natural hedge.

Currency exposures for the entire Group are managed and controlled centrally. Forward foreign currency contracts are used to reduce exposures to fluctuations in foreign exchange rates. Group policy is to limit the short-term exposures to fluctuations in foreign currencies by hedging a portion of the projected non-euro forecast sales revenue up to a maximum of two years ahead. The Group does not enter into derivative financial instruments for speculative purposes. All derivative contracts entered into are in liquid markets with credit-approved parties. Treasury operations are controlled within strict terms of reference that have been approved by the Board.

In addition, the Group has a number of long term sterling intra group loans for which settlement is neither planned nor likely to happen in the foreseeable future, and as a consequence are deemed quasi equity in nature and are therefore part of the Group’s net investment in its foreign operations.

The Group seeks to partially manage foreign currency translation risk through borrowings denominated in sterling. As outlined in note 20, the Group negotiated a sterling debt facility during the prior financial year, which is designated as a net investment hedge of its sterling subsidiaries. The Group does not hedge the remaining translation exposure on the translation of the profits of foreign currency subsidiaries.

The net currency gains and losses on transactional currency exposures are recognised in the income statement and the changes arising from fluctuations in the euro value of the Group’s net investment in foreign currency subsidiaries are reported separately within other comprehensive income.

The currency profile of the Group’s financial instruments subject to transactional exposure as at 28 February 2011 is as follows:-

  Sterling
€m
USD/CAD
€m
Not at risk
€m
Total
€m
         
Cash & cash equivalents 8.4 3.6 116.7 128.7
Trade receivables 7.8 2.4 80.8 91.0
Advances to customers - - 24.4 24.4
Derivative financial assets and liabilities 0.3 - (2.0) (1.7)
Interest bearing loans & borrowings (35.2) - (99.8) (135.0)
Trade payables & accruals (4.9) (0.1) (134.1) (139.1)
Provisions - - (15.7) (15.7)
         
Total (23.6) 5.9 (29.7) (47.4)

The currency profile of the Company’s financial instruments as at 28 February 2011 is as follows:-

  Sterling
€m
USD/CAD
€m
Not at risk
€m
Total
€m
         
Amounts due from subsidiary undertakings - - 24.9 24.9
Derivative financial assets and liabilities - - (2.0) (2.0)
Interest bearing loans & borrowings (35.2) - (99.8) (135.0)
Trade payables & accruals - - (0.4) (0.4)
         
Total (35.2) - (77.3) (112.5)

Foreign currency contracts in place at 28 February 2011 to sell fixed amounts of sterling for contracted euro amounts can be summarised as follows:-

  Sterling £m Average
forward rate
     
Year ended 29 February 2012 20.0 0.84

A 10% strengthening in the euro against sterling, Canadian dollar and the US dollar, based on outstanding financial assets and liabilities at 28 February 2011, would have a €1.6m negative impact on the income statement and an immaterial impact on the cashflow hedging reserve. A 10% weakening in the euro against sterling, Canadian dollar and the US dollar would have a €1.9m positive effect on the income statement and an immaterial impact on the cash flow hedging reserve. This analysis assumes that all other variables, in particular interest rates, remain constant.

Interest rate risk
The interest rate profile of the Group and Company’s interest-bearing financial instruments at the reporting date is summarised as follows:

                 Group               Company
  2011 2010 2011 2010
         
Variable rate instruments        
Interest bearing loans & borrowings (135.3) (480.2) (135.3) (480.2)
Cash & cash equivalents 128.7 113.5 - -
Derivative financial instruments - notional amounts (50.0) (100.0) (50.0) (100.0)
         
  (56.6) (466.7) (185.3) (580.2)

The Group and Company’s exposure to market risk for changes in interest rates arises principally from its long-term debt obligations. Group treasury, using interest rate swaps to give the desired mix of fixed and floating rate debt, manages interest cost and exposure to market risk centrally. The Group policy is to fix interest rates on a percentage of Group debt. With the objective of managing this mix in a cost-efficient manner, the Group and Company enter into interest rate swaps under which the Group contracts to exchange, at predetermined intervals, the difference between fixed and variable interest amounts calculated by reference to a pre-agreed notional principal. These swaps are designated under IAS 39 as cash flow hedges to hedge the exposure to variability in cash flow arising from the changes in benchmark interest rates.

Interest rate swap contracts in place at 28 February 2011 have the effect of converting up to €50.0m (2010: €100.0m) of Group and Company debt from floating rates to fixed rates. The level of cover in place in summarised as follows:-

  Amount
fixed
€m
Fixed
interest
rate
     
Expiring on 31 August 2012 50.0 4.57%

Based on the level and composition of year-end debt, a change in average interest rates of one percent per annum would change the interest charge by €0.9m (2010: €3.8m).

Financial instruments: Cash flow hedges
The following table indicates the periods in which cash flows associated with derivatives that are cash flow hedges are expected to occur:-

Group

28 February 2011
Carrying
amount
€m
Expected
cash flows
€m
6 months
or less
€m
6-12
months
€m
1-2
years
€m
More than
2 years
€m
             
Interest rate swaps            
- liabilities (2.0) (2.4) (0.8) (0.8) (0.8) -
             
Forward exchange contracts            
- assets 0.4 0.4 0.4 - - -
- liabilities (0.1) (0.1) - (0.1) - -
             
  (1.7) (2.1) (0.4) (0.9) (0.8) -

28 February 2010            
             
Interest rate swaps            
- liabilities (4.9) (6.6) (1.6) (1.9) (2.1) (1.0)
             
Forward exchange contracts            
- assets - - - - - -
- liabilities (1.9) (1.8) (0.8) (1.0) - -
             
  (6.8) (8.4) (2.4) (2.9) (2.1) (1.0)

The following table indicates the periods in which cash flows associated with derivatives that are cash flow hedges are expected to impact the income statement:-

Group

28 February 2011
Carrying
Amount
€m
Expected
cash flows
€m
6 months
or less
€m
6-12
months
€m
1-2
years
€m
More than
2 years
€m
             
Interest rate swaps            
- liabilities (2.0) (2.4) (0.8) (0.8) (0.8) -
             
Forward exchange contracts            
- assets 0.4 0.3 0.3 - - -
- liabilities (0.1) (0.1) - (0.1) - -
             
  (1.7) (2.2) (0.5) (0.9) (0.8) -

28 February 2010            
             
Interest rate swaps            
- liabilities (4.9) (6.6) (1.6) (1.9) (2.1) (1.0)
             
Forward exchange contracts            
- liabilities (1.9) (1.7) (0.8) (0.9) - -
             
  (6.8) (8.3) (2.4) (2.8) (2.1) (1.0)

The following table indicates the periods in which cash flows associated with derivatives that are cash flow hedges are expected to occur:-

Company

28 February 2011
Carrying
amount
€m
Expected
cash flows
€m
6 months
or less
€m
6-12
months
€m
1-2
years
€m
More than
2 years
€m
             
Interest rate swaps            
- liabilities (2.0) (2.4) (0.8) (0.8) (0.8) -
             
  (2.0) (2.4) (0.8) (0.8) (0.8) -

28 February 2010            
             
Interest rate swaps            
- liabilities (4.9) (6.6) (1.6) (1.9) (2.1) (1.0)
             
  (4.9) (6.6) (1.6) (1.9) (2.1) (1.0)

The cash flows associated with derivatives that are cash flow hedges are expected to impact the income statement in the same periods.

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25. SHARE CAPITAL AND RESERVES
Share capital

  Authorised
number
Allotted and
called up
number
Authorised
€m
Allotted and
called up
€m
         
At 28 February 2011        
Ordinary shares of €0.01 each 800,000,000 337,196,128* 8.0 3.4
         
At 28 February 2010        
Ordinary shares of €0.01 each 800,000,000 334,068,149** 8.0 3.3
         
At 28 February 2009        
Ordinary shares of €0.01 each 800,000,000 328,583,417*** 8.0 3.3

* inclusive of 12.6m treasury shares which are not fully paid up. The balance of 324,609,460 ordinary shares are fully paid
** inclusive of 16.0m treasury shares which are not fully paid up. The balance of 318,068,149 ordinary shares are fully paid
*** inclusive of 12.8m treasury shares which are not fully paid up. The balance of 315,783,417 ordinary shares are fully paid

All shares in issue carry equal voting and dividend rights. The beneficial owners of the 12.6m shares issued under the Joint Share Ownership Plan have waived their right to receive a dividend.

Reserves
Group
Movements in the year ended 28 February 2011
In September 2010, 1,276,318 ordinary shares were issued to the holders of ordinary shares who elected to receive additional ordinary shares at a price of €3.19 per share, instead of part or all the cash element of their year ended 28 February 2010 final dividend entitlement. In December 2010, 1,261,761 ordinary shares were issued to the holders of ordinary shares who elected to receive additional ordinary shares at a price of €3.17 per share, instead of part or all the cash element of their year ended 28 February 2011 interim dividend entitlement. Also during the financial year, 589,900 ordinary shares were issued on the exercise of share options for a net consideration of €1.2m.

During the financial year 3,413,332 vested Interests awarded under the Joint Share Ownership Plan in December 2008 were sold and are no longer accounted for as Treasury shares. In addition, 650,000 unvested Interests held by participants who had left the Group were acquired by Kleinwort Benson (Guernsey) Trustees Limited and continue to be held in trust by them while a further 50,000 vested Interests held by a participant who had left the Group had not been sold at 28 February 2011. As these shares were neither cancelled nor disposed of by the Trust at 28 February 2011 they continue to be included in the treasury share reserve.

Movements in the year ended 28 February 2010
In September 2009, 1,345,209 ordinary shares were issued to the holders of ordinary shares who elected to receive additional ordinary shares at a price of €2.19 per share, instead of part or all the cash element of their year ended 28 February 2009 final dividend entitlement. In December 2009, 506,723 ordinary shares were issued to the holders of ordinary shares who elected to receive additional ordinary shares at a price of €2.69 per share, instead of part or all the cash element of their year ended 28 February 2010 interim dividend entitlement.

Also during the financial year, 432,800 ordinary shares were issued on the exercise of share options for a consideration of €0.8m and a further 3,200,000 shares were issued as part of a Joint Share Ownership Plan for a total consideration of €6.6m, of which €0.7m was funded by the participating executives and the balance funded by the Group. These shares are held in trust with Kleinwort Benson (Guernsey) Trustees Limited and the entitlements associated with the shares fall to the benefit of the relevant executives if certain conditions in the Joint Share Ownership Plan are met over the life of the scheme.

Share premium - Company
The share premium, as stated in the Company balance sheet, represents the premium recognised on shares issued and amounts to €788.2m as at 28 February 2011 (2010: €779.0m). The current year movement relates to the exercise of share options and the issuance of a scrip dividend to those who elected to receive additional ordinary shares in place of a cash dividend.

Share premium - Group
The change in legal parent of the Group on 30 April 2004, as disclosed in detail in that year’s annual report, was accounted for as a reverse acquisition. This transaction gave rise to a reserve of €703.9m, which, for presentation purposes in the Group financial statements, has been netted against the share premium in the consolidated balance sheet.

Capital redemption reserve and capital reserve
These reserves initially arose on the conversion of preference shares into share capital of the Company and other changes and reorganisations of the Group’s capital structure. These reserves are not distributable.

Cash flow hedging reserve
The hedging reserve includes the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred as set out in note 24 together with any deferred gains or losses on hedging contracts where hedge accounting was discontinued but the forecast transaction was still anticipated to occur.

Share-based payment reserve
The reserve relates to amounts expensed in the income statement in connection with share option grants falling within the scope of IFRS 2 Share-based Payment plus amounts received from participants on award of Interests under the Group’s Joint Share Ownership Plan less reclassifications to retained income following exercise/forfeit post vesting or lapse of such share options and Interests, as set out in note 5.

Currency translation reserve
The translation reserve comprises all foreign exchange differences from 1 March 2004, arising from the translation of the Group’s net investment in its non-euro denominated operations, including the translation of the profits of such operations from the average exchange rate for the year to the exchange rate at the balance sheet date, as adjusted for the translation of foreign currency borrowings designated as net investment hedges.

Treasury shares
This reserve arises when the Company issues equity share capital under its Joint Share Ownership Plan, which is held in trust by the Group’s Employee Benefit Trust. The consideration paid, 90% by a Group company and 10% by the participants, in respect of these shares is deducted from total shareholders’ equity and classified as treasury shares on consolidation until such time as the Interests vest and the participant acquires the shares from the Trust or the Interests lapse and the shares are cancelled or disposed of by the Trust.

Capital management
The Board’s policy is to maintain a strong capital base so as to safeguard the Group’s ability to continue as a going concern for the benefit of shareholders and stakeholders, to maintain investor, creditor and market confidence and to sustain the future development of the business through the optimisation of the value of the debt and equity shareholding balance. There are no externally imposed requirements with respect to capital. The Board considers capital to comprise long-term debt and equity.

The Board periodically reviews the capital structure of the Group, considering the cost of capital and the risks associated with each class of capital. The Board approves any material adjustments to the capital structure in terms of the relative proportions of debt and equity. In order to maintain or adjust the capital structure, the Group may issue new shares, dispose of assets, alter dividend policy or return capital to shareholders. In respect of the financial year ended 28 February 2011 the Company paid an interim dividend on ordinary shares of 3.3c per share (2010: 3.0c per share) and the Directors propose, subject to shareholder approval, that a final dividend of 3.3c per share be paid, bringing the total dividend for the year to 6.6c per share (2010: 6.0c per share).

The level of debt in the capital structure is measured by the ratio of Net debt:EBITDA before exceptional items. In the period following the disposal of the Group’s Spirits & Liqueurs business, this ratio reduced from 2.8 at 28 February 2010 to 0.07 at 28 February 2011. The Group’s sterling debt facility matures in June 2011 and will be repaid from existing cash resources while its primary euro debt facility matures in May 2012. It is Group policy to ensure that a structure of long term debt funding is in place at least 6 months in advance of the maturity date of existing borrowings.

Company income statement
In accordance with Section 148(8) of the Companies (Amendment) Act, 1963, the income statement of the Company has not been presented separately in these consolidated financial statements. A loss of €5.6m (2010: €8.2m profit) was recognised in the individual Company income statement of C&C Group plc.

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