Notes to the consolidated financial statements (continued) 142 John Lewis Partnership plc Annual Report and Accounts 2016


7 Financial risk management (continued) 7.1 Management of financial risks (continued)


7.1.5 Credit risk The Partnership has no significant exposure to an individual customer’s credit risk due to transactions being principally of a high volume, low value and short maturity. Cash deposits and other financial instruments give rise to credit risk on the amounts due from counterparties. These risks are managed by restricting such transactions to an approved list of counterparties, who have an investment grade credit rating by at least two of the three primary rating agencies. Appropriate credit limits are designated to each counterparty.


The Partnership considers its maximum exposure to credit risk is as follows:


2016 £m


Trade and other receivables Cash and cash equivalents


Derivative financial instruments # Refer to note 1.1.5. 7.1.6 Energy risk


The Partnership operates risk management processes for the Partnership’s energy costs associated with its activities. The Partnership’s energy policy is reviewed by an energy committee, which meets regularly to review pricing exposure to diesel, electricity and gas consumption and determines strategy for forward purchasing and hedging of energy costs using flexible purchase contracts and by entering into over-the-counter diesel swap contracts.


7.1.7 Sensitivity analysis


The following analysis illustrates the sensitivity of the Partnership’s financial instruments to changes in market variables, namely UK interest rates and the US dollar and euro to sterling exchange rates. The level of sensitivities chosen, being 1% movement in sterling interest rates and a 10% movement in sterling when compared to the US dollar and euro, provide a reasonable basis to measure sensitivity whilst not being the Partnership’s view of what is likely to happen in the future.


The analysis excludes the impact of movements in market variables on the carrying value of pension and other post-retirement obligations and provisions.


The analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating rate borrowings and the proportion of financial instruments in foreign currencies are constant throughout the year, based on positions as at the year-end.


The following assumptions have been made in calculating the sensitivity analysis: a The sensitivity of interest costs to movements in interest rates is calculated using floating rate debt and investment balances prevailing at the year-end a Changes in the carrying value of derivative financial instruments not in hedging relationships are assumed only to affect the income statement; and a All derivative financial instruments designated as hedges are assumed to be fully effective


2016 Income


statement +/- £m


UK interest rates +/- 1% (2015: +/- 1%)


US dollar exchange rate (GBP/USD) +/- 10% (2015: +/- 10%) Euro exchange rate (GBP/EUR) +/- 10% (2015: +/- 10%)


6.2 0.6 0.6


Equity +/- £m –


11.1 5.9


Income


statement +/- £m


1.4 0.4 1.3


2015


Equity +/- £m –


10.7 8.8


142.9 667.4 11.5


821.8 2015


(re-stated)# £m


131.6 336.9 9.6


478.1


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