| Financial risk management objectives and policies | 27 Financial risk management objectives and policies
The Group’s principal financial instruments, other than derivatives, comprise bank overdrafts, lease liabilities, loans, current and non-current investments, cash and short-term deposits. The main purpose of these financial instruments is to manage the Group’s funding and liquidity requirements. The Group has other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.
The principal financial risks to which the Group is exposed are those of liquidity, interest rate, foreign currency and credit. Each of these is managed in accordance with Board-approved policies. These policies are set out below.
Hedge accounting
The Group uses foreign currency borrowings, foreign currency forwards and swaps, currency options, interest rate swaps and cross-currency interest rate swaps for the purpose of hedging its foreign currency and interest rate risks. The Group may designate certain financial instruments as fair value hedges, cash flow hedges or net investment hedges in accordance with IFRS 9. Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. Sources of hedge effectiveness will depend on the hedge relationship designation but may include:
>
a significant change in the credit risk of either party to the hedging relationship
>
a timing mismatch between the hedging instrument and the hedged item
>
movements in foreign currency basis spread for derivatives in a fair value hedge
>
a significant change in the value of the foreign currency denominated net assets of the Group in a net investment hedge.
The hedge ratio for each designation will be established by comparing the quantity of the hedging instrument and the quantity of the hedged item to determine their relative weighting; for all of the Group’s existing hedge relationships the hedge ratio has been determined as 1:1. Designated hedges are expected to be effective and therefore the impact of ineffectiveness on profit is not expected to be material. The accounting treatment for fair value hedges and debt designated as fair value through profit or loss is disclosed in the Group Accounting Policies section from page [180].
The following table represents the Group’s continuing designated hedge relationships under IFRS 9.
2018
Other comprehensive income
Fair value
loss
Opening
Fair value
recycled
Closing
Nominal
balance
loss/(gain)
to the
balance
Average
amounts
Carrying
1 January
deferred
income
31 December
Average
Average
pay
in local
value
to OCI
statement
maturity
USD FX
interest
currency
$m
$m
$m
$m
$m
year
rate
rate
Fair value hedge – foreign currency and interest rate risk
Cross currency interest rate swap – Euro bond
EUR 300m
16
–
–
–
–
1.09
USD LIBOR + 1.27%
Cash flow hedges – foreign currency and interest rate risk
Cross currency interest rate swaps – Euro bonds
EUR 2,200m
101
(76)
95
(111)
(92)
1.14
USD 2.69%
Net investment hedge – foreign exchange risk 4
Transactions matured pre 2018
–
(338)
–
–
(338)
–
–
–
Cross currency interest rate swap – JPY investment
JPY 58.5bn
213
(223)
10
–
(213)
78.01
JPY 0.35%
Cross currency interest rate swap – CNY investment
CNY 458m
(4)
4
–
–
4
6.68
CNY 4.80%
Cross currency interest rate swap – CNY investment
CNY 919m
–
(12)
(6)
–
(18)
6.09
CNY 3.12%
Foreign currency borrowing – GBP investment
GBP 350m
(443)
(240)
(25)
–
(265)
n/a
GBP 5.75%
Foreign currency borrowing – EUR investment
EUR 450m
(508)
65
(21)
–
44
n/a
EUR 0.88%
Contingent consideration liabilities and Acerta Pharma put option liability – AZUK and AZAB USD investments
USD 6,015m
(6,015)
1,239
566
–
1,805
–
–
–
2019
Other comprehensive income
Fair value
loss
Opening
Fair value
recycled
Closing
Nominal
balance
loss/(gain)
to the
balance
Average
amounts
Carrying
1 January
deferred
income
31 December
Average
Average
pay
in local
value
to OCI
statement
maturity
USD FX
interest
currency
$m
$m
$m
$m
$m
year
rate
rate
Fair value hedge – foreign currency and interest rate risk 1
Cross currency interest rate swap – Euro bond
EUR 300m
10
–
–
–
–
1.09
USD LIBOR + 1.27%
Cash flow hedges – foreign currency and interest rate risk 2, 4
Cross currency interest rate swaps – Euro bonds
EUR 2,200m
(13)
(92)
114
(52)
(30)
1.14
USD 2.69%
Net investment hedge – foreign exchange risk 3, 4
Transactions matured pre 2019
–
(356)
–
–
(356)
–
–
–
Cross currency interest rate swap – JPY investment 5
JPY 58.5bn
–
(213)
4
–
(209)
78.01
JPY 0.35%
Cross currency interest rate swap – JPY investment
JPY 58.3bn
4
–
(4)
–
(4)
108.03
JPY 1.53%
Cross currency interest rate swap – CNY investment
CNY 458m
(1)
4
(3)
–
1
6.68
CNY 4.80%
Foreign currency borrowing – GBP investment
GBP 350m
(457)
(265)
14
–
(251)
n/a
GBP 5.75%
Foreign currency borrowing – EUR investment
EUR 450m
(498)
44
(10)
–
34
n/a
EUR 0.88%
Contingent consideration liabilities and Acerta Pharma put option liability – AZUK and AZAB USD investments
USD 5,583m
(5,583)
1,805
248
–
2,053
–
–
–
2020
Other comprehensive income
Fair value
gain
Opening
Fair value
recycled
Closing
Nominal
balance
(gain)/loss
to the
balance
Average
amounts
Carrying
1 January
deferred
income
31 December
Average
Average
pay
in local
value
to OCI
statement
maturity
USD FX
interest
currency
$m
$m
$m
$m
$m
year
rate
rate
Fair value hedge – foreign currency and interest rate risk 1
Cross currency interest rate swap – Euro bond
EUR 300m
43
–
–
–
–
1.09
USD LIBOR + 1.27%
Cash flow hedges – foreign currency and interest rate risk 2, 4, 6
Cross currency interest rate swaps – Euro bonds
EUR 2,200m
150
(30)
(163)
239
46
1.14
USD 2.69%
FX Forwards − short term FX risk
USD 618m
5
–
(20)
15
(5)
–
–
Net investment hedge – foreign exchange risk 3, 4
Transactions matured pre 2020
–
(565)
–
–
(565)
–
–
–
Cross currency interest rate swap – JPY investment
JPY 58.5bn
19
(4)
(15)
–
(19)
108.03
JPY 1.53%
Cross currency interest rate swap – CNY investment
CNY 458m
(2)
1
1
–
2
6.68
CNY 4.80%
Foreign currency borrowing – GBP investment
GBP 350m
(475)
(251)
18
–
(233)
n/a
GBP 5.75%
Foreign currency borrowing – EUR investment
EUR 450m
(548)
34
51
–
85
n/a
EUR 0.88%
Contingent consideration liabilities and Acerta Pharma put option liability – AZUK and AZAB USD investments
USD 5,252m
(5,252)
2,053
(642)
–
1,411
–
–
–
1.
Hedge ineffectiveness recognised on swaps designated in a fair value hedge during the period was a gain of $1m (2019: gain of $3m).
2.
Hedge ineffectiveness recognised on swaps designated in a cash flow hedge during the period was $nil (2019: $nil).
3.
Hedge ineffectiveness recognised on swaps designated in a net investment hedge during the period was $nil (2019: $nil).
4.
Fair value movements on cross currency interest rate swaps in cash flow hedge and net investment hedge relationships are shown inclusive of the impact of costs of hedging.
5.
In September 2019, the maturity of our JPY 58.5bn cross currency interest rate swap resulted in a net cash inflow of $209m. The cash flow associated with the settlement has been reflected in cash flows from investing activities within the Consolidated Statement of Cash Flows on page [179], as its primary purpose was to hedge the translation foreign exchange risk arising on the consolidation of the Group’s net investment in Japan.
6.
Nominal amount of FX forwards in a cash flow hedge of USD 618m represents the USD equivalent notional of the FX forwards. By currency, the nominal amounts were SEK 3,310m at FX rate 8.35373, RMB 366m at 6.5561, JPY 4,690m at 103.5085 and EUR 99m at 1.21918. All FX forwards in a cash flow hedge mature on 25 January 2021.
Key controls applied to transactions in derivative financial instruments are to use only instruments where good market liquidity exists, to revalue all financial instruments regularly using current market rates and to sell options only to offset previously purchased options or as part of a risk management strategy. The Group is not a net seller of options, and does not use derivative financial instruments for speculative purposes. The Group held no options during the reporting period.
Capital management
The capital structure of the Group consists of Shareholders’ equity (Note 24), Debt (Note 19), Other current investments (Note 12) and Cash (Note 17). For the foreseeable future, the Board will maintain a capital structure that supports the Group’s strategic objectives through:
>
managing funding and liquidity risk
>
optimising shareholder return
>
maintaining a strong, investment-grade credit rating.
The Group utilises factoring arrangements for selected trade receivables. These factoring arrangements qualify for full derecognition of the associated trade receivables under IFRS 9. Amounts due, on invoices that have not been factored at year end, from customers that are subject to factoring arrangements are disclosed in Note 16.
Funding and liquidity risk are reviewed regularly by the Board and managed in accordance with policies described below.
The Board’s distribution policy comprises a regular cash dividend and, subject to business needs, a share repurchase component. The Board regularly reviews its shareholders’ return strategy, and, in 2012, decided to suspend share repurchases in order to retain strategic flexibility.
The Group’s net debt position (loans and borrowings net of Cash and cash equivalents, Other investments and Derivative financial instruments) has increased from a net debt position of $11,904m at the beginning of the year to a net debt position of $12,110m at 31 December 2020.
Liquidity risk
The Board reviews the Group’s ongoing liquidity risks annually as part of the planning process and on an ad hoc basis. The Board considers short-term requirements against available sources of funding, taking into account forecast cash flows. The Group manages liquidity risk by maintaining access to a number of sources of funding which are sufficient to meet anticipated funding requirements. Specifically, the Group uses US and European commercial paper, bank loans, committed bank facilities and cash resources to manage short-term liquidity and manages long-term liquidity by raising funds through the capital markets. The Group is assigned short-term credit ratings of P-2 by Moody’s and A-2 by Standard and Poor’s. The Group’s long-term credit rating is A3 Negative outlook by Moody’s and BBB+ CreditWatch Positive outlook by Standard and Poor’s.
In addition to Cash and cash equivalents of $7,832m, short-term fixed income investments of $118m, fixed deposits of $42m, less overdrafts of $286m at 31 December 2020, the Group has committed bank facilities of $21,625m. Of the committed facilities, $4,125m is intended to manage liquidity. Of these, $3,375m mature in April 2024 and $750m is available until November 2021 with a one-year extension option, exercisable by the Group. In conjunction with the acquisition of Alexion Pharmaceuticals, Inc., the Company entered into committed bank facilities totalling $17,500m during December 2020. None of the above facilities contain any financial covenants and all were undrawn at 31 December 2020. The Group regularly monitors the credit standing of the banking group and currently does not anticipate any issue with drawing on the committed facilities should this be necessary. Advances under these facilities currently bear an interest rate per annum based on the LIBOR (or other relevant benchmark rate) plus a margin. The facilities contain arrangements to switch to alternative risk free rate benchmarks during 2021.
At 31 December 2020, the Group has $4,083m outstanding from debt issued under a Euro Medium Term Note programme and $14,950m under a SEC-registered programme. The funds made available under these facility agreements may be used for the general corporate purposes of the Group.
The maturity profile of the anticipated future contractual cash flows including interest in relation to the Group’s financial liabilities, on an undiscounted basis and which, therefore, differs from both the carrying value and fair value, is as follows:
Bank
Total
Derivative
Derivative
Total
overdrafts
Trade
non-derivative
financial
financial
derivative
and other
Finance
and other
financial
instruments
instruments
financial
loans
Bonds
leases
1
payables
instruments
receivable
2
payable
2
instruments
2
Total
$m
$m
$m
$m
$m
$m
$m
$m
$m
Within one year
774
1,629
–
13,029
15,432
(10,368)
10,171
(197)
15,235
In one to two years
7
2,210
–
1,688
3,905
(35)
82
47
3,952
In two to three years
14
2,002
–
833
2,849
(950)
974
24
2,873
In three to four years
–
1,813
–
3,340
5,153
(30)
58
28
5,181
In four to five years
–
2,069
–
776
2,845
(30)
58
28
2,873
In more than five years
–
17,405
–
2,084
19,489
(2,084)
2,154
70
19,559
795
27,128
–
21,750
49,673
(13,497)
13,497
–
49,673
Effect of interest
(2)
(8,669)
–
–
(8,671)
251
(509)
(258)
(8,929)
Effect of discounting, fair values and issue costs
(17)
(122)
–
(2,139)
(2,278)
(9)
(117)
(126)
(2,404)
31 December 2018
776
18,337
–
19,611
38,724
(13,255)
12,871
(384)
38,340
Bank
Total
Derivative
Derivative
Total
overdrafts
Trade
non-derivative
financial
financial
derivative
and other
Lease
and other
financial
instruments
instruments
financial
loans
Bonds
liability
payables
instruments
receivable
2
payable
instruments
Total
$m
$m
$m
$m
$m
$m
$m
$m
$m
Within one year
234
2,207
205
14,054
16,700
(11,956)
11,985
29
16,729
In one to two years
14
1,970
158
1,769
3,911
(955)
976
21
3,932
In two to three years
–
1,810
117
1,811
3,738
(54)
67
13
3,751
In three to four years
–
2,068
79
1,592
3,739
(54)
67
13
3,752
In four to five years
–
1,479
50
1,652
3,181
(1,051)
1,079
28
3,209
In more than five years
–
15,906
128
1,052
17,086
(1,648)
1,654
6
17,092
248
25,440
737
21,930
48,355
(15,718)
15,828
110
48,465
Effect of interest
(1)
(8,038)
–
–
(8,039)
409
(488)
(79)
(8,118)
Effect of discounting, fair values and issue costs
(3)
(94)
(62)
(1,619)
(1,778)
(20)
(54)
(74)
(1,852)
31 December 2019
244
17,308
675
20,311
38,538
(15,329)
15,286
(43)
38,495
Bank
Total
Derivative
Derivative
Total
overdrafts
Trade
non-derivative
financial
financial
derivative
and other
Lease
and other
financial
instruments
instruments
financial
loans
Bonds
liability
payables
instruments
receivable
payable
instruments
Total
$m
$m
$m
$m
$m
$m
$m
$m
$m
Within one year
667
2,136
207
15,812
18,822
(9,719)
9,620
(99)
18,723
In one to two years
–
1,839
168
2,584
4,591
(60)
67
7
4,598
In two to three years
–
2,101
120
1,658
3,879
(59)
67
8
3,887
In three to four years
–
1,617
82
1,728
3,427
(1,151)
1,080
(71)
3,356
In four to five years
–
2,502
53
722
3,277
(36)
40
4
3,281
In more than five years
–
16,921
108
1,435
18,464
(1,707)
1,652
(55)
18,409
667
27,116
738
23,939
52,460
(12,732)
12,526
(206)
52,254
Effect of interest
–
(7,974)
–
–
(7,974)
379
(405)
(26)
(8,000)
Effect of discounting, fair values and issue costs
(1)
(109)
(57)
(2,070)
(2,237)
(70)
24
(46)
(2,283)
31 December 2020
666
19,033
681
21,869
42,249
(12,423)
12,145
(278)
41,971
1.
Comparative figures relate to Finance leases recognised under IAS 17.
2.
The maturity profile table has been amended in 2019 to show gross derivative flows and to include all derivatives shown in Note 13 on page [203]. In previous periods the table separately disclosed the net cash flows on interest rate swaps and cross-currency swaps. Other derivative instruments amounting to $18m in 2018 were not included in the table.
Where interest payments are on a floating rate basis, it is assumed that rates will remain unchanged from the last business day of each year ended 31 December.
It is not expected that the cash flows in the maturity profile could occur significantly earlier or at significantly different amounts, with the exception of $3,323m of contingent consideration held within Trade and other payables (see Note 20).
Market risk
Interest rate risk
The Group maintains a mix of fixed and floating rate debt. The portion of fixed rate debt was approved by the Board and any variation requires Board approval.
A significant portion of the long-term debt is held at fixed rates of interest. The Group uses interest rate swaps and forward rate agreements to manage this mix.
At 31 December 2020, the Group held interest rate swaps with a notional value of $288m, converting the 7% guaranteed debentures payable in 2023 to floating rates. No new interest rate swaps were entered into during 2020. At 31 December 2020, swaps with a notional value of $288m related to debt designated as fair value through profit or loss.
The majority of surplus cash is currently invested in US dollar liquidity funds and investment-grade fixed income securities.
The interest rate profile of the Group’s interest-bearing financial instruments are set out below. In the case of current and non-current financial liabilities, the classification includes the impact of interest rate swaps which convert the debt to floating rate.
Fixed rate
Floating rate
Total
Fixed rate
Floating rate
Total
Fixed rate
Floating rate
Total
$m
$m
$m
$m
$m
$m
$m
$m
$m
Financial liabilities
Interest-bearing loans and borrowings
Current
1,357
1,029
2,386
1,785
225
2,010
999
755
1,754
Non-current
17,005
989
17,994
14,893
1,324
16,217
16,038
1,321
17,359
Total
18,362
2,018
20,380
16,678
1,549
18,227
17,037
2,076
19,113
Financial assets
Fixed deposits
42
–
42
38
–
38
40
–
40
Cash and cash equivalents
–
7,832
7,832
–
5,369
5,369
–
4,831
4,831
Total
42
7,832
7,874
38
5,369
5,407
40
4,831
4,871
In addition to the financial assets above, there are $6,328m (2019: $6,765m; 2018: $6,195m) of other current and non-current asset investments and other financial assets. Of these, $nil receive floating rate interest (2019: $111m; 2018: $nil).
The Group is also exposed to market risk on equity securities, which represent non-controlling interests in third-party biotech companies.
$m
$m
$m
Equity securities at fair value through Other comprehensive income (Note 12)
1,108
1,339
833
Total
1,108
1,339
833
Foreign currency risk
The US dollar is the Group’s most significant currency. As a consequence, the Group results are presented in US dollars and exposures are managed against US dollars accordingly.
Translational
Approximately 66% of Group external sales in 2020 were denominated in currencies other than the US dollar, while a significant proportion of manufacturing, and research and development costs were denominated in pounds sterling and Swedish krona. Surplus cash generated by business units is substantially converted to, and held centrally in, US dollars. As a result, operating profit and total cash flow in US dollars will be affected by movements in exchange rates.
This currency exposure is managed centrally, based on forecast cash flows. The impact of movements in exchange rates is mitigated significantly by the correlations which exist between the major currencies to which the Group is exposed and the US dollar. Monitoring of currency exposures and correlations is undertaken on a regular basis and hedging is subject to pre-execution approval.
As at 31 December 2020, before the impact of derivatives, 3% of interest-bearing loans and borrowings were denominated in pounds sterling and 18% were denominated in euros. Where there is non-US dollar debt and an underlying net investment of that amount in the same currency, the Group applies net investment hedging. Exchange differences on the retranslation of debt designated as net investment hedges are recognised in Other comprehensive income to the extent that the hedge is effective. Any ineffectiveness is taken to profit.
The Group holds cross-currency swaps to hedge against the impact of fluctuations in foreign exchange rates. Fair value movements on the revaluation of the cross-currency swaps are recognised in Other comprehensive income to the extent that the hedge is effective, with any ineffectiveness taken to profit.
Foreign currency risk arises when the Group has inter-company funding and investments in certain subsidiaries operating in countries with exchange controls or where there is risk of significant future currency devaluation. One indicator of potential foreign currency risk is where a country is officially designated as hyperinflationary. As at 31 December 2020, the Group operates in two countries designated as hyperinflationary, being Argentina and Venezuela.
The foreign exchange risk to the Group from Argentina and Venezuela has been assessed and deemed to be immaterial.
Transactional
The Group aims to hedge all its forecast major transactional currency exposures on working capital balances, which typically extend for up to three months. Where practicable, these are hedged using forward foreign exchange. In addition, the Group’s external dividend, which is paid principally in pounds sterling and Swedish krona, is fully hedged from announcement to payment date. Foreign exchange gains and losses on forward contracts transacted for transactional hedging are taken to profit.
Sensitivity analysis
The sensitivity analysis set out [overleaf] summarises the sensitivity of the market value of our financial instruments to hypothetical changes in market rates and prices. The range of variables chosen for the sensitivity analysis reflects our view of changes which are reasonably possible over a one-year period. Market values are the present value of future cash flows based on market rates and prices at the valuation date. For long-term debt, an increase in interest rates results in a decline in the fair value of debt.
The sensitivity analysis assumes an instantaneous 100 basis point change in interest rates in all currencies from their levels at 31 December 2020, with all other variables held constant. Based on the composition of our long-term debt portfolio as at 31 December 2020, a 1% increase in interest rates would result in an additional $20m in interest expense being incurred per year. The exchange rate sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from their levels at 31 December 2020, with all other variables held constant. The +10% case assumes a 10% strengthening of the US dollar against all other currencies and the -10% case assumes a 10% weakening of the US dollar.
Each incremental 10% movement in foreign currency exchange rates would have approximately the same effect as the initial 10% detailed in the table below and each incremental 1% change in interest rates would have approximately the same effect as the 1% detailed in the table below.
Interest rates
Exchange rates
31 December 2018
+1%
−1%
+10%
−10%
Increase/(decrease) in fair value of financial instruments ($m)
1,130
(1,267)
(146)
161
Impact on profit: (loss)/gain ($m)
–
–
(299)
348
Impact on equity: gain/(loss) ($m)
–
–
153
(187)
Interest rates
Exchange rates
31 December 2019
+1%
−1%
+10%
−10%
Increase/(decrease) in fair value of financial instruments ($m)
1,417
(1,521)
(4)
(36)
Impact on profit: (loss)/gain ($m)
–
–
(174)
172
Impact on equity: gain/(loss) ($m)
–
–
170
(208)
Interest rates
Exchange rates
31 December 2020
+1%
−1%
+10%
−10%
Increase/(decrease) in fair value of financial instruments ($m)
1,696
(1,758)
114
(132)
Impact on profit: (loss)/gain ($m)
–
–
(57)
74
Impact on equity: gain/(loss) ($m)
–
–
171
(206)
Credit risk
The Group is exposed to credit risk on financial assets, such as cash investments, derivative instruments, and Trade and other receivables. The Group is also exposed in its Net asset position to its own credit risk in respect of the 2023 debentures which are accounted for at fair value through profit or loss. Under IFRS 9, the effect of the losses and gains arising from own credit risk on the fair value of bonds designated at fair value through profit or loss are recorded in Other comprehensive income.
Financial counterparty credit risk
The majority of the AstraZeneca Group’s cash is centralised within the Group treasury entity and is subject to counterparty risk on the principal invested. The level of the Group’s cash investments and hence credit risk will depend on the cash flow generated by the Group and the timing of the use of that cash. The credit risk is mitigated through a policy of prioritising security and liquidity over return and, as such, cash is only invested in high credit-quality investments. Counterparty limits are set according to the assessed risk of each counterparty and exposures are monitored against these limits on a regular basis.
The Group’s principal financial counterparty credit risks at 31 December 2020 were as follows:
Current assets
$m
$m
$m
Cash at bank and in hand
1,182
755
893
Money market liquidity funds
6,602
4,110
3,435
Collateralised repurchase agreement
–
400
400
Other short-term cash equivalents
48
104
103
Total Cash and cash equivalents (Note 17)
7,832
5,369
4,831
Fixed income securities at fair value through profit and loss (Note 12)
118
811
809
Fixed deposits (Note 12)
42
38
40
Total derivative financial instruments (Note 13)
142
36
258
Current assets subject to credit risk
8,134
6,254
5,938
Non-current assets
$m
$m
$m
Fixed income securities at fair value through profit and loss (Note 12)
–
62
–
Derivative financial instruments (Note 13)
171
61
157
Non-current assets subject to credit risk
171
123
157
The Group may hold significant cash balances as part of its normal operations, with the amount of cash held at any point reflecting the level of cash flow generated by the business and the timing of the use of that cash. The majority of the Group’s cash is invested in US dollar AAA rated money market liquidity funds.
The money market liquidity fund portfolios are managed by five external third-party fund managers to maintain an AAA rating. The Group’s investments represent no more than 10% of each overall fund value. There were no other significant concentrations of financial credit risk at the reporting date.
The short-term repurchase agreements were fully collateralised investments. The Group closed out its repurchase agreements during 2020. The value of the cash deposited in repurchase agreements at 31 December 2020 was $nil (2019: $401m; 2018: $403m).
The fixed income securities are managed by four external third-party fund managers. During 2020, a significant amount of the securities were sold and reinvested in money market liquidity funds. The long-term rating of these securities was BBB- or better.
All financial derivatives are transacted with commercial banks, in line with standard market practice. The Group has agreements with some bank counterparties whereby the parties agree to post cash collateral, for the benefit of the other, equivalent to the market valuation of the derivative positions above a predetermined threshold. The carrying value of such cash collateral held by the Group at 31 December 2020 was $288m (2019: $71m; 2018: $384m) and the carrying value of such cash collateral posted by the Group at 31 December 2020 was $11m (2019: $10m; 2018: $14m).
The impairment provision for other financial assets at 31 December 2020 was immaterial.
Trade receivables
Trade receivable exposures are managed locally in the operating units where they arise and credit limits are set as deemed appropriate for the customer. The Group is exposed to customers ranging from government-backed agencies and large private wholesalers to privately owned pharmacies, and the underlying local economic and sovereign risks vary throughout the world. Where appropriate, the Group endeavours to minimise risks by the use of trade finance instruments such as letters of credit and insurance. The Group applies the expected credit loss approach to establish an allowance for impairment that represents its estimate of expected losses in respect of Trade receivables.
The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all Trade receivables. To measure expected credit losses, Trade receivables have been grouped based on shared credit characteristics and the days past due.
The expected loss rates are based on payment profiles over a period of 36 months before 31 December 2020, 31 December 2019 or 31 December 2018 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customer to settle the receivables.
On that basis, the loss allowance was determined as follows:
0-90 days
90-180 days
Over 180 days
31 December 2018
Current
past due
past due
past due
Total
Expected loss rate
%
0.75
%
10
%
47
%
Gross carrying amount ($m)
2,854
82
27
70
3,033
Loss allowance ($m)
1
1
3
33
38
0-90 days
90-180 days
Over 180 days
31 December 2019
Current
past due
past due
past due
Total
Expected loss rate
%
0.75
%
2
%
44
%
Gross carrying amount ($m)
3,178
312
82
34
3,606
Loss allowance ($m)
2
2
2
15
21
0-90 days
90-180 days
Over 180 days
31 December 2020
Current
past due
past due
past due
Total
Expected loss rate
%
2.00
%
19
%
61
%
Gross carrying amount($m)
3,659
124
21
25
3,829
Loss allowance ($m)
2
2
4
15
23
Trade receivables are written off where there is no reasonable expectation of recovery.
Impairment losses on Trade receivables are presented as net impairment losses within Operating profit, any subsequent recoveries are credited against the same line.
In the US, sales to three wholesalers accounted for approximately 95% of US sales (2019: three wholesalers accounted for approximately 94%; 2018: three wholesalers accounted for approximately 88%).
The movements of the Group expected credit losses provision are follows:
$m
$m
$m
At 1 January
21
38
16
Net movement recognised in income statement
3
(13)
22
Amounts utilised, exchange and other movements
(1)
(4)
–
At 31 December
23
21
38
Given the profile of our customers, including large wholesalers and government-backed agencies, no further credit risk has been identified with the Trade receivables not past due other than those balances for which an allowance has been made. The income statement credit or charge is recorded in Operating profit. |
