Notes to the Financial Statements

For the short period 1 April 2006 to 3 March 2007

26. OTHER FINANCIAL ASSETS AND LIABILITIES

	Current 2007 £m	Non-current 2007 £m	Current 2006 £m	Non-current 2006 £m
Other financial assets
Cash flow hedge – foreign exchange contracts	–	–	1.8	–
Other financial assets	–	8.5	–	5.5
Total other financial assets	–	8.5	1.8	5.5
Other financial liabilities
Cash flow hedge – foreign exchange contracts	1.7	–	–	–
Fair value hedge – interest rate swap	0.5	–	–	–
Total other financial liabilities	2.2	–	–	–

	The cash flow hedges are intended to hedge the foreign currency exposures of future purchases of inventory. The hedged cash flows are expected to occur up to one year into the future and will be transferred to the consolidated income statement or inventory carrying value as applicable. Forward foreign exchange contracts Gains and losses recognised in the hedging reserve in shareholders equity on forward foreign exchange contracts as of 3 March 2007 and 31 March 2006 will be released to the income statement within one year from the balance sheet date. The notional principal amounts of the outstanding forward foreign exchange contracts at 3 March 2007 were £473.2m (2006: £241.2m). Interest rate swaps The notional principal amounts of the outstanding interest rate swap contracts as at 3 March 2007 were £225.0m (2006: nil). At 3 March 2007 and 31 March 2006, the main floating rates are based on LIBOR. Gains and losses recognised in the hedging reserve in shareholders equity on interest rate swap contracts as of 3 March 2007 and 31 March 2006 will be continuously released to the income statement until the repayment of the bank borrowings. Home Retail Group’s activities expose it to a variety of financial risks and Home Retail Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on Home Retail Group’s performance.

(a)	Market risk Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the euro. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. To manage their foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, entities in the Group use forward contracts, transacted with external banks. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity’s functional currency. Group Treasury is responsible for managing the net position in each foreign currency by using external forward currency contracts. For segment reporting purposes, each subsidiary designates contracts with Group Treasury as fair value hedges or cash flow hedges, as appropriate. External foreign exchange contracts are designated at Group level as hedges of foreign exchange risk on specific assets, liabilities or future transactions on a gross basis. The cash flow hedges are intended to hedge the foreign currency exposure of future purchases of inventory. The hedged cash flows are expected to occur up to one year into the future and will be transferred to the consolidated income statement or inventory carrying value as applicable. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group’s foreign operations is not hedged.

(b)	Credit risk The Group has no significant concentrations of credit risk. It has policies in place to ensure that sales of financial services products are made to customers with an appropriate credit history. Sales to retail customers are made in cash or via major credit cards.

(c)	Liquidity risk Home Retail Group manages its cash and committed bank borrowing facilities to maintain liquidity and funding flexibility.

(d)	Cash flow and fair value interest rate risk Whilst the Group has £24.2m (2006: £54.7m) of gross instalment receivable balances on fixed interest rates, with the remainder on floating rates, the Group’s income and operating cash flows are still considered to be substantially independent of changes in market interest rates. The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group manages its cash flow interest rate risk by using fixed-to-floating interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from fixed rates to floating rates. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional principal amounts. Fair value estimation The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date.