Diageo Capital plc # Annual report and financial statements # 30 June2022 Registered number: SC040795 CONTENTS        PAGES | | | | --- | --- | | | | | [STRATEGIC REPORT](#i02ebf916283d42b1aa80f2f801964da3_10) | [2](#i02ebf916283d42b1aa80f2f801964da3_10) | | [DIRECTORS' REPORT](#i02ebf916283d42b1aa80f2f801964da3_19) | [6](#i02ebf916283d42b1aa80f2f801964da3_19) | | [STATEMENT OF DIRECTORS' RESPONSIBILITIES](#i02ebf916283d42b1aa80f2f801964da3_46) | [8](#i02ebf916283d42b1aa80f2f801964da3_46) | | [INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF DIAGEO](#i02ebf916283d42b1aa80f2f801964da3_49) [CAPITAL PLC](#i02ebf916283d42b1aa80f2f801964da3_49) | [9](#i02ebf916283d42b1aa80f2f801964da3_49) | | [INCOME STATEMENT](#i02ebf916283d42b1aa80f2f801964da3_52) | [15](#i02ebf916283d42b1aa80f2f801964da3_52) | | [STATEMENT OF COMPREHENSIVE INCOME](#i02ebf916283d42b1aa80f2f801964da3_55) | [16](#i02ebf916283d42b1aa80f2f801964da3_55) | | [BALANCE SHEET](#i02ebf916283d42b1aa80f2f801964da3_58) | [17](#i02ebf916283d42b1aa80f2f801964da3_58) | | [STATEMENT OF CHANGES IN EQUITY](#i02ebf916283d42b1aa80f2f801964da3_61) | [18](#i02ebf916283d42b1aa80f2f801964da3_61) | | [NOTES TO THE FINANCIAL STATEMENTS](#i02ebf916283d42b1aa80f2f801964da3_64) | [19](#i02ebf916283d42b1aa80f2f801964da3_64) | | | | Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 1 ## STRATEGIC REPORT The Directors present their strategic report for the year ended 30 June 2022. Activities Diageo Capital plc (the ”company”) is engaged in the provision of treasury risk and cash management for Diageo plc and its subsidiary undertakings (the ”group”). Diageo Capital plc's principal activity is to raise external funds, principally using the London and New York financial markets. The company finances other companies of the group via intragroup loans and deposits. Foreign exchange translation hedging, interest rate risk management and cash management are also performed by the company. Business review Development and performance of the business of the company during the financial year and position of the company as at 30 June 2022. The results of the company and the development of its business are influenced to a considerable extent by group financing requirements. Further information on the risk management policies of the group is included in the Annual Report 2022 of Diageo plc (see note 16 of the consolidated financial statements of Diageo plc). Net finance charge was £5 million in the year ended 30 June 2022, which is a £4 million decrease from net finance charge of £9 million in the year ended 30 June 2021. External borrowings increased by £559 million in the year ended 30 June 2022 to £5,997 million from £5,438 million in the year ended 30 June 2021, which was driven by the strengthening of the US dollar against sterling as the company have not issued or repaid bonds during fiscal 22. Financial and other key performance indicators As the company forms part of the group’s treasury operations, the company’s performance is measured at the group level. The company receives management fee income from Diageo plc to reimburse the expenses incurred in relation to treasury services provided to the group. Principal and financial risks and uncertainties facing the company as at 30 June 2022 The principal risks identified by the group are disclosed on page 42-46 of the Diageo plc Annual Report 2022. The most relevant of the group risks to this entity are the ones we have selected and articulated below, together with specific considerations relating to the company’s operations and environment.  If any of these risks occur, the company’s business, financial condition and operational results could suffer. As the company forms part of the group’s financial operations, the financial risk management measures used by management to analyse the development, performance and position of the company’s business are mainly similar to those facing the group as a whole and are managed by the group’s treasury department. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 2 ## STRATEGIC REPORT (continued) Business review (continued) Principal and financial risks and uncertainties facing the company as at 30 June 2022 (continued) In addition, given that the company performs treasury functions for the group, as set out in the detailed description under note 10 ‘Financial instruments and risk management’, it is exposed to foreign currency risk associated with certain foreign currency denominated bonds and interest rate risk arising principally on changes in US dollar and sterling interest rates. The company uses derivative financial instruments to hedge its exposures to fluctuations in interest and exchange rates. Cash flow hedges are carried out to hedge the currency risk of highly probable future foreign currency cash flows, as well as the cash flow risk from changes in interest rates. Fair value hedges are carried out to manage the currency and/or interest rate risks to which the fair value of certain assets and liabilities are exposed. The Directors have assessed the potential risk of the increasing interest rates and resulting potential increase in cost of borrowing on the operation and the financial statements of the company. Considering the company forms part of the group’s financial operations and as such it will be reimbursed for any potential increase in the charges of its financial instruments therefore the impact of this risk is considered to be very limited. Pandemics, geopolitical tension and ongoing supply chain disruption The pandemic continues to cause disruption in regions across the world, contributing to a heightened level of uncertainty. Vaccination rollouts are at all-time highs in many markets, and our understanding and agility in responding to and managing through volatility has grown. Supply chain disruption has emerged as a risk of significant global impact. Ongoing geopolitical issues, increasing inflation, strict regional responses to Covid-19 outbreaks, in addition to heightened demand for raw and packaging materials, has led to ongoing constraints, longer lead times and increased costs. We continue to improve our levels of resilience across our end-to-end supply chain, while continuously monitoring the external landscape and responding with agility. The Directors have assessed that the key impacts from the pandemic, ongoing supply chain disruption, and Russian invasion of Ukraine on the company would be in respect of any change in credit risk impacting the valuation of derivatives and the effect of Covid-19 on remote working and ability to access IT systems, along with a potentially heightened cyber risk. The Directors believe that the ongoing mitigation actions taken in relation to the pandemic, ongoing supply chain disruption and Russian invasion of Ukraine have been agile and effective and that the group is strongly positioned and will maintain adequate liquidity. As part of the group viability statement assessment, the group has prepared cash flow forecasts which have also been sensitised to reflect severe, but plausible downside scenarios taking into consideration the group's principal risks. In the base case scenario, management has included assumptions for mid-single digit net sales growth, operating margin improvement and global TBA market share growth. In light of the ongoing geopolitical volatility, the base case outlook and plausible downside scenarios have incorporated considerations for a slower post-pandemic economic recovery, supply chain disruptions, higher inflation and further geopolitical deterioration. Even with these negative sensitivities, the group’s cash position is still considered to remain strong, therefore it is not anticipated that the solvency or the liquidity of the company will deteriorate. Climate Risk Considering that the company forms part of the group’s treasury operations, the probability of climate change related risks having a significant and direct impact on the activities and operation of the company is remote. The Directors believe that the risk mitigation actions taken in relation to climate Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 3 ## STRATEGIC REPORT (continued) Business review (continued) risk by the group are appropriate measures in managing direct or indirect risks posed by climate change. Including the risk to the company of being able to access financing at competitive rates where borrowings could become sustainability linked. Based on the climate risk assessment performed by the group, the risk attached to the recoverability of intercompany balances is considered to be remote. Further information on the group’s actions to combat climate change are disclosed on pages 47-56 of Diageo plc’s 2022 Annual Report. Statement on Section 172 of the Companies Act 2006 Section 172 of the Companies Act 2006 requires the Directors to promote the success of the company for the benefit of the members as a whole, having regard to the interests of stakeholders in their decision-making. In making decisions, the Directors consider what is most likely to promote the success of the company for its shareholders in the long term, as well as the interests of the group’s stakeholders. The Directors understand the importance of taking into account the views of stakeholders and the impact of the company’s activities on local communities, the environment, including climate change, and the group’s reputation. The company is a member of the group of companies (the “Group”) whose ultimate holding company is Diageo plc (“Diageo”). In accordance with the requirements of UK company law, Diageo has included in its 2022 Annual Report and Accounts on page 7 a statement as to how the Directors of Diageo have had regard to the matters set out in Section 172 of the Companies Act 2006. In order to ensure consistency in how the Group operates with regard to its wider stakeholders, the Group has adopted an internal Code of Business Conduct alongside a comprehensive framework of global policies and standards that are designed to ensure, amongst other things, that all companies throughout the Group, including the company, have regard to its wider stakeholders in a consistent manner. The company has therefore had regard to the matters set out in Section 172 of the Act in a manner that is consistent with the approach adopted by Diageo, while at the same time ensuring the directors of the company are fulfilling their duties. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 4 ## STRATEGIC REPORT (continued) Business review (continued) Main activities of the Board The activities of the Board during the year include: •Approval of the terms of and entry into the amendment and restatement agreements in respect of the London Inter-bank Offered Rate; and •Approval of financial statements for the year ended 30 June 2021 and half year results for the six-month period to 31 December 2021 On behalf of the Board J M C Edmunds Director 11 Lochside Place Edinburgh Scotland EH12 9HA 26 October 2022 Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 5 ## DIRECTORS' REPORT The Directors have pleasure in submitting their Directors’ report and audited financial statements for the year ended 30 June 2022. The Directors foresee no changes in the company's activities. The company is incorporated and domiciled as a public company limited by shares in Scotland, United Kingdom. The registered address is 11 Lochside Place, Edinburgh, Scotland, EH12 9HA. Going concern The company’s business activities, together with the factors likely to affect its future development and position, are set out in the business review section of the strategic report on pages 2-5. The company is expected to continue to generate profit for its own account and to remain in a positive net asset position for the foreseeable future. The company is in net current liability position, however the company participates in the group’s centralised treasury arrangements and the parent will provide financial support for the foreseeable future. The Directors have no reason to believe that a material uncertainty exists that may cast significant doubt about the ability of the company to continue as a going concern. On the basis of their assessment, the company’s Directors have a reasonable expectation that the company will be able to continue in operational existence for a period of at least 12 months from the date the financial statements are approved and signed as the ultimate parent undertaking has agreed its policy is to provide financial support for a period of at least 12 months from the date the financial statements are approved and signed. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. In arriving at this conclusion, the Directors have also considered the potential impact that the principal risks outlined on the Strategic report may have on the company and believe that any impact would be minimal. Financial performance The result for the year ended 30 June 2022 is shown on page 16. The loss for the year transferred to reserves was £1 million (2021 - £1 million profit) and the other comprehensive loss for the year is £4 million (2021 - £104 million). No dividend was paid during the year (2021 - £nil) and there was no dividend proposed to be distributed to the shareholders in regard to the financial year (2021 - £nil). Net financial assets were £132 million at 30 June 2022 (2021 - £139 million). More details on financial instruments and risk management can be found under note 10. Directors The Directors of the company who were in office during the year and up to the date of signing the financial statements were: M Pais J M C Edmunds Cs Hajos (resigned 26 September 2022) K E Major I Thrustle (appointed 30 September 2021) C M Lewin (resigned 30 September 2021) C-L Jordan (appointed 26 September 2022) Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 6 ## DIRECTORS' REPORT (continued) Directors’ remuneration None of the Directors received any remuneration during the year in respect of their services as directors of the company (2021 - £nil). The Directors were paid by fellow group undertakings, and no cost was recharged to the company. Secretary The secretary of the company who was in office during the year and up to the date of signing the financial statements was: J M C Edmunds Internal control and risk management over financial reporting The company operates under the financial reporting processes and controls of the group. Diageo plc’s internal control and risk management systems including its financial reporting process, which include those of the company, are discussed in the group's Annual Report 2022 on page 97 at www.diageo.com, which does not form part of this report. Independent auditors Pursuant to Section 487 of the Companies Act 2006, the auditors, PricewaterhouseCoopers LLP, have been reappointed and will continue in office as auditors of the company. Disclosure of information to the auditors The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the company’s auditors are unaware; and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the company’s auditors are aware of that information. On behalf of the Board J M C Edmunds Director 11 Lochside Place Edinburgh Scotland EH12 9HA 26 October 2022 Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 7 ## DIRECTORS' REPORT (continued) ## Statement of directors’ responsibilities in respect of the financial statements The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulation. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law). Under company law, directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing the financial statements, the directors are required to: •select suitable accounting policies and then apply them consistently; •state whether applicable United Kingdom Accounting Standards, comprising FRS 101 have been followed, subject to any material departures disclosed and explained in the financial statements; •make judgements and accounting estimates that are reasonable and prudent; and •prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are also responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. ## Directors’ confirmations Each of the directors, whose names and functions are listed in the Directors' Report confirm that, to the best of their knowledge: •the company financial statements, which have been prepared in accordance with United Kingdom Accounting Standards, comprising FRS 101, give a true and fair view of the assets, liabilities, financial position and profit of the company; and •the Strategic Report includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal risks and uncertainties that it faces. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 8 ## INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF DIAGEO ## CAPITAL PLC Report on the audit of the financial statements Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 9 Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 10 Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 11 Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 12 Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 13 Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 14 INCOME STATEMENT | | | | | | | | --- | --- | --- | --- | --- | --- | | | | | | | | | | | | Year ended | | Year ended | | | | | 30 June 2022 | | 30 June 2021 | | | Notes | | £ million | | £ million | | | | | | | | | Other operating income | 2 | | 4 | | 10 | | Finance income | 4 | | 450 | | 298 | | Finance charges | 4 | | (455) | | (307) | | Operating (loss)/profit | | | (1) | | 1 | | | | | | | | | (Loss)/Profit before taxation on ordinary activities | | | (1) | | 1 | | Taxation on profit on ordinary activities | 5 | | — | | — | | | | | | | | | (Loss)/Profit for the year | | | (1) | | 1 | The accompanying notes are an integral part of these financial statements. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 15 STATEMENT OF COMPREHENSIVE INCOME | | | | | | --- | --- | --- | --- | | | | | | | | | Year ended | Year ended | | | | 30 June 2022 | 30 June 2021 | | | Notes | £ million | £ million | | | | | | | Other comprehensive income Items that may be recycled subsequently to the income statement | | | | | Effective portion of changes in fair value of cash flow hedges | | | | | -gains/(losses) taken to other comprehensive income/ (expense) | 12 | 233 | (298) | | -recycled to income statement | 12 | (239) | 175 | | Tax credit on effective portion of changes in fair value of cash flow hedge | 12 | 2 | 19 | | Other comprehensive loss | | (4) | (104) | | | | | | | (Loss)/Profit for the year | | (1) | 1 | | | | | | | Total comprehensive loss for the year | | (5) | (103) | The accompanying notes are an integral part of these financial statements. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 16 BALANCE SHEET | | | | | | | | --- | --- | --- | --- | --- | --- | | | | | | | | | | | | 30 June 2022 | | 30 June 2021 | | | Notes | | £ million | | £ million | | Non-current assets | | | | | | | Other receivables | 7 | | 8,137 | | 7,594 | | Other financial assets | 6 | | 325 | | 295 | | | | | 8,462 | | 7,889 | | Current assets | | | | | | | Trade and other receivables | 7 | | 92 | | 17 | | Other financial assets | 6 | | 45 | | 3 | | | | | 137 | | 20 | | Total assets | | | 8,599 | | 7,909 | | | | | | | | | Current liabilities | | | | | | | Trade and other payables | 11 | | (2,256) | | (2,217) | | Other financial liabilities | 6 | | (2) | | (3) | | Borrowings and bank overdrafts | 9 | | (1,113) | | (13) | | | | | (3,371) | | (2,233) | | Non-current liabilities | | | | | | | Borrowings | 9 | | (4,884) | | (5,425) | | Other financial liabilities | 6 | | (212) | | (112) | | Deferred tax liability | 8 | | (15) | | (17) | | | | | (5,111) | | (5,554) | | Total liabilities | | | (8,482) | | (7,787) | | | | | | | | | Net assets | | | 117 | | 122 | | | | | | | | | Equity | | | | | | | Called up share capital | 12 | | — | | — | | Share premium | | | 250 | | 250 | | Fair value and hedging reserves | | | 47 | | 51 | | Other reserves | | | 70 | | 70 | | Accumulated losses | | | (250) | | (249) | | Total equity | | | 117 | | 122 | The accounting policies and accompanying notes on pages 19 to 41 are an integral part of these financial statements. These financial statements on pages 15 to 41 were approved by the Board of Directors on 26 October 2022 and were signed on its behalf by: J M C Edmunds Director Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 17 STATEMENT OF CHANGES IN EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY | | | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | | | | | | | | | | | | | | Subtotal | | | | | | | Share | | Hedging | | Other | | Other | | Accumulated | | | | | premium | | reserve | | reserves | | reserves | | losses | | Total | | | £ million | | £ million | | £ million | | £ million | | £ million | | £ million | | | | | | | | | | | | | | | Balance at 30 June 2020 | 250 | | 155 | | 70 | | 225 | | (250) | | 225 | | Other comprehensive loss for the year | — | | (104) | | — | | (104) | | — | | (104) | | Profit for the year | — | | — | | — | | — | | 1 | | 1 | | | | | | | | | | | | | | | Balance at 30 June 2021 | 250 | | 51 | | 70 | | 121 | | (249) | | 122 | | Other comprehensive loss for the year | — | | (4) | | — | | (4) | | — | | (4) | | Loss for the year | — | | — | | — | | — | | (1) | | (1) | | | | | | | | | | | | | | | Balance at 30 June 2022 | 250 | | 47 | | 70 | | 117 | | (250) | | 117 | The accompanying notes are an integral part of these financial statements. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 18 NOTES TO THE FINANCIAL STATEMENTS 1.  ACCOUNTING POLICIES Basis of preparation These financial statements are prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101). In preparing these financial statements, the company applies the recognition, measurement and disclosure requirements of International Financial Reporting Standards as adopted by the UK (IFRS) but makes amendments where necessary in order to comply with Companies Act 2006 and sets out below where the FRS 101 disclosure exemptions have been taken. These financial statements are prepared on a going concern basis under the historical cost convention, except that certain financial instruments are stated at their fair value. The company is a wholly owned subsidiary of Diageo plc and is included in the consolidated financial statements of Diageo plc which are publicly available. The company has taken advantage of the following exemptions from the requirements of IFRS in the preparation of these financial statements, in accordance with FRS 101: •A cash flow statement and related notes as per IAS 1 and IAS 7 •Disclosures in respect of transactions with wholly owned subsidiaries; •The effects of new but not yet effective IFRSs. New accounting standards and interpretations The following amendments to the accounting standards, issued by the IASB which have been endorsed by the UK, have been adopted by the company from 1 July 2021 with no impact on the company’s results, financial position or disclosures: •Amendments to IFRS 16 – Covid-19 - related rent concessions beyond 30 June 2021 The following amendments and standards issued by the IASB which have been endorsed by the UK, have been adopted by the company: •Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest rate benchmark reform (phase 2). The amendment to IFRS 9 provides relief from applying specific hedge accounting and financial instrument derecognition requirements directly affected by interbank offered rate (IBOR) reform. By applying the practical expedient, Diageo is not required to discontinue its hedging relationships as a result of changes in reference rates due to IBOR reform. The amendment to IFRS 7 requires additional disclosure explaining the nature and extent of risk related to the reform and the progress of the transition, see note 10. The adoption of Phase 2 Amendments in respect of disclosures and other accounting matters relating to Interest Rate Benchmark Reform had no material impact on its consolidated results or financial position and not resulted in any change to the entity’s risk management strategy. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 19 NOTES TO THE FINANCIAL STATEMENTS (continued) 1.   ACCOUNTING POLICIES (continued) Functional and presentational currency These financial statements are presented in sterling (£), which is the company’s functional currency. All financial information presented in sterling has been rounded to the nearest million unless otherwise stated. Finance costs Finance costs which are not capitalised are recognised in the income statement based on the effective interest method. Going concern The financial statements have been prepared on a going concern basis as the ultimate parent undertaking has agreed its policy is to provide financial support for a period of at least 12 months from the date the financial statements are approved and signed. Foreign currencies Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the financial year end exchange rates and these foreign exchange differences are recognised in the income statement. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 20 NOTES TO THE FINANCIAL STATEMENTS (continued) 1.   ACCOUNTING POLICIES (continued) Financial assets and liabilities Financial assets and liabilities are initially recorded at fair value including, where permitted by IFRS 9, any directly attributable transaction costs. For those financial assets that are not subsequently held at fair value, the company assesses whether there is evidence of impairment at each balance sheet date. The company classifies its financial assets and liabilities into the following categories: financial assets and liabilities at amortised cost, financial assets and liabilities at fair value through profit and loss and financial assets at fair value through other comprehensive income. Under IFRS 9, classification and measurement of financial assets depend on the company’s business model for managing the asset and the cash flow characteristics of the assets. The business model and cash flow characteristics assessment is carried out on an instrument by instrument basis. Financial assets measured at amortised cost recognise finance income using effective interest method. Trade and other receivables Amounts owed by other group companies are initially measured at fair value and are subsequently reported at amortised cost. Non-interest bearing trade receivables are stated at their nominal value as they are due on demand. Allowance for expected credit losses are made based on the risk of non-payment taking into account ageing, previous experience, economic conditions and forward-looking data. Such allowances are measured as either 12-months expected credit losses or lifetime expected credit losses depending on changes in the credit quality of the counterparty. Borrowings Borrowings are initially measured at fair value net of transaction costs and are subsequently reported at amortised cost. Certain bonds are designated as being part of a fair value hedge and/or a cash flow hedge relationship. In these cases, the amortised cost is adjusted for the fair value of the risk being hedged, with changes in value recognised in the income statement. The fair value adjustment is calculated using a discounted cash flow technique based on unadjusted market data. Trade and other payables Amounts owed to other group companies are initially measured at fair value and are subsequently reported at amortised cost. Derivative financial instruments Derivative financial instruments are carried at fair value using a discounted cash flow technique based on market data applied consistently for similar type of instruments. Gains and losses on derivatives that do not qualify for cash flow hedge accounting treatment are taken to the income statement as they arise. The company designates and documents certain derivatives as hedging instruments against changes in fair value of recognised assets and liabilities (fair value hedges) and the cash flow risk from a change in exchange or interest rates (cash flow hedges). The effectiveness of such hedges is assessed at inception and at least on a quarterly basis, using prospective testing. Methods used for testing effectiveness include dollar offset, critical terms, regression analysis and hypothetical derivative method. Fair value movements of foreign exchange derivatives are included other operating income line and fair value movements of interest instruments are included within finance charges. Fair value hedges are used to manage the currency and/or interest rate risks to which the fair value of certain assets and liabilities are exposed. Changes in fair value of the derivatives are recognised in the income statement, along with any changes in the relevant fair value of the underlying hedged asset or liability. If such a hedge relationship is de-designated or no longer meets hedge accounting criteria, fair value movements on the derivative continue to be taken to the income statement while any fair value Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 21 NOTES TO THE FINANCIAL STATEMENTS (continued) 1.   ACCOUNTING POLICIES (continued) adjustments made to the underlying hedged item to that date are amortised through the income statement over its remaining life using the effective interest rate method. Cash flow hedges are used to hedge the foreign currency risk of highly probable future foreign currency cash flows, as well as the cash flow risk from changes in exchange or interest rates. The effective portion of the gain or loss on the hedges is recognised in the other comprehensive income, while any ineffective part is recognised in the income statement. Amounts recorded in the other comprehensive income are recycled to the income statement in the same period in which the underlying foreign currency or interest exposure affects the income statement. Derivative financial instruments are presented in the financial statements as ‘Intra-group derivative assets/(liabilities)’as these transactions are entered into by Diageo Finance plc, a fellow group undertaking, and subsequently passed to the company. Taxation Current tax is based on taxable profit for the year. Taxable profit is different from accounting profit due to temporary differences between accounting and tax treatments, and due to items, that are never taxable or tax deductible. Tax benefits are not recognised unless it is probable that the tax positions are sustainable. Once considered to be probable, tax benefits are reviewed each year to assess whether a provision should be taken against full recognition of the benefit on the basis of potential settlement through negotiation and/or litigation. Tax provisions are included in current liabilities. Penalties and interest on tax liabilities are included in profit before taxation. Full provision for deferred tax is made for temporary differences between the carrying value of assets and liabilities for financial reporting purposes and their value for tax purposes. The amount of deferred tax reflects the expected recoverable amount and is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using the basis of taxation enacted or substantively enacted by the balance sheet date. Deferred tax assets are not recognised where it is more likely than not that the asset will not be realised in the future. Judgements in applying accounting policies and key sources of estimation uncertainty The Directors make estimates and judgements concerning the future of the company. The resulting accounting estimates will, by definition, seldom equate to actual results. The company's Directors are of the opinion that there are no estimates and assumptions, nor significant judgements that have a significant risk of casting material adjustment to the carrying value of the assets and liabilities for the company within the next financial year due to the nature of the business. The critical accounting policy, which the Directors consider is of greater complexity and particularly subject to estimates, is set out in detail in the accounting policy for derivative financial instruments. A critical accounting estimate, specific to the company, is the estimation of fair valuation of derivative assets and liabilities (see detailed description under note 10. Financial instruments and risk management (f) Fair value measurements). Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 22 NOTES TO THE FINANCIAL STATEMENTS (continued) 2.    OTHER OPERATING INCOME | | | | | | | --- | --- | --- | --- | --- | | | | | | | | | | Year ended | | Year ended | | | | 30 June 2022 | | 30 June 2021 | | | | £ million | | £ million | | Intercompany management income | | 5 | | 8 | | Foreign exchange (loss)/gain on operations | | (1) | | 2 | | | | 4 | | 10 | The auditors’ remuneration of £9,831 (2021 - £10,023) was paid on behalf of the company by a fellow group undertaking. There were no fees payable to the auditors in respect of non-audit services (2021 - £nil). 3.    EMPLOYEES The company did not employ any staff during either the current or prior year. None of the Directors received any remuneration during the financial year in respect of their services as directors of the company (2021 - £nil) as the directors are paid by fellow group undertakings. 4.  FINANCE INCOME AND CHARGES | | | | | | | --- | --- | --- | --- | --- | | | | | | | | | | Year ended | | Year ended | | | | 30 June 2022 | | 30 June 2021 | | | | £ million | | £ million | | | | | | | | Finance income from fellow group undertakings | | 194 | | 175 | | Fair value gain on intra-group derivative financial instruments | | 19 | | 22 | | Fair value adjustment on borrowings | | 237 | | 101 | | Total finance income | | 450 | | 298 | | | | | | | | Finance charge to fellow group undertakings | | (29) | | (22) | | Finance charge on all other borrowings | | (162) | | (153) | | Fair value loss on intra-group derivative financial instruments | | (260) | | (124) | | Discount and fee amortisation | | (4) | | (8) | | Total finance charges | | (455) | | (307) | | | | | | | | Net finance charges | | (5) | | (9) | Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 23 NOTES TO THE FINANCIAL STATEMENTS (continued) 5.  TAXATION | | | | | | | --- | --- | --- | --- | --- | | | | | | | | | | Year ended | | Year ended | | | | 30 June 2022 | | 30 June 2021 | | | | £ million | | £ million | | (a) Analysis of taxation for the year | | | | | | Current tax | | — | | — | | Deferred tax | | — | | — | | Taxation on profit on ordinary activities | | — | | — | | | | | | | | | | Year ended | | Year ended | | | | 30 June 2022 | | 30 June 2021 | | | | £ million | | £ million | | (b) Tax  included in other comprehensive income | | | | | | Current tax | | — | | — | | Deferred tax - current year | | 2 | | 30 | | Deferred tax - rate change | | — | | (11) | | Total tax credit included in other comprehensive income | | 2 | | 19 | | | | | | | | | | Year ended | | Year ended | | | | 30 June 2022 | | 30 June 2021 | | | | £ million | | £ million | | (c) Factors affecting total tax for the year | | | | | | (Loss)/Profit on ordinary activities before taxation | | (1) | | 1 | | Taxation on (loss)/profit on ordinary activities at UK corporation tax rate of 19% (2021 - 19%) | | — | | — | | Group relief received for nil consideration | | — | | — | | Total tax charge for the year | | — | | — | | | | | | | The UK corporation tax rate for the year ended 30 June 2022 is 19% which has been effective since 1 April 2017. Legislation increasing the corporation tax rate to 25% rate with effect from 1 April 2023 was substantively enacted on 24 May 2021. Deferred taxes at 30 June 2022 have been measured using this enacted tax rate and reflected in these financial statements. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 24 NOTES TO THE FINANCIAL STATEMENTS (continued) 6.  OTHER FINANCIAL ASSETS AND LIABILITIES | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | | | | Assets | | Assets due | | Liabilities | | Liabilities | | | due after | | within  one | | due within | | due after one | | | one year | | year | | one year | | year | | | £ million | | £ million | | £ million | | £ million | | 30 June 2022 | | | | | | | | | Intra-group derivative assets/(liabilities) | | | | | | | | | Designated in cash flow hedge | 324 | | 43 | | — | | — | | Designated in fair value hedge | 1 | | — | | — | | (212) | | Not designated in a hedge relationship | — | | 2 | | (2) | | — | | | | | | | | | | | Total derivative assets/(liabilities) | 325 | | 45 | | (2) | | (212) | Diageo Finance plc, a fellow group undertaking, entered into external cross currency interest rate swaps on behalf of Diageo Capital plc, market value of which amounted to net £367 million at the balance sheet date (2021 - £154 million). The external deals are mirrored through Diageo plc to Diageo Capital plc, the ultimate beneficiary. Market value of intra-group cross currency interest rate swaps amounts to a net asset of £367 million (2021 - £154 million). | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | | | | | | Assets | | Assets due | | Liabilities | | Liabilities | | | | due after | | within  one | | due within | | due after one | | | | one year | | year | | one year | | year | | | | £ million | | £ million | | £ million | | £ million | | 30 June 2021 | | | | | | | | | | Intra-group derivative assets/(liabilities) | | | | | | | | | | Designated in cash flow hedge | | 205 | | — | | — | | (51) | | Designated in fair value hedge | | 72 | | — | | — | | (43) | | Not designated in a hedge relationship | | 18 | | 3 | | (3) | | (18) | | | | | | | | | | | | Total derivative assets/(liabilities) | | 295 | | 3 | | (3) | | (112) | Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 25 NOTES TO THE FINANCIAL STATEMENTS (continued) 7.  TRADE AND OTHER RECEIVABLES | | | | | | | --- | --- | --- | --- | --- | | | | | | | | | 30 June 2022 | | 30 June 2021 | | | | Due within one | Due after one | Due within one | Due after one | | | year | year | year | year | | | £ million | £ million | £ million | £ million | | Amounts owed by fellow group | | | | | | undertakings | 91 | 8,137 | 16 | 7,594 | | Prepayments | 1 | — | 1 | — | | | 92 | 8,137 | 17 | 7,594 | Amounts owed by fellow group undertakings include accrued and capitalised interest on the underlying balances at 30 June 2022 and at 30 June 2021. These balances bear interest at fixed and variable rates from 0.0465% to 8.11% for the year ended 30 June 2022 (2021 - from 0.0189 % to 8.11%). Amounts owed by fellow group undertakings represent transactions with companies in the group with which the company has a long-term financing relationship. These financing relationships are expected to continue for the foreseeable future. Certain amounts owed by fellow group undertakings are reclassified to non-current assets as they are not expected to be repaid in the foreseeable future. Amounts owed by group undertakings are considered to have a fair value which is not materially different to the book value. Expected credit loss is immaterial for amounts owed by fellow group undertakings. 8.DEFERRED TAX LIABILITY | | | | | --- | --- | --- | | | | | | | Fair value and hedging reserves | Total | | | £ million | £ million | | At 30 June 2020 | 36 | 36 | | Recognised in other comprehensive income | (19) | (19) | | At 30 June 2021 | 17 | 17 | | Recognised in other comprehensive income | (2) | (2) | | At 30 June 2022 | 15 | 15 | The deferred tax liability arose from temporary timing differences on cross currency swaps designated as a cash flow hedge relationship. The amount of deferred tax liability on temporary differences is £15 million (2021 - £17 million). Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 26 NOTES TO THE FINANCIAL STATEMENTS (continued) 9.  BORROWINGS AND BANK OVERDRAFTS | | | | | | | | --- | --- | --- | --- | --- | --- | | | | | | | | | | | | 30 June 2022 | | 30 June 2021 | | | | | £ million | | £ million | | Bank overdrafts | | | — | | 13 | | US$ 1,350 million 2.625% bonds due 2023 | | | 1,115 | | — | | Fair value adjustment to borrowings | | | (2) | | — | | | | | (1,113) | | (13) | | Borrowings due within one year and bank overdrafts | | | 1,113 | | 13 | | | | | | | | | US$ 1,350 million 2.625% bonds due 2023 | | | — | | 970 | | US$ 500 million 3.500% bonds due 2023 | | | 413 | | 360 | | US$ 600 million 2.125% bonds due 2024 | | | 495 | | 431 | | US$ 750 million 1.375% bonds due 2025 | | | 618 | | 537 | | US$ 500 million 3.875% bonds due 2028 | | | 411 | | 358 | | US$ 1,000 million 2.375% bonds due 2029 | | | 819 | | 711 | | US$ 1,000 million 2.000% bonds due 2030 | | | 821 | | 714 | | US$ 750 million 2.125% bonds due 2032 | | | 614 | | 534 | | US$ 600 million 5.875% bonds due 2036 | | | 491 | | 427 | | US$ 500 million 3.875% bonds due 2043 | | | 407 | | 353 | | Fair value adjustment to borrowings | | | (205) | | 30 | | | | | (4,884) | | (5,425) | | Borrowings due after one year | | | 4,884 | | 5,425 | | | | | (5,997) | | (5,438) | | Total external borrowings | | | 5,997 | | 5,438 | The interest rates of external borrowings shown in the table above are those contracted on the underlying borrowings before taking into account any interest rate hedges. Bonds are stated net of unamortised finance costs of £36 million (2021 - £37 million). Bonds are reported at amortised cost with a fair value adjustment shown separately. These fair value adjustments are determined using discounted cash flow method based on observable market input (Level 2). All bonds, medium-term notes and commercial paper issued by the company are fully and unconditionally guaranteed by Diageo plc. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 27 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The company’s funding, liquidity and exposure to foreign currency and interest rate risks are managed at group level by the group’s treasury department. The treasury department uses a range of financial instruments to manage these underlying risks. Treasury operations are conducted within a framework of Board-approved policies and guidelines, which are recommended and monitored by the finance committee, chaired by the Chief Financial Officer. The policies and guidelines include benchmark exposure and/or hedge cover levels for key areas of treasury risk which are periodically reviewed by the Board following, for example, significant business, strategic or accounting changes. The framework provides for limited defined levels of flexibility in execution to allow for the optimal application of the Board-approved strategies. Transactions arising from the application of this flexibility are carried at fair value, gains or losses are taken to the income statement as they arise and are separately monitored on a daily basis using Value at Risk analysis. In the years ended 30 June 2022 and 30 June 2021, gains and losses on these transactions were not material. The company does not use derivatives for speculative purposes. All transactions in derivative financial instruments are initially undertaken to manage the risks arising from underlying business activities. The finance committee receives monthly reports on the key activities of the treasury department, including any exposures different from the defined benchmarks. (a) Currency risk The company presents its financial statements in sterling (which is the functional currency of the entity) and conducts business in several currencies. As a result, it is subject to foreign currency risk due to exchange rate movements, which will affect the company’s transactions. To manage the currency risk the company uses certain financial instruments. Where hedge accounting is applied, hedges are documented and tested for effectiveness on an ongoing basis. The company expects hedges entered into to continue to be effective and therefore does not expect the impact of ineffectiveness on the income statement to be material. Hedge of foreign currency debt The company uses cross currency interest rate swaps to hedge the foreign currency risk associated with certain foreign currency denominated borrowings. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 28 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) (b) Interest rate risk The group has an exposure to interest rate risk, arising principally on changes in US dollar, euro and sterling interest rates. To manage interest rate risk, the group manages its proportion of fixed to floating rate borrowings within limits approved by the Board, primarily through issuing fixed and floating rate borrowings, and by utilising interest rate swaps. These practices aim to minimise the group’s net finance charges with acceptable year-on-year volatility. To facilitate operational efficiency and effective hedge accounting, for the year ended 30 June 2022, the group’s policy was to maintain fixed rate borrowings within a band of 40% to 90%. For these calculations, net borrowings exclude interest rate related fair value adjustments. The majority of the group’s existing interest rate derivatives are designated as hedges and are expected to be effective. Fair value of these derivatives is recognised in the income statement, along with any changes in the relevant fair value of the underlying hedged asset or liability. The potential risk of the increasing interest rates and resulting potential increase in cost of borrowing is considered to be limited as the company forms part of the group’s financial operations and as such it will be reimbursed for any potential increase in the charges of its financial instruments. IBOR reform In accordance with the UK Financial Conduct Authority’s announcement on 5 March 2021, LIBOR benchmark rates were discontinued after 31 December 2021, except for the majority of the US dollar settings which will be discontinued after 30 June 2023. There have been amendments to the contractual terms of IBOR-referenced interest rates and the corresponding update of the hedge designations. By 30 June 2022, changes required to systems and processes in relation to the fair valuation of financial instruments were implemented and the transition had no material tax or accounting implications. The company also evaluated the implications of the reference rate changes in relation to other valuation models and credit risk, and concluded that they were not material. In line with the relief provided by the amendment, the group assumes that the interest rate benchmark on which the cash flows of the hedged item, the hedging instrument or the hedged risk are based are not altered by the IBOR reform. The derivative hedging instruments provide a close approximation to the extent and nature of the risk exposure the group manages through hedging relationships. Included in floating rate net borrowings are interest rate swaps designated in fair value hedges, with a notional amount of £2,355 million (2021: £2,050 million) whose interest rates are based on USD LIBOR. In preparation for the discontinuation of USD LIBOR, the company will amend these agreements to either reference the Secured Overnight Financing Rate or include mechanics for selecting an alternative rate ensuring that subsequent to the amendments the agreements will be economically equivalent on transition date. (c) Market risk sensitivity analysis The company uses a sensitivity analysis that estimates the impacts on the income statement and other comprehensive income of either an instantaneous increase or decrease of 0.5% in market interest rates or a 10% strengthening or weakening in sterling against all other currencies, from the rates applicable at 30 June 2022 and 30 June 2021, for each class of financial instruments with all other variables remaining constant. The sensitivity analysis excludes the impact of market risks on the corporate tax Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 29 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) payable. This analysis is for illustrative purposes only, as in practice interest and foreign exchange rates rarely change in isolation. The sensitivity analysis estimates the impact of changes in interest and foreign exchange rates. All hedges are expected to be highly effective for this analysis and it considers the impact of all financial instruments, including financial derivatives, cash and cash equivalents, borrowings and other financial assets and liabilities. The results of the sensitivity analysis should not be considered as projections of likely future events, gains or losses as actual results in the future may differ materially due to developments in the global financial markets which may cause fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed in the table below. | | | | | | | --- | --- | --- | --- | --- | | | | | | | | | 0.5% | 0.5% | 10% | 10% | | | decrease in | increase in | weakening of | strengthening of | | | interest rates | interest rates | sterling | sterling | | | £ million | £ million | £ million | £ million | | 30 June 2022 | | | | | | | | | | | | Impact on income statement - | | | | | | gain/(loss) | 44 | (44) | 2 | (2) | | Impact on other comprehensive | | | | | | income - gain/(loss) | 18 | (17) | 41 | (33) | | | | | | | | 30 June 2021 | | | | | | | | | | | | Impact on income statement - | | | | | | gain/(loss) | 37 | (37) | 5 | (4) | | Impact on other comprehensive | | | | | | income - gain/(loss) | 10 | (9) | 17 | (14) | Impact on the statement of comprehensive income includes the impact on the income statement. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 30 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) (d) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the company. Credit risk arises on cash balances (including bank deposits and cash and cash equivalents), derivative financial instruments, trade and other receivables, loans, financial guarantees and committed transactions. The carrying amount of financial assets represents the company’s exposure to credit risk at the balance sheet date as disclosed in section (h), excluding the impact of any collateral held or other credit enhancements. A financial asset is in default when the counterparty fails to pay its contractual obligations. Financial assets are written-off when there is no reasonable expectation of recovery. The gross carrying amount of the financial asset has to be reduced (written-off) in case there is no reasonable expectation of recovering the contractual cash flows on the asset in its entirety or its portion only. Expected recovery of contractual cash flows is assessed individually, on instrumental basis. Credit risk is managed separately for financial and business related credit exposures. The credit risk impact of the Covid-19 pandemic has been assessed and considering the nature of the activity of the company, the assessment and mitigation actions taken on a group level are considered to be effective measures to ensure adequate level of liquidity. Financial credit risk The group aims to minimise its financial credit risk through the application of risk management policies approved and monitored by the Board. Counterparties are limited to major banks and financial institutions, primarily with a long-term credit rating within the A band or better, and the policy restricts the exposure to any one counterparty by setting credit limits taking into account the credit quality of the counterparty. The group’s policy is designed to ensure that individual counterparty limits are adhered to and that there are no significant concentrations of credit risk. The Board also defines the types of financial instruments which may be transacted. The credit risk arising through the use of financial instruments for currency and interest rate risk management is estimated with reference to the fair value of contracts with a positive value, rather than the notional amount of the instruments themselves. The group annually reviews the credit limits applied and regularly monitors the counterparties’ credit quality reflecting market credit conditions. When derivative transactions are undertaken with bank counterparties, the group way, where appropriate, enter into certain agreements with such bank counterparties whereby the parties agree to post cash collateral for the benefit of the other if the net valuations of the derivatives are above a predetermined threshold. Business related credit risk Since trade and other receivables principally include balances with fellow group undertakings, the risk of non-performance is considered remote. Under IFRS 9, the significant increase in credit risk of financing relationships with fellow group undertakings is determined based on the group’s internal credit rating assessment. The assessment practice takes into account as inputs the historical default of the financial instruments, currently available information about fellow group undertakings’ financial performance and forward-looking information. The total balance of trade and other receivables is qualified as performing in accordance with internal credit rating assessment. As a result of low risk Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 31 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) credit risk these financial assets have a very low risk of default (probability of default (PD)) and the 12- months expected credit loss is considered to be immaterial. (e) Liquidity risk Liquidity risk is the risk that the company may encounter difficulties in meeting its obligations associated with financial liabilities that are settled by delivering cash or other financial assets. The company uses short term commercial paper to finance its day-to-day operations. The group’s policy with regard to the expected maturity profile of borrowings is to limit the amount of such borrowings maturing within 12 months to 50% of gross borrowings less money market demand deposits, and the level of commercial paper to 30% of gross borrowings less money market demand deposits. In addition, the group’s policy is to maintain backstop facilities with relationship banks to support commercial paper obligations. The following tables provide an analysis of the anticipated contractual cash flows including interest payable for the company financial liabilities and derivative instruments on an undiscounted basis. Where interest payments are on a floating rate basis, rates of each cash flow until maturity of the instruments are calculated based on the forward yield curve prevailing at 30 June 2022 and 30 June 2021. The gross cash flows of cross currency swaps are presented for the purposes of this table. All other derivative contracts are presented on a net basis. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 32 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Contractual cash flows | | | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | | | | | | | | | | | | | | | | | | Carrying | | | | | Due | | Due | | | | | | amount | | | Due | | between | | between | | Due | | | | at balance | | | within 1 | | 1 and 3 | | 3 and 5 | | after 5 | | | | sheet | | | year | | years | | years | | years | | Total | | date^ | | | £ million | | £ million | | £ million | | £ million | | £ million | | £ million | | 2022 | | | | | | | | | | | | | Borrowings | (1,116) | | (909) | | (620) | | (3,595) | | (6,240) | | (5,997) | | Interest on borrowings | (173) | | (261) | | (225) | | (714) | | (1,373) | | (34) | | Trade and other financial | | | | | | | | | | | | | liabilities | (2,222) | | — | | — | | — | | (2,222) | | (2,222) | | Non derivative financial | | | | | | | | | | | | | liabilities | (3,511) | | (1,170) | | (845) | | (4,309) | | (9,835) | | (8,253) | | | | | | | | | | | | | | | Cross currency swaps (gross) | | | | | | | | | | | | | - Receivable | 851 | | 90 | | 90 | | 1,442 | | 2,473 | | — | | - Payable | (783) | | (56) | | (56) | | (958) | | (1,853) | | — | | Other derivative instruments (net) | 51 | | 36 | | (1) | | (20) | | 66 | | — | | | | | | | | | | | | | | | Derivative instruments | 119 | | 70 | | 33 | | 464 | | 686 | | 156 | | | | | | | | | | | | | | | 2021 | | | | | | | | | | | | | Borrowings | (13) | | (1,331) | | (972) | | (3,129) | | (5,445) | | (5,438) | | Interest on borrowings | (151) | | (270) | | (208) | | (717) | | (1,346) | | (28) | | Trade and other financial | | | | | | | | | | | | | liabilities | (2,189) | | — | | — | | — | | (2,189) | | (2,189) | | Non derivative financial | | | | | | | | | | | | | liabilities | (2,353) | | (1,601) | | (1,180) | | (3,846) | | (8,980) | | (7,655) | | | | | | | | | | | | | | | Cross currency swaps (gross) | | | | | | | | | | | | | - Receivable | 57 | | 780 | | 79 | | 1,294 | | 2,210 | | — | | - Payable | (41) | | (811) | | (56) | | (986) | | (1,894) | | — | | Other derivative instruments (net) | 28 | | 31 | | (4) | | (21) | | 34 | | — | | | | | | | | | | | | | | | Derivative instruments | 44 | | — | | 19 | | 287 | | 350 | | 183 | ^ Difference between total contractual cash flow amount and carrying amount at balance sheet date is due to the unamortized discount and fee balances and fair value adjustments of bonds in fair value hedge relationships. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 33 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) On 30 June 2022 the group had available undrawn committed bank facilities of £2,789 million (2021 - £2,518 million). The facilities can be used for general corporate purposes and, together with cash and cash equivalents, support the group’s commercial paper programmes. There are no financial covenants on either of the group’s or the company's material short- and long-term borrowings. Certain of these borrowings contain cross default provisions and negative pledges. The committed bank facilities are subject to a single financial covenant, being minimum interest cover ratio of two times (defined as the ratio of operating profit before exceptional items, aggregated with share of after tax results of associates and joint ventures, to net interest). They are also subject to pari passu ranking and negative pledge covenants. Any non-compliance with covenants underlying group’s financing arrangements could, if not waived, constitute an event of default with respect to any such arrangements, and any non- compliance with covenants may, in particular circumstances, lead to an acceleration of maturity on certain borrowings and the inability to access committed facilities. Both the group and the company were in full compliance with its financial, pari passu ranking and negative pledge covenants in respect of its material short- and long-term borrowings throughout each of the years presented. (f) Fair value measurements Fair value measurements of financial instruments are presented through the use of a three-level fair value hierarchy that prioritises the valuation techniques used in fair value calculations. The group and the company maintains policies and procedures to value instruments using the most relevant data available. If multiple inputs that fall into different levels of the hierarchy are used in the valuation of an instrument, the instrument is categorised on the basis of the most subjective input. Foreign currency forwards and swaps, cross currency swaps and interest rate swaps are valued using discounted cash flow techniques. These techniques incorporate inputs at levels 1 and 2, such as foreign exchange rates and interest rates. These market inputs are used in the discounted cash flow calculation incorporating the instrument’s term, notional amount and discount rate, and taking credit risk into account. As significant inputs to the valuation are observable in active markets, these instruments are categorised as level 2 in the hierarchy. There were no significant changes in the measurement and valuation techniques, or significant transfers between the levels of the financial assets and liabilities in the year ended 30 June 2022. The company’s financial assets and liabilities measured at fair value are categorised as follows: | | | | | | | --- | --- | --- | --- | --- | | | | | | | | | | 30 June 2022 | | 30 June 2021 | | | | £ million | | £ million | | Derivative assets | | 370 | | 298 | | Derivative liabilities | | (214) | | (115) | | | | | | | | Valuation techniques based on observable market input | | 156 | | 183 | | (Level 2) | | | | | Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 34 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) (g) Results of hedge relationships The company targets a one-to-one hedge ratio. Strengths of the economic relationship between the hedged item and the hedging instrument is analysed on an ongoing basis. Ineffectiveness can arise from subsequent change in the forecast transactions as a result of timing, cash flows or value except when the critical terms of the hedging instrument and hedged item are closely aligned. The change in the credit risk of the hedging instruments or the hedged items is not expected to be the primary factor in the economic relationship. The notional amounts, contractual maturities and rates of the hedging instruments designated in hedging relationship as of 30 June 2022 by the main risk categories are as follows: | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | | | | | Notional | | | Range of | | | | | amounts | | Maturity | hedged | | | | | £ million | | | rates | | 2022 | | | | | | | | | | | | | | | | Cash flow hedges | | | | | | | | Derivatives in cash flow hedge | | | 1,694 | | April 2023 - April 2043 | US dollar 1.22 - 1.88 | | (foreign currency debt) | | | | | | | | | | | | | | | | Fair value hedges | | | | | | | | Derivatives in fair value hedge | | | 2,769 | | April 2023 - April 2030 | 1.375 - 3.093% | | (interest rate risk) | | | | | | | | | | | | | | | | 2021 | | | | | | | | | | | | | | | | Cash flow hedges | | | | | | | | Derivatives in cash flow hedge | | | 1,475 | | April 2023 - April 2043 | US dollar 1.22 - 1.88 | | (foreign currency debt) | | | | | | | | | | | | | | | | Fair value hedges | | | | | | | | Derivatives in fair value hedge | | | 2,050 | | April 2023 - April 2030 | 1.375 - 3.093% | | (interest rate risk) | | | | | | | Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 35 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) With respect to hedges of the cash flow risk from a change in forward foreign exchange rates using cross currency interest rate swaps, the retranslation of the related bond principal to closing foreign exchange rates and recognition of interest on the related bonds will affect the income statement in each year until the related bonds mature in 2023, 2036, 2043. Foreign exchange retranslation and the interest on the hedged bonds in the income statement are expected to offset those on the cross currency swaps in each of the years. In respect of cash flow hedging instruments, a gain of £233 million (2021 - a loss of £298 million) has been recognised in other comprehensive income due to changes in fair value driven by movements in foreign exchange and interest rates. A gain of £239 million has been transferred out of comprehensive income to total finance charges (2021 - a loss of £175 million). | | | | | | | | --- | --- | --- | --- | --- | --- | | | | | | | | | | At the | | Consolidated | | | | | beginning | Income | comprehensive | | At the end | | | of the year | statement | income | Other | of the year | | | £ million | £ million | £ million | £ million | £ million | | 2022 | | | | | | | | | | | | | | Cash flow hedges | | | | | | | Derivatives in cash flow hedge (foreign currency debt) | 154 | 239 | (6) | (20) | 367 | | | | | | | | | Fair value hedges | | | | | | | Derivatives in fair value hedge (interest rate risk) | 29 | (241) | — | — | (212) | | Fair value hedge hedged item | (30) | 237 | — | — | 207 | | Instruments in fair value hedge relationship | (1) | (4) | — | — | (5) | | | | | | | | | 2021 | | | | | | | | | | | | | | Cash flow hedges | | | | | | | Derivatives in cash flow hedge (foreign currency debt) | 469 | (175) | (123) | (17) | 154 | | | | | | | | | Fair value hedges | | | | | | | Derivatives in fair value hedge (interest rate risk) | 132 | (103) | — | — | 29 | | Fair value hedge hedged item | (131) | 101 | — | — | (30) | | Instruments in fair value hedge relationship | 1 | (2) | — | — | (1) | Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 36 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) (h) Reconciliation of financial instruments The table below sets out the company’s accounting classification of each class of financial assets and liabilities. | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | | | Fair | | Not | | | | | | value | Assets and | categorised | | | | | | through | liabilities at | as a | | | | | | income | amortised | financial | | | Non- | | | statement | cost | instrument | Total | Current | current | | | £ million | £ million | £ million | £ million | £ million | £ million | | 2022 | | | | | | | | Trade and other | — | 8,228 | 1 | 8,229 | 92 | 8,137 | | receivables | | | | | | | | Intra-group derivatives | 367 | — | — | 367 | 43 | 324 | | in cash flow hedge | | | | | | | | Intra-group derivatives | 1 | — | — | 1 | — | 1 | | in fair value hedge | | | | | | | | Intra-group derivatives | 2 | — | — | 2 | 2 | — | | | | | | | | | | Total financial assets | 370 | 8,228 | 1 | 8,599 | 137 | 8,462 | | | | | | | | | | Borrowings | — | (5,997) | — | (5,997) | (1,113) | (4,884) | | Trade and other | — | (2,256) | — | (2,256) | (2,256) | — | | payables | | | | | | | | Intra-group derivatives | — | — | — | — | — | — | | in cash flow hedge | | | | | | | | Intra-group derivatives | (212) | — | — | (212) | — | (212) | | in fair value hedge | | | | | | | | Intra-group derivatives | (2) | — | — | (2) | (2) | — | | | | | | | | | | Total financial | | | | | | | | liabilities | (214) | (8,253) | — | (8,467) | (3,371) | (5,096) | | | | | | | | | | Total net financial | | | | | | | | assets/(liabilities) | 156 | (25) | 1 | 132 | (3,234) | 3,366 | Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 37 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) (h) Reconciliation of financial instruments (continued) | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | | | Fair | | Not | | | | | | value | Assets and | categorised | | | | | | through | liabilities at | as a | | | | | | income | amortised | financial | | | Non- | | | statement | cost | instrument | Total | Current | current | | | £ million | £ million | £ million | £ million | £ million | £ million | | 2021 | | | | | | | | Trade and other | — | 7,610 | 1 | 7,611 | 17 | 7,594 | | receivables | | | | | | | | Intra-group derivatives | 205 | — | — | 205 | — | 205 | | in cash flow hedge | | | | | | | | Intra-group derivatives | 72 | — | — | 72 | — | 72 | | in fair value hedge | | | | | | | | Intra-group derivatives | 21 | — | — | 21 | 3 | 18 | | not designated in a | | | | | | | | hedge relationship | | | | | | | | | | | | | | | | Total financial assets | 298 | 7,610 | 1 | 7,909 | 20 | 7,889 | | | | | | | | | | Borrowings | — | (5,438) | — | (5,438) | (13) | (5,425) | | Trade and other | — | (2,217) | — | (2,217) | (2,217) | — | | payables | | | | | | | | Intra-group derivatives | (51) | — | — | (51) | — | (51) | | in cash flow hedge | | | | | | | | Intra-group derivatives | (43) | — | — | (43) | — | (43) | | in fair value hedge | | | | | | | | Intra-group derivatives | (21) | — | — | (21) | (3) | (18) | | not designated in a | | | | | | | | hedge relationship | | | | | | | | | | | | | | | | Total financial | | | | | | | | liabilities | (115) | (7,655) | — | (7,770) | (2,233) | (5,537) | | | | | | | | | | Total net financial | | | | | | | | assets/(liabilities) | 183 | (45) | 1 | 139 | (2,213) | 2,352 | At 30 June 2022 and 30 June 2021, the carrying values of cash and cash equivalents, other financial assets and liabilities approximate to fair values. At 30 June 2022, the fair value of borrowings, based on unadjusted quoted market data (Level 1 sources as categorised by IFRS 13), was £5,880 million (2021 - £5,865 million). Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 38 NOTES TO THE FINANCIAL STATEMENTS (continued) 10.  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) (i) Capital management The group’s management is committed to enhancing shareholder value in the long term, both by investing in the businesses and brands so as to deliver continued improvement in the return from those investments and by managing the capital structure. The group manages its capital structure to achieve capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to debt markets at attractive cost levels. 11.  TRADE AND OTHER PAYABLES | | | | | --- | --- | --- | | | | | | | Year ended | Year ended | | | 30 June 2022 | 30 June 2021 | | | £ million | £ million | | Amounts owed to fellow group undertakings | 2,222 | 2,189 | | Interest payable | 34 | 28 | | | (2,256) | | | | 2,256 | 2,217 | Amounts owed to fellow group undertakings include accrued and capitalised interest on the underlying balances at 30 June 2022 and at 30 June 2021. These balances are repayable on demand and bear interest at fixed and variable rates from 0.0465% to 3.8175% for the year ended 30 June 2022 (2021 - from 0.0189% to 3.8175%). Amounts owed to fellow group undertakings represent transactions with companies in the group with which the company has a long-term financing relationship. These financing relationships are expected to continue for the foreseeable future. Amounts owed to group undertakings are considered to have a fair value which is not materially different to the book value. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 39 NOTES TO THE FINANCIAL STATEMENTS (continued) 12.  CALLED UP SHARE CAPITAL AND RESERVES (a) Share capital | | | | | --- | --- | --- | | | | | | | 30 June 2022 | 30 June 2021 | | | £ | £ | | Allotted, called up and fully paid: | | | | 200,000 (2020-200,000) ordinary shares of £1 each | 200,000 | 200,000 | (b) Hedging reserve | | | | | --- | --- | --- | | | | | | | | Hedging reserve | | | | £ million | | | | | | At 30 June 2020 | | 155 | | Effective portion of changes in fair value of cash flow hedges | | | | - losses taken to other comprehensive income | | (298) | | - recycled to income statement | | 175 | | Tax charge on effective portion of changes in fair value of cash flow hedge | | 19 | | | | | | At 30 June 2021 | | 51 | | Effective portion of changes in fair value of cash flow hedges | | | | - gains taken to other comprehensive income | | 233 | | - recycled to income statement | | (239) | | Tax charge on effective portion of changes in fair value of cash flow hedge | | 2 | | | | 2 | | At 30 June 2022 | | 47 | 13.  IMMEDIATE AND ULTIMATE PARENT UNDERTAKING The immediate and ultimate parent undertaking of the company is Diageo plc which is the ultimate controlling party of the group. The ultimate parent undertaking and the smallest and largest group to consolidate these financial statements is Diageo plc. Diageo plc is incorporated and registered in England, United Kingdom. The consolidated financial statements of Diageo plc can be obtained from the registered office at Diageo, 16 Great Marlborough Street, London, W1F 7HS, United Kingdom. 14. POST BALANCE SHEET EVENTS On 19 October 2022 Diageo Capital Plc issued $2.0 billion of SEC-registered bonds, consisting of $500 million 5.200% fixed rate notes due 2025; $750 million 5.300% fixed rate notes due 2027 and $750 million 5.500% fixed rate notes due 2033. Payment of principal and interest fully and unconditionally guaranteed by Diageo plc. Proceeds from this issuance will be used for general corporate purposes. Diageo Capital plc Registered number: SC040795 Year ended 30 June 2022 40