Imperial Brands PLC

Annual Report • Jan 16, 2024

Company Number: 03214426 IMPERIAL BRANDS FINANCE PLC Annual Report and Financial Statements 2023 Imperial Brands Finance PLC Board of Directors L J Paravicini M E Slade D M Tillekeratne Company Secretary J M Downing (resigned on 30 June 2023) E J Carey (appointed on 30 June 2023) Registered Office 121 Winterstoke Road Bristol BS3 2LL Independent Auditors Ernst & Young 1 More London Place London SE1 2AF 1 Imperial Brands Finance PLC Strategic Report For the year ended 30 September 2023 Principal activity and principal risks and uncertainties of the Company Global economic situation Climate Change LIBOR As a subsidiary of the Imperial Brands Group, the Company adheres to the Group's climate related strategy. The ESG review is discussed on pages 38 to 43 of the Imperial Brands Annual Report. Details of the climate-related financial disclosures consistent with the recommendations and disclosures of the Task Force on Climate-related Financial Disclosures (TCFD) are discussed on pages 70 to 81 of the Imperial Brands Annual Report. For this reason, the Company's Directors consider further detail of the assessment of climate related risks in this report is not necessary. Review of the business Following the announcement of the discontinuation of GBP LIBOR at the end of 2021 and US$ LIBOR discontinuation in 2023, the Company amended its bank facility agreement on 28 September 2021 to stop referencing GBP and US$ LIBOR and instead reference the daily risk free rates of SONIA and SOFR respectively. The Company amended all GBP LIBOR derivatives to reference the daily risk free rate of SONIA instead of GBP LIBOR and all US$ LIBOR derivatives were amended to reference the daily risk free rate of SOFR instead of US$ LIBOR. There are no changes pending for EUR derivatives. The policy is to ensure that we always have sufficient capital markets funding and committed bank facilities in place to meet foreseeable peak borrowing requirements of the Group. The Directors recognise that the current environment brings uncertainty due to global economic challenges including those caused by the situation in Russia and Ukraine, low global economic growth and inflationary pressure. However, the Group has effectively managed operations across the world, and has proved it has an established mechanism to operate efficiently despite the uncertainty caused. The profit for the financial year was £393 million (2022: loss of £29 million) and is stated after a release of £25 million (2022: charge of £116 million) arising on a decrease in the expected credit loss provision against the carrying value of certain loans made to entities within the Imperial Brands Group. The release of £25 million was largely due to a corporate restructure that reduced the loan receivable exposure, offset by increased exposures due to higher interest rates. The expected loss provision arises due to the assessment of credit risk associated with the future repayment of the loans. The decision to exit operations in Russia during the 2022 fiscal year has impacted the recoverability of one other intragroup loan, with the other provision relating to investments entities associated with Next Generation Products (NGP). The release of the provision is not tax allowable and therefore there is no associated tax credit. The Company repaid several bond issuances during the year. On 13 February 2023, $354 million (£292 million equivalent) 3.5% notes were Total equity as at 30 September 2023 was £2,677 million (2022: £2,284 million). The aggregate dividends on the ordinary shares recognised as a charge to shareholders' funds during the year amount to £nil million (2022: £nil million). The Directors present their Strategic Report together with the audited financial statements of Imperial Brands Finance PLC (the "Company") for the year ended 30 September 2023. The principal activity of the Company is to provide treasury services to Imperial Brands PLC and its subsidiaries (the "Group"). The Company is a wholly owned indirect subsidiary of Imperial Brands PLC, which is the ultimate parent company within the Group, and the Directors of the Group manage operations at a Group level. Given the nature of the Company's activities and that the overall management is within the Group framework, the Company's Directors believe that analysis using key performance indicators for the Company is not necessary or appropriate for an understanding of the development, performance or position of the business of the Company. The development, performance and position of the treasury operations of the Group, which includes the Company, are discussed in note 20 of the Imperial Brands PLC Annual Report ("Imperial Brands Annual Report") which does not form part of this report, but is available at www.imperialbrandsplc.com. Financial risk management disclosures can be found in note 13. The performance of the Company is dependent on external borrowings and intragroup loans payable and receivable and interest thereon, together with fair value gains and losses on derivative financial instruments. While the Company remains the principal financing entity for the Imperial Brands Group, another Group entity, Imperial Brands Financing Netherlands BV, incorporated in 2020, is also involved in Group financing activity. The Company, as the main financing and financial risk management company for the Group, undertakes transactions to manage the Group's financial risks, together with its financing and liquidity requirements. Financial risks comprise, but are not limited to, market, credit and liquidity risk. A summary of the Company's policies in respect of foreign exchange, interest, credit and liquidity risks is included in note 13. There is an ongoing risk that failure to maintain cash flows could impact the Group's and therefore the ability to pay down debt, impacting covenants, credit ratings, bank, bond, and investor confidence. In addition, a downgrade in our credit ratings would raise the cost of our existing committed funding and is likely to raise the cost of future funding and affect our ability to raise debt. However, the Group has a strong focus on cash generation supported by robust governance processes. Cash flows, financing requirements and key rating agency metrics are regularly forecasted and updated in line with performance and expectations to manage future financing needs and optimise cost and availability. The Company has investment grade credit ratings from the main credit rating agencies, which supports it to access financing in the global debt capital markets. 2 Imperial Brands Finance PLC On behalf of the Board L J Paravicini Director 13 December 2023 The Company is part of the Imperial Brands Group and is ultimately owned by Imperial Brands PLC. As set out above the Company's principal activities comprise undertaking transactions to manage the Group's financial risks, together with its financing and liquidity requirements. Under Section 172 (1) of the UK Companies Act 2006 and as part of the Directors' duty to the Company's shareholders to act as they consider most likely to promote the success of the Company, the Directors must have regard to the long term consequences of decisions and the desirability of maintaining a reputation for high standards of business conduct. The Directors must also have regard for business relationships with the Company's wider stakeholders, and the impact of the Company's operations on the environment and communities in which it operates. Consideration of these factors and other relevant matters is embedded into board decision making and risk assessments throughout the year. The Company's key stakeholders are financial institutions which it engages in relation to the Company's financial activities and those members of the Imperial Brands Group to which it provides finance-related services. Primary ways in which the Company engages with financial institutions are through meetings, ongoing dialogue and relationship management conducted by the Imperial Brands Group Treasury and Finance teams. There is regular engagement with Imperial Brands PLC on finance related matters, which is taken into account in the Company's decision making. Primary ways in which the Company engages directly or indirectly, as part of the Imperial Brands Group, with its key stakeholders are summarised at pages 32 to 36 of the Imperial Brands Annual Report. This enables the Directors to maintain an effective understanding of what matters to those stakeholders and to draw on these perspectives in Board decision making. During the decision making process the Directors are made aware of the impact of decisions on relevant stakeholders and engagement that has occurred with those stakeholders where applicable. In accordance with the Imperial Brands Group's overall governance and internal control framework and in support of the Company's purpose as part of the Imperial Brands Group, the Company applies and the Directors have regard to all applicable Imperial Brands Group policies and procedures, including the Group Statement of Delegated Authorities, standards of business conduct, health and safety and environmental policies. Where authority for decision making is delegated to management under the Group delegated authority rules, appropriate regard is given to the likely long term consequences of decisions, the imperative of maintaining high standards of business conduct, employees' interests, business relationships with wider stakeholders, the impact of business operations on the environment and communities, and other relevant factors. The Imperial Brands Group Statement of Delegated Authorities is part of the Imperial Brands Group's governance and internal control framework through which good corporate governance, risk management and internal control is promoted within the Imperial Brands Group and does not derogate from any requirement for Board review, oversight or approval in relation to the Company's activities. UK Companies Act: Section 172 (1) statement 3 Imperial Brands Finance PLC Report of the Directors Company Number: 03214426 For the year ended 30 September 2023 Principal activity and financial risk management Financial results and dividends The financial results of the Company for the year are outlined in the Strategic Report. The Directors do not recommend the payment of a final dividend for the year (2022: £nil million). Responsibility statements under the Disclosure and Transparency Rules Corporate governance Financial reporting Insurance Future outlook Board of Directors L J Paravicini M E Slade D M Tillekeratne give a true and fair view of the assets, liabilities, financial position and profit of the company, and Imperial Brands PLC has purchased Directors' and Officers' liability insurance that has been in force throughout the financial year and is currently in force. The Directors of the Company have the benefit of this insurance, which is a qualifying third party indemnity provision as defined by the Companies Act 2006. The business activity is expected to continue at levels similar to the current level. The Company will continue to manage the overall liquidity and financial risk management requirements of the Group as they change over time. The Company will manage the Group's financing requirement in combination with other Group entities where it is beneficial to the Group as a whole. The Directors submit their report together with the Strategic Report (on page 2) and the audited financial statements of the Company for the year ended 30 September 2023. As set out in the Strategic Report, the principal activity of the Company is to provide treasury services to the Group. The principal risks and uncertainties facing the Company are outlined in the Strategic Report, with the management of those risks discussed in note 13 to the financial statements. The Company is a wholly owned indirect subsidiary of Imperial Brands PLC and the Directors of the Group manage corporate governance at a Group level. The Group's statement on corporate governance can be found in the corporate governance report in the Imperial Brands Annual Report, which does not form part of this report, but is available at www.imperialbrandsplc.com. Consideration is given to the risk management policies of the Company included in note 13 to the financial statements. For this reason, the Company's Directors consider further detail of corporate governance in this report not necessary. Each of the directors confirm that to the best of their knowledge: The Company has in place internal control and risk management systems in relation to the financial reporting process and the process for the preparation of financial statements. These systems include clearly defined lines of accountability and delegation of authority, policies and procedures that cover financial planning and reporting, preparation of monthly management accounts, review of the disclosures within the report and accounts to ensure that the disclosures made appropriately reflect the developments within the Company in the year and meet the requirement of being fair, balanced and understandable. The above disclosures are made in accordance with the United Kingdom Listing Authority Disclosure and Transparency Rules Section 7.2.5, requiring disclosure of internal control and risk compliance systems. the position of the Company together with a description of the principal risks and uncertainties that it faces. 4 Imperial Brands Finance PLC Report of the Directors (continued) Company Number: 03214426 For the year ended 30 September 2023 Going concern Statement of Directors' responsibilities Disclosure of information to Auditors On behalf of the Board L J Paravicini Director 13 December 2023 The Directors are responsible for preparing the Strategic Report, the Report of the Directors and the financial statements in accordance with applicable law and regulations. Each of the Directors in office as of the date of approval of this report confirms that: The Company has been issued a support letter from its parent company, Imperial Brands PLC, confirming ongoing financial support in meeting liabilities as they fall due from the date of approval of these financial statements to 31 December 2024. Imperial Brands PLC has evaluated its ability to continue as a going concern until 31 March 2025. This evaluation is an extension to the previous assessment that was audited and reported on page 182 of the Imperial Brands Annual Report for the year ended 30 September 2023. The Directors are therefore satisfied there are no uncertainties relating to going concern, and accordingly the Directors considered it appropriate to rely upon this support in making their going concern assessment for these financial statements. The Directors are satisfied that the Company has adequate resources to meet its operational needs from the date of this report through to 31 December 2024 and, therefore concludes that it is appropriate to prepare the financial statements on a going concern basis. disclosed and explained in the financial statements; and The Directors are 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. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. information and to establish that the Company's Auditors are aware of that information. them consistently; 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 Disclosure and applicable law). Under company law, the 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 these financial statements, the Directors are required to: 5 Imperial Brands Finance PLC Independent auditor's report to the members of Imperial Brands Finance PLC Opinion In our opinion, the financial statements: Basis for opinion We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the ability to continue as a going concern. sensitivities included the impact of certain severe but plausible scenarios identified in other areas of our audit, including litigation and tax, materialising within the going concern period; and, - evaluating the amount and timing of identified mitigating actions available to respond to a severe but plausible downside scenario, and whether In auditing the financial statements, we have concluded that the use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the assessment of the ability to continue to adopt the going concern basis of accounting included the following procedures: - reviewing the terms of the letter of support provided to the Company and checking if any caveats or conditions have been included by the Group; - verifying inputs against the board-approved business plan, cash flow forecasts and debt facility terms, and reconciling the opening liquidity position to the prior year end assessment; - reviewing borrowing facilities to confirm both their availability to the Group and the forecast debt repayments through the going concern assessment period and to validate that there are only two financial covenants in relation to the revolving credit facility; other areas of the audit, such as our audit procedures on the business plan and cash flow forecasts; - testing the assessment, including forecast liquidity under base and downside scenarios, for clerical accuracy; relevant principal risks and uncertainties and our own independent assessment of those risks; We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the responsibilities for the audit of the financial statements section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. factors were taken into account. knowledge arising from other areas of the audit. evaluation of the ability of the Group to provide the support included the following procedures: We have audited the financial statements of Imperial Brands Finance Plc for the year ended 30 September 2023 which comprise Income Statement, the Balance Sheet, the statement of changes in equity and the related notes 1 to 19 including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards liquidity or financial covenants and whether the reduction in EBITDA that result in breaches to liquidity or financial covenants has no more than a remote possibility of occurring. 6 Imperial Brands Finance PLC Overview of our audit approach Key audit matters Materiality An overview of the scope of our audit Tailoring the scope Climate Change Key audit matters Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for the company. This enables us to form an opinion on the financial statements. We take into account size, risk profile, the organisation of the company and effectiveness of controls, the potential impact of climate change and changes in the business environment when assessing the level of work to be performed. All audit work was performed directly by the audit engagement team. There has been increasing interest from stakeholders as to how climate change will impact Imperial Brands Finance plc. The company has determined that there will be no material future impacts from climate change on its operations. This is explained on page 2 in the strategic report which forms part of the rather than the audited financial statements. Our procedures on these unaudited disclosures therefore consisted solely of considering whether they are materially inconsistent with the financial statements, or our knowledge obtained in the course of the audit, or otherwise appear to be materially misstated, in line with our responsibilities on as well as assessing management considerations related to material climate change impacts in the going concern period and ability to provide the support to the company. Our audit effort in considering climate change was focused on evaluating assessment that there is no impact of climate change risk, both physical and transition, and ensuring that the effect of material climate risks have been appropriately reflected. We also challenged the Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters. Key observations communicated to the directors Risk Valuation of derivative financial instruments (£53m net liabilities, 2022: £86m net liabilities) Our response to the risk In order to assess the valuation of derivative financial instruments, our audit procedures included: There is a heightened risk of error in the valuation of the derivative financial instruments due to the judgments used in fair value measurement. a) an independent valuation of a sample of the derivative instruments, b) an assessment of the classification of the derivatives, c) an audit of the credit risk adjustment and its movement throughout the period, and d) an assessment of the accounting treatment under IFRS with derivatives being treated at fair value through profit and loss. statements for consistency with the findings of our audit procedures, including a description of the assumptions used in calculating this estimate. derivative counterparties. counterparties confirming the existence of derivative instruments outstanding at the balance sheet date. Refer to the Strategic Report (page 2); Accounting policies (page 14); Note 3 to the financial statements (page 16); and Note 13 of the financial statements (page 20) The company has a portfolio of derivatives including a range of instruments with differing maturity dates, some of which are over five years. The derivatives are reported at their fair value in accordance with IFRS 9 requirements. The fair values are determined based on observable market data such as yield curves and foreign exchange rates to calculate the present value of future cash flows associated with each derivative at the balance sheet date. We concluded that derivative financial instruments are fairly stated at 30 September 2023. This amount was calculated based on interim balances. Our reassessment of materiality using the final year end balances did not result in the performance of any additional audit procedures. Based on our work we have not identified the impact of climate change on the financial statements to be a key audit matter or to impact a key audit matter. management for derivatives valuation and walking through the controls over the process. 7 Imperial Brands Finance PLC Materiality We determined materiality for the company to be £32.6 million (2022: £22.8 million), which is 1.2% (2022: 1%) of net assets. We believe that net The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. Refer to the Strategic Report (page 2); Accounting policies (page 14); Note 3 to the financial statements (page 16); and Note 10 to the Financial Statements (page 18) Under IFRS 9 management is required, at each reporting date, to assess whether the financial instruments are credit impaired using the ECL model. This assessment involves recognition of provisions relating to potential future impairments, in addition to impairments that have already occurred. There is a risk that the ECL provision is misstated given the subjectivity involved in estimating potential future impairments. management to perform the ECL provision assessment, including the evaluation of operational factors impacting the assumptions used by management to determine the probability of default and loss given default in case of default of each of the assess the recoverability of loan receivables. reference to, among other things, the nature of the entity (Tobacco or NGP), its operating performance and the presence of guarantee letters provided to the counterparties. key input assumptions by: performance. - Comparing the net asset/liability position of the counterparties as at 30 September 2023 to the loss given default used in the calculation. assess the recoverability of loan receivables through the current performance of those receivables. statements for consistency with the findings of our audit procedures, including a description of the methodology used in calculating this estimate. On the basis of our risk assessments, together with our assessment of the overall control environment, our judgement was that performance materiality was 75% (2022: 75%) of our planning materiality, namely £24.4m (2022: £17.1m). We have set performance materiality at this percentage due to a reduced expectation of material misstatements. Performance materiality Our application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. Risk Our response to the risk Valuation of ECL provision for intercompany loan receivables (£583m, 2022: £608m) In order to assess the recoverability of intercompany loan receivables, our audit procedures included, among others: We concluded that the expected credit loss provision is fairly stated at 30 September 2023. Key observations communicated to the directors The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. 8 Imperial Brands Finance PLC Reporting threshold We have nothing to report in this regard. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: Matters on which we are required to report by exception Responsibilities of directors As explained more fully in the responsibilities statement set out on page 5, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Other information Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £1.63m (2022: £1.14m), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: The other information comprises the information included in the annual report, other than the financial statements and our report thereon. The directors are responsible for the other information contained with the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. consistent with the financial statements; and In preparing the financial statements, the directors are responsible for assessing the ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so. An amount below which identified misstatements are considered as being clearly trivial. 9 Imperial Brands Finance PLC o FRS101 and the Companies Act 2006 o Tax legislation (Governed by HM Revenue and Customs) Use of our report A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting website at Other matters we are required to address financial statements for the year ending 30 September 2020 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is 4 years, covering the years ending 30 September 2020 to 30 September 2023. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the company and management. enquiries of senior management and evaluating fraud risk factors arising from our understanding of the company and its environment. We planned our audit to identify risks of management override, tested higher risk journal entries and performed audit procedures to address the potential for management bias, particularly over areas involving significant estimation and judgment. significant are: internal audit regarding known instances of non-compliance or suspected non-compliance with laws and regulations. We designed our audit procedures to identify non-compliance with such laws and regulations identified in the paragraph above. As well as enquiry and attendance at minutes to identify any non-compliance with laws and regulations. Our procedures also involved journal entry testing, with a focus on journals meeting our defined risk criteria based on our understanding of the business. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. management meeting minutes. We also completed procedures to conclude on the compliance of significant disclosures in the Annual Report and Financial Statements with the requirements of the relevant accounting standards and UK legislation. Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud company in conducting the audit. Bilal Raja (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 14 December 2023 This report is made solely to the members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the members those matters we are required to state to them in an report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and 10 Imperial Brands Finance PLC Income Statement For the year ended 30 September 2023 (In £ million) Notes 2023 2022 Administrative expenses (4) (3) Impairment gain/(loss) 10 25 (245) Other operating income 1 1 Operating profit/(loss) 4 22 (247) Investment income 5 2,671 2,888 Finance costs 6 (2,194) (2,618) Profit before tax 499 23 Tax on profit 8 (106) (52) Profit/(loss) for the financial year 393 (29) The Company has no other comprehensive income other than that included above and, therefore, a separate statement of comprehensive income has not been presented. 11 Imperial Brands Finance PLC Balance Sheet as at 30 September 2023 (In £ million) Notes 2023 2022 Non-current assets Other receivables 10 - 44 Derivative financial instruments 14 824 985 824 1,029 Current assets Other receivables 10 28,624 28,846 Cash and cash equivalents 681 1,161 Derivative financial instruments 14 126 54 29,431 30,061 Total assets 30,255 31,090 Current liabilities Borrowings 12 (1,450) (985) Derivative financial instruments 14 (174) (54) Other payables 11 (17,245) (17,704) (18,869) (18,743) Non-current liabilities Borrowings 12 (6,178) (8,110) Derivative financial instruments 14 (829) (1,071) Other payables 11 (1,702) (882) (8,709) (10,063) Total liabilities (27,578) (28,806) Net assets 2,677 2,284 Equity Share capital 15 2,100 2,100 Retained earnings 577 184 Total equity 2,677 2,284 L J Paravicini Director D M Tillekeratne Director Company Number: 03214426 The financial statements on pages 11 to 26 were approved by the Board of Directors on 13 December 2023 and signed on its behalf by: 12 Imperial Brands Finance PLC Statement of Changes in Equity For the year ended 30 September 2023 (In £ million) Notes Share capital Retained earnings Total equity At 1 October 2022 2,100 184 2,284 Total comprehensive income Profit for the financial year - 393 393 Total comprehensive income for the year - 393 393 At 30 September 2023 2,100 577 2,677 (In £ million) Notes Share capital Retained earnings Total equity At 1 October 2021 2,100 213 2,313 Total comprehensive income Loss for the financial year - (29) (29) Total comprehensive income for the year - (29) (29) At 30 September 2022 2,100 184 2,284 13 Imperial Brands Finance PLC Notes to the Financial Statements For the year ended 30 September 2023 1. Authorisation of financial statements and statement of compliance with FRS101 2. Accounting policies Basis of preparation of financial statements a) the requirement in paragraph 38 of IAS 1 Presentation of Financial Statements to present comparative information in respect of paragraph 79(a)(iv) of IAS 1 Presentation of Financial Statements. b) the requirements of paragraphs 10(d) and 10(f) of IAS 1 Presentation of Financial Statements. c) the requirements of IAS 7 Statement of Cash Flows. d) the requirements of paragraph 17 of IAS 24 Related Party Disclosures. e) the requirements in IAS 24 Related Party Disclosures to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member. There are a number of other amendments and clarifications to IFRS, effective in future years. None of which are expected to significantly impact Amendment to IAS 1 - Non-current liabilities with covenants: Under the amendments to IAS 1 Presentation of Financial Statements the classification of certain liabilities as current or non-current may change. This is not expected to impact the Company's results and will only require additional disclosures for liabilities subject to covenants. The amendments will be effective for accounting periods beginning on or after 1 January 2024. The preparation of financial statements in conformity with FRS 101 requires the use of certain critical accounting estimates and judgements in applying the Company's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3. Accounting standards and interpretations not yet in issue Amendments to IFRS 9, IAS 39 and IFRS 7 Interest rate benchmark reform (phase 2) effective from 1 October 2021. Following the announcement of the discontinuation of GBP LIBOR at the end of 2021 and US$ LIBOR discontinuation in 2023, the Company amended its bank facility agreement on 28 September 2021 to stop referencing GBP and US$ LIBOR and instead reference the daily risk free rates of SONIA and SOFR respectively. The Company amended all GBP LIBOR derivatives to reference the daily risk free rate of SONIA instead of GBP LIBOR and all US$ LIBOR derivatives were amended to reference the daily risk free rate of SOFR instead of US$ LIBOR. There are no changes pending for EUR derivatives. There has been no material impact on the Company's results for the year as a result of these changes. These financial statements have been prepared on the going concern basis and in accordance with the United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law) including the Companies Act 2006 and FRS 101. The Company has been issued a support letter from its parent company, Imperial Brands PLC, confirming ongoing financial support in meeting liabilities as they fall due from the date of approval of these financial statements to 31 December 2024. Imperial Brands PLC has evaluated its ability to continue as a going concern until 31 March 2025. This evaluation is an extension to the previous assessment that was audited and reported on page 182 of the Imperial Brands Annual Report for the year ended 30 September 2023. The Directors are therefore satisfied there are no uncertainties relating to going concern, and accordingly the Directors considered it appropriate to rely upon this support in making their going concern assessment for these financial statements. The Directors are satisfied that the Company has adequate resources to meet its operational needs from the date of this report through to 31 December 2024 and, therefore concludes that it is appropriate to prepare the financial statements on a going concern basis. The financial statements are presented in pounds sterling, its functional currency, and all values are rounded to the nearest million pounds (£ million) except when otherwise indicated. The financial statements of the Company for the year ended 30 September 2023 were authorised for issue by the Board of Directors on 13 New accounting standards and interpretations From 1 October 2021, as a result of the UK leaving the European Union, the Company has been required to prepare financial statements in line with FRS 101 applying applicable international accounting standards, issued by the IASB or International Financial Reporting Interpretations The principal activity of the Company is to provide treasury services to the Group. The Company is a public limited company incorporated and domiciled in England and Wales. The registered address is 121 Winterstoke Road, Bristol, BS3 2LL. The Company is classified as a financial institution as defined by FRS 101. The principal accounting policies adopted by the Company are set out in note 2. The Company has taken advantage of the following disclosure exemptions under FRS 101 on the basis that the disclosures are available within the consolidated financial statements of the ultimate parent company, which is Imperial Brands Plc. The disclosures may be found via the investor relations section of the Imperial Brands PLC website at www.imperialbrandsplc.com/investors. The financial statements have been prepared on an amortised cost or fair value basis as described in the accounting policies on financial instruments below. 14 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 2. Accounting policies (continued) Interest Taxes Dividends Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the relevant instrument. Financial assets are de-recognised when the rights to receive benefits have expired or been transferred, and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are de-recognised when the obligation is extinguished. Non-derivative financial liabilities are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method under a hold to collect business model. For borrowings, the carrying value includes accrued interest payable, as well as unamortised transaction costs. Cash and cash equivalents include cash in hand and deposits held on call, together with other short-term highly liquid investments. Final dividends are recognised as a liability in the period in which the dividends are approved by shareholders, whereas interim dividends are recognised in the period in which the dividends are paid. The calculation of impairment provisions is subject to an expected credit loss model, involving a prediction of future credit losses based on past loss patterns. The approach involves the recognition of provisions relating to potential future impairments, in addition to impairments that have already occurred. The expected credit loss approach involves modelling of historic loss rates (where applicable) and consideration of the level of future credit risk. Expected loss rates are then applied to the gross receivables balance to calculate the impairment provision. Receivables held under a hold to collect business model are stated at amortised cost. Deferred tax is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax is measured on a non-discounted basis. The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in shareholders' funds. In this case, the tax is also recognised in other comprehensive income or directly in the shareholders' funds, respectively. The principal activity of the Company is to provide treasury services to the Group. However, the Company has chosen to present interest receivable and payable below operating profit, including foreign exchange gains and losses on financing activities, in order to have a consistent treatment with the format of the consolidated financial statements of the Group. This is considered appropriate since the Company undertakes transactions on behalf of the Group. Interest payable and receivable is recognised in the income statement using the effective interest method. Foreign currencies Financial instruments Monetary assets and liabilities denominated in foreign currencies are translated into pound sterling at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than pound sterling are initially recorded at the exchange rate ruling at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions are taken to the income statement. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. A net deferred tax asset is recognised only to the extent that it is probable that future taxable profit will be available against which the asset can be utilised. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous periods. 15 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 2. Accounting policies (continued) Financial instruments (continued) Derivatives 4. Operating profit 5. Investment income (In £ million) 2023 2022 Interest receivable from Group undertakings 1,328 487 Interest on bank deposits 6 3 Exchange gains on monetary assets and liabilities 630 - Fair value gains on external derivative financial instruments 707 1,483 Fair value gains on intragroup derivative financial instruments - 915 2,671 2,888 An expected credit loss provision has been recognised against the carrying value of certain trade and other receivables. The provision is a reduction in the carrying value of the asset involved reflecting an assessment of the level of risk that future repayment may default. The loans receivable involved are all loans made to entities within the Imperial Brands Group. The provision has been calculated based on the size of the loan, the probability of default (measured through credit default rates or expected future cashflows) and the loss estimated to arise if a default occurred (considered with regard to the value of the realisable assets of the counterparty). The probability of default rates used vary from 1% up to 100% (2022: 1% up to 100%). The loss given default rates ranged from nil up to 100% (2022: nil up to 100%) for certain entities where the counterparty has insufficient assets that could be realised to repay the loan. All intergroup loans continue to perform at present, are not in default and operate within their loan limits. 3. Critical accounting estimates and assumptions The fair value of derivatives are determined based on observable market data such as yield curves, foreign exchange rates and credit default swap prices to calculate the present value of future cash flows associated with each derivative at the balance sheet date. Those techniques are significantly affected by the assumptions used, including discount rates, estimates of future cash flows, exchange rates and interest rates. The valuation of derivatives is subject to changes in the underlying assumptions used by financial markets in valuing financial instruments. The impact of changes in these assumptions can be significant resulting in volatility in valuations. Further information as to the sensitivity of valuations is disclosed in note 13. There may be circumstances where intragroup guarantees are in place where a Group company accepts the credit risk associated with an intergroup loan between the Company and a further third Group entity. These guarantees are evaluated in terms of their effect on the level of credit risk retained by the Company and therefore the total amount of the expected credit loss provision. Further information as to the sensitivity of expected credit loss risk is disclosed in note 13, B) credit risk. Expected credit loss on other receivables The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below. There were no critical judgements involved in the preparation of these financial statements. The Company transacts both intragroup and external derivative financial instruments to manage the Company's and the Group's underlying exposure to foreign exchange and interest rate risks. The Company does not transact derivative financial instruments for trading purposes. Derivative financial instruments are initially recorded at fair value. Derivative financial assets and liabilities are included in the balance sheet at fair value, and include accrued interest receivable and payable where relevant. The Company has decided (as permitted under FRS 101) not to hedge account for its derivative financial instruments and so changes in fair values are recognised in the income statement in the period in which they arise. Collateral transferred under the terms and conditions of a credit support annex document under an International Swaps and Derivatives Association ("ISDA") agreement in respect of one derivative is net settled and is, therefore, netted off the carrying value of the derivative in the balance sheet. The categorisation within the fair value hierarchy (i.e. level 1, 2 or 3) of the inputs to the fair value measurements of derivatives carried at fair value is set out in note 13. The operating profit includes a release of an expected credit loss provision on loans receivable of £25 million (2022: charge of £116 million). The operating loss in the previous financial year included a loan waiver of £129 million on disposal of the Group's Russian business. There was no such charge in the financial year ended 30 September 2023. It is stated after charging fees of £194,913 (2022: £170,798) which were met by Imperial Tobacco Limited ("ITL"), a wholly owned indirect subsidiary of Imperial Brands PLC. There were non-audit fees of £29,000 paid during the year (2022: £50,000). The Company has also been recharged office rental costs from another Group company of £30,960 (2022: £30,960). 16 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 6. Finance costs (In £ million) 2023 2022 Interest payable to Group undertakings 607 125 Interest on bank loans and other loans 349 297 Exchange losses on monetary assets and liabilities - 983 Fair value losses on external derivative financial instruments 568 1,213 670 - 2,194 2,618 7. Directors and employees Employment costs 8. Tax on profit Analysis of charge in the year: (In £ million) 2023 2022 UK Corporation tax on profit for the year 106 51 Withholding tax 1 1 Double taxation relief (2) (1) Adjustments in respect of prior years 1 1 Current tax 106 52 Total tax charge 106 52 (In £ million) 2023 2022 Profit before taxation 499 23 Profit before taxation multiplied by standard rate of corporation tax in the UK of 22% (2022: 19%) 110 4 Effects of: Non-deductible expected credit loss provision (credit)/charge (6) 47 Adjustments to tax charge in respect of prior years (current tax) 1 1 Transfer pricing adjustment 1 - Total tax charge 106 52 Movement on current tax account (In £ million) 2023 2022 At 1 October 111 93 Charged to the income statement - current year 106 52 Cash paid (112) (34) At 30 September 105 111 9. Dividends No dividend is proposed for the current year (2022: nil) Tax for the year is higher than (2022: higher than) the standard rate of corporation tax in the UK for the year of 22% (2022: 19%). The corporation tax charge has not been adjusted (2022: has not been adjusted) as the Company paid consideration of £53 million for group relief claimed (2022: £52 million) from other Imperial Brands PLC group subsidiaries. The differences are explained as follows: The Finance Act 2021 received Royal Assent on 10th June 2021, which confirmed that the main rate for UK corporation tax rate will increase to 25% with effect from 1st April 2023. Fair value losses on intragroup derivative financial instruments The emoluments of the Directors are paid by ITL. The Directors' services to the Company and to a number of fellow subsidiaries below the ultimate parent company are of a non-executive nature and their emoluments and retirement benefits are deemed to be wholly attributable to their services to ITL and the Group. Services directly attributable to the Company are a negligible proportion of those provided to the Group, accordingly no emoluments or retirement benefits are disclosed in these financial statements. Employment costs, which do not include pension costs, are paid by ITL and subsequently recharged to the Company. The total salary costs recharged in the year of £766,603 (2022: £896,196) and social security costs of £77,059 (2022: £96,012) are recognised within administrative expenses in the income statement. The average monthly number of employees during the year was 11 (2022: 10). Factors that may affect future tax charges The current year tax rate of 22% arises from profits being taxed at 22% for the year to 30 September 2023. 17 Imperial Brands Finance PLC Notes to the Financial Statements (continued) - - For the year ended 30 September 2023 10. Other receivables 2023 2022 (In £ million) Current Non-current Current Non-current Amounts owed by Group undertakings 28,610 - 28,840 44 Other receivables and prepayments 14 - 6 - 28,624 - 28,846 44 Gross amount ECL allowance Net balance 28,401 - 28,401 792 583 209 29,193 583 28,610 Gross amount ECL allowance Net balance 28,586 - 28,586 906 608 298 29,492 608 28,884 11. Other payables 2023 2022 (In £ million) Current Non-current Current Non-current Amounts owed to Group undertakings 17,140 1,702 17,593 882 Corporation tax payable 105 - 111 - 17,245 1,702 17,704 882 Loan receivable balances that are impaired 2023 Amounts owed to Group undertakings are unsecured, both interest bearing and non-interest bearing and repayable on a future date to be mutually agreed between the Company and the counterparty lender (treated as a current liability). There were £18,841 million (2022: £16,744 million) of interest bearing loans and £1 million (2022: £1,731 million) of non-interest bearing loans. Where loans were subject to interest the rates charged varied from 0.245% to 13.750% (2022: 0.245% to 13.750%). Loan receivable balances that are not impaired Amounts owed by Group undertakings are unsecured, both interest bearing and non-interest bearing and can be either repayable on a future date to be mutually agreed between the Company and the counterparty borrower or have fixed repayment dates. At 30 September 2023 £25,450 million (2022: £25,619 million) of the amounts owed by Group undertakings were repayable on a mutually agreed future date (treated as a current receivable) and £3,160 million (2022: £3,221 million) were term loans treated as current receivables and £nil million (2022: £44 million) were term loans treated as non-current receivables. There were £28,584 million (2022: £28,192 million) of interest bearing loans and £26 million (2022: £692 million) of non-interest bearing loans. Where loans were subject to interest the rates charged varied from 0.53% to 10.335% (2022: 0.125% to 7.5%). The Directors have assessed the extent to which amounts owed by the Group companies are impaired. For those balances that are neither overdue nor impaired the Directors have concluded that the expected credit losses (ECL) that are possible from default events over the next twelve months are immaterial and consequently no allowance for impairment has been recognised. For those balances assessed to be impaired, an expected credit loss adjustment of £583 million (2022: £608 million) has been recognised to reflect the credit risk inherent within a number of the current intercompany loans receivable, as follows: 2022 Loan receivable balances that are not impaired Loan receivable balances that are impaired Amounts owed to Group undertakings are not included in the borrowings analysis in note 12 of the financial statements which only includes borrowings with external counterparties. 18 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 12. Borrowings (In £ million) 2023 2022 Bank loans and overdrafts - - Capital market issuance: $354m 3.5% notes due February 2023 - 322 - 663 £600m 8.125% notes due March 2024 627 - $1,000m 3.125% notes due July 2024 823 - Total current borrowings 1,450 985 Bank loans 8 5 Capital market issuance: £600m 8.125% notes due March 2024 - 626 $1,000m 3.125% notes due July 2024 - 910 437 445 $1,500m 4.25% notes due July 2025 1,236 1,366 574 584 $750m 3.5% notes due July 2026 617 682 £500m 5.5% notes due September 2026 500 500 657 670 $1,000m 6.125% notes due July 2027 822 908 $1,000m 3.875% notes due July 2029 822 909 £500m 4.875% notes due June 2032 505 505 Total non-current borrowings 6,178 8,110 Total borrowings 7,628 9,095 Analysed as: Capital market issuance 7,620 9,090 Bank loans and overdrafts 8 5 Net Net derivative derivative Borrowings financial Borrowings financial and (assets)/ and (assets)/ (In £ million) overdrafts liabilities Total overdrafts liabilities Total Amounts expiring: Between one and two years 1,672 (38) 1,634 1,533 18 1,551 Between two and five years 3,171 126 3,297 5,156 147 5,303 In five years or more 1,335 (83) 1,252 1,421 (79) 1,342 6,178 5 6,183 8,110 86 8,196 2023 The maturity profile of non-current financial liabilities outstanding as at 30 September 2023 (including the impact of derivative financial instruments detailed in note 14) is as follows: Current and non-current borrowings include interest payable of £31 million (2022: £3 million) and £61 million (2022: £96 million) respectively as at 30 September 2023. On 13 February 2023, $354 million (£292 million equivalent) 3.5% notes were repaid. On 14 August 2023, million (£646 million equivalent) 1.125% notes were repaid. Non-current financial liabilities 2022 Current borrowings Non-current borrowings All borrowings are unsecured and the Company has not defaulted on any during the year (2022: no defaults). Interest payable on capital market issuances are at fixed rates of interest and interest payable on bank loans and overdrafts are at floating rates of interest. All capital market issuances are listed on the London Stock Exchange. The Company's borrowings are held at amortised cost as follows: 19 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 12. Borrowings (continued) Fair value of borrowings Balance sheet Fair Balance sheet Fair (In £ million) amount value amount value GBP 1,524 1,457 EUR 1,573 2,189 USD 4,097 4,768 Total capital market issuance 7,194 8,414 (In £ million) 2023 2022 Amounts expiring: In less than one year 550 - Between one and two years 159 - Between two and five years 2,866 3,091 3,575 3,091 13. Financial risk management Overview (a) Market risk Price risk Translation risk The Company, as the main financing and financial risk management company for the Group, undertakes transactions to manage the Group's financial risks, together with its financing and liquidity requirements. As a result, the Company is exposed to risks including, but not limited to, market, credit and liquidity risk. This note explains the Company's exposure to these risks, how they are measured and assessed, and summarises the policies and processes used to manage them, including those related to the management of capital. The Company is not exposed to equity securities price risk. 9,090 4,320 5,096 Undrawn borrowing facilities The Company's management of financial risks cover the following: At 30 September the Company had the following undrawn committed facilities: The Company has translation risk on cash, borrowings, derivatives and intragroup loans held in non-functional currencies. The Company enters into intragroup derivative contracts to manage some of the Company's exposure to exchange rate movements. 7,620 The Company issues debt in the most appropriate market or markets at the time of raising new finance and has a policy of using derivative financial instruments, cross currency swaps, to change the currency of debt as required. Management of the Company's foreign exchange translation risk is addressed below. The Company is exposed to movements in foreign exchange rates due to the translation of balance sheet items held in non-functional currencies. The Company's financial results are principally exposed to fluctuations in euro and US dollar exchange rates. The Board of Directors of Imperial Brands PLC reviews and approves all major Treasury decisions. The treasury function does not operate as a profit centre, nor does it enter into speculative transactions. Foreign exchange risk 2023 2022 1,632 1,631 1,668 2,363 The Group's treasury activities are overseen by the Treasury Committee, which meets four times a year and comprises the Chief Financial Officer, the Director of Treasury, the Group Finance Director, the Chief Legal and Corporate Affairs Officer, the Chief Strategy and Development Officer and three Group Regional Finance Directors. The Treasury Committee operates in accordance with the terms of reference set out by the Board and a policy (the Treasury Operations policy) which sets out the expectations and boundaries to assist in the effective oversight of treasury activities. The fair value of borrowings as at 30 September 2023 is estimated to be £7,203 million (2022: £8,419 million). £7,194 million (2022: £8,414 million) relates to capital market issuance and has been determined by reference to market prices as at the balance sheet date. A comparison of the carrying amount and fair value of capital market issuance by currency is provided below. The fair value of all other borrowings is considered to equal their carrying amount. During the year three new bilateral facilities for a total £550 million, all maturing in September 2024, were arranged. 20 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 13. Financial risk management (continued) Foreign exchange sensitivity analysis 2023 2022 (In £ million) (Decrease) in income (Decrease)/ increase in income Income Statement impact on non-functional currency foreign exchange exposures: 10% appreciation of Sterling against Euro (2022: 10%) (14) (33) 10% appreciation of Sterling against US dollar (2022: 10%) (15) 40 Interest rate risk 2023 2022 (In £ million) Change in income Change in income Income Statement impact of interest rate movements: +/- 1% increase in euro interest rates (2022: 1%) 12 9 +/- 1% increase in US dollar interest rates (2022: 1%) (9) (4) (b) Credit risk An equivalent depreciation of Sterling against the above currencies would cause an increase in income of £18 million and £19 million for euro and US dollar exchange rates respectively (2022: decrease of £40 million and £48 million respectively). The Company's interest rate risk arises from its borrowings net of cash and cash equivalents, with the primary exposures arising from fluctuations in euro and US dollar interest rates. Borrowings at variable rates expose the Company to cash flow interest rate risk. Borrowings at fixed rates expose the Company to fair value interest rate risk. There is no direct net impact on equity (2022: £nil). The Company's sensitivity to foreign exchange rate movements, which impacts the translation of monetary items held by the Company in currencies other than its functional currency, is illustrated on an indicative basis below. The sensitivity analysis has been prepared on the basis that the proportion of cash, borrowings, derivatives and intragroup loans held in non-functional currencies remains constant. The Company manages its sensitivity to foreign exchange rates through the use of intragroup derivative contracts to reduce foreign exchange gains or losses on the translation of financial instruments. The sensitivity analysis does not reflect any change to non-finance costs that may result from changing exchange rates and ignores any taxation implications and offsetting effects of movements in the fair value of derivative financial instruments. As at 30 September 2023, after adjusting for the effect of derivative financial instruments detailed in note 14, approximately 107% (2022: 97%) of the Company's borrowings were at fixed rates of interest. This ratio is a result of a high level of fixed rate debt exposures combined with substantial financial assets such as cash which earn interest at floating rates. The Company manages its exposure to interest rate risk on its borrowings by entering into derivative financial instruments, interest rate swaps, to achieve an appropriate mix of fixed and floating interest rate debt in accordance with the Treasury Operations Policy and Treasury Committee decisions. The Company's sensitivity to interest rates on its euro and US dollar monetary items which are primarily external borrowings, cash and cash equivalents, is illustrated on an indicative basis below. The impact in the Company's Income Statement reflects the effect on net finance costs in respect of the Company's net debt and the fixed to floating rate debt ratio prevailing at 30 September 2023, ignoring any taxation implications and offsetting effects of movements in the fair value of derivative financial instruments. The sensitivity analysis has been prepared on the basis that net debt and the derivatives portfolio remain constant and that there is no direct net impact on equity (2022: £nil). The movement in interest rates is considered reasonable for the purposes of this analysis and the estimated effect assumes a lower limit of zero for interest rates where relevant. IFRS 9 requires an expected credit loss (ECL) model to be applied to financial assets. The ECL model requires the Company to account for expected losses as a result of credit risk on initial recognition of financial assets and to recognise changes in those expected credit losses at each reporting date. Allowances are measured at an amount equal to the lifetime expected credit losses where the credit risk on the receivables increases significantly after initial recognition. The Company is exposed to credit risk arising from loans to entities within the Imperial Brands Group, cash deposits, derivatives and other amounts due from external financial counterparties arising on other financial instruments. The maximum credit risk relating to intergroup loans was £28,610 million (2022: £28,884 million). The maximum aggregate credit risk to parties external to the Imperial Brands Group was considered to be £1,631 million at 30 September 2023 (2022: £2,200 million). Intragroup counterparty credit risk may be mitigated where there is control of a counterparty within the Group, allowing the Group to facilitate repayment through realising counterparty assets or through refinancing. At 30 September 2023 an ECL provision of £583 million was recognised relating to the risk of intergroup loans not being repaid (2022: £608 million). Interest rate sensitivity analysis 21 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 13. Financial risk management (continued) Trade and other receivables Financial instruments 2023 2022 Maximum Maximum exposure to exposure to credit risk credit risk Counterparty Exposure £ million £ million Highest 311 136 2nd highest 104 135 3rd highest 84 128 4th highest 83 127 5th highest 80 114 (c) Liquidity risk We remain fully compliant with all our banking covenants (2022: fully compliant). The Group primarily borrows centrally in order to meet forecast funding requirements, and the treasury function is in regular dialogue with subsidiaries in the Group to ensure their liquidity needs are met. Subsidiaries in the Group are funded by a combination of share capital and retained earnings, intercompany loans, and in very limited cases through external local borrowings. Cash pooling processes are used to centralise surplus cash held by subsidiaries in the Group where possible in order to minimise external borrowing requirements and interest costs. Treasury invests surplus cash in bank deposits and money market funds and uses foreign exchange contracts to manage short term liquidity requirements in line with short term cash flow forecasts. As at 30 September 2023, the Company held liquid assets of £681 million (2022: £1,161 million). The table below summarises the Company's largest exposures to financial counterparties as at 30 September 2023. At the balance sheet date management does not expect these counterparties to default on their current obligations. Policies are in place to manage the risk associated with the extension of credit to third parties, including companies within the Group, to ensure that commercial intent is balanced effectively with credit risk management. Credit is extended with consideration to financial risk and creditworthiness. Analysis of trade and other receivables is provided in note 10. The Company is exposed to liquidity risk, which represents the risk of having insufficient funds to meet its financing needs. To manage this risk the Company has a policy of actively maintaining a mixture of short, medium and long-term committed facilities that are structured to ensure that the Company has sufficient available funds to meet the forecast requirements of the Group over the short to medium term. To prevent over-reliance on individual sources of liquidity, funding is provided across a range of instruments including debt capital market issuance, bank bilateral agreements, bank revolving credit facilities and European commercial paper. In order to manage its credit risk to any one counterparty, the Company places cash deposits and enters into derivative financial instruments with a diversified group of financial institutions carrying suitable credit ratings in line with the Treasury Operations Policy. Utilisation of counterparty credit limits is regularly monitored by Treasury and ISDA agreements are in place to permit the net settlement of assets and liabilities in certain circumstances. During the year the Group terminated one collateralised trade held under an ISDA Credit Support Annex and as at 30 September 2023 had placed collateral of £nil (2022: £12 million) with a third party in order to manage their counterparty risk on the Group under derivative financial instruments. As discussed in the accounting policies note the calculation of the expected credit loss provision is based on management's assessment of the probability of default (PoD) and the percentage loss expected to arise in the event of default (LGD), multiplied by the current size of the loan receivable. The PoD and LGD rates are estimated on a loan by loan basis. Most of the intragroup loan receivables have very low PoD and LGD due to their low credit risk and do not contribute significantly to the overall ECL provision. However, there are a small group of intragroup loan with higher credit risk that contribute most towards the ECL provision and these loans have an average PoD of 75% and LGD of 100%. Management estimates of these rates is judgemental and any changes in estimates would change the amount of ECL recognised. For the higher credit risk loans a 1% increase in the PoD would increase the ECL by approximately £8 million (2022: approximately £8 million). In regards to the LGD estimate a 1% reduction would reduce the ECL by approximately £6 million (2022: approximately £6 million). It is not possible to increase the LGD and therefore there is no risk of the ECL increasing due to this factor. These exposures are held with counterparties with investment grade credit ratings or in money market funds with a AAA rating. Certain of these borrowings contain cross default provisions and negative pledges. The core committed bank facilities are subject to two financial covenants, these being minimum interest cover ratio of four times and maximum gearing of four times (per the definition within the agreement) and are subject to pari passu ranking and negative pledge covenants. Any non-compliance with covenants underlying the Company'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. 22 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 13. Financial risk management (continued) Balance Contractual Between Between At 30 September 2023 sheet cash flows 1 and 2 2 and 5 (In £ million) amount Total <1 year years years > 5 years Non-derivative financial liabilities: Bank loans 8 - - - - - Capital market issuance 7,620 10,663 1,766 1,951 3,651 3,294 18,842 18,030 17,147 - - 883 26,470 28,693 18,913 1,951 3,651 4,177 Balance Contractual Between Between At 30 September 2022 sheet cash flows 1 and 2 2 and 5 (In £ million) amount Total <1 year years years > 5 years Non-derivative financial liabilities: Bank loans 5 - - - - - Capital market issuance 9,090 11,440 1,349 1,830 5,710 2,551 18,475 18,462 17,601 - - 861 27,570 29,902 18,950 1,830 5,710 3,412 2023 (In £ million) Gross financial assets/ liabilities Gross financial assets/ liabilities set off Net financial assets/ liabilities per balance sheet Related amounts not set off in the balance sheet Net Assets Derivative financial instruments 950 - 950 (817) 133 950 - 950 (817) 133 Liabilities Derivative financial instruments (1,003) - (1,003) 817 (186) (1,003) - (1,003) 817 (186) 2022 (In £ million) Gross financial assets/ liabilities Gross financial assets/ liabilities set off Net financial assets/ liabilities per balance sheet Related amounts not set off in the balance sheet Net Assets Derivative financial instruments 1,051 (12) 1,039 (948) 91 1,051 (12) 1,039 (948) 91 Liabilities Derivative financial instruments (1,138) 12 (1,126) 948 (178) (1,138) 12 (1,126) 948 (178) All financial assets and liabilities are carried on the balance sheet at amortised cost, other than derivative financial instruments which are carried at fair value. Derivative financial instruments are valued using techniques based significantly on observable market data such as yield curves, foreign exchange rates and credit default swap prices for the Imperial Brands PLC Group as at the balance sheet date (Level 2 classification hierarchy per IFRS 7) as detailed in note 14. There were no changes to the valuation methods or transfers between hierarchies during the year. With the exception of capital market issuance, the fair value of all financial assets and financial liabilities is considered approximate to their carrying amount as outlined in note 14. Amounts owed to Group undertakings Total non-derivative financial liabilities The table below summarises the non derivative financial liabilities by maturity based on their remaining contractual cash flows as at 30 September 2023. The amounts disclosed are undiscounted cash flows calculated using spot rates of exchange prevailing at the relevant balance sheet date. Contractual cash flows in respect of the Company's derivative financial instruments are detailed in note 14. Amounts owed to Group undertakings Total non-derivative financial liabilities Amounts owed to the Company by Group undertakings of £28,610 million (2022: £28,884 million) are excluded from the above tables, as disclosure of contractual cash flows is only required for liabilities. The management of the Company's capital structure forms part of the capital risk management, details of which can be found in note 20 of the Imperial Brands Annual Report which does not form part of this report, but is available at www.imperialbrandsplc.com. The following tables set out the Company's financial assets and financial liabilities that are subject to netting and set-off arrangements. Financial assets and liabilities that are subject to set-off arrangements and disclosed on a net basis in the Company's balance sheet primarily relate to collateral in respect of one derivative financial instrument under an ISDA credit support annex. Amounts which do not meet the criteria for offsetting on the balance sheet but could be settled net in certain circumstances principally relate to derivative transactions executed under ISDA agreements where each party has the option to settle amounts on a net basis in the event of default of the other party. Capital management Fair value estimation and hierarchy Netting arrangements of financial instruments 23 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 13. Financial risk management (continued) Classification of financial instruments 2023 Fair value through income statement Assets and liabilities at amortised cost Total Current Non-current - 28,624 28,624 28,624 - - 681 681 681 - 950 - 950 126 824 950 29,305 30,255 29,431 824 - (7,628) (7,628) (1,450) (6,178) - (18,947) (18,947) (17,245) (1,702) (1,003) - (1,003) (174) (829) (1,003) (26,575) (27,578) (18,869) (8,709) (53) 2,730 2,677 10,562 (7,885) 2022 Fair value through income statement Assets and liabilities at amortised cost Total Current Non-current - 28,890 28,890 28,846 44 - 1,161 1,161 1,161 - 1,039 - 1,039 54 985 1,039 30,051 31,090 30,061 1,029 - (9,095) (9,095) (985) (8,110) - (18,586) (18,586) (17,704) (882) (1,125) - (1,125) (54) (1,071) (1,125) (27,681) (28,806) (18,743) (10,063) (86) 2,370 2,284 11,317 (9,034) 14. Derivative financial instruments Current derivative financial instruments (In £ million) Assets Liabilities Assets Liabilities Interest rate swaps 30 (66) 6 (36) Foreign exchange contracts 12 (5) 31 (13) Cross currency swaps 84 (103) 17 (5) Total current derivatives 126 (174) 54 (54) Non-current derivative financial instruments (In £ million) Assets Liabilities Assets Liabilities Interest rate swaps 745 (652) 680 (746) Cross currency swaps 79 (177) 305 (337) Collateral¹ - - - 12 Total non-current derivatives 824 (829) 985 (1,071) Total carrying value of derivatives financial instruments 950 (1,003) 1,039 (1,125) Net liability (53) (86) Analysed as: Interest rate swaps 775 (718) 686 (782) Foreign exchange contracts 12 (5) 31 (13) Cross currency swaps 163 (280) 322 (342) Collateral¹ - - - 12 950 (1,003) 1,039 (1,125) Net liability (53) (86) ¹ Collateral deposited against derivative financial liabilities under the terms and conditions of an ISDA credit support annex. Borrowings Other payables Derivatives Other receivables 2023 The Company has the following derivative financial instruments measured at fair value through profit and loss: Total net financial (liabilities)/assets Other receivables Cash and cash equivalents Derivatives Total financial assets Borrowings Other payables Total net financial (liabilities)/assets Derivatives Total financial liabilities Derivatives Total financial assets 2022 Cash and cash equivalents Total financial liabilities 24 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 14. Derivative financial instruments (continued) At 30 September 2023 Balance Contractual Between Between sheet cash flows 1 and 2 2 and 5 (In £ million) amount total <1 year years years > 5 years Net settled derivatives 57 200 (3) 34 143 26 Gross settled derivatives (110) - - - - - Receipts - 17,822 5,429 4,010 5,283 3,100 Payments - (17,675) (5,374) (3,941) (5,247) (3,113) (53) 347 52 103 179 13 At 30 September 2022 Balance Contractual Between Between sheet cash flows 1 and 2 2 and 5 (In £ million) amount total <1 year years years > 5 years Net settled derivatives (84) (321) (71) (64) (101) (85) Gross settled derivatives (3) - - - - - Receipts - 9,890 1,934 3,293 4,059 604 Payments - (9,635) (1,851) (3,201) (3,944) (639) (87) (66) 12 28 14 (120) Derivatives as hedging instruments Interest rate swaps As a result of the discontinuation of GBP LIBOR in December 2021 and US$ LIBOR discontinuation in June 2023, the Company amended all GBP LIBOR derivatives to reference the daily risk free rate of SONIA instead of GBP LIBOR and all US$ LIBOR derivatives were amended to reference the daily risk free rate of SOFR instead of US$ LIBOR. There are no changes pending for EUR derivatives. These changes did not impact the Group's commercial hedging strategy and they did not have a material financial impact. To manage interest rate risk on its borrowings, the Company issues debt in the market or markets that are most appropriate at the time of raising new finance with regard to currency, interest denomination and duration, and then uses interest rate swaps and/or cross currency swaps to re-base the debt into the appropriate proportions of fixed and floating interest rates where necessary. Interest rate swaps are also transacted to manage and re-profile the Company's interest rate risk over the short, medium and long term in accordance with the Treasury Operations Policy and Treasury Committee decisions. Fair value movements are recognised in investment income and finance costs in the relevant reporting period. Derivative financial instruments have been classified in the balance sheet as current or non-current on an undiscounted contractual basis based on spot rates as at the balance sheet date. For the purposes of the above and following analysis, maturity dates have been based on the likelihood of any early termination options being exercised with consideration to counterparty expectations and market conditions prevailing as at 30 September 2023. As at 30 September 2022 collateral transferred to counterparties in respect of derivative financial liabilities was classified consistently with the related underlying derivative. No collateralised trades are outstanding as at 30 September 2023. The table below summarises the Company's derivative financial instruments by maturity based on their remaining contractual cash flows as at 30 September 2023. The amounts disclosed are the undiscounted cash flows calculated using spot rates of exchange prevailing at the relevant balance sheet date. Contractual cash flows in respect of the Company's non derivative financial instruments are detailed in note 13. Fair values are determined based on observable market data such as yield curves, foreign exchange rates and credit default swap prices to calculate the present value of future cash flows associated with each derivative at the balance sheet date. Market data is sourced from a reputable financial data provider and valuations are validated by comparison to counterparty valuations where appropriate. Some of the Group's derivative financial instruments contain early termination options and these have been considered when assessing the element of the fair value related to credit risk. On this basis the reduction in reported net derivative liabilities due to credit risk is £2 million (2022: £3 million) and would have been a £5 million (2022: £8 million) reduction without considering the early termination options. All derivative assets and liabilities are classified under the FRS 101 fair value hierarchy as being level 2. As outlined in note 13, the Company hedges its underlying interest rate exposure and foreign currency translation exposure in an efficient, commercial and structured manner, primarily using interest rate swaps and cross currency swaps. Foreign exchange contracts are used to manage the Company's short term liquidity requirements in line with short term cash flow forecasts as appropriate. The Company does not apply cash flow or fair value hedge accounting as permitted under IFRS 9, which results in fair value gains and losses attributable to derivative financial instruments being recognised in net finance costs. Maturity of obligations under derivative financial instruments As at 30 September 2023, the notional amount of interest rate swaps outstanding that were entered into to convert fixed rate borrowings into floating rates of interest at the time of raising new finance were £8,111 million (2022: £9,578 million) with a fair value of £714 million liability (2022: £755 million liability). The fixed interest rates vary from 1.3% to 7.9% (2022: 1.1% to 7.9%), and the floating rates are EURIBOR, SONIA and SOFR. 25 Imperial Brands Finance PLC Notes to the Financial Statements (continued) For the year ended 30 September 2023 14. Derivative financial instruments (continued) 15. Share capital (In £ million) 2023 2022 Issued and fully paid 2,100,000,000 ordinary shares of £1 each (2022: 2,100,000,000) 2,100 2,100 16. Related party transactions 17. Guarantees 18. Number of employees 19. Immediate and ultimate parent undertakings As at 30 September 2023, the notional amount of interest rate swaps outstanding that were entered into to convert the Group's debt into the appropriate proportion of fixed and floating rates to manage and re-profile the Group's interest rate risk were £11,622 million (2022: £11,548 million) with a fair value of £771 million asset (2022: £670 million asset). The fixed interest rates vary from 3.1% receivable to 4.0% payable (2022: 0.5% payable to 4.0% payable), and the floating rates are EURIBOR and SOFR. This includes forward starting interest rate swaps with a total notional amount of £4,055 million equivalent (2022: £3,353 million equivalent) with tenors between 1 and 10 years, starting between October 2023 and May 2032. The ultimate parent undertaking and controlling party of the Company at 30 September 2023 was Imperial Brands PLC, a company incorporated in Great Britain and registered in England and Wales. The smallest and largest group in which the results of the Company are consolidated is that headed by Imperial Brands PLC, whose consolidated financial statements may be obtained from The Company Secretary, Imperial Brands PLC, 121 Winterstoke Road, Bristol, BS3 2LL and are also available in the investors section of the Group website at www.imperialbrandsplc.com. The immediate parent undertaking of the Company at 30 September 2023 was Imperial Tobacco Holdings Limited, a company incorporated in Great Britain and registered in England and Wales. The Company has taken advantage of the Group exemption under the terms of FRS 101 from disclosing related party transactions with entities that are part of the Group since the Company is a wholly owned indirect subsidiary of Imperial Brands PLC and is included in the consolidated financial statements of the Group, which are publicly available. The Company is party to a cross guarantee of its bank accounts held at HSBC Bank plc against accounts of Imperial Brands PLC and some of its subsidiary companies. At 30 September 2023, the amount drawn under this cross guarantee was £nil million (2022: £1 million). Together with other Group undertakings, the Company guarantees various borrowings and liabilities of other subsidiary companies under this arrangement with HSBC Bank plc. At 30 September 2023, the contingent liability totalled £nil million (2022: £1 million). The Company enters into foreign exchange contracts to manage short term liquidity requirements in line with cash flow forecasts. As at 30 September 2023, the notional amount of these contracts was £2,020 million (2022: £1,662 million) and the fair value of these contracts was a net asset of £7 million (2022: £19 million net asset). Cross currency swaps As at 30 September 2023, the notional amount of cross currency swaps entered into to convert floating rate sterling debt into the desired currency at floating rates of interest was £1,600 million (2022: £1,600 million) and the fair value of these swaps was £111 million net liability (2022: £232 million net liability); the notional amount of cross currency swaps entered into to convert floating rate US dollar debt into the desired currency at floating rates of interest was $5,250 million (2022: $2,250 million) and the fair value of these swaps was £6 million net liability (2022: £211 million net asset). Foreign exchange contracts The average monthly number of employees during the year was 11 (2022: 10). The Company is party to three counter-indemnity deeds, each dated April 2023, made on substantially the same terms under which certain insurance companies have made available to Imperial Brands PLC, Imperial Tobacco Limited and the Company, a surety bond. In each case issued on a standalone basis but in aggregate forming an amount of £120 million, until December 2028. These surety bonds provide support to the Imperial Tobacco Pension Trustees Ltd, the main UK pension scheme. The Directors have assessed the fair value of the above guarantees and do not consider them to be material. They have, therefore, not been recognised on the balance sheet. The Company enters into cross currency swaps to covert the currency of debt into the appropriate currency with consideration to the underlying assets of the Group as appropriate. Fair value movements are recognised in investment income and finance costs in the relevant reporting period. 26