COMBINED FINANCIAL STATEMENTS > NOTES TO THE COMBINED FINANCIAL STATEMENTS Financial instruments  (continued) 22 Hedges REED ELSEVIER ANNUAL REPORTS & FINANCIAL STATEMENTS 2003 65 The unrecognised and deferred gains and losses on financial instruments used for hedging purposes as at 31 December 2003, and before taking into account gains and losses arising in the year and included in the profit and loss account, are derived as follows: The amounts shown as the book value of derivative financial instruments represent accruals or deferred income arising from these financial instruments. The fair value of long term debt has been based on current market rates offered to Reed Elsevier for debt of the same remaining maturities. The fair values for interest rate swaps, interest rate options and forward rate agreements represent the replacement cost calculated using market rates of interest at 31 December 2003 and 2002. The fair values of all other items have been calculated by discounting expected future cash flows at market rates. 2003 2002 Notional Notional amount Book value Fair value amount Book value Fair value € m € m € m € m € m € m Primary financial instruments held or issued to finance operations Investments 58 58 90 90 Cash 97 97 259 259 Short term investments  809 809 613 612 Other financial assets 33 33 31 31 Short term borrowings and current portion of long term borrowings (1,701) (1,700) (2,091) (2,102) Long term borrowings (2,573) (2,702) (2,961) (3,127) Other financial liabilities  (19) (19) (27) (27) Provisions (72) (72) (109) (109) (3,368) (3,496) (4,195) (4,373) Derivative financial instruments held to manage  interest rate and currency exposure Interest rate swaps 1,995 (10) (77) 1,115 (14) (112) Interest rate options 878 (6) (46) 1,050 (6) (99) Interest rate floors 71 – – 230 – – Forward rate agreements 359 – – 1,481 – (2) Forward foreign exchange contracts 74 – 7 376 – 13 3,377 (16) (116) 4,252 (20) (200) Total financial instruments 3,377 (3,384) (3,612) 4,252 (4,215) (4,573) Unrecognised Deferred Gains Losses Gains Losses £m £m £m £m On hedges at 1 January 2003 8 (126) 58 (15) Arising in previous years included in 2003 profit and loss account (8) 49 (30) 8 Arising in previous years not included in 2003 profit and loss account – (77) 28 (7) Arising in 2003 not included in 2003 profit and loss account 7 (1) 41 (18) On hedges at 31 December 2003 7 (78) 69 (25) Of which: Expected to be included in 2004 profit and loss account 4 (35) 44 (14) Expected to be included in 2005 profit and loss account or later 3 (43) 25 (11)