Air New Zealand 2009 Annual Report Download - page 28

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17. FINANCIAL INSTRUMENTS
GROUP
2009
$M
GROUP
2008
$M
COMPANY
2009
$M
COMPANY
2008
$M
Current derivative financial assets 143 208 143 208
Term derivative financial assets - 6 - 6
143 214 143 214
Current derivative financial liabilities (282) (84) (282) (84)
Term derivative financial liabilities (25) (3) (25) (3)
(307) (87) (307) (87)
Air New Zealand is subject to credit, foreign currency, interest rate, and fuel price risks. These risks are managed with various financial instruments,
using a set of policies approved by the Board of directors. Compliance with these policies is reviewed and reported monthly to the Board and is included
as part of the internal audit programme. Group policy is not to enter, issue or hold financial instruments for speculative purposes.
CREDIT RISK
Credit risk is the potential loss from a transaction in the event of default by a counterparty during the term of the transaction or on settlement of the
transaction. Air New Zealand incurs credit risk from transactions with trade receivables and financial instruments in the normal course of business.
The maximum exposure to credit risk is represented by the carrying value of financial assets.
Air New Zealand places cash, short term deposits and derivative financial instruments with good credit quality counterparties, having a minimum
Standard and Poors credit rating of A. Limits are placed on the exposure to any one financial institution.
Credit evaluations are performed on all customers requiring direct credit. Air New Zealand is not exposed to any concentrations of credit risk within
receivables, other assets and derivatives. Air New Zealand does not require collateral or other security to support financial instruments with credit risk.
A significant proportion of receivables are settled through the International Aviation Travel Association (IATA) clearing mechanism which undertakes its
own credit review of members.
MARKET RISK
Foreign currency risk
Foreign currency risk is the risk of loss to Air New Zealand arising from adverse fluctuations in exchange rates.
Air New Zealand has exposure to foreign exchange risk as a result of transactions denominated in foreign currencies, arising from normal trading
activities, foreign currency borrowings and foreign currency capital commitments.
Air New Zealand has a formal foreign exchange management policy (mandated by the Board of directors) to enter into foreign exchange contracts to
manage economic exposure to fluctuations in foreign exchange rates impacting operating cash flows and asset values. Any exposure to gains or losses
on these contracts is offset by a related loss or gain on the item being hedged.
Foreign currency operating cash inflows are primarily denominated in Australian Dollars, European Community Euro, Japanese Yen, United Kingdom
Pounds and United States Dollars. Foreign currency outflows are primarily denominated in United States Dollars. The Group’s treasury risk management
policy is to hedge between 75% and 95% of forecast net operating cash flows for the first 6 months, with progressive reductions in percentages
hedged in subsequent months out to 2 years. In accordance with this policy, the underlying forecast revenue and expenditure transactions in respect
of foreign currency cash flow hedges in place at reporting date, are expected to occur over the next 24 months. Where exposures are certain, such
as foreign currency borrowings and capital commitments, it is the Group’s policy to elect to hedge these risks as they arise, within Board approved
parameters. The hedge accounted capital transactions will affect earnings as the underlying hedged asset is depreciated over the useful economic life of
that asset.
The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising
on the net assets of the Group’s foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies.
AIR NEW ZEALAND
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS AT 30 JUNE 2009
26