Air New Zealand 2011 Annual Report Download - page 42

18. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
To the extent that qualifying cash flow hedges were assessed as highly effective, a summary of the amounts that were included in the
cash flow hedge reserve, together with the nature of the hedged risk exposure is as follows:
GROUP
2011
$M
GROUP
2010
$M
COMPANY
2011
$M
COMPANY
2010
$M
Future foreign currency operating revenue and expenditure (99) (32) (101) (32)
Future foreign currency capital expenditure 51 9 51 9
Future foreign currency sales of non-financial assets 12 (3) - -
Future fuel expenditure 10 - 10 -
(26) (26) (40) (23)
Tax effect 6 8 10 7
Cash flow hedge reserve (20) (18) (30) (16)
Foreign currency hedges
The Group hedge accounts the foreign currency risk arising on future foreign currency operating revenue, operating expense and capital
expenditure transactions.
Forward points are excluded from the hedge designation in respect of operating revenue and expenditure transactions and are marked
to market through earnings. Forward point costs of $23 million in respect of these derivatives were marked to market through “Finance
costs” in the year to 30 June 2011 (30 June 2010: $21 million of costs).
Accounting ineffectiveness arising in the year to 30 June 2011 on these cash flow hedges was nil on operating transactions and a loss
of $1 million on capital transactions (30 June 2010: nil on operating transactions; $1 million gain on capital transactions).
A proportion of United States Dollar denominated borrowings are designated as the hedging instrument in qualifying cash flow hedges of
highly probable future foreign currency sales of non-financial assets. This reduces the level of derivative cover required to offset the foreign
currency risk arising on foreign currency borrowings and lease obligations. No accounting ineffectiveness arises on these hedge relationships.
Fuel hedges
Where the Group uses crude oil collar options to hedge price risk in jet fuel, the intrinsic value component of these derivatives is
designated as a cash flow hedge. All other components (mainly time value) are marked to market through earnings, with losses of
$5 million recognised within “Fuel” in the year to 30 June 2011 (30 June 2010: $5 million loss).
Accounting ineffectiveness arising in the year to 30 June 2011 of $2 million loss was recognised within “Fuel” (30 June 2010:
$7 million gain).
NON-HEDGE ACCOUNTED DERIVATIVES
Foreign currency derivatives
Where changes in the fair value of a derivative provide a natural offset to the underlying hedged item as it impacts earnings, hedge
accounting is not applied. Both the changes in value of the hedged item and the hedging instrument are recognised through the same
line within the Statement of Financial Performance.
Foreign currency translation gains or losses on lease return provisions and non-hedge accounted United States Dollar denominated
interest-bearing liabilities are recognised in the Statement of Financial Performance within “Foreign exchange (losses)/gains”. Marked
to market gains or losses on non-hedge accounted foreign currency derivatives provide a natural offset to these foreign exchange
movements, and are also recognised within “Foreign exchange (losses)/gains”.
During the year to 30 June 2011, a loss of $119 million was recognised in respect of the above non-hedge accounted foreign currency
derivatives (30 June 2010: $56 million loss), which was offset by exchange movements on the underlying exposures. Forward point
costs of $17 million in respect of these derivatives were marked to market through “Finance costs” in the year to 30 June 2011 (30
June 2010: $19 million of costs).
Fuel derivatives
Short-dated fuel derivatives are not hedge accounted due to the short term nature of these instruments, and are marked to market
through earnings. In the year to 30 June 2011, gains of $19 million were recognised within “Fuel” (30 June 2010: $1 million gain).
Equity swaps
During the year to 30 June 2011, a gain of $12 million was recognised in respect of the marked to market valuation of equity
swaps (30 June 2010: loss of $1 million). The equity swaps did not provide any right to buy shares but provided price protection in
the event of an actual purchase of shares in Virgin Blue Holdings Limited. This is included in “Other expenses” in the Statement of
Financial Performance.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
AS AT 30 JUNE 2011
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2011