Air New Zealand 2016 Annual Report Download - page 31

Notes to the Financial Statements (continued)
As at 30 June 2016
29
AIR NEW ZEALAND GROUP
24. Financial Risk Management (continued)
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, purchases and sales. The documented risk management approach
(as approved by the Board of Directors) is to manage both forecast foreign currency operating revenues and expenditure and foreign currency
denominated balance sheet items. Hedges of foreign currency capital transactions are only undertaken if there is a large volume of forecast capital
transactions over a short period of time.
Air New Zealand enters into foreign exchange contracts to manage the economic exposure arising due to fluctuations in foreign exchange rates
affecting both highly probable forecast operating cash flows and foreign currency denominated liabilities. Any exposure to gains or losses on these
contracts is offset by a related loss or gain on the item being hedged.
Forecast operating transactions
Foreign currency operating cash inflows are primarily denominated in Australian Dollars, European Community Euro, Japanese Yen, Chinese
Renminbi, United Kingdom Pounds and United States Dollars. Foreign currency operating cash outflows are primarily denominated in United States
Dollars. The Group’s treasury risk management policy is to hedge between 60% and 90% of forecast net operating cash flows for the first 6
months, with progressive reductions in percentages hedged over the next 6 to 12 months. Forward points are excluded from the hedge designation
in respect of operating revenue and expenditure transactions and are marked to market through earnings. 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 12 months.
Japanese Yen denominated finance lease obligations and Euro denominated borrowings are designated as the hedging instrument in qualifying
cash flow hedges of highly probable forecast Japanese Yen and Euro revenues, respectively.
Balance sheet exposures
Certain United States Dollar denominated borrowings are designated as the hedging instrument in fair value hedges of underlying United States
Dollar aircraft values. A further proportion of United States denominated borrowings remains unhedged to provide an offset to foreign currency
movements within depreciation expense, resulting from revisions made to aircraft residual values during the year.
The Group has investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising on
the net assets of certain Group foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies.
Where changes in the fair value of a derivative provide an offset to the underlying hedged item as it impacts earnings, hedge accounting is not
applied. Foreign currency translation gains or losses on lease return provisions and the remaining non-hedge accounted United States Dollar and
Euro denominated interest-bearing liabilities are recognised in the Statement of Financial Performance within ‘Foreign exchange gains’. Marked to
market gains or losses on non-hedge accounted foreign currency derivatives provide an offset to these foreign exchange movements, and are also
recognised within ‘Foreign exchange gains’.
With the exception of foreign currency denominated working capital balances, which together are immaterial to foreign currency fluctuations,
Air New Zealand’s exposure to foreign exchange risk arising on items recognised in the Statement of Financial Position at reporting date is
summarised over the following page. This risk is translation risk before hedging activities, which is then managed through a number of different
hedging strategies in which the items identified below may be designated either as the hedged item or the hedging instrument depending on the
most efficient and cost effective strategy.
Derivative financial instruments are excluded from this table as they are specifically used to manage risk and do not create an initial exposure.
The impact of derivative financial instruments in terms of managing identified risks is detailed over the following pages.
Forecast foreign currency revenue and expenditure transactions occur in the future and are not included in the following table. The effect of foreign
currency risk arising on forecast transactions and how this is managed is detailed over the following pages.