Air New Zealand 2016 Annual Report Download - page 38

Notes to the Financial Statements (continued)
As at 30 June 2016
36
AIR NEW ZEAL AND ANNUAL FINANCIAL RESULTS 2016
24. Financial Risk Management (continued)
INTEREST RATE RISK
Interest rate risk is the risk of loss to Air New Zealand arising from adverse fluctuations in interest rates.
Air New Zealand has exposure to interest rate risk as a result of the long-term borrowing activities which are used to fund ongoing activities. It is the
Group’s policy to ensure the interest rate exposure is maintained to minimise the impact of changes in interest rates on its net floating rate long-term
borrowings. The Group’s policy is to fix between 70% to 100% of its exposure to interest rates, including fixed interest operating leases, in the next
12 months. Interest rate swaps are used to achieve an appropriate mix of fixed and floating rate exposure if the volume of fixed rate loans or fixed
rate operating leases is insufficient.
Impact of hedging interest rate risk
2016 2015
Interest rate derivatives
Volume (USD M)
Weighted average contract rate (%)
Weighted average contract maturities (years)
150
1.7
3.4
150
1.7
4.4
CASH FLOW HEDGES OF INTEREST RATE RISK
The impact of changes in floating interest rates is recognised in the financial statements when the transactions occur. The volume of the floating
rate interest-bearing liabilities hedged, together with contract rates and maturities are set out above.
Interest rate derivatives were recognised within ‘Derivative financial instruments’ on the Statement of Financial Position as at reporting date and
were designated as the hedging instrument in qualifying cash flow hedges.
2016
$M
2015
$M
Statement of financial position
Derivative financial (liabilities)/assets (5) -
The effective portion of changes in the fair value of interest rate hedging instruments which were deferred to the cash flow hedge reserve
(within hedge reserves) during the year are set out below, together with transfers to earnings, when the underlying hedged item occurred.
Hedge reserves
Balance at the beginning of the year
Change in fair value*
Transfers to finance costs
Taxation on reserve movements
-
(7)
2
1
-
-
-
-
Balance at the end of the year (4) -
*The change in fair value recognised in the cash flow hedge reserve is the effective portion. No ineffectiveness arose on cash flow hedges of
interest rates during the year (30 June 2015: Nil).
Interest rate sensitivity on financial instruments
Earnings are sensitive to changes in interest rates on the floating rate element of borrowings and finance lease obligations and the fair value of
interest rate swaps. Their sensitivity to a reasonably possible change in interest rates with all other variables held constant, is set out below. This
analysis assumes that the amount and mix of fixed and floating rate debt, including finance lease obligations, remains unchanged from that in place
at reporting date, and that the change in interest rates is effective from the beginning of the year. In reality, the fixed/floating rate mix will fluctuate
over the year and interest rates will change continually.
Interest rate change:
2016
$M
+50 bp*
2016
$M
-50 bp*
2015
$M
+50 bp*
2015
$M
-50 bp*
Impact on profit before taxation
Impact on cash flow hedge reserve (within equity)
(8)
(1)
8
1
(7)
(1)
7
1
*bp = basis points
The impact on equity as shown above would be offset by the hedged floating interest rate exposure as it occurs.