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Cathay Pacific Airways Limited
50
Independent Auditor’s Report
Revenue recognition
Refer to note 1 to the consolidated financial statements and the accounting policies on page 104.
The key audit matter How the matter was addressed in our audit
Passenger and cargo sales are recognised as revenue when
the related transportation service is provided. The value of
passenger and cargo sales for which the related
transportation service has not yet been provided at the end
of the reporting period is recorded as unearned
transportation revenue in the consolidated statement of
financial position.
The fair value of programme awards under the Group’s
customer loyalty programme, Asia Miles, is also deferred and
included in unearned transportation revenue. This deferred
revenue arises as members of the programme accumulate
Asia Miles by travelling on the Group’s flights or when the
Group sells Asia Miles to participating partners in the
programme. The deferred revenue is recognised as income
when the related goods or services are provided subsequent
to the redemption of the Asia Miles.
The Group maintains sophisticated information technology
systems in order to track the point of service provision for
each passenger and cargo sale and also to track the
issuance and subsequent redemption and utilisation of Asia
Miles. The Group also estimates the unit fair value of Asia
Miles which are initially deferred when earned by members of
the programme.
We have identified revenue recognition as a key audit matter
because revenue is one of the key performance indicators of
the Group and because it involves complicated information
technology systems and an estimation of fair value, all of which
give rise to an inherent risk that revenue could be recorded in
the incorrect period or could be subject to manipulation.
Our audit procedures were designed to challenge the
accuracy of the amounts recognised as revenue. These
procedures included testing controls over the Group’s
systems which govern the revenue recognition and
substantive analytical procedures on the Group’s passenger
and cargo revenue and unearned transportation revenue.
We scrutinised all manual journal entries related to revenue
and inspected underlying documentation for any journal
entries which were considered to be material or met other
specified risked-based criteria.
We assessed the reasonableness of the Group’s estimate of
the unit fair value of Asia Miles, with reference to the prices
for third party Asia Miles sales and flight redemption values.
We challenged this estimate by discussing alternatives with
management and assessing whether or not there was an
indication of management bias.
Hedge accounting
Refer to notes 11, 13, 16, 19 and 29 to the consolidated financial statements and the accounting policies on page 103.
The key audit matter How the matter was addressed in our audit
The Group enters into derivative financial instrument
contracts in order to manage its exposure to fuel price risk,
foreign currency risk and interest rate risk, which arise during
the normal course of its business. These contracts gave rise
to derivative financial assets of HK$2,778 million and
derivative financial liabilities of HK$21,871 million as at 31st
December 2015. Hedge accounting under HKFRSs is applied
for a majority of these arrangements.
We have identified hedge accounting (including the valuation
of hedging instruments) as a key audit matter because hedge
accounting under HKFRSs is a complex area and the Group
has entered into a high volume of hedge contracts,
necessitating a sophisticated system to record and track
each contract and calculate the related valuations at each
financial reporting date. The valuation of hedging instruments
and consideration of hedge effectiveness can involve a
significant degree of both complexity and management
judgement and is subject to an inherent risk of error.
Our audit team included financial instruments valuation
specialists and our audit procedures included testing
management’s controls over derivative financial instruments
and the related hedge accounting and the following
substantive procedures which were performed on
a sampling basis.
We inspected management’s hedge documentation and
contracts for the purposes of considering whether the
related accounting treatment was in accordance with
HKFRSs.
We re-performed year end valuations of derivative financial
instruments and calculations of hedge effectiveness.
We also requested written confirmations from contract
counterparties for derivative financial instruments that
existed at the reporting date.