EasyJet 2010 Annual Report Download - page 65

Overview Business review Governance Accounts Other information
easyJet plc
Annual report and accounts 2010
63
Financial instruments
Financial instruments are recognised when easyJet becomes a party to the contractual provisions of the relevant instrument and
derecognised when it ceases to be a party to such provisions.
Where market values are not available, the fair value of financial instruments is calculated by discounting cash flows at prevailing interest
rates and by applying year end exchange rates.
Non-derivative financial assets
Non-derivative financial assets are recorded at amortised cost and include loan notes, trade receivables, cash and money market deposits.
Investments in equity instruments are carried at cost where fair value cannot be reliably measured due to significant variability in the range
of reasonable fair value estimates.
Restricted cash comprises cash deposits which have restrictions governing their use and is classified as a current or non-current asset based
on the estimated remaining length of the restriction. Cash and cash equivalents comprise cash held in bank accounts with no access
restrictions and bank or money market deposits repayable on demand or maturing within three months of inception. Interest income
on cash and money market deposits is recognised using the effective interest method.
Impairment losses are recognised on financial assets carried at amortised cost where there is objective evidence that an impairment loss
has been incurred. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of
future cash flows, discounted at the original effective interest rate.
If, subsequently, the amount of the impairment loss decreases, and the decrease can be related objectively to an event that occurred after
the impairment was recognised, the appropriate portion of the loss is reversed. Both impairment losses and reversals are recognised in the
income statement as components of net finance charges.
Non-derivative financial liabilities
Non-derivative financial liabilities are initially recorded at fair value less directly attributable transaction costs, and subsequently at amortised
cost. Interest expense on loans is recognised using the effective interest method.
Borrowings are classified as current liabilities unless there is an unconditional right to defer settlement of the liability for at least 12 months
after the balance sheet date.
Derivative financial instruments
Derivative financial instruments are measured at fair value.
Derivative financial instruments designated as cash flow hedges are used to mitigate operating and investing transaction exposures to
movements in jet fuel prices and currency exchange rates. Hedge accounting is applied to these instruments.
Changes in intrinsic fair value are recognised in other comprehensive income to the extent that the cash flow hedges are determined
to be effective. All other changes in fair value are recognised immediately in the income statement. Where the hedged item results in a
non-financial asset or liability the accumulated gains and losses previously recognised in other comprehensive income form part of the
initial carrying amount of the asset or liability. Otherwise accumulated gains and losses are recognised in the income statement in the
same period in which the hedged items affect the income statement.
Hedge accounting is discontinued when a hedging instrument is derecognised (e.g. through expiry or disposal), or no longer qualifies
for hedge accounting. Where the hedged item is a highly probable forecast transaction, the related gains and losses remain in other
comprehensive income until the transaction takes place.
When a hedged future transaction is no longer expected to occur, any related gains and losses previously recognised in other
comprehensive income are immediately recognised in the income statement.
Financial guarantees
If a claim on a financial guarantee given to a third party becomes probable, the obligation is recognised at fair value. For subsequent
measurement, the carrying amount is the higher of initial measurement and best estimate of the expenditure required to settle the
obligation on the statement of financial position date.