EasyJet 2012 Annual Report Download - page 75

Leases
Non-contingent operating lease rentals are charged to the income statement on a straight-line basis over the life of the lease.
A number of operating leases require easyJet to make contingent rental payments based on variable interest rates; these are
expensed as incurred.
easyJet enters into sale and leaseback transactions whereby it sells to a third-party rights to acquire aircraft. On delivery of the aircraft,
easyJet subsequently leases the aircraft back, by way of an operating lease. Surpluses arising on disposal, where the price that the
aircraft is sold for is above fair value, are recognised in deferred income and amortised on a straight-line basis over the lease term
of the asset.
Finance leases, which transfer to easyJet substantially all the risks and benefits incidental to ownership of the leased item, are
recognised at the inception of the lease at the fair value of the leased asset, or, if lower, at the present value of the minimum lease
payments. Any directly attributable costs of entering into financing sale and leasebacks are included in the value of the asset
recognised. Lease payments are apportioned between the finance charges and the reduction of the lease liability so as to achieve
a constant rate of interest on the remaining balance of the liability. Finance charges are included in interest payable and other
financing charges.
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 borrowings 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
shareholders’ equity until the transaction takes place.
When a hedged future transaction is no longer expected to occur, any related gains and losses previously recognised in shareholders’
equity are immediately recognised in the income statement.
Accounts & other information
easyJet plc
Annual report and accounts 2012 73