Aer Lingus 2011 Annual Report Download - page 75

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Annual Report 2011 73
Notes to the consolidated financial statements (continued)
FINANCIAL STATEMENTS Aer Lingus Group Plc
The fair values of various derivative instruments used for hedging purposes are disclosed in note 19. Movements on the hedging reserve
in shareholders’ equity are shown in note 30. The full fair value of a hedging derivative is classified as a non-current asset or liability
when the remaining maturity of the hedged item is more than 12 months and as a current asset or liability when the remaining maturity
of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability.
(a) Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement,
together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The Group only
applies fair value hedge accounting for hedging fixed interest risk on assets and borrowings. The gain or loss relating to the effective
portion of interest rate swaps hedging fixed rate assets and borrowings is recognised in the income statement within ‘finance
expenses’. The gain or loss relating to the ineffective portion is recognised in the income statement within ‘other gains/losses – net’.
The gain or loss relating to the ineffective portion of the interest rate swaps is recognised in the income statement within ‘other
gains/losses – net’.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the
effective interest method is used is amortised to profit or loss over the period to maturity.
(b) Cash flow hedge
Cash flow hedges are principally used to hedge the commodity price risk associated with the Group’s forecasted fuel purchases as
well as certain foreign exchange and interest rate exposures. The effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective
portion is recognised immediately in the income statement within ‘fuel and oil’ costs in the case of fuel purchases and ‘other
gains/losses – net’ in the case of the foreign exchange derivatives.
Amounts accumulated in equity are reclassified to the statement of financial position or income statement in the periods when the
hedged item affects the statement of financial position or income statement (for example, when the forecast sale that is hedged takes
place). They are included under the relevant caption in the consolidated financial statements, i.e. fuel hedges in ‘fuel and oil costs’
caption and foreign exchange hedges within the captions ‘other gains/losses – net’ or ‘property plant and equipment’.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative
gain or loss existing in equity at that time remains in equity and is recognised when the forecast cash flow arises. When a forecast
transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the
income statement.
2.12 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using weighted average cost. Net realisable value
is the estimated selling price in the ordinary course of business, less applicable disposal costs.
2.13 Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method,
where appropriate, less provision for impairment. Trade receivables are classified as current assets if they are expected to be recovered
within 1 year or less. If not, they are classified as non-current assets.
A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect
all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the
debtor will reject charges and default or delinquencies in payments are considered indicators that the trade receivable is impaired. The
amount of the provision is the difference between the asset’s carrying amount and the present value of estimated cash flows, discounted
at the effective interest rate. The carrying amount of the assets is reduced through the use of an allowance account and the amount of
the loss is recognised in the income statement within ‘ground operating, catering and other operating costs’. When a trade receivable is
uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off
are credited against the same account in the income statement.