Aer Lingus 2011 Annual Report Download - page 78

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Annual Report 2011
76
FINANCIAL STATEMENTS Aer Lingus Group Plc
Notes to the consolidated financial statements (continued)
2.21 Provisions
Provisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an
outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are measured at the
present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is
recognised as interest expense.
Provisions are made on a monthly basis for aircraft maintenance costs which the Group incurs in connection with major airframe and
engine overhauls on operating leased aircraft, where the terms of the lease impose obligations on the lessee to have these overhauls
carried out. Provisions for costs to meet the contractual return conditions are also included. The actual cash outflow of the overhauls is
charged against the provision when incurred. Any residual balance is transferred to the income statement.
A provision for business repositioning costs is recognised when a constructive obligation exists. The amount of the provision is based on
the terms of business repositioning measures, including employee severance and early retirement measures which have been
communicated to employees. They represent the Directors’ best estimate of the cost of these measures.
2.22 Revenue recognition
The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that the future economic benefits
will flow to the entity and when specific criteria have been met for each of the Group’s activities as described below.
Revenue comprises the fair value of the consideration received or receivable for the sale of the Group’s services in the ordinary course of
the Group’s activities, and can be divided into scheduled passenger, cargo, ancillary revenue and other revenue. Scheduled passenger
revenue is shown inclusive of passenger charges and other fees to the extent that these are recovered directly from customers at the point
of sale, but exclusive of applicable government taxes. Revenue is recognised as follows:
(a) Revenues
Scheduled passenger and cargo revenues are recognised when transportation is provided. The value of sales made for which
transportation has not been provided at the statement of financial position date is included in ‘trade and other payables’ under the
caption of ‘ticket sales in advance’. Expired tickets are recognised as revenue using estimates regarding the timing of recognition
based on historical trends. Fees charged for any changes to flight tickets are recognised as revenue immediately. Ancillary revenues
are recognised in the income statement in the period in which the associated services are provided. The Group recognises revenues
arising from its franchise agreement with Aer Arann on a net basis with the agreed franchise fee reported within "other revenue".
(b) Interest income
Interest income is recognised using the effective interest method.
(c) Dividend income
Dividend income is recognised when the right to receive payment is established.
2.23 Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.
Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-
line basis over the period of the lease.
Leases of aircraft where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases
are capitalised at the lease’s commencement at the lower of the fair value of the leased aircraft and the present value of the minimum
lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance
balance outstanding. The corresponding rental obligations, net of finance charges, are included in ‘finance lease obligations’. The interest
element of the finance expense is charged to the income statement over the lease period so as to produce a constant periodic rate of
interest on the remaining balance of the liability for each period. Certain lease contracts contain interest rate swaps that are closely
related to the underlying financing and as such, are not split out and accounted for as an embedded derivative. The aircraft acquired
under finance leases is depreciated over the shorter of the useful life of the asset and the lease term.