Aer Lingus 2013 Annual Report Download - page 96

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2.11 Emission Allowances.
Emission allowances received free of charge are recognised at nil cost on date of grant. Allowances purchased subsequently are recognised
at cost. Purchased allowances continue to be carried at original cost, and are not revalued or amortised but are tested for impairment where
indicators exist that the carrying value may not be recoverable. Liabilities in respect of emission obligations are measured as the best
estimate of the further expenditure required to settle the present obligation at the reporting date.
2.12 Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their
fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument,
and if so, the nature of the item being hedged. The Group designates certain derivatives as either:
 Hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges); or
 Hedges of a particular risk associated with a recognised assets or liability or a highly probable forecast transaction (cash flow hedge).
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk
management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge
inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items.
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 31. 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. 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 of the
interest rate swaps is recognised in the income statement within “Other gains – net”.
If a 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
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.
2.13 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.
2.14 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 12 months 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.