Cathay Pacific 1998 Annual Report Download - page 36

Principal Accounting Policies
34 CATHAY PACIFIC AIRWAYS LIMITED ANNUAL REPORT 1998
4. Foreign currencies (continued)
Exchange differences arising on the translation of foreign currencies into Hong Kong dollars are
reflected in the profit and loss account except that:-
(i) To reduce its exposure to exchange rate fluctuations on future operating cash flows, the
Group arranges its borrowings and leasing obligations in foreign currencies such that
repayments can be met by these anticipated operating cash flows. In addition the Group takes
out currency swaps to hedge anticipated cash flows. Any unrealised exchange differences on
these borrowings, leasing obligations and currency swaps and on related security deposits are
deferred and carried forward in the balance sheet as deferred items. These exchange
differences are recognised in the profit and loss account as repayments under the original
loan or leasing obligation fall due or on the settlement date of the relevant currency swaps.
This treatment does not comply with HK SSAP11 which requires that all such unrealised
exchange differences are charged to the profit and loss account. The effect of this departure
from HK SSAP11 is set out in note 16(a) to the accounts.
(ii) Unrealised differences on net investments in foreign subsidiary and associated companies
(including intra-Group balances of an equity nature) and related long-term liabilities are taken
directly to reserves.
In the opinion of the Directors, the deferral of unrealised exchange differences on foreign currency
borrowings and lease obligations fairly reflects the effects of the Group’s long-term foreign currency
financing arrangements. The matching of foreign currency debt repayments against surplus
operating cash flows in the same currencies is a key foreign exchange risk management tool for the
Group’s airline operations, which involve multi-currency cash flows. The appropriateness of
continuing to defer these exchange differences is assessed regularly, taking into consideration the
latest operating cash flow projections of each currency in which the Group has long-term liabilities.
The Directors consider that the immediate recognition of all such exchange fluctuations in the profit
and loss account could materially distort year on year results and would not give a true and fair view.
5. Fixed assets and depreciation
Fixed assets are stated at cost less depreciation.
Depreciation of fixed assets is calculated on a straight line basis to write down their cost over their
anticipated useful lives to estimated residual values as follows:
Aircraft and related equipment over 15 to 20 years to residual value of between
10% to 20% of cost
Other equipment over 3 to 7 years to nil residual value
Leasehold land and buildings over the period of the lease to nil residual value
Major modifications to aircraft and reconfiguration costs are capitalised as part of aircraft cost and
are depreciated over periods of up to ten years.
The Group’s aircraft depreciation policy is reviewed regularly, taking into consideration factors
such as changes in fleet composition, current and forecast market prices, and technical factors which
affect the life expectancy of the fleet. Where decisions have been made to take aircraft out of service,
any impairment in value is recognised by writing down their carrying value to estimated net
recoverable amount.
All costs incurred by the Group in the construction of facilities at Chek Lap Kok are initially
recorded as properties under construction. No depreciation is provided on these costs until
construction is complete and the assets are put into effective use.