Cathay Pacific 2001 Annual Report Download - page 30

28 Cathay Pacific Airways Limited Annual Report 2001
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 exposure to exchange rate fluctuations on future operating cash flows the Group arranges
borrowings and leasing obligations in foreign currencies such that repayment can be met by anticipated
operating cash flows. In addition the Group takes out currency derivatives to hedge anticipated cash flows.
Any unrealised exchange differences on these borrowings, leasing obligations, currency derivatives and on
related security deposits are recognised directly in equity via the statement of recognised gains and losses.
These exchange differences are included in the profit and loss account as an adjustment to revenue in the
same period or periods during which the hedged transaction affects the net profit and loss.
Although this complies with International Accounting Standards it does not comply with HK SSAP 11 which
requires that all such exchange differences are charged to the profit and loss account immediately. The effect
of this departure from HK SSAP 11 is set out in note 22 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.
The treatment of exchange differences on foreign currency operating cash flow hedges is supported by that
element of International Accounting Standards which deals with accounting for hedge transactions. In the opinion
of the Directors this treatment fairly reflects the effects of the Group’s foreign currency cash flow hedge
arrangements. The matching of foreign currency cash flows is a key risk management tool for the Group's
airline operations. The appropriateness of continuing this treatment is assessed regularly, taking into consideration
the latest operating cash flow projections of each currency. 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
conclude that the adopted treatment gives a true and fair view of the financial position, financial performance
and cash flow of the Group.
5. FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost less accumulated depreciation and impairment.
Depreciation of fixed assets is calculated on a straight line basis to write down cost over anticipated useful
lives to estimated residual values as follows:
Aircraft and related equipment over 20 years to residual value of between 0% to 10% 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 10 years.
The Group’s depreciation policy and the carrying amount of fixed assets are reviewed annually 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 assets. Any impairment in value is recognised by writing down
the carrying amount to estimated recoverable amount which is the higher of the value in use (the present
value of future cash flows) and the net selling price.
PRINCIPAL ACCOUNTING POLICIES