Cathay Pacific 2004 Annual Report Download - page 38

Principal Accounting Policies
34 Cathay Pacific Airways Limited 2004 Annual Report
2. BASIS OF CONSOLIDATION (continued)
In the Company’s balance sheet investments in
subsidiary companies are stated at cost less any
impairment loss recognised. The results of
subsidiary companies are accounted for by
the Company on the basis of dividends received
and receivable.
3. ASSOCIATED COMPANIES
Associated companies are those companies,
not being subsidiary companies, in which the
Group holds a substantial long-term interest
in the equity share capital and over which the
Group is in a position to exercise significant
management influence.
The consolidated profit and loss account
includes the Group’s share of results of
associated companies as reported in their
accounts made up to 31st December.
In the consolidated balance sheet investments
in associated companies represent the Group’s
share of net assets and loans to those
companies.
In the Company’s balance sheet, investments
in associated companies are stated at cost less
any impairment loss recognised and loans
to those companies.
4. FOREIGN CURRENCIES
Foreign currency transactions entered into during
the year are translated into Hong Kong dollars at
the market rates ruling at the relevant transaction
dates whilst the following items are translated at
the rates ruling at the balance sheet date:
(i) foreign currency denominated monetary
assets and liabilities (including currency
derivatives).
(ii) the balance sheets of foreign subsidiary
and associated companies.
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,
borrowings and leasing obligations are
arranged in foreign currencies such that
repayment can be met by anticipated
operating cash flows. In addition currency
derivatives are used 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 Changes in Equity.
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.
This accounting treatment is supported by
that element of International Financial
Reporting Standards (“IFRS”) which deals
with accounting for hedge transactions.
HKAS 39 “Financial Instruments: Recognition
and Measurement”, which is the same as the
equivalent IFRS, became effective on 1st
January 2005 and replaced HK SSAP 11 which
required all such exchange differences be
charged to the profit and loss account
immediately. Note 21 to the accounts sets out
the effect had HK SSAP 11 been adopted.
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 have
concluded that the adopted treatment gives
a true and fair view of the financial position,
financial performance and cash flow of
the Group.