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44 Cathay Pacific Airways Limited Annual Report 2005
9. Financial liabilities (continued)
entered into before 2005, such netting off occurs
where there is a right to insist on net settlement
of the liability and the deposit including situations
of default and where that right is assured beyond
doubt, thereby reflecting the substance and
economic reality of the transactions.
The accounting policy for derivative financial
liabilities is outlined in accounting policy 10.
Financial liabilities are recognised or derecognised
when the contracted obligations are committed
or extinguished.
Interest expenses incurred under financial liabilities
are calculated and recognised using the effective
interest method.
10. Derivative financial instruments
Derivative financial instruments are used solely
to manage exposures to fluctuations in foreign
exchange rates, interest rates and jet fuel
prices in accordance with the Group’s risk
management policies. The Group does not hold
or issue derivative financial instruments for
trading purposes.
With the adoption of HKAS 39, all derivative
financial instruments are now recognised at fair
value in the balance sheet. Where derivative
financial instruments are designated as effective
hedging instruments under HKAS 39 and hedge
exposure to fluctuations in foreign exchange rates,
interest rates or jet fuel prices, any fair value
change is accounted for as follows:
(a) the portion of the fair value change that is
determined to be an effective cash flow
hedge is recognised directly in equity via the
Statement of Changes in Equity and is included
in the profit and loss account as an adjustment
to revenue, net finance charges or fuel expense
in the same period or periods during which the
hedged transaction affects the profit and loss.
(b) the ineffective portion of the fair value
change is recognised in the profit and loss
account immediately.
Derivatives which do not qualify as hedging
instruments under HKAS 39 are accounted for as
held for trading financial instruments and any fair
value change is recognised in the profit and loss
account immediately.
In previous years, currency derivatives were stated
at amortised cost and amounts receivable or
payable under interest rate derivatives were
accrued as interest expense or interest income.
Jet fuel derivatives were not recognised in the
balance sheet.
As a result of adopting the transitional provisions
of HKAS 39, retained earnings brought forward
from 2004 have been reduced by HK$106 million
being the restatement of derivative financial
instruments. The effect of the change in the 2005
results is set out in note 28 to the accounts.
11. Fair value measurement
Fair value of financial assets and financial liabilities
is determined either by reference to quoted
market values or by discounting future cash flows
using market interest rates for similar instruments.
12. Retirement benefits
Arrangements for staff retirement benefits vary
from country to country and are made in
accordance with local regulations and customs.
The retirement benefit obligation in respect of
defined benefit retirement plans refers to the
obligation less the fair value of plan assets where
the obligation is calculated by estimating the
present value of the expected future payments
required to settle the benefit that employees have
earned using the projected unit credit method.
Principal Accounting Policies