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Cathay Pacific Airways Limited Annual Report 2006
48
Principal Accounting Policies
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 incurred
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.
All derivative financial instruments are 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.
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.
Actuarial gains and losses are not recognised
unless their cumulative amounts exceeds either
10% of the present value of the defined benefit
obligation or 10% of the fair value of plan assets
whichever is greater. The amount exceeding this
corridor is recognised on a straight line basis over
the expected average remaining working lives of
the employees participating in the plans.