Cathay Pacific 2009 Annual Report Download - page 53

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Principal Accounting Policies
8. Financial assets (continued)
Funds with investment managers and other liquid
investments which are managed and evaluated on a
fair value basis are designated as at fair value through
profit and loss.
The accounting policy for derivative financial assets is
outlined in accounting policy 10.
Financial assets are recognised or derecognised by
the Group on the date when the purchase or sale of
the assets occurs.
Interest income from financial assets is recognised as
it accrues while dividend income is recognised when
the right to receive payment is established.
9. Financial liabilities
Long-term loans, finance lease obligations and trade
and other payables are stated at amortised cost or
designated as at fair value through profit and loss.
Where long-term liabilities have been defeased by the
placement of security deposits, those liabilities and
deposits (and income and charge arising therefrom)
are netted off, in order to reflect the overall
commercial effect of the arrangements. Such netting
off occurs where there is a current legally enforceable
right to set off the liability and the deposit and the
Group intends either to settle on a net basis or to
realise the deposit and settle the liability
simultaneously. For transactions 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 statement of financial position. Where
derivative financial instruments are designated as
effective hedging instruments under HKAS 39
“Financial Instruments: Recognition and
Measurement” 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 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 immediately.
Derivatives which do not qualify as hedging
instruments under HKAS 39 “Financial Instruments:
Recognition and Measurement” are accounted for
as held for trading financial instruments and any fair
value change is recognised in the profit and
loss 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 in the profit and
loss account on a straight line basis over the
expected average remaining working lives of the
employees participating in the plans.
Cathay Pacific Airways Limited Annual Report 2009 51