Cathay Pacific 2010 Annual Report Download - page 52

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50
Principal Accounting Policies
Cash and cash equivalents comprise cash at bank and
on hand, demand deposits with banks and other
financial institutions, and short-term, highly liquid
investments that are readily convertible into known
amounts of cash and which are subject to an
insignificant risk of changes in value, having been
within three months of maturity at acquisition.
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.
Impairment is recognised when the recoverability of
the debt is in doubt resulting from financial difficulty
of a customer or the debt in dispute.
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 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 profit and loss.
(b) the ineffective portion of the fair value change is
recognised in 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 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.