Qantas 2011 Annual Report Download - page 58

THE QANTAS GROUP 56
for the year ended 30 June 2011
Notes to the Financial Statements continued
1. Statement of Signicant Accounting Policies continued
Group has incurred legal or constructive obligations or made
payments on behalf of an associate or jointly controlled entity.
E FOREIGN CURRENCY
Transactions
Transactions in foreign currencies are translated to functional
currency at the rates of exchange prevailing at the date of each
transaction except where hedge accounting is applied. At balance
date, monetary assets and liabilities denominated in foreign currencies
are translated to the functional currency at the rates of exchange
prevailing at that date. Resulting exchange differences are brought
to account as exchange gains or losses in the Consolidated Income
Statement in the year in which the exchange rates change. Non-
monetary assets and liabilities that are measured in terms of historical
cost in a foreign currency are translated using the exchange rate
at the date of the transaction. Non-monetary assets and liabilities
denominated in foreign currencies that are stated at fair value are
translated to Australian dollars at foreign exchange rates prevailing
at the dates the fair value was determined.
Translation of Foreign Operations
Assets and liabilities of foreign operations, including controlled
entities and investments in associates and jointly controlled entities,
are translated at the rates of exchange prevailing at balance date.
The Income Statements of foreign operations are translated to
Australian dollars at rates approximating the foreign exchange rates
prevailing at the dates of the transactions. Exchange differences
arising on translation are recognised in other comprehensive income
and are presented within equity in the foreign currency translation
reserve. The balance of the foreign currency translation reserve
relating to a foreign operation that is disposed of, or partially
disposed of, is recognised in the Consolidated Income Statement
in the year of disposal.
When the settlement of a monetary item receivable from or payable
to a foreign operation is neither planned nor likely in the foreseeable
future, foreign exchange gains and losses arising from such a
monetary item are considered to form part of the net investment
in a foreign operation and are recognised in other comprehensive
income and are presented within equity in the foreign currency
translation reserve.
F DERIVATIVE FINANCIAL INSTRUMENTS
The Qantas Group is subject to foreign currency, interest rate, fuel
price and credit risks. Derivative and non-derivative nancial
instruments are used to hedge these risks. It is the Qantas Group’s
policy not to enter into, issue or hold derivative nancial instruments
for speculative trading purposes.
Derivative nancial instruments are recognised at fair value both
initially and on an ongoing basis. Transaction costs attributable to
the derivative are recognised in the Consolidated Income Statement
when incurred. The method of recognising gains and losses resulting
from movements in market prices depends on whether the derivative
is a designated hedging instrument, and if so, the nature of the risk
being hedged. The Qantas Group designates certain derivatives as
either hedges of the fair value of recognised assets or liabilities or
a rm commitment (fair value hedges), or hedges of highly probable
forecast transactions (cash ow hedges). Gains and losses on
derivative nancial instruments qualifying for hedge accounting
are recognised in the same category in the Consolidated Income
Statement as the underlying hedged item. Changes in underlying
market conditions or hedging strategies could result in recognition
in the Consolidated Income Statement of changes in fair value of
derivative nancial instruments designated as hedges.
The Qantas Group documents at the inception of the transaction
the relationship between hedging instruments and hedged items,
including the risk management objective and strategy for undertaking
each transaction. The Qantas Group also documents its assessment,
both at hedge inception and on an ongoing basis, of whether the
hedging instruments that are used in hedge transactions have been
and will continue to be highly effective.
Fair Value Hedges
Changes in the fair value of derivative nancial instruments that are
designated and qualify as fair value hedges are recorded in the
Consolidated Income Statement, together with any changes in the
fair value of the hedged asset or liability that are attributable to the
hedged risk.
Cash Flow Hedges
The effective portion of changes in the fair value of derivative
nancial instruments that are designated and qualify as cash ow
hedges are recognised in other comprehensive income and are
presented within equity in the hedge reserve. The cumulative gain
or loss in the hedge reserve is recognised in the Consolidated Income
Statement in the periods when the hedged item will affect prot or
loss (i.e. when the underlying income or expense is recognised).
Where the hedged item is of a capital nature, the cumulative gain
or loss recognised in the hedge reserve is transferred to the carrying
amount of the asset or liability when the asset or liability is recognised.
When a hedging instrument expires or is sold, terminated or exercised,
or the Qantas Group revokes designation of the hedge relationship
but the hedged forecast transaction is still expected to occur, the
cumulative gain or loss at that point remains in the hedge reserve
and is recognised in accordance with the above policy when the
transaction occurs. If the underlying hedged transaction is no longer
expected to take place, the cumulative unrealised gain or loss
recognised in the hedge reserve with respect to the hedging
instrument is recognised immediately in the Consolidated Income
Statement.
Ineffective and Non-designated Derivatives
From time to time certain derivative nancial instruments do not
qualify for hedge accounting notwithstanding that the derivatives
are held to hedge identied exposures. Any changes in the fair value
of a derivative instrument, or part of a derivative instrument, that do
not qualify for hedge accounting are classied as ‘ineffective’ and
recognised immediately in the Consolidated Income Statement.
Fair Value Calculations
The fair value of nancial instruments traded in active markets is
based on quoted market prices at balance date. The fair value of
nancial instruments that are not traded in an active market are
estimated using valuation techniques consistent with accepted
market practice. The Qantas Group uses a variety of methods
and input assumptions that are based on market conditions
existing at balance date.
Financial Guarantee Contracts
Financial guarantee contracts are recognised as a nancial liability
at the time the guarantee is issued. The liability is initially measured
at fair value and subsequently at the higher of the amount determined
in accordance with AASB 
Provisions, Contingent Liabilities and
Contingent Assets
and the amount initially recognised less cumulative
amortisation, where appropriate.
The fair value of nancial guarantees is determined as the present
value of the difference in net cash ows between the contractual
payments under the debt instrument and the payments that would
be required without the guarantee, or the estimated amount that
would be payable to a third party for assuming the obligations.
Where guarantees in relation to loans or payables of associates and
jointly controlled entities are provided for no compensation, the fair
values are accounted for as contributions and recognised as part
of the cost of the investment.