Ryanair 2008 Annual Report Download - page 51

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Derivative financial instruments
Ryanair is exposed to market risks relating to fluctuations in commodity prices, interest rates and
currency exchange rates. The objective of financial risk management at Ryanair is to minimise the impact of
commodity price, interest rate and foreign exchange rate fluctuations on the Group’s earnings, cash flows
and equity.
To manage these risks, Ryanair uses various derivative financial instruments, including interest rate
swaps, foreign currency forward contracts and commodity contracts. These derivative financial instruments
are generally held to maturity. The Group enters into these arrangements with the goal of hedging its
operational and balance sheet risk. However, Ryanair’s exposure to commodity price, interest rate and
currency exchange rate fluctuations cannot be neutralised completely.
Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition,
derivative financial instruments continue to be remeasured to fair value, and changes therein are accounted
for as described below.
The fair value of interest rate swaps is computed by discounting the projected cash flows on the
company’s swap arrangements to present value. The fair value of forward exchange contracts and
commodity contracts is their quoted market price at the balance sheet date, being the present value of the
quoted forward price. Recognition of any resultant gain or loss depends on the nature of the item being
hedged.
Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a
recognised asset or liability or a highly probable forecasted transaction, the effective part of any gain or loss
on the derivative financial instrument is recognised directly in equity (in the cash flow hedging reserve).
When the hedged forecasted transaction results in the recognition of a non financial asset or liability, the
cumulative gain or loss is removed from equity and included in the initial measurement of that asset or
liability. Otherwise the cumulative gain or loss is removed from equity and recognised in the income
statement at the same time as the hedged transaction. The ineffective part of any hedging transaction and the
gain or loss thereon is recognised in the income statement immediately.
When a hedging instrument or hedge relationship is terminated but the underlying hedged transaction
still is expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in
accordance with the above policy when the transaction occurs. If the hedged transaction is no longer
expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised in the
income statement immediately.
Where a derivative financial instrument hedges the changes in fair value of a recognised asset or
liability or an unrecognised firm commitment, any gain or loss on the hedging instrument is recognised in the
income statement. The hedged item also is stated at fair value in respect of the risk being hedged, with any
gain or loss also being recognised in the income statement.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is based on invoiced price on an
average basis for all stock categories. Net realisable value is calculated as estimated selling price arising in
the ordinary course of business, net of estimated selling costs.