Singapore Airlines 2010 Annual Report Download - page 186

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SINGAPORE AIRLINES
184
notes to the financial statements
31 march 2010
38 Financial Risk Management Objectives and Policies (in $ million) (continued)
(c) Interest rate risk
The Group’s earnings are also affected by changes in interest rates due to the impact such changes have on
interest income and expense from short-term deposits and other interest-bearing financial assets and liabilities.
The Group enters into interest rate swap contracts and interest rate cap contracts to manage interest rate costs
on its financial assets and liabilities, with the prior approval of the BEC or Boards of subsidiary companies.
Cash flow hedges
As at 31 March 2010, the Company had interest rate cap contracts at a strike rate of 6.50% (2009: 6.50%),
maturing in 7 to 8 years, to hedge against risk of increase in aircraft lease rentals.
The cash flow hedges of the interest rate cap contracts are assessed to be highly effective and as at 31 March
2010, a net fair value gain before tax of $4.1 million (2009: net fair value loss before tax of $6.5 million), with
a related deferred tax charge of $0.7 million (2009: deferred tax credit of $1.3 million), was included in the fair
value reserve in respect of these contracts.
The Group also has interest rate swap contracts in place whereby it pays fixed rates of interest ranging from
3.00% to 4.95% (2009: 3.00% to 4.95%) and receives the USD Swap rate then prevailing at the delivery of
certain aircraft on operating lease. These contracts are used to protect a portion of the finance lease commitments
from exposure to fluctuations in interest rates. The maturity period of these contracts ranges from 7 September
2015 to 25 October 2015.
The cash flow hedges of some of the interest rate swap contracts are assessed to be highly effective and as at
31 March 2010, a net fair value loss before tax of $22.7 million (2009: $14.4 million), with a related deferred
tax credit of $2.2 million (2009: $2.4 million), was included in the fair value reserve in respect of these contracts.
Interest rate sensitivity analysis
The interest rate sensitivity analysis is based on the following assumptions:
• Changes in market interest rates affect the interest income or finance charges of variable interest
financial instruments.
• Changes in market interest rates affect the fair value of derivative financial instruments designated as
hedging instruments and all interest rate hedges are expected to be highly effective.
• Changes in the fair values of derivative financial instruments and other financial assets and liabilities
are estimated by discounting the future cash flows to net present values using appropriate market rates
prevailing at the end of the reporting period.