Singapore Airlines 2015 Annual Report Download - page 198

Notes to the Financial Statements
31 March 2015
38 Financial Risk Management Objectives and Policies (in $ million) (continued)
(c) Interest rate risk
The Group’s earnings are also aected 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 2015, the Company has interest rate cap contracts at a strike rate of 6.50% (2014: 6.50%), maturing in two to
three years, to hedge against risk of increase in aircra lease rentals. The cash flow hedges of the interest rate cap contracts
are assessed to be highly eective. A net fair value loss before tax of $6.1 million (2014: $16.7 million), with a related
deferred tax credit of $1.0 million (2014: $2.8 million), is included in the fair value reserve in respect of these contracts.
In FY2009/10, the Company entered into interest rate swap contracts to protect a portion of the future operating lease
rent payments from exposure to fluctuations in interest rates. These contracts were settled in FY2010/11. The balance
in the fair value reserve will be recognised in the profit and loss account over the lease term of the respective aircra. A
net fair value loss before tax of $4.6 million (2014: $14.7 million), with a related deferred tax credit of $0.8 million (2014:
$2.5 million), is included in the fair value reserve in respect of these contracts.
In FY2013/14, the Company entered into new interest rate swap contracts to protect a portion of the future operating lease
rent payments from exposure to fluctuations in interest rates. These contracts were settled in FY2014/15. The balance in
the fair value reserve will be recognised in the profit and loss account over the lease term of the respective aircra. A net
fair value loss before tax of $1.1 million (2014: nil), with a related deferred tax credit of $0.2 million (2014: nil), is included
in the fair value reserve in respect of these contracts.
As at 31 March 2015, other than those instruments entered into by the Company, the Group has interest rate swap agreements
in place whereby it pays fixed rates of interest ranging from 3.00% to 3.45% (2014: 3.00% to 3.45%) and receives a variable
rate linked to LIBOR. 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 swaps ranges from 21 August 2015 to 5 March 2016. The cash
flow hedges of some of these contracts are assessed to be highly eective and at 31 March 2015, a net fair value gain of
$1.2 million (2014: net fair value loss of $0.9 million) is 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aecttheinterestincomeorfinancechargesofvariableinterestfinancialinstruments.
• Changesinmarketinterestratesaectthefairvalueofderivativefinancialinstrumentsdesignatedashedging
instruments and all interest rate hedges are expected to be highly eective.
• 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.
Under these assumptions, an increase or decrease in market interest rates of one basis point for all currencies in which the
Group has derivative financial instruments and variable rate assets and liabilities at 31 March 2015 will have the eects
as set out in the table below.
196 FINANCIAL