Singapore Airlines 2016 Annual Report Download - page 205

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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
In FY2013/14, 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 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 $0.7 million (2015: $1.1 million),
with a related deferred tax credit of $0.1 million (2015: $0.2 million), is included in the fair value reserve in respect of these contracts.
As at 31 March 2016, 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% (2015: 3.00% to 3.45%) and receives a variable rate linked to LIBOR.
These contracts are used to protect a portion of the lease commitments from exposure to fluctuations in interest rates. The cash flow
hedges of the interest rate swaps were assessed to be highly eective and at 31 March 2016, a net fair value gain of $1.2 million (2015: net
fair value gain of $1.2 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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 2016 will have the eects as set out in the table below.
Annual Report FY2015/16 203