Singapore Airlines 2013 Annual Report Download - page 183

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181
ANNUAL REPORT 2012/13
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 2013, the Company has interest rate cap contracts at a strike rate of 6.50% (2012: 6.50%), maturing
in 4 to 5 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. A net fair value loss before tax of $17.6 million (2012: $15.9 million),
with a related deferred tax credit of $3.0 million (2012: $2.7 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 aircraft.
A net fair value loss before tax of $24.8 million (2012: $34.8 million), with a related deferred tax credit of $4.2 million
(2012: $5.9 million), is included in the fair value reserve in respect of these contracts.
As at 31 March 2013, 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 4.95% (2012: 3.00% to 4.95%)
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 1 March
2014 to 5 March 2016. The cash flow hedges of some of these contracts are assessed to be highly effective and at 31
March 2013, a net fair value loss of $4.4 million (2012: $8.3 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 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.