I N I T I A L P U B L I C O F F E R I N G - Aer Lingus

Part IXOperating and Financial ReviewAer Lingus receives prepayments for its ticket sales which are recorded as advance payments on itsbalance sheet. Prior to October 2004, when Aer Lingus ceased making bulk ticket sales, it receivedpayments from charter and package tour operators for bulk ticket sales in the month the flight wasflown. Accordingly, for the period during which bulk ticket sales were made, Aer Lingus generallydid not incur a liability for advanced payments for such sales.Aer Lingus generally recognises cargo revenues when the transportation is provided, which typicallyoccurs shortly after the time of booking.Aer Lingus recognises ancillary and other revenues when the services are rendered.11.2 Derivative Financial Instruments and Hedging ActivitiesAer Lingus initially recognises derivatives at fair value on the date a derivative contract is entered intoand subsequently re-measures them at their fair value. The method of recognising the resulting gainor loss depends on whether the derivative is designated as a hedging instrument, and if so, thenature of the item being hedged. Aer Lingus designates certain derivatives as either hedges of:) the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or) a particular risk associated with a recognised asset or liability or a highly probable forecasttransaction (cash flow hedge).(a)Fair value hedgeFair value hedges are principally used to manage the interest rate risk in certain fixed rate exposures.Changes in the fair value of derivatives that are designated and qualify as fair value hedges arerecorded in the income statement, together with any changes in the fair value of the hedged assetor liability that are attributable to the hedged risk. The gain or loss relating to the effective portion ofinterest rate swaps, hedging fixed rate assets and borrowings is recognised in the income statementwithin ‘‘financing income or expense’’, along with the changes in the fair value of the hedged fixedrate assets and borrowings attributable to interest rate risk. The gain or loss relating to theineffective portion of the interest rate swaps is recognised in the income statement within ‘‘FinanceExpense’’.If a hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amountof a hedge item for which the effective interest method is used is amortised to profit or loss over theperiod to maturity.(b)Cash flow hedgeCash flow hedges are principally used to hedge the commodity price risk associated with Aer Lingus’forecasted fuel purchases as well as certain foreign exchange and interest rate exposures. Theeffective portion of changes in the fair value of derivatives that are designated and qualify as cashflow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognisedimmediately in the income statement within ‘‘Fuel and oil costs’’ in the case of fuel purchases, and‘‘Other gains/(losses) — net’’ in the case of foreign exchange hedges.Amounts accumulated in equity are reclassified in the income statement in the periods when thehedged item affects profit or loss (for instance when the forecast purchase that is hedged takesplace). They are included under the relevant caption in the financial statements which reflect thenature and purpose of the hedge.(c)Derivatives that do not qualify for hedge accountingSome derivatives, while being economic hedges, do not meet the detailed hedge accounting criteriaunder IFRS. Changes in the fair value of these instruments are recognised immediately in the incomestatement. As Aer Lingus believes that the arrangements entered into in relation to its fuel andforeign exchange requirements are effective commercial hedges, the underlying financialperformance is separately disclosed as if these hedges had qualified in full for hedge accounting.158