annual report 2009 - Aer Lingus

Financial Statements Aer Lingus Group Plc – Annual Report 2009673 Financial risk management [continued]3.2 Financial risk factorsThe Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to providereturns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.In order to maintain or adjust the capital structure, the Group may return capital to shareholders, issue new shares or sell assets toreduce debt.Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as debtdivided by total capital. Debt consists solely of finance lease obligations. Total capital is calculated as equity as shown in theconsolidated statement of financial position plus debt. Overall, the Group is currently in a net cash position.3.3 Fair value estimationEffective 1 January 2009, the Group adopted the amendment to IFRS 7 for financial instruments that are measured in the statementof financial position at fair value. This requires disclosure of fair value measurements by level of the following fair value measurementhierarchy:• quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);• inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices)or indirectly (that is, derived from prices) (level 2); and• inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).The following table presents the Group’s assets and liabilities that are measured at fair value at 31 December 2009.Level 1 Level 2 Level 3 Total€’000 €’000 €’000 €’000AssetsDerivative financial instruments – 24,548 – 24,548LiabilitiesDerivative financial instruments – 19,176 – 19,176The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determinedby using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely aslittle as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrumentis included in level 2.Specific valuation techniques used to value derivative financial instruments include:• The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observableyield curves.• The fair value of forward foreign exchange contracts is determined using forward exchange rates at the statement of financialposition date, with the resulting value discounted back to present value.• The fair value of fuel price swaps is determined using forward fuel prices at the statement of financial position date, with theresulting value discounted back to present value.