12 Months Financial Report - Turkish Airlines

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TÜRK HAVA YOLLARI ANONİM ORTAKLIĞINOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER, 20092. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Cont’d)2.5 Summary of Significant Accounting Policies (Cont’d)2.5.8 Financial Instruments (Cont’d)a) Financial assets (cont’d)Cash and cash equivalentsCash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquidinvestments which their maturities are three months or less from date of acquisition and that are readilyconvertible to a known amount of cash and are subject to an insignificant risk of changes in value. Thecarrying amount of these assets approximates their fair value.b) Financial liabilitiesThe Group’s financial liabilities and equity instruments are classified in accordance with the contractualarrangements and recognition principles of a financial liability and equity instrument. An equityinstrument is any contract that evidences a residual interest in the assets of an entity after deducting all ofits liabilities. The significant accounting policies for financial liabilities and equity instruments aredescribed below. Financial liabilities are classified as either financial liabilities at fair value through profitand loss or other financial liabilities.Financial liabilities at fair value through profit or lossFinancial liabilities at fair value through profit or loss are initially measured at fair value, and at eachreporting period revalued at fair value as of balance sheet date. Changes in fair value are recognized inprofit and loss. The net gain or loss recognized in profit or loss incorporates any interest paid on thefinancial liability.Other financial liabilitiesOther financial liabilities, including bank borrowings, are initially measured at fair value, net oftransaction costs. Other financial liabilities are subsequently measured at amortized cost using theeffective interest method, with interest expense recognized on an effective yield basis. The effectiveinterest method is a method of calculating the amortized cost of a financial liability and of allocatinginterest expense over the relevant period. The effective interest rate is the rate that exactly discountsestimated future cash payments through the expected life of the financial liability, or, where appropriate, ashorter period.19
TÜRK HAVA YOLLARI ANONİM ORTAKLIĞINOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER, 20092. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (Cont’d)2.5 Summary of Significant Accounting Policies (Cont’d)2.5.8 Financial Instruments (Cont’d)b) Financial liabilities (Cont’d)Derivative financial instruments and hedge accountingThe Group’s activities expose it primarily to the financial risks of changes in foreign exchange rates andinterest rates. The major source of interest rate risk is finance lease liabilities. The Group’s policy is toconvert some financial liabilities with fixed interest rates into financial liabilities with variable interestrates, and some financial liabilities denominated in EUR into financial liabilities denominated in USD.The derivative financial instruments obtained for this purpose are not subject to hedge accounting andprofit/loss arising from the changes in the fair values of those instruments are directly accounted in theincome statement. In 2009, Group converted some of the floating-rate loans into fixed-rate loans throughderivative financial instruments. Also, Group began to obtain derivative financial instruments to hedgeagainst jet fuel price risks beginning from 2009. Group accounts for those transactions as hedging againstcash flow risks arising from jet fuel prices. Use of derivative financial instruments is managed accordingto Group policy which is written principles approved by Board of Directors and compliant with riskmanagement strategy.The Group does not use derivative financial instruments for speculative purposes.Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, orexercised, or no longer qualifies for hedge accounting. At that time, for forecast transactions, anycumulative gain or loss on the hedging instrument recognized in equity is retained in equity until theforecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulativegain or loss recognized in equity is transferred to profit or loss for the period.Derivatives embedded in other financial instruments or other non-financial host contracts are treated asseparate derivatives when their risks and characteristics are not closely related to those of the hostcontract and the host contract is not carried at fair value with unrealized gains or losses reported in profitor loss.2.5.9 Foreign Currency TransactionsTransactions in foreign currencies are translated into Turkish Lira at the rates of exchange ruling at thetransaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at theexchange rate ruling at the balance sheet date.Gains and losses arising on settlement and translation of foreign currency items are included in thestatements of income.20
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