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Key Audit Matters (cont’d.)
Derivative financial instruments
Our response
Refer to Note 21 to the financial statements.
As at 31 December2017, the derivative financial assets and liabilities
amounted to RM588 mil and RM146 mil respectively for the Group
and RM588 mil and RM161 mil respectively for the Company. Net
gains and losses on effective cash flow hedges arising during the
financial year were recognised in other comprehensive income.
The gain or loss arising from ineffective hedge is recognised
immediately in the income statement.
The Group and the Company enter into various derivative financial
instruments as part of the Group’s overall hedging strategy to
manage its exposure to fuel price risk, foreign currency risk and
interest rate risk. These instruments comprised forward foreign
currency contracts, interest rate swaps, interest rate caps, cross-
currency interest rate swaps, fuel options and fuel swap contracts.
Valuation models used to estimate the fair value of derivative
financial instrument can be subjective in nature and involve various
assumptions regarding future market conditions, such as risk free
rates, interest rate volatility and forward rates. The use of different
valuation techniques and assumptions could produce significantly
different estimates of fair value and/or hedge effectiveness.
Due to the complexity involved and the magnitude of the balance,
we consider the fair value measurement of derivative financial
instruments to be an area of audit focus.
In addressing this area of audit focus, our audit procedures
included, amongst others:
• Involved our valuation specialists to assess the methodology
and the appropriateness of the valuation models used to
estimate the fair value of the derivative financial instruments.
Our valuation specialists also evaluated the key inputs applied
in the valuation model such as contractual cash flows, risk free
rates, interest ratevolatility and forward rates, bybenchmarking
them with external data; and
• Obtained third party confirmations to corroborate the existence
and valuation of the derivative financial instruments.
Intangible assets arising from the consolidation of PT Indonesia
AirAsia (“IAA”) and Philippines AirAsia (PAA”)
Our response
Refer to Note 12 to the financial statements.
During the financial year ended 31 December 2017, the Group,
pursuant to MFRS 10, Consolidated Financial Statements
consolidated the results and financial positions of PT Indonesia
AirAsia (“IAA”) and Philippines AirAsia (“PAA”).
Included in the identifiable assets of IAA and PAA as of the date
of consolidation are intangible assets of RM374.6 million and
RM69.3 million respectively, representing landing rights. These
intangible assets are assessed to have indefinite useful lives. The
Group estimated the fair value of these intangible assets based on
income approach using assumptions that are highly judgmental.
Due to the significance of the intangible assets and the subjective
nature of the valuations, we consider this to be an area of audit
focus.
In addressing this area of audit focus, our audit procedures
included, amongst others:
• Obtained an understanding of the methodology adopted in
estimating the cash flows to be derived from the intangible
assets and assessed whether such methodology is consistent
with those used in the industry;
• Evaluated the management’s assumption on the revenue to be
derived from the use of the landing rights; and
• Assessed whether the discount rate used to determine the
present value of the cash flows reflects the return that investors
would require if they were to choose an investment that would
generate cash flows with timing and risk profile equivalent to
those that the entity expects to derive.
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AirAsia Berhad
REPORTS AND FINANCIAL STATEMENTS