376 / 396
40. Financial risk management policies (cont’d.)
(e) Fair value measurement (cont’d.)
Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are valued by
reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted prices is readily
available, and the price represents actual and regularly occurring market transactions. An active market is one in which
transactions occur with sufficient volume and frequency to provide pricing information on an on-going basis. These would
include actively traded listed equities and actively exchange-traded derivatives.
Where fair value is determined using unquoted market prices in less active markets or quoted prices for similar assets and
liabilities, such instruments are generally classified as Level 2. In cases where quoted prices are generally not available,
the Group and Company then determines fair value based upon valuation techniques that use as inputs, market parameters
including but not limited to yield curves, volatilities and foreign exchange rates. The majority of valuation techniques employ
only observable market data and so reliability of the fair value measurement is high. These would include certain bonds,
government bonds, corporate debt securities, repurchase and reverse purchase agreements, loans, credit derivatives, certain
issued notes and the Group’s and Company’s over the counter (“OTC”) derivatives. Specific valuation techniques used to value
financial instruments includes:
• The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable
yield curves;
• The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date,
with the resulting value discounted back to present value;
• The fair value of fuel swap contracts is determined using forward fuel price at the balance sheet date, with the resulting
value discounted back to present value.
Financial instruments are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable
market data (unobservable inputs). Such inputs are generally determined based on observable inputs of a similar nature,
historical observations on the level of the input or other analytical techniques, including discounted cash flow projections.
41. Unconsolidated structured entities
The Company has set up Merah entities, special purpose companies (“SPC”) pursuant to aircraft related borrowings obtained from
various financial institutions. Under the arrangement, the Company enters into an Aircraft Instalment Sale Agreement with the SPC,
permitting the Company to possess and operate each of the Airbus A320 aircraft financed under the facility.
The SPC are orphan trust companies in which the Company has no equity interest. The SPC do not incur any losses or earn
any income during the financial year ended 31 December 2017. The aircraft and the corresponding term loans and finance costs
associated with the SPC have been recognised by the Group and Company upon the purchase of the aircraft.
The Group and Company does not provide any financial support to the SPC or have any contractual obligation to make good the
losses, if any.
NOTES TO THE
FINANCIAL STATEMENTS
FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2017
[ ]
AirAsia Berhad
REPORTS AND FINANCIAL STATEMENTS
362