1998 Annual Report - Four Seasons Hotels and Resorts

15. F A I R V A L U E O F F I N A N C I A L I N S T R U M E N T S:The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a currenttransaction between willing parties, other than a forced or liquidation sale. These estimates, although based on the relevantmarket information about the financial instrument, are subjective in nature and involve uncertainties and matters ofsignificant judgment and therefore cannot be determined with precision. Changes in assumptions could significantlyaffect the estimates.As cash equivalents, current accounts receivable, current accounts payable and certain other short-term financialinstruments are all short-term in nature, their carrying amounts approximate fair value.The fair values of the Corporation’s long-term debt are estimated using discounted cash flow analysis which arebased on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.Other financial instruments held by the Corporation include interest bearing loans receivable due from owners ofmanaged hotels (note 4). The Corporation does not have plans to sell these loans to third parties and will realize or settlethem in the ordinary course of business. The fair value of these instruments cannot be reasonably estimated because noactive and liquid market exists for these instruments, and a market rate of interest (for instruments having similar termsand characteristics) required to use estimation techniques such as discounted cash flow analysis cannot reasonably bedetermined due to the unusual terms of these instruments.The Corporation enters into foreign exchange forward contracts that oblige it to buy or sell specific amounts offoreign currencies at set future dates at predetermined exchange rates. Because a significant portion of the Corporation’srevenues are derived in foreign currencies (primarily US dollars) and expenditures incurred by the Corporation for its hotelmanagement operations are denominated primarily in Canadian dollars, the Corporation enters into such contracts toprotect itself in the event of a strengthening Canadian currency. Management estimates future foreign currency cash flowson an ongoing basis, based on its projections of foreign currency denominated management fees and other transactions.Management negotiates foreign exchange forward contracts in proportion to the magnitude and timing of these cash flows.As at December 31, 1998, the Corporation had sold forward US$139,805 (1997 – US$90,700), under 26 forwardcontracts (1997 – 14 forward contracts) maturing over a 25-month period.Because the Corporation has significant long-term receivables in pound sterling, the Corporation, in 1998, enteredinto foreign exchange forward contracts to protect itself in the event of a strengthening Canadian currency. As at December 31,1998, the Corporation had sold forward £37,651, under seven forward contracts maturing between February 1999and March 2001.The fair value of foreign exchange forward contracts is estimated from quotes obtained from the Corporation’scounterparties for the same or similar financial instruments.The fair value of financial instruments is as follows:Estimatedfair valueCarryingamount1998:Long-term debt $ 164,000 $ 164,987Foreign exchange forward contracts (4,600) —1997:Long-term debt 139,000 140,241Foreign exchange forward contracts (4,500) —79Four Seasons Hotels Inc.