Financial - Turkish Airlines

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(Convenience Translation of Report and Financial Statements Originally Issued in Turkish)TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI AND ITS SUBSIDIARIESNotes to the Audited Consolidated Financial StatementsFor the Year Ended 31 December 2012(All amounts are expressed in Turkish Lira (TL) unless otherwise stated.)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 each reporting periodrevalued at fair value as of balance sheet date. Changes in fair value are recognized in profit and loss. The net gain orloss recognized in profit or loss incorporates any interest paid on the financial liability.Other financial liabilitiesOther financial liabilities, including bank borrowings, are initially measured at fair value, net of transaction costs. Otherfinancial liabilities are subsequently measured at amortized cost using the effective interest method, with interestexpense recognized on an effective yield basis. The effective interest method is a method of calculating the amortizedcost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is therate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, whereappropriate, a shorter period.Derivative financial instruments and hedge accountingThe Group’s activities expose it primarily to the financial risks of changes in foreign exchange rates and interest rates.The major source of interest rate risk is finance lease liabilities. The Group’s policy is to convert some financial liabilitieswith fixed interest rates into financial liabilities with variable interest rates, and some financial liabilities denominatedin EUR into financial liabilities denominated in USD. The derivative financial instruments obtained for this purposeare not subject to hedge accounting and profit/loss arising from the changes in the fair values of those instruments isdirectly accounted in the income statement. The Group converted some of the floating-rate loans into fixed-rate loansthrough derivative financial instruments.Also, the Group began to obtain derivative financial instruments to hedge against jet fuel price risks beginning from2009. The Group accounts for those transactions as hedging against cash flow risks arising from jet fuel prices.Use of derivative financial instruments is managed according to the Group policy which is written principles approved bythe Board of Directors and compliant with the risk management 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, or exercised, or no longerqualifies for hedge accounting. At that time, for forecast transactions, any cumulative gain or loss on the hedginginstrument recognized in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction isno longer expected to occur, the net cumulative gain or loss recognized in equity is transferred to profit or loss for theperiod.Derivative financial instruments are calculated according to the fair value and again calculated for the next reportingperiod at fair value base. If the changes in the fair value of derivatives which are determined as the hedge of future cashflows are the ineffective, then they are recorded directly under income statement.20 TÜRK HAVA YOLLARI ANNUAL REPORT 2012
(Convenience Translation of Report and Financial Statements Originally Issued in Turkish)TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI AND ITS SUBSIDIARIESNotes to the Audited Consolidated Financial StatementsFor the Year Ended 31 December 2012(All amounts are expressed in Turkish Lira (TL) unless otherwise stated.)2.5.10 Foreign Currency TransactionsTransactions in foreign currencies are translated into US Dollar at the rates of exchange ruling at the transaction dates.Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate ruling at thebalance sheet date.Gains and losses arising on settlement and translation of foreign currency items are included in the statements ofincome.The closing and average TL - US Dollar exchange rates for the periods are as follows:Closing RateAverage RateYear ended 31 December 2012 1,7826 1,7922Year ended 31 December 2011 1,8889 1,6708Year ended 31 December 2010 1,5460 1,4990The closing and average US Dollar - Euro exchange rates for the periods are as follows:Closing RateAverage RateYear ended 31 December 2012 1,3193 1,2856Year ended 31 December 2011 1,2938 1,3912Year ended 31 December 2010 1,3254 1,32662.5.11 Earnings per ShareEarnings per share is calculated by dividing net profit by weighted average number of shares outstanding in the relevantperiod. In Turkey, companies are allowed to increase their capital by distributing free shares to share holders fromaccumulated profits. In calculation of earnings per share, such free shares are considered as issued shares. Therefore,weighted average number of shares in the calculation of earnings per share is found by applying distribution of freeshares retrospectively.2.5.12 Events After to the Balance Sheet DateAn explanation for any event between the balance sheet date and the publication date of the balance sheet, which haspositive or negative effects on the Group (should any evidence come about events that were prior to the balance sheetdate or should new events come about) they will be explained in the relevant footnote.If such an event were to arise, the Group restates its financial statements accordingly.2.5.13 Provisions, Contingent Liabilities, Contingent AssetsProvisions are recognized when the Group has a present obligation as a result of a past event, and it is probable that theGroup will be required to settle that obligation, and a reliable estimate can be made of the amount of the obligation. Theamount recognized as a provision is the best estimate of the consideration required to settle the present obligation atthe balance sheet date, taking into account the risks and uncertainties surrounding the obligation.21
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