Air Canada 2006 Annual Report Download - page 49

14. CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that are most important to the portrayal of the Corporation’s financial
condition and results of operations. They require management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual
results could differ from those estimates under different assumptions or conditions.
The Corporation has identified the following areas that contain critical accounting estimates utilized in the
preparation of its financial statements:
Passenger and Cargo Revenues
Airline passenger and cargo advance sales are deferred and included in current liabilities. Advance sales
include the proceeds from the sale of flight tickets to Aeroplan which provides loyalty program services to the
Corporation and purchases seats from Air Canada under the CPSA. Passenger and cargo revenues are
recognized when the transportation is provided, except for revenue on unlimited flight passes which is
recognized on a straight-line basis over the period during which the travel pass is valid. The Corporation has
formed alliances with other airlines encompassing loyalty program participation, code sharing and coordination
of services including reservations, baggage handling and flight schedules. Revenues are allocated based upon
formulas specified in the agreements and are recognized as transportation is provided.
The Corporation performs regular evaluations on the deferred revenue liability which may result in adjustments
being recognized as revenue. Due to the complex pricing structures, the complex nature of interline, and other
commercial agreements used throughout the industry, historical experience over a period of many years, and
other factors including refunds, exchanges and unused tickets, certain relatively small amounts are recognized
as revenue based on estimates. Events and circumstances may result in actual results that are different from
estimates however these differences have historically not been material.
Employee Future Benefits
The Corporation maintains several defined benefit and defined contribution plans providing pension, other
retirement and post-employment benefits to its employees, including those employees of Air Canada who are
contractually assigned to ACTS and Aeroplan. These employees are members of Air Canada’s sponsored
defined benefit pension plans and also participate in Air Canada’s sponsored health, life and disability future
benefit plans. Air Canada’s combined consolidated financial statements include all of the assets and liabilities
of all sponsored plans of the Corporation.
Management makes a number of assumptions in the calculation of both the accrued benefit obligation as well
as the pension costs:
December 31, December 31,
2006 2005
Weighted average assumptions used to
determine accrued benefit obligation
Discount rate as at period-end 5.00% 5.00%
Rate of compensation increase
(1) 2.50% 4.00%
Weighted average assumptions used to
determine pension costs
Discount rate as at period-end 5.00% 5.75%
Expected long-term rate of return on plan assets 7.50% 7.50%
Rate of compensation increase (2) 4.00% 4.00%
(1) As a result of the pay awards during 2006, a rate of compensation increase of 1.75 percent was used for the years
2006 to 2008 in determining the net benefit obligation for the pension plan and 2.5 percent for the remaining years.
(2) A rate of compensation increase of 0 percent in 2005 and 2 percent in 2006 was used in determining the net
benefit pension expense and 4 percent for the remaining years.
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Management's Discussion and Analysis of Results and Financial Condition