Air Canada 2006 Annual Report Download - page 52

these capital expenditures. Based on projected results, Air Canada does not forecast having any significant
current taxes payable within the foreseeable future.
Impairment of Long-Lived Assets
Long-lived assets are tested for impairment whenever circumstances indicate that the carrying value may not
be recoverable. When events or circumstances indicate that the carrying value of long-lived assets, other than
indefinite life intangibles, are not recoverable, the long-lived assets are tested for impairment by comparing the
estimate of future expected cash flows to the carrying amount of the assets or groups of assets. If the carrying
value of long-lived assets is not recoverable from future expected cash flows, any loss is measured as the
amount by which the asset's carrying value exceeds fair value. Recoverability is assessed relative to
undiscounted cash flows from the direct use and disposition of the asset or group of assets.
Property and Equipment
Property and equipment is originally recorded at cost. Property under capital leases and the related obligation
for future lease payments are initially recorded at an amount equal to the lesser of fair value of the property or
equipment and the present value of those lease payments. On the application of fresh start accounting effective
September 30, 2004, the cost of the Corporation’s property and equipment was adjusted to fair value. In
addition, the estimated useful lives of certain assets were adjusted, including buildings where useful lives were
extended to periods not exceeding 50 years.
Property and equipment are depreciated to estimated residual values based on the straight-line method over
their estimated service lives. Property and equipment under capital leases and variable interest entities are
depreciated to estimated residual values over the life of the lease. The Corporation’s aircraft and flight
equipment are depreciated over 20 to 30 years, with 10 to 20 percent estimated residual values. Aircraft
reconfiguration costs are amortized over 3 years. Betterments to owned aircraft are capitalized and amortized
over the remaining service life of the aircraft. Betterments to aircraft on operating leases are amortized over the
term of the lease.
Buildings are depreciated over their useful lives not exceeding 40 to 50 years on a straight-line basis. An
exception to this is where the useful life of the building is greater than the term of the land lease. In these
circumstances, the building is depreciated over the life of the lease. Leasehold improvements are amortized
over the lesser of the lease term or 5 years. Ground and other equipment is depreciated over 3 to 25 years.
Aircraft depreciable life is determined through economic analysis, a review of existing fleet plans and
comparisons to other airlines operating similar fleet types. Residual values are estimated based on the
Corporation’s historical experience with regard to the sale of aircraft and spare parts, as well as forward-looking
valuations prepared by independent third parties.
Intangible Assets
The identifiable intangible assets of the Corporation were recorded at their estimated fair values at September
30, 2004. Indefinite-life intangible assets are subject to impairment tests under Canadian GAAP on an annual
basis or when events or circumstances indicate a potential impairment. If the carrying value of such assets
exceeds the fair values, the assets are written down to fair value.
Fair value under Canadian GAAP is defined as "the amount of the consideration that would be agreed upon in
an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act".
Assessing the fair value of intangible assets requires significant management estimates on future cash flows to
be generated by the assets, including the estimated useful life of the assets.
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