Air Canada 2006 Annual Report Download - page 77

Allocation of Corporate Expenses
The Corporation receives services from ACE and other affiliates outside the Corporation. Similarly the
Corporation also provides services to ACE and other affiliates outside the Corporation. Direct costs of the
services received, as well as management fees charged by ACE to the components of the Corporation have
been included in these combined consolidated financial statements as described in Note 18. The costs of
services provided to other affiliates outside the Corporation have been reflected in these combined consolidated
financial statements in accordance with the terms of the relevant agreement. In addition, for the period prior to
November 24, 2006, these combined consolidated financial statements include an allocation of the general
corporate expenses incurred by ACE based upon the proportion of the Corporation's consolidated revenues
compared to ACE's consolidated revenues. The allocation of general corporate expenses to the Corporation
includes its proportionate share of such general corporate expenses incurred by ACE, including executive
management, legal, investor relations, treasury, finance, financial reporting, tax, internal audit and human
resources services as well as costs of governance, professional fees and regulatory filings, all of which
amounted to $11 for the year ended December 31, 2006 ($21 for the year ended December 31, 2005). This
allocation of corporate expenses is recorded within the Air Canada Services segment. This allocation of
corporate expenses is recorded as a credit to contributed surplus. The allocation of general corporate expenses
ceased on November 24, 2006.
These combined consolidated financial statements do not include an allocation of additional interest expense on
corporate debt issued by ACE which has a weighted average effective interest rate of 12% for the period ended
November 24, 2006 (12% for the year ended December 31, 2005). In conjunction with the Air Canada IPO
described above, the Corporation settled the outstanding loans due to ACE and its affiliates of $140. As at
December 31, 2005 the Corporation had outstanding loans due to ACE and its affiliates of $340 on which the
Corporation was charged interest. For the loans outstanding as at December 31, 2005, borrowings in the
amount of $90 bear interest at prime plus 3.00%, an amount of $50 bear interest at a fixed interest rate of
10.00%, and the remaining $200 bear interest at a rate per annum equal to the CIBC commercial prime
Canadian dollar loans plus 3.00%. The weighted average effective interest rates on these inter-company loans
amounted to 9.36% for the period ended November 24, 2006 (8.29% for the year ended December 31, 2005).
Management of the Corporation believes that the inter-company debt and the rates thereon are appropriate in
the circumstances.
Management of the Corporation believes the assumptions underlying the combined consolidated financial
statements, including the allocations described above, are reasonable. These costs and allocations are not
necessarily indicative of the costs and allocations that may be reflected in future periods when the Corporation
is a stand alone entity.
Excluded Inter-company Investments
Prior to the Air Canada IPO, Air Canada held, for tax planning purposes, certain investments in limited
partnerships of which ACE owned directly or indirectly all of the limited partner units. These investments and
related income and income tax effects have been excluded from these combined consolidated statements of
financial positions and operations of the Corporation, as these activities did not relate to the operations of the
Corporation. Certain of these investments were transferred to ACE during 2005 and 2006 in exchange for cash
and a note receivable. For purposes of these combined consolidated financial statements, these exchanges of
the investments for cash and a note receivable were recorded as related party transactions resulting in a
contribution of cash and notes receivable to the Corporation. These contributions of cash have been reflected
as financing activities in the combined consolidated statement of cash flows. During 2006 the Corporation
received cash from ACE of $673 for the investments in ACTS and $483 for the investments in Jazz (2005 –
$1,070 for the investments in Aeroplan).
During 2006, Jazz settled a Note payable outstanding to a subsidiary of ACE of $200 in connection with the
initial public offering of Jazz Air Income Fund (Note 19).
C) NATURE OF OPERATIONS
Air Canada is Canada's largest domestic and international full-service airline and the largest provider of
scheduled passenger services in the domestic market, the US transborder market as well as the international
markets to and from Canada. Certain of the scheduled passenger services are provided by Jazz through the
Jazz CPA. Through Air Canada's global route network, virtually every major market throughout the world is
77
Combined Consolidated Financial Statements 2006