Air Canada 2006 Annual Report Download - page 79

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF VALUATION
In accordance with Section 1625 of the CICA Handbook, Comprehensive Revaluation of Assets and Liabilities
(“CICA 1625”), Air Canada adopted fresh start reporting on September 30, 2004. As a result of the financial
reorganization under CCAA, the assets and liabilities of the combined consolidated entity, excluding goodwill,
were comprehensively revalued to fair values. A revaluation adjustment of $4,234 was recorded to
shareholders’ equity.
B) PRINCIPLES OF CONSOLIDATION/COMBINATION
These combined consolidated financial statements include the accounts of the operations described in Note 1A
above, with provisions for non-controlling interests. The combined consolidated financial statements of the
Corporation include the accounts of variable interest entities for which the Corporation is the primary
beneficiary. All inter-company and inter-entity balances and transactions are eliminated.
C) USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
D) 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, a subsidiary of ACE that provides loyalty
program services to Air Canada and purchases seats from Air Canada under the Commercial Participation and
Services Agreement ("CPSA" — refer to Note 2F). 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.
E) CAPACITY PURCHASE AGREEMENTS
Air Canada has capacity purchase agreements with certain unaffiliated regional carriers, which are referred to
as Tier III carriers, operating aircraft of 18 seats or less. Under these agreements, Air Canada is responsible for
the marketing, ticketing and commercial arrangements relating to these flights and records the revenue it earns
under passenger revenue. For the year ended December 31, 2006, passenger revenues under capacity
purchase agreements with Tier III carriers amounted to $68 ($70 - 2005). Operating expenses under capacity
purchase agreements with Tier lll carriers are recorded primarily in the aircraft fuel, airport and navigation fees
and other operating expense categories.
F) AEROPLAN LOYALTY PROGRAM
Air Canada is an Aeroplan partner providing certain of Air Canada's customers with Aeroplan Miles, which can
be redeemed by customers for air travel or other rewards acquired by Aeroplan.
Under the Commercial Participation and Services Agreement ("CPSA") between the Corporation and Aeroplan,
Aeroplan purchases passenger tickets from Air Canada to meet its obligation for the redemption of Aeroplan
Miles for air travel. The proceeds from the sale of passenger tickets to Aeroplan are included in Advance ticket
79
Combined Consolidated Financial Statements 2006