Air Canada 2006 Annual Report Download - page 82

Derivatives under the fuel-hedging program are designated as hedges for accounting purposes and hedge
accounting is being applied prospectively from October 1, 2005. Under hedge accounting, gains or losses on
fuel hedging contracts are recognized as a component of aircraft fuel expense when the underlying jet fuel
being hedged is consumed. Premiums paid for option contracts and the excluded time value of the options is
deferred as a cost of the hedge in the combined consolidated statement of financial position in Other assets and
recognized in Fuel expense at the same time as the hedged jet fuel is consumed. Similarly, the value of the
derivatives previously measured at fair value where the Corporation did not apply hedge accounting is also
treated as a cost of the hedge and accounted for in the same way. Prior to these derivative instruments being
designated as hedges for accounting purposes, gains or losses are recorded in other non-operating expense.
The Corporation will discontinue hedge accounting when the hedge item matures, expires, is sold, terminated,
cancelled or exercised, the Corporation terminates its designation of the hedging relationship, the hedging
relationship ceases to be effective, or the anticipated transaction is no longer probable.
When a hedging item ceases to exist and is not replaced, any gains, losses, revenues or expenses associated
with the hedging item that have been deferred previously as a result of applying hedge accounting are carried
forward to be recognized in income in the same period as the corresponding gains, losses, revenues or
expenses associated with the hedged item.
When a hedged item ceases to exist or an anticipated transaction is no longer probable, any gains, losses,
revenues or expenses associated with the hedging item that had been deferred previously as a result of hedge
accounting are realized in the current period's statement of operations.
N) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates of
exchange in effect at the date of the combined consolidated statement of financial position. Non-monetary
assets, non-monetary liabilities, revenues and expenses arising from transactions denominated in foreign
currencies, are translated at rates of exchange in effect, which is based on an average for the month.
Adjustments to the Canadian dollar equivalent of foreign denominated monetary assets and liabilities due to the
impact of exchange rate changes are classified on the combined consolidated statement of operations as a
foreign exchange gain or loss.
O) INCOME TAXES
The Corporation utilizes the liability method of accounting for income taxes under which future income tax
assets and liabilities are recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amount and the tax basis of assets and liabilities. Future income tax
assets and liabilities are measured using substantively enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect on future income tax assets and
liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
Future income tax assets are recognized to the extent that realization is considered more likely than not.
As the income of excluded inter-company investments held by Air Canada (Note 1) has been excluded from
these combined consolidated financial statements, the future income tax expense resulting from the utilization
of the losses accumulated prior to the implementation of the Plan has been allocated to Shareholders’ Equity.
P) CASH AND CASH EQUIVALENTS
Cash includes $1,330 pertaining to investments with original maturities of three months or less at December 31,
2006 (2005 $1,084). Investments include bankers’ acceptances, bankers discount notes, and commercial
paper, which may be liquidated promptly and have original maturities of three months or less. The weighted
average interest rate on investments as at December 31, 2006 is 4.31 % (2005 – 3.39%).
Q) SHORT-TERM INVESTMENTS
Short-term investments, comprised of bankers’ acceptances and bankers’ discount notes, have original
maturities over three months, but not more than one year. The weighted average interest rate on short-term
investments as at December 31, 2006 is 4.38% (2005 – 3.15%).
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