Air Canada 2007 Annual Report Download - page 61

Management’s Discussion and Analysis of Results and Financial Condition
61
14. CHANGES IN ACCOUNTING POLICIES
Financial Instruments
On January 1, 2007, Air Canada adopted CICA accounting handbook section 3855, Financial Instruments – Recognition and
Measurement, section 3861, Financial Instruments and Presentation, section 3865, Hedges, section 1530, Comprehensive
Income and section 3251, Equity.
Section 3861 establishes standards for presentation of fi nancial instruments and non-fi nancial derivatives, and identifi es
the information that should be disclosed about them. The purpose of the section is to enhance fi nancial statement users’
understanding of the signifi cance of fi nancial instruments to an entity’s fi nancial position, performance and cash fl ows.
Section 3855 establishes standards for recognizing and measuring fi nancial assets, fi nancial liabilities and non-fi nancial
derivatives. Under this standard, all fi nancial instruments are required to be measured at fair value on initial recognition
except for certain related party transactions. Measurement in subsequent periods is dependent upon the classifi cation of
the fi nancial instrument as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other fi nancial
liabilities.
The Corporation has implemented the following classifi cations:
■ Cash and cash equivalents are classifi ed as held-for-trading and any period change in fair value is recorded through
net income.
■ Aircraft-related deposits are classifi ed as held-to-maturity investments and are measured at amortized cost using
the effective interest rate method. Interest income is recorded in net income, as applicable.
■ Accounts receivable are classifi ed as loans and receivables and are measured at amortized cost using the effective
interest rate method. Interest income is recorded in net income, as applicable.
■ Accounts payable, credit facilities and bank loans are classifi ed as other fi nancial liabilities and are measured at
amortized cost using the effective interest rate method. Interest income is recorded in net income, as applicable.
Derivative instruments are recorded on the consolidated statement of fi nancial position at fair value, including those
derivatives that are embedded in fi nancial or non-fi nancial contracts. Changes in the fair values of derivative instruments
are recognized in non-operating income (expense) with the exception of foreign exchange risk management contracts and
derivatives designated as effective cash fl ow hedges.
Changes in the fair value of foreign currency forward contracts, option agreements and currency swap agreements used
for foreign exchange risk are recorded in foreign exchange gain (loss). These contracts are included in prepaid expenses and
other current assets, deposits and other assets, accounts payable and accrued liabilities, or other long-term liabilities as
appropriate.
The standards 3865 also provide guidance on accounting for derivatives in hedging relationships. In addition to requiring all
derivatives to be fair valued on the consolidated statement of fi nancial position, the standards require the effectiveness of
the hedging relationships for the reporting period to be quantifi ed. The effective portion of the change in the fair value of
the hedging derivative is recognized in other comprehensive income (“OCI”) while the ineffective portion is recognized in
non-operating income (expense). Upon maturity of fuel derivatives, the effective gains and losses previously recognized in
Accumulated OCI (“AOCI”) are recorded in fuel expense. These derivatives are recorded in prepaid expenses and other current
assets, deposits and other assets, accounts payable and accrued liabilities, or other long-term liabilities as appropriate.
OCI represents changes in shareholders’ equity during a period arising from transactions and other events with non-owner
sources that are recognized in comprehensive income, but excluded from net income.