Air Canada 2007 Annual Report Download - page 90

2007 Air Canada Annual Report
90
On January 1, 2007, the Corporation adopted CICA accounting handbook section 3855, Financial Instruments – Recognition
and Measurement, section 3861, Financial Instruments – Disclosure and Presentation, section 3865, Hedges, section 1530,
Comprehensive Income, and section 3251, Equity.
Financial assets and fi nancial liabilities, including derivatives, are recognized on the consolidated statement of fi nancial
position when the Corporation becomes a party to the contractual provisions of the fi nancial instrument or non-fi nancial
derivative contract. 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, held-to-maturity, available-for-sale, loans and receivables, or other fi nancial liabilities. The
held-for-trading classifi cation is applied when an entity is “trading” in an instrument or alternatively the standard permits
that any fi nancial instrument be irrevocably designated as held-for-trading. The held-to-maturity classifi cation is applied
only if the asset has specifi ed characteristics and the entity has the ability and intent to hold the asset until maturity. For
fi nancial instruments classifi ed as other than held-for-trading, transaction costs are added to the initial fair value of the
related fi nancial instrument. Transaction costs related to the revolving line of credit which are not drawn are deferred and
amortized straight line over the term of the credit facility.
Financial assets and fi nancial liabilities classifi ed as held-for-trading are measured at fair value with changes in those fair
values recognized in non-operating income (expense). Financial assets classifi ed as held-to-maturity, loans and receivables,
or other fi nancial liabilities are measured at amortized cost using the effective interest method of amortization. Financial
assets classifi ed as available-for-sale are measured at fair value with unrealized gains and losses, including changes in foreign
exchange rates, being recognized in Other Comprehensive Income (“OCI”), as described below.
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, as further described below.
For fi nancial instruments measured at amortized cost, transaction costs or fees, premiums or discounts earned or incurred are
recorded, at inception, net against the fair value of the fi nancial instrument. Interest expense is recorded using the effective
interest method. For any guarantee issued that meets the defi nition of a guarantee pursuant to Accounting Guideline 14,
Disclosure of Guarantees, the inception fair value of the obligation relating to the guarantee is recognized and amortized
over the term of the guarantee. It is the Corporation’s policy to not re-measure the fair value of the fi nancial guarantee
unless it qualifi es as a derivative.
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.
Changes in the fair value of foreign currency forward contracts, option agreements and currency swap agreements used for
foreign exchange risk management but not designated as hedges for accounting purposes, are recorded in foreign exchange
gain (loss). These contracts are included in the consolidated statement of fi nancial position at fair value in Prepaid expenses
and other current assets, Deposits and other assets, Accounts payable and accrued liabilities, or Other long-term liabilities
as appropriate.
The Corporation from time to time enters into interest rate swaps to manage the risks associated with interest rate
movement on US and Canadian fl oating rate debt, including anticipated debt transactions. Changes in the fair value of these
swap agreements, which are not designated as hedges for accounting purposes, are recognized in income in Other non-
operating income. These contracts are included in the consolidated statement of fi nancial position at fair value in Prepaid