Air Canada 2008 Annual Report Download - page 68

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2008 Air Canada Annual Report
68
Fair value under Canadian GAAP is defined as “the amount of the consideration that would be agreed upon in an arm’s
length transaction between knowledgeable, willing parties who are under no compulsion to act”. Assessing the fair value of
intangible assets requires significant management estimates on discount rates to be applied in the analysis and future cash
flows to be generated by the assets, including the estimated useful life of the assets. Discount rates are determined with
reference to estimated risk adjusted market rates of return for similar cash flows and were increased in 2008 reflecting a
higher risk premium. The Corporation performs sensitivity analysis on the discount rates applied. The discount rates used
are subject to measurement uncertainty.
Property and Equipment
Property and equipment is originally recorded at cost. Property under capital leases and the related obligation for future
lease payments are initially recorded at an amount equal to the lesser of fair value of the property or equipment and the
present value of those lease payments.
Property and equipment are depreciated to estimated residual values based on the straight-line method over their estimated
service lives. Property and equipment under capital leases within variable interest entities are depreciated to estimated
residual values over the life of the lease. Air Canada’s aircraft and flight equipment, including spare engines and related parts
(“rotables”), are depreciated over 20 to 25 years, with 10 to 20% estimated residual values. Aircraft reconfiguration costs
are amortized over three to five years. Betterments to owned aircraft are capitalized and amortized over the remaining
service life of the aircraft. Betterments to aircraft on operating leases are amortized over the term of the lease.
Buildings are depreciated over their useful lives not exceeding 40 to 50 years on a straight-line basis. An exception to this
is where the useful life of the building is greater than the term of the land lease. In these circumstances, the building is
depreciated over the life of the lease. Leasehold improvements are amortized over the lesser of the lease term or five years.
Ground and other equipment is depreciated over three to 25 years.
Aircraft depreciable life is determined through economic analysis, a review of existing fleet plans and comparisons to other
airlines operating similar fleet types. Residual values are estimated based on the Corporation’s historical experience with
regard to the sale of aircraft and spare parts, as well as forward-looking valuations prepared by independent third parties.
IntangibleAssets
The identifiable intangible assets of the Corporation were recorded at their estimated fair values at September 30, 2004
upon emergence from CCAA. Since that time, the intangible assets have been reduced by a tax allocation of $914 million.
Indefinite-life intangible assets are subject to impairment tests under Canadian GAAP on an annual basis or when events
or circumstances indicate a potential impairment. If the carrying value of such assets exceeds the fair values, the assets are
written down to fair value.