Air Canada 2009 Annual Report Download - page 62

2009 Air Canada Annual Report
62
Income taxes
The Corporation utilizes the assets and liability method of accounting for income taxes under which future income tax
assets and liabilities are recognized for the estimated future income tax consequences attributable to differences between
the fi nancial statement carrying value amount and the tax basis of assets and liabilities. Management uses judgment
and estimates in determining the appropriate rates and amounts in recording future taxes, giving consideration to timing
and probability. Actual taxes could signifi cantly vary from these estimates as a result of future events, including changes in
income tax law or the outcome of reviews by tax authorities and related appeals. The resolution of these uncertainties and
the associated fi nal taxes may result in adjustment to the Corporation’s tax assets and tax liabilities.
Future income tax assets are recognized to the extent that realization is considered more likely than not. The Corporation
considers past results, current trends and outlooks for future years in assessing realization of income tax assets.
Cash tax projections
As at December 31, 2009, Air Canada has substantial tax attributes largely in the form of loss carry forwards and other tax
attributes to shelter future taxable income. Air Canada does not forecast having any signifi cant current taxes payable within
the foreseeable future.
Impairment of long-lived assets
Long-lived assets are tested for impairment whenever circumstances indicate that the carrying value may not be recoverable.
When events or circumstances indicate that the carrying value of long-lived assets, other than indefi nite life intangibles, are
not recoverable, the long-lived assets are tested for impairment by comparing the estimate of future expected cash fl ows
to the carrying amount of the assets or groups of assets. If the carrying value of long-lived assets is not recoverable from
future expected cash fl ows, any loss is measured as the amount by which the asset’s carrying value exceeds fair value and
recorded in the period. Recoverability is assessed relative to undiscounted cash fl ows from the direct use and disposition of
the asset or group of assets.
Fair value under Canadian GAAP is defi ned 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 signifi cant management estimates on discount rates to be applied in the analysis and future
cash fl ows 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 fl ows. 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 fl ight equipment, including spare engines and related parts
(“rotables”), are depreciated over 20 to 25 years, with 10 to 20% estimated residual values. Aircraft reconfi guration costs
are amortized over three to fi ve 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 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 fi ve years. Ground and
other equipment is depreciated over three to 25 years.
Aircraft depreciable life is determined through economic analysis, a review of existing fl eet plans and comparisons to other
airlines operating similar fl eet 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.