Air Canada 2012 Annual Report Download - page 135

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2012 Consolidated Financial Statements and Notes
135
Share-based Compensation Risk
The Corporation issues share-based compensation to its employees in the form of stock options and PSUs as described in
Note 14. Each PSU entitles the employees to receive a payment in the form of one Air Canada ordinary share, cash in the
amount equal to market value of one ordinary share, or a combination thereof, at the discretion of the Board of Directors.
Share-based compensation risk refers to the risk that future cash flows to settle the PSUs will fluctuate because of changes in
the Corporation’s share price. To hedge the exposure to outstanding PSUs, the Corporation entered into share forward
contracts to hedge PSUs that may vest between 2013 and 2015, subject to the terms of vesting including realization of
performance vesting criteria. The contracts were prepaid by the Corporation. The forward dates for the share forward
contracts coincide with the planned settlement date in 2013 of 1,152,580 PSUs which were eligible for vesting in 2012, and
the vesting term of 2,658,670 PSUs in 2013 and 2,149,190 in 2014 and will be cash settled. These contracts were not
designated as hedging instruments for accounting purposes. Accordingly, changes in the fair value of these contracts are
recorded in Gain (loss) on financial instruments recorded at fair value in the period in which they arise. During 2012, a gain of
$5 was recorded (2011 – loss of $10). As at December 31, 2012, the fair value of the share forward contracts is $10 in favour
of the Corporation (2011 – $5 in favour of the Corporation) and is recorded in Deposits and other assets.
Liquidity risk
Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with its financial
liabilities and other contractual obligations, including pension funding obligations as described in Note 9 and covenants in
credit card agreements as described below. The Corporation monitors and manages liquidity risk by preparing rolling cash flow
forecasts, monitoring the condition and value of assets available to be used as well as those assets being used as security in
financing arrangements, seeking flexibility in financing arrangements, and establishing programs to monitor and maintain
compliance with terms of financing agreements. The Corporation’s principal objective in managing liquidity risk is to maintain
a minimum unrestricted cash balance in excess of a liquidity level of 15% of annual operating revenues. At December 31,
2012, Air Canada had Cash and cash equivalents and Short-term investments of $2,026, which represents 17% of 2012
operating revenues.
A maturity analysis of the Corporation’s financial liabilities, other fixed operating commitments and capital commitments is
set out in Note 16.
Market Risks
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices. Market risk comprises three types of risk: foreign exchange risk; interest rate risk; and other price risk, which
includes commodity price risk.