Air Canada 2012 Annual Report Download - page 96

2012 Air Canada Annual Report
96
T) PROPERTY AND EQUIPMENT
Property and equipment is recognized using the cost model. Property under finance 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.
The Corporation allocates the amount initially recognized in respect of an item of property and equipment to its significant
components and depreciates separately each component. Property and equipment are depreciated to estimated residual
values based on the straight-line method over their estimated service lives. Aircraft and flight equipment are componentized
into airframe, engine, and cabin interior equipment and modifications. Airframe and engines are depreciated over 20 to 25
years, with 10% to 20% estimated residual values. Cabin interior equipment and modifications are depreciated over the lesser
of 5 years or the remaining useful life of the aircraft. Spare engines and related parts (“rotables”) are depreciated over the
average remaining useful life of the fleet to which they relate with 10% to 20% estimated residual values. Cabin interior
equipment and modifications to aircraft on operating leases are amortized over the term of the lease. Major maintenance of
airframes and engines, including replacement spares and parts, labour costs and/or third party maintenance service costs, are
capitalized and amortized over the average expected life between major maintenance events. Major maintenance events
typically consist of more complex inspections and servicing of the aircraft. All maintenance of fleet assets provided under
power-by-the-hour contracts are charged to operating expenses in the income statement as incurred, respectively. Buildings
are depreciated on a straight-line basis over their useful lives not exceeding 50 years or the term of any related lease,
whichever is less. Leasehold improvements are amortized over the lesser of the lease term or 5 years. Ground and other
equipment is depreciated over 3 to 25 years.
Residual values and useful lives are reviewed at least annually and depreciation rates are adjusted accordingly on a prospective
basis. Gains and losses on disposals of property and equipment are determined by comparing the proceeds with the carrying
amount of the asset and are included as part of non-operating gains and losses in the consolidated statement of operations.
U) INTEREST CAPITALIZED
Borrowing costs are expensed as incurred, except for interest attributable to the acquisition, construction or production of an
asset that necessarily takes a substantial period of time to get ready for its intended use, in which case they are capitalized as
part of the cost of that asset. Capitalization of borrowing costs commences when expenditures for the asset and borrowing
costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are
capitalized up to the date when the project is completed and the related asset is available for its intended use.
To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing
costs eligible for capitalization is determined at the actual borrowing costs incurred on that borrowing during the period less
any investment income on the temporary investment of those borrowings. To the extent that funds are borrowed generally
and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization is
determined by applying a capitalization rate to the expenditures on that asset. The capitalization rate is the weighted average
of the borrowing costs applicable to the borrowings of the Corporation that are outstanding during the period, other than
borrowings made specifically for the purpose of obtaining a qualifying asset.
V) LEASES
Leases are classified as finance leases when the lease arrangement transfers substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as operating leases. Gains and losses on sale and operating leaseback
transactions are recognized immediately in the statement of operations when it is clear that the transactions are established
at fair value. If the sale price is below fair value, any loss is recognized immediately except that, if the loss is compensated for
by future lease payments at below market price, it is deferred and amortized in proportion to the lease payments over the
period for which the asset is expected to be used. If the sale price is above fair value, the gain is deferred and amortized over
the period for which the asset is expected to be used. In the context of sale and finance leaseback transactions, any gain on
the sale is deferred and amortized over the lease term.