Air Canada 2007 Annual Report Download - page 48

2007 Air Canada Annual Report
48
Air Canada has entered into two interest rate swap agreements with a term to January 2024 which convert lease payments
related to two Boeing 767 aircraft leases consolidated under AcG-15 from fi xed to fl oating rates. These have not been
designated as hedges for accounting purposes. As at December 31, 2007, these two swaps have a fair value of $7 million in
favour of Air Canada ($4 million in favour of Air Canada as at December 31, 2006). The notional amount under these two
swaps is US$104 million as at December 31, 2007 (December 31, 2006 – US$112 million).
Statement of Consolidated Financial Position - Fair Values of Financial Instruments
The carrying amounts reported on Air Canada’s consolidated statement of fi nancial position for short-term fi nancial assets
and liabilities which include cash and short-term investments, accounts receivable and accounts payable, approximate fair
values due to the immediate or short-term maturities of these fi nancial instruments. Cash equivalents and short-term
investments are classifi ed as held for trading and therefore are recorded at fair value.
The carrying amounts of foreign currency and interest rate swaps and fuel derivatives is equal to the fair value, which is
based on the amount at which they could be settled based on estimated current market rates.
The following is a comparison of fair value versus carrying value of Air Canada’s long-term debt and capital lease obligations,
which was estimated using valuation techniques based on current market rates of interest for similar fi nancial liabilities:
($ millions)
Carrying
Value
Estimated
Fair Value
Direct Corporation debt $ 2,551 $ 2,611
Debt consolidated under AcG-15 896 933
Capital lease obligations 972 1,127
$ 4,419 $ 4,671
Concentration of Credit Risk
Air Canada does not believe it is subject to any signifi cant concentration of credit risk. Cash and short-term investments are
in place with major fi nancial institutions, Canadian governments and major corporations. Accounts receivable are generally
the result of sales of tickets to individuals, often through the use of major credit cards, through geographically dispersed
travel agents, corporate outlets, or other airlines, often through the use of major credit cards.
Asset-Backed Commercial Paper (ABCP)
Air Canada holds $37 million ($29 million net of a fair value adjustment) in a non-bank sponsored ABCP, which has been
recorded in deposits and other assets on Air Canada’s consolidated statement of fi nancial position. These investments, which
were scheduled to mature during the third quarter of 2007, were previously recorded in cash and cash equivalents and the
transfer to deposits and other assets was refl ected as an investing activity on Air Canada’s consolidated statement of cash
fl ows. An agreement in principle to restructure the ABCP investments was approved by the Pan-Canadian Committee for
Third Party Structured ABCP (“Committee”) on December 23, 2007. The approval of the restructuring, subject to a vote
by all investors, is anticipated to occur by March 2008. Under the terms of the restructuring, all of the ABCP would be
exchanged for longer term notes that will match the maturity of the underlying assets in the proposed structure. Air Canada
is not accruing interest on these investments.
During 2007, Air Canada recorded a charge of $8 million ($5 million after tax) in non-operating income (expense).
The charge is based on a number of assumptions as to the fair value of the investments including factors such as estimated
cash fl ow scenarios and risk adjusted discount rates. The assumptions used in estimating the fair value of the investments
are subject to change, which may result in further adjustments to non-operating results in the future.