Air Canada 2007 Annual Report Download - page 57

Download and view the complete annual report

Please find page 57 of the 2007 Air Canada annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 144

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144

Management’s Discussion and Analysis of Results and Financial Condition
57
13. CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that are most important to the portrayal of the Corporation’s fi nancial condition
and results of operations. They require management’s most diffi cult, subjective or complex judgments, often as a result of
the need to make estimates about the effect of matters that are inherently uncertain. Actual results could differ from those
estimates under different assumptions or conditions.
The Corporation has identifi ed the following areas that contain critical accounting estimates utilized in the preparation of
its consolidated fi nancial statements:
Passenger and Cargo Revenues
Airline passenger and cargo advance sales are deferred and included in current liabilities. Advance sales also include the
proceeds from the sale of fl ight tickets to Aeroplan which provides loyalty program services to the Corporation and purchases
seats from Air Canada under the Aeroplan CPSA. Passenger and cargo revenues are recognized when the transportation is
provided, except for revenue on unlimited fl ight passes which is recognized on a straight-line basis over the period during
which the travel pass is valid. Air Canada has formed alliances with other airlines encompassing loyalty program participation,
code sharing and coordination of services including reservations, baggage handling and fl ight schedules. Revenues are
allocated based upon formulas specifi ed in the agreements and are recognized as transportation is provided.
The Corporation performs regular evaluations on the deferred revenue liability which may result in adjustments being
recognized as revenue. Due to the complex pricing structures, the complex nature of interline, and other commercial
agreements used throughout the industry, historical experience over a period of many years, and other factors including
refunds, exchanges and unused tickets, certain relatively small amounts are recognized as revenue based on estimates.
Events and circumstances may result in actual results that are different from estimates, however, these differences have
historically not been material.
Employee Future Benefi ts
Air Canada maintains several defi ned benefi t and defi ned contribution plans providing pension, other retirement and post-
employment benefi ts to its employees, including those employees of Air Canada who are contractually assigned to ACTS Aero
and Aeroplan. These employees are members of Air Canada’s sponsored defi ned benefi t pension plans and also participate
in Air Canada’s sponsored health, life and disability future benefi t plans. The Corporation’s audited consolidated fi nancial
statements for 2007 include all of the assets and liabilities of all the sponsored plans of the Corporation. Employee benefi ts
expense refl ects a cost recovery which is charged to the related parties for those employees currently performing work for
their benefi t. The cost recovery includes current service costs for pensions along with their portion of post-employment and
post-retirement benefi ts based on the actuarial calculation for their specifi c employee group. The cost recovery amounted
to $40 million for the year ended December 31, 2007.
Management makes a number of assumptions in the calculation of both the accrued benefi t obligation as well as the
pension costs:
December 31,
2007
December 31,
2006
Weighted average assumptions used to determine accrued benefi t obligation
Discount rate as at period-end 5.75 % 5.00 %
Rate of compensation increase (1) 2.50 % 2.50 %
Weighted average assumptions used to determine pension costs
Discount rate as at period-end 5.00 % 5.00 %
Expected long-term rate of return on plan assets 7.15 % 7.50 %
Rate of compensation increase (2) 2.50 % 4.00 %
(1) As a result of the pay awards during 2006, a rate of compensation increase of 1.75% was used for the years 2007 and 2008 in determining the net benefi t obligation
for the pension plan and 2.5% for the remaining years.
(2) A rate of compensation increase of 2% in 2006 and 2% in 2007 was used in determining the net benefi t pension expense.