Air Canada 2008 Annual Report Download - page 65

2008 Management’s Discussion and Analysis
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15. CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that are most important to the portrayal of the Corporation’s financial condition
and results of operations. They require management’s most difficult, 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 identified the following areas that contain critical accounting estimates utilized in the preparation of
its consolidated financial 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 flight tickets to Aeroplan, a company that provides loyalty program services to the Corporation
and purchases seats from Air Canada under the Aeroplan Commercial Participation and Services Agreement (“Aeroplan
CPSA”). Passenger and cargo revenues are recognized when the transportation is provided, except for revenue on unlimited
flight 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 flight schedules. Revenues are allocated based upon formulas specified 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 Benefits
Air Canada maintains several defined benefit and defined contribution plans providing pension, other retirement and post-
employment benefits to its employees, certain employees who perform work for ACE and others who are contractually
assigned to Aveos and Aeroplan. These employees are members of Air Canada’s sponsored defined benefit pension
plans and also participate in Air Canada’s sponsored health, life and disability future benefit plans. The Corporation’s
audited consolidated financial statements for 2008 include all of the assets and liabilities of all the sponsored plans of
the Corporation. Employee benefits expense reflects a cost recovery which is charged to Aveos and Aeroplan, for those
employees who are contractually assigned, and to ACE, for those employees currently performing work for their benefit. The
cost recovery includes current service costs for pensions along with their portion of post-employment and post-retirement
benefits based on the actuarial calculation for their specific employee group. The cost recovery amounted to $40 million
for the year ended December 31, 2008 ($40 million for the year ended December 31, 2007).
Management makes a number of assumptions in the calculation of both the accrued benefit obligation as well as the
pension costs:
 December31,2008  December31,2007
Weightedaverageassumptionsusedtodetermineaccruedbenetliability
Discount rate 7.35 % 5.75 %
Rate of compensation increase (1) 2.50 % 2.50 %
Weightedaverageassumptionsusedtodeterminetheaccruedbenetcost
Discount rate 5.75 % 5.00 %
Expected long-term rate 7.15 % 7.15 %
Rate of compensation increase (2) 2.50 % 2.50 %
(1) As a result of the pay awards, a rate of compensation increase of 1.75% was used in 2007 and 2008 in determining the net benefit obligation for the pension plan and
2.50% for the remaining years.
(2) A rate of compensation increase of 1.75% was used in 2007 and 2008 in determining the net benefit pension expense and 2.50% for the remaining years.