Air Canada 2008 Annual Report Download - page 67

2008 Management’s Discussion and Analysis
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The Corporation’s expected long-term rate of return on assets assumption is selected based on the facts and circumstances
that exist as of the measurement date, and the specific portfolio mix of plan assets. Management reviewed anticipated
future long-term performance of individual asset categories and considered the asset allocation strategy adopted by the
Corporation, including the longer duration in its bond portfolio in comparison to other pension plans. These factors are used
to determine the average rate of expected return on the funds invested to provide for the pension plan benefits. While the
review considers recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate.
Sensitivity Analysis
Sensitivity analysis on the 2008 pension expense based on different actuarial assumptions with respect to discount rate and
expected return on plan assets is as follows:
Impact on 2008 pension expense in $ millions
0.25 percentage point
Decrease Increase
Discount rate on obligation assumption $ 9 $ (9)
Long-term rate of return on plan assets assumption $ 28 $ (28)
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. An 8.25%
annual rate of increase in the per capita cost of covered health care benefits was assumed for 2008 (9.25% was assumed
for 2007). The rate is assumed to decrease gradually to 5% by 2015. A one percentage point increase in assumed health
care trend rates would have increased the service and interest costs by $1 million and the obligation by $16 million. A one
percentage point decrease in assumed health care trend rates would have decreased the service and interest costs by $1
million and the obligation by $21 million.
Income Taxes
The Corporation utilizes the assets and liability method of accounting for income taxes under which future income tax
assets and liabilities are recognized for the estimated future income tax consequences attributable to differences between
the financial statement carrying value amount and the tax basis of assets and liabilities. Management uses judgment and
estimates in determining the appropriate rates and amounts in recording future taxes, giving consideration to timing and
probability. Actual taxes could significantly vary from these estimates as a result of future events, including changes in
income tax law or the outcome of reviews by tax authorities and related appeals. The resolution of these uncertainties and
the associated final taxes may result in adjustment to the Corporation’s tax assets and tax liabilities.
Future income tax assets are recognized to the extent that realization is considered more likely than not. The Corporation
considers past results, current trends and outlooks for future years in assessing realization of income tax assets.
Cash Tax Projections
As at December 31, 2008, Air Canada has substantial tax attributes largely in the form of loss carry forwards and other tax
attributes to shelter future taxable income. These tax attributes are expected to continue to increase over the next several
years due to capital expenditures related to aircraft acquisitions. Air Canada does not forecast having any significant current
taxes payable within the foreseeable future.
Impairment of Long-Lived Assets
Long-lived assets are tested for impairment whenever circumstances indicate that the carrying value may not be recoverable.
When events or circumstances indicate that the carrying value of long-lived assets, other than indefinite life intangibles, are
not recoverable, the long-lived assets are tested for impairment by comparing the estimate of future expected cash flows
to the carrying amount of the assets or groups of assets. If the carrying value of long-lived assets is not recoverable from
future expected cash flows, any loss is measured as the amount by which the asset’s carrying value exceeds fair value and
recorded in the period. Recoverability is assessed relative to undiscounted cash flows from the direct use and disposition of
the asset or group of assets.