Air Canada 2008 Annual Report Download - page 96

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2008 Air Canada Annual Report
96
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of all entities controlled by Air Canada, with adjustments for
non-controlling interests. The consolidated financial statements of the Corporation include the accounts of variable interest
entities for which the Corporation is the primary beneficiary. All inter-company balances and transactions are eliminated.
B) USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those
estimates.
Significant estimates made in the preparation of the consolidated financial statements include those used in accounting for employee
future benefits (Note 8), accounting for income taxes (Note 7), the determination of passenger revenues, the determination of
amortization period for long-lived assets, the impairment considerations on long-lived assets and the carrying value of financial
instruments recorded at fair value.
C) 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 Air Canada
and purchases seats from Air Canada under the Commercial Participation and Services Agreement (“CPSA”) (Note 14).
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. The Corporation 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.
D) CAPACITY PURCHASE AGREEMENTS – JAZZ & TIER III CARRIERS
Air Canada has capacity purchase agreements with Jazz and certain other regional carriers, which are referred to as Tier III
carriers, operating aircraft of 18 seats or less. Under these agreements, Air Canada is responsible for the marketing, ticketing
and commercial arrangements relating to these flights and records the revenue it earns under Passenger revenue. Operating
expenses under capacity purchase agreements include the capacity purchase fees, which include a variable component that
is dependent on Jazz aircraft utilization, and pass-through costs, which are non-marked-up costs charged to the Corporation,
which include fuel, airport and user fees and other; these expenses are recorded in the applicable category within Operating
expenses.
The Corporation does not hold any partnership units of Jazz. Due to terms of the Jazz CPA, Jazz is deemed to be a variable
interest entity. The Corporation was deemed to be the primary beneficiary of Jazz up until May 24, 2007. As a result of ACE’s
distribution of units of Jazz Air Income Fund on May 24, 2007, the Corporation no longer consolidates Jazz. Prospective from
the date of the deconsolidation, the Corporation has one reportable segment.
As a result of the deconsolidation of Jazz, the Corporation recorded an adjustment of $82 as a credit to Contributed surplus.
This credit consists of the Corporation’s initial negative investment in Jazz of $78, which had not previously reversed as none
of the income of Jazz is distributed to Air Canada, and a future income tax credit of $4.