Air Canada 2010 Annual Report Download - page 55

2010 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 Air Canada’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.
Air Canada 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 corporation that provides loyalty program services to Air Canada
and purchases seats from Air Canada pursuant to the Aeroplan Commercial Participation and Services Agreement between
Aeroplan and Air Canada (the “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. Passenger revenue also
includes revenues from passenger-related services such as ticket changes, seat selection, and excess baggage which are
recognized as the services are provided.
Air Canada 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 amounts are recognized as revenue based on estimates. Events and circumstances may result in
actual results that are different from estimates.
Employee Future Benefits
Air Canada maintains several defined benefit plans providing pension, other retirement and post-employment benefits to
its employees. Management makes a number of assumptions in the calculation of both the accrued benefit obligation as
well as the pension costs.
December 31, 2010 December 31, 2009
Weighted average assumptions used to determine the accrued benefit
liability
Discount rate 5.50 % 6.40 %
Rate of compensation increase (1) 2.50 % 2.50 %
Weighted average assumptions used to determine the accrued benefit cost
Discount rate 6.40 % 7.35 %
Expected long-term rate 7.00 % 7.15 %
Rate of compensation increase (2) 2.50 % 2.50 %
(1) A rate of compensation increase of 0% plus merit was used for 2010 in determining the net benefit obligation for the pension plan and 2.5% plus merit for the remaining
years.
(2) A rate of compensation increase of 0% plus merit was used for 2010 in determining the net benefit pension expense and 2.5% plus merit for the remaining years.
Discount Rate
The discount rate used to determine the pension obligation was determined by reference to market interest rates on
corporate bonds rated “AA” or better with cash flows that approximately match the timing and amount of expected
benefit payments. An increase or decrease in the discount rate of 0.25% results in a decrease or increase of $411 million
to the pension obligation, respectively. A sensitivity analysis on pension expense assuming a change in the discount rate
on plan obligations is provided below.