Air Canada 2010 Annual Report Download - page 57

2010 Management’s Discussion and Analysis
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Derivatives are permitted provided that they are used for hedging a particular risk (including interest rate risk related to
pension liabilities) or to create exposures to given markets and currencies and that counterparties have a minimum credit
rating of “A”. As of December 31, 2010, a 15% derivative exposure to matched assets is in place to hedge interest rate risk
related to pension liabilities.
Similar investment policies are established for the other pension plans sponsored by Air Canada.
Air Canada’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 Air
Canada, 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 2010 pension expense based on different actuarial assumptions with respect to discount rate and
expected return on plan assets is as follows:
Impact on 2010 pension expense (Canadian dollars in millions)
0.25 percentage point
Decrease Increase
Discount rate on obligation assumption $ 8 $ (9)
Long-term rate of return on plan assets assumption $ 29 $ (29)
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 2010 (8.25% was assumed
for 2009). 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 $2 million and the obligation by $47 million. A one
percentage point decrease in assumed health care trend rates would have decreased the service and interest costs by $2
million and the obligation by $46 million.
Income Taxes
Air Canada 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 adjustments to Air Canada’s tax assets and tax liabilities.
Future income tax assets are recognized to the extent that realization is considered more likely than not. Air Canada
considers past results, current trends and outlooks for future years in assessing realization of income tax assets.
As at December 31, 2010, Air Canada has substantial tax attributes largely in the form of loss carry forwards and other
tax attributes to shelter future taxable income. 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 undiscounted cash flows to the carrying amount of the assets or groups of assets. Indefinite-life intangible assets
are subject to impairment tests under Canadian GAAP on an annual basis or when events or circumstances indicate a
potential impairment. If the carrying value of long-lived assets is not recoverable from future expected undiscounted 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.