Air Canada 2010 Annual Report Download - page 93

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Consolidated Financial Statements and Notes
93
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, accounting for income taxes, the determination of passenger revenues, the determination of amortization period for
long-lived assets, the impairment considerations on long-lived assets, the carrying value of financial instruments recorded at fair value
and provisions for investigations and proceedings related to alleged anti-competitive cargo pricing activities.
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 Canada Inc. (“Aeroplan”), a corporation that provides loyalty program
services to Air Canada and purchases seats from Air Canada pursuant to the Commercial Participation and Services
Agreement between Aeroplan and Air Canada (the “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. 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.
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.
D) CAPACITY PURCHASE AGREEMENTS – JAZZ & TIER III CARRIERS
Air Canada has capacity purchase agreements with Jazz and certain other regional carriers, some of which are referred to
as Tier III carriers, operating aircraft of 18 seats or less. Under these agreements, Air Canada markets, tickets and enters
into other 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, under the Jazz CPA, are
based on variable and fixed rates (“CPA Rates”) plus mark-up and pass-through costs. The CPA Rates are periodically set by
the parties for rate periods of three years. The parties set the rates through negotiations based on Jazz’s forecasted costs for
the applicable rate period and an operating plan for the applicable rate period provided by Air Canada. Pass-through costs
are non-marked-up costs charged to the Corporation and include fuel, airport and user fees and other costs. These expenses
are recorded in the applicable category within Operating expenses.