Air Canada 2011 Annual Report Download - page 124

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2011 Air Canada Annual Report
124
Share-based Compensation Risk
The Corporation issues share-based compensation to its employees in the form of stock options and PSUs as described in
Note 15. Each PSU entitles the employees to receive a payment in the form of one Air Canada ordinary share, cash in the
amount equal to market value of one ordinary share, or a combination thereof, at the discretion of the Board of Directors.
Share-based compensation risk refers to the risk that future cash flows to settle the PSUs will fluctuate because of changes in
the Corporation’s share price. To hedge the exposure to outstanding PSUs, the Corporation entered into share forward
contracts during 2010 and 2011 which now hedge an average of approximately 82% of the PSUs that may vest between 2011
and 2014, subject to the performance vesting criteria. The contracts were prepaid by the Corporation for $11, representing the
initial price of $1.785 per share for 2,700,000 Air Canada ordinary shares and $2.374 on 2,658,670 Air Canada ordinary shares.
The forward dates for the share forward contracts coincide with the planned settlement date in 2012 of 825,000 PSUs which
were eligible for vesting in 2011, and the vesting term of 1,875,000 PSUs in 2012 and 2,658,670 in 2014 and will be cash
settled. These contracts were not designated as hedging instruments for accounting purposes. Accordingly, changes in the fair
value of these contracts are recorded in Gain (loss) on financial instruments recorded at fair value in the period in which they
arise. During 2011, a loss of $10 was recorded (2010 – gain of $4). As at December 31, 2011, the fair value of the share
forward contracts is $5 in favour of the Corporation (2010 – $9 in favour of the Corporation) and is recorded in Deposits and
other assets.
Liquidity risk
Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with its financial
liabilities and other contractual obligations, including pension funding obligations as described in Note 10 and covenants in
credit card agreements as described below. The Corporation monitors and manages liquidity risk by preparing rolling cash flow
forecasts, monitoring the condition and value of assets available to be used as well as those assets being used as security in
financing arrangements, seeking flexibility in financing arrangements, and establishing programs to monitor and maintain
compliance with terms of financing agreements. The Corporation’s principal objective in managing liquidity risk is to maintain
a minimum unrestricted cash balance in excess of a target liquidity level of 15% of annual operating revenues. At
December 31, 2011, Air Canada had Cash and cash equivalents and Short-term investments of $2,099, which represents 18%
of 2011 operating revenues.
A maturity analysis of the Corporation’s financial liabilities, other fixed operating commitments and capital commitments is
set out in Note 17.
Market Risks
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices. Market risk comprises three types of risk: foreign exchange risk; interest rate risk; and other price risk, which
includes commodity price risk.
Refer to the Asset Backed Commercial Paper section below for information regarding these instruments held by the
Corporation and the associated market risks.