Air Canada 2011 Annual Report Download - page 52

2011 Air Canada Annual Report
52
13. 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 because 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 Revenues
Air Canada performs regular evaluations on the advance ticket sales liability, which may result in adjustments being
recognized as passenger 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 amounts that are different from those estimates.
Employee Future Benefits
The cost and related liabilities of Air Canada’s pensions, other post-retirement and post-employment benefit programs are
determined using actuarial valuations. The actuarial valuations involve assumptions, including discount rates, expected rates
of return on assets, future salary increases, mortality rates and future benefit increases. Also, due to the long-term nature of
these programs, such estimates are subject to significant uncertainty.
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, 2011 December 31, 2010
Weighted average assumptions used to determine the accrued benefit liability
Discount rate 5.20% 5.50%
Rate of compensation increase 2.50% 2.50%
Weighted average assumptions used to determine the accrued benefit cost
Discount rate 5.50% 6.40%
Expected long-term rate 6.90% 7.00%
Rate of compensation increase 2.50% 2.50%
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 $473 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.
Expected Return on Assets Assumption
Air Canada’s expected long-term rate of return on assets assumption is selected based on the facts and circumstances that
existed as of the measurement date and the specific portfolio mix of plan assets. Air Canada’s management, in conjunction
with its actuaries, reviews anticipated future long-term performance of individual asset categories and considers 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. The determination of the long-term rate considers recent fund performance and historical returns, to
the extent that the past is indicative of the expected long-term, prospective rate. There can be no assurance that any of the
plans will earn the expected rate of return. A sensitivity analysis on pension expense assuming a change in the expected return
on plan assets is provided below.