Air Canada 2011 Annual Report Download - page 54

2011 Air Canada Annual Report
54
Sensitivity Analysis
Sensitivity analysis on 2011 employee benefits expense and on net financing expense relating to employee benefit liabilities,
based on different actuarial assumptions with respect to discount rate and expected return on plan assets, is as follows:
0.25 Percentage Point
(Canadian dollars in millions) Decrease Increase
Discount rate on obligation assumption
Employee benefits expense $ 15 $ (15)
Net financing expense relating to employee benefit liabilities (10) 8
$5 $ (7)
Long-term rate of return on plan assets assumption
Net financing expense relating to employee benefit liabilities 28 (28)
$ 28 $ (28)
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 7.50%
annual rate of increase in the per capita cost of covered health care benefits was assumed for 2011 (2010 – 8.25%). 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 current service and interest costs by $5 million and the obligation by $57 million. A one percentage point
decrease in assumed health care trend rates would have decreased the current service and interest costs by $4 million and the
obligation by $55 million.
Impairment Considerations of Long-Lived Assets
Long-lived assets include property and equipment, definite lived intangible assets, indefinite lived intangible assets and
goodwill. Assets that have an indefinite useful life, including goodwill, are tested annually for impairment or when events or
circumstances indicate that the carrying value may not be recoverable. Assets that are subject to depreciation or amortization
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment test is performed by comparing the carrying amount of the asset or cash generating unit to their
recoverable amount. Recoverable amount is calculated as the higher of an asset’s or cash-generating unit’s fair value less costs
to sell and its value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there
are separately identifiable cash flows (cash-generating units or CGUs). Management has determined that the appropriate level
for assessing impairments in accordance with IFRS is at the North American and international fleet levels for aircraft and
related assets supporting the operating fleet. Parked aircraft not used in operations and aircraft leased or subleased to third
parties are assessed for impairment at the individual asset level. Value in use is calculated based upon a discounted cash flow
analysis, which requires management to make a number of significant assumptions including assumptions relating to future
operating plans, discount rates and future growth rates. An impairment loss is recognized for the amount by which the asset's
carrying amount exceeds its recoverable amount.
Depreciation and Amortization Period for Long-Lived Assets
Air Canada makes estimates about the expected useful lives of long-lived assets and the expected residual values of the assets
based on the estimated current fair value of the assets, Air Canada’s fleet plans and the cash flows they generate. Changes to
these estimates, which can be significant, could be caused by a variety of factors, including changes to maintenance programs,
changes in utilization of the aircraft, and changing market prices for new and used aircraft of the same or similar types.
Estimates and assumptions are evaluated at least annually. Generally, these adjustments are accounted for on a prospective
basis, through depreciation and amortization expense. For the purposes of sensitivity analysis on these estimates, a 50%
reduction to residual values on aircraft with remaining useful lives greater than five years results in an increase of $17 million
to annual depreciation expense. For aircraft with shorter remaining useful lives, the residual values are not expected to change
significantly.