Air Canada 2011 Annual Report Download - page 86

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2011 Air Canada Annual Report
86
L) FINANCIAL INSTRUMENTS
Under the Corporation's risk management policy, derivative financial instruments are used only for risk management purposes
and not for generating trading profits.
Financial assets and financial liabilities, including derivatives, are recognized on the Consolidated Statement of Financial
Position when the Corporation becomes a party to the contractual provisions of the financial instrument or derivative
contract. All financial instruments are required to be measured at fair value on initial recognition. The Corporation’s own
credit risk and the credit risk of the counterparty are taken into consideration in determining the fair value of financial assets
and financial liabilities, including derivative instruments. Measurement in subsequent periods is dependent upon the
classification of the financial instrument. The Corporation classifies its financial assets as either fair value through profit or
loss (“FVTPL”), loans and receivables, held to maturity or available-for-sale. The classification depends on the purpose for
which the financial assets were acquired.
Management determines the classification of its financial assets at initial recognition. Financial assets at FVTPL are financial
assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the
short term. Derivatives are also categorized as held for trading unless they are designated as hedges. Loans and receivables are
non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Held-to-maturity
financial assets are non-derivatives that have fixed and determinable payments and the entity has the ability and intent to
hold the asset until maturity. Available-for-sale financial assets are non-derivatives that are either designated in this category
or not classified in any of the other categories. For financial instruments classified as other than held-for-trading, transaction
costs are added to the initial fair value of the related financial instrument. Financial assets and financial liabilities classified as
held-for-trading are measured at FVTPL. Financial assets classified as held-to-maturity, loans and receivables, or other
financial liabilities are measured at amortized cost using the effective interest rate method.
The Corporation assesses at the end of each reporting period whether there is objective evidence that a financial asset or a
group of financial assets is impaired. For loans and receivables, the amount of the loss is measured as the difference between
the asset’s carrying value and the present value of estimated future cash flows. The carrying amount of the asset is reduced by
the amount of the loss and the latter is recognized in the Consolidated Statement of Operations. In the case of equity
investments classified as available-for-sale, a significant or prolonged decline in the fair value of the investment below its cost
is evidence that the asset is impaired. If such evidence exists for available-for-sale financial assets, the cumulative loss –
measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial
asset previously recognized in the Consolidated Statement of Operations – is removed from equity and recognized in the
Consolidated Statement of Operations. Impairment losses recognized on equity instruments are not reversed through the
Consolidated Statement of Operations.
The Corporation enters into interest rate, foreign currency, fuel derivatives and share forward contracts to manage the
associated risks. Derivative instruments are recorded on the Consolidated Statement of Financial Position at fair value,
including those derivatives that are embedded in financial or non-financial contracts. Changes in the fair value of derivative
instruments are recognized in Non-operating income (expense) with the exception of fuel derivatives designated as effective
cash flow hedges, as further described below. These derivative contracts are included in the Consolidated Statement of
Financial Position at fair value in Prepaid expenses and other current assets, Deposits and other assets, Accounts payable and
accrued liabilities, or Other long-term liabilities based on the terms of the contractual agreements. All cash flows associated
with purchasing and selling derivatives are classified as operating cash flows in the Consolidated Statement of Cash Flow.
The Corporation has implemented the following classifications:
Cash and cash equivalents and Short-term investments are classified as held-for-trading and any period change in fair
value is recorded through Interest income in the Consolidated Statement of Operations.
Restricted cash is classified as held-for-trading and any period change in fair value is recorded through Interest income in
the Consolidated Statement of Operations.
Aircraft related and other deposits are classified as loans and receivables and are measured at amortized cost using the
effective interest rate method. Interest income is recorded in the Consolidated Statement of Operations, as applicable.
Accounts receivable are classified as loans and receivables and are measured at amortized cost using the effective interest
rate method. Interest income is recorded in the Consolidated Statement of Operations, as applicable.