Air Canada 2013 Annual Report Download - page 61

2013 Management’s Discussion and Analysis
61
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 jet fuel prices and other operating costs, 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 $22 million to annual depreciation expense. For aircraft with shorter remaining useful lives,
the residual values are not expected to change significantly.
Maintenance Provisions
The recording of maintenance provisions related to return conditions on aircraft leases requires management to make
estimates of the future costs associated with the maintenance events required under the lease return condition and estimates
of the expected future maintenance condition of the aircraft at the time of lease expiry. These estimates take into account
current costs of these maintenance events, estimates of inflation surrounding these costs as well as assumptions surrounding
utilization of the related aircraft. Any difference in the actual maintenance cost incurred and the amount of the provision is
recorded in maintenance expense in the period. The effect of any changes in estimates, including changes in discount rates,
inflation assumptions, cost estimates or lease expiries, is also recognized in maintenance expense in the period. Assuming the
aggregate cost for return conditions increases by 5%, holding all other factors constant, there would be a cumulative balance
sheet adjustment to increase the provision by $32 million at December 31, 2013 and an increase to maintenance expense in
2014 of approximately $4 million. For illustrative purposes, if the discount rates were to increase by 1%, holding all other
factors constant, there would be a cumulative balance sheet adjustment to decrease the provision by $15 million at
December 31, 2013. Due to low market rates of interest, a 1% decrease in discount rates was not considered a reasonable
scenario.