Air Canada 2014 Annual Report Download - page 129

129
2014 Consolidated Financial Statements and Notes
Share-based Compensation Risk
The Corporation issues share-based compensation to
certain of its employees in the form of stock options,
RSUs and PSUs as described in Note 14. Each RSU and
PSU entitles the employees to receive a payment in
the form of one Air Canada common share, cash in
the amount equal to market value of one common
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 RSUs and PSUs will
fluctuate because of changes in the Corporation’s
share price. To hedge the exposure, the Corporation
entered into share forward contracts to hedge PSUs
and RSUs that may vest between 2015 and 2017,
subject to the terms of vesting including realization
of performance vesting criteria. The contracts were
prepaid by the Corporation. The forward dates for
the share forward contracts coincide with the vesting
terms and planned settlement dates of 7,198,609
PSUs and RSUs from 2015 to 2018. These contracts
were not designated as hedging instruments for
accounting purposes. Accordingly, changes in the
fair value of these contracts are recorded in Fuel and
other derivatives in the period in which they arise.
During 2014, a gain of $31 was recorded (2013 – gain
of $42). Share forward contracts cash settled with a
fair value of $7 in favour of the Corporation in 2014.
As at December 31, 2014, the fair value of the share
forward contracts is $85 in favour of the Corporation
(2013 – $56 in favour of the Corporation), with those
contracts maturing in 2015 of $25 recorded in Prepaid
expenses and other current assets and the remainder
of $60 is recorded in Deposits and other assets.
Liquidity risk
The Corporation manages its liquidity needs through
a variety of strategies including by seeking to
sustain and improve cash from operations, sourcing
committed financing for new and existing aircraft,
and through other financing activities.
Liquidity needs are primarily related to meeting
obligations associated with financial liabilities, capital
commitments, ongoing operations, contractual and
other obligations, including pension funding obligations
as described in Note 9 and covenants in credit card and
other 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
liquidity level of $1,700. This minimum target level
was determined in conjunction with the Corporation’s
liquidity risk management strategy. At December 31,
2014, unrestricted liquidity was $2,685 comprised of
Cash and cash equivalents and Short-term investments
of $2,275 and undrawn lines of credit of $410.
In January 2015, in order to effectively manage financing
costs, the amount outstanding under an undrawn line
of credit was reduced by $116. As at January 31, 2015,
the amount available under undrawn lines of credit was
$315.
A maturity analysis of the Corporation’s financial
liabilities, other fixed operating commitments and
capital commitments is set out in Note 16.
Credit Risk
Credit risk is the risk of loss due to a counterparty’s
inability to meet its obligations. As at December 31,
2014, the Corporation’s credit risk exposure consists
mainly of the carrying amounts of Cash and cash
equivalents, Short-term investments and Accounts
receivable. Cash and cash equivalents and Short-
term investments are in place with major financial
institutions, the Canadian government, and major
corporations. Accounts receivable are generally the
result of sales of tickets to individuals, often through
the use of major credit cards, through geographically
dispersed travel agents, corporate outlets, or
other airlines. Credit rating guidelines are used in
determining counterparties for hedging. In order to
manage its exposure to credit risk and assess credit
quality, the Corporation reviews counterparty credit
ratings on a regular basis and sets credit limits when
deemed necessary.
Sensitivity Analysis
The following table is a sensitivity analysis for
each type of market risk relevant to the significant
financial instruments recorded by the Corporation
as at December 31, 2014. The sensitivity analysis
is based on certain movements in the relevant risk
factor. These assumptions may not be representative
of actual movements in these risks and may not be
relied upon. Given potential volatility in the financial
and commodity markets, the actual movements and
related percentage changes may differ significantly
from those outlined below. Changes in income
generally cannot be extrapolated because the
relationship of the change in assumption to the
change in income may not be linear. Each risk is
contemplated independent of other risks; however,
changes in one factor may result in changes in one
or more several other factors, which may magnify or
counteract the sensitivities.