Air Canada 2014 Annual Report Download - page 130

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130 2014 Annual Report
The sensitivity analysis related to derivative contracts is based on the estimated fair value change applicable
to the derivative as at December 31, 2014 considering a number of variables including the remaining term to
maturity and does not consider the fair value change that would be applicable to the derivative assuming the
market risk change was applicable to the maturity date of the derivative contract.
INTEREST
RATE RISK (1) FOREIGN EXCHANGE RATE RISK (2) OTHER PRICE RISK (3)
INCOME INCOME INCOME
1% INCREASE 5% INCREASE 5% DECREASE 10% INCREASE 10% DECREASE
Cash and cash equivalents $ 7 $ (8) $ 8 $ - $ -
Short–term investments $ 16 $ (28) $ 28 $ - $ -
Aircraft related deposits $ - $ (4) $ 4 $ - $ -
Long–term debt and finance
leases
$ (13) $ 231 $ (231) $ - $ -
Fuel derivatives $ - $ - $ - $ 3 $ (3)
Share forward contracts - - - 9 (9)
Foreign exchange derivatives $ - $ (27) $ 22 $ - $ -
Interest rate swaps $ (1) $ - $ - $ - $ -
1 Due to currently low market rates of interest, a 1% decrease in interest rates was not considered a reasonable scenario within the forecast period, being one year.
2 Increase (decrease) in foreign exchange relates to a strengthening (weakening) of the Canadian dollar versus the U.S. dollar. The impact on long-term debt and finance leases includes
$5 related to the Canadian dollar versus the Japanese yen. The impact of changes in other currencies is not significant to the Corporation’s financial instruments.
3 The sensitivity analysis for fuel derivatives is based upon a 10% increase or decrease in the price of the underlying commodity. The sensitivity analysis for share forward contracts is
based upon a 10% increase or decrease in the Air Canada share price.
Covenants in Credit Card Agreements
The Corporation has various agreements with companies that process customer credit card transactions.
Approximately 85% of the Corporation’s sales are processed using credit cards, with remaining sales processed
through cash or online banking based transactions. The Corporation receives payment for a credit card sale
generally in advance of when the passenger transportation is provided.
The Corporation’s principal credit card processing agreements for credit card processing services in North America
contain triggering events upon which the Corporation is required to provide the credit card processor with cash
deposits. The obligation to provide cash deposits and the required amount of deposits are each based upon a matrix
measuring, on a quarterly basis, both a fixed charge coverage ratio for the Corporation and the unrestricted cash and
short-term investments of the Corporation. In 2014, the Corporation made no cash deposits under these agreements
(nil in 2013).
FINANCIAL INSTRUMENT FAIR VALUES IN THE CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
The carrying amounts reported in the consolidated statement of financial position for short-term financial
assets and liabilities, which includes Accounts receivable and Accounts payable and accrued liabilities,
approximate fair values due to the immediate or short-term maturities of these financial instruments. Cash
equivalents and Short-term investments are classified as held for trading and therefore are recorded at fair
value.
The carrying amounts of interest rate swaps, share forward contracts, foreign exchange, and fuel derivatives are
equal to fair value, which is based on the amount at which they could be settled based on estimated current
market rates.
Management estimated the fair value of its long-term debt based on valuation techniques taking into account
market information where available, market rates of interest, the condition of any related collateral, the current
conditions in credit markets and the current estimated credit margins applicable to the Corporation based on
recent transactions. Based on significant observable inputs (Level 2 in the fair value hierarchy), the estimated
fair value of debt is $5,306 compared to its carrying value of $5,216.