Air Canada 2014 Annual Report Download - page 64

64 2014 Annual Report
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 $32 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 $40 million at December 31, 2014 and an increase
to maintenance expense in 2015 of approximately
$3 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 $17 million
at December 31, 2014. Due to low market rates of
interest, a 1% decrease in discount rates was not
considered a reasonable scenario.
INCOME TAXES
Deferred income tax assets are recognized only to
the extent that it is probable that future taxable
income will be available to realize them. In making
this assessment, consideration is given to available
positive and negative evidence and relevant
assumptions. Consideration is given to, among
other things, future projections of taxable income,
overall business environment, historical financial
results, and industry-wide trends and outlook. At
December 31, 2014, no deferred income tax assets
have been recorded.