Westjet 2008 Annual Report Download - page 49

WestJet 2008 Annual Report 45
the balance sheet approximate their carrying amounts
due to the short-term nature of the instruments. The fair
value of the US-dollar deposits, which relate to purchased
aircraft, approximates their carrying amounts as they
are at a fl oating market rate of interest. At December 31,
2008, the fair value of long-term debt was approximately
$1,515.5 million (2007 – $1,474.0 million). The fair value of
our fi xed-rate long-term debt is determined by discounting
the future contractual cash fl ows under current fi nancing
arrangements at discount rates obtained from the lender,
which represent borrowing rates presently available to us
for loans with similar terms and remaining maturities.
As at December 31, 2008, rates used in determining the
fair value ranged from 2.08 per cent to 2.58 per cent
(2007 – 4.52 per cent to 4.61 per cent). The fair value of
our variable-rate long-term debt approximates its carrying
value as it is at a fl oating market rate of interest. Please
refer to Results of Operations – Aircraft Fuel and Results
of Operations – Foreign Exchange on pages 28 and 32,
respectively, of this MD&A for a discussion of the
signifi cant assumptions made in determining fair value
of derivatives both designated and not designated in an
effective hedging relationship.
Critical accounting estimates
Our signifi cant accounting policies are described in note 1
to our consolidated fi nancial statements. The preparation
of fi nancial statements in conformity with Canadian
GAAP requires estimates and assumptions that affect our
results of operations and fi nancial position. By their nature,
these judgments are subject to an inherent degree of
uncertainty and actual results could differ materially from
those estimates.
We have identifi ed the following areas that contain critical
accounting estimates utilized in the preparation of our
consolidated fi nancial statements:
Property and equipment
We make estimates about the expected useful lives,
depreciation and amortization methods, projected residual
values, lease return conditions, and the potential for
impairment of our property and equipment. In estimating
the lives and expected residual values of our fl eet, we rely
on annual independent appraisals, recommendations from
Boeing and actual experience with the same aircraft types.
Revisions to the estimates for our fl eet can be caused by
changes in the utilization of the aircraft or changing market
prices of used aircraft of the same type. We evaluate our
estimates and potential impairment on all property and
equipment when events and circumstances indicate that
the assets may be impaired. We make estimates for future
costs to return leased aircraft to certain standard conditions
as specifi ed within our lease agreements, subject to an
appropriate discount rate.
Derivative fi nancial instruments
The fair values of derivative fi nancial instruments are
calculated on the basis of information available at the
balance sheet date. The fair value of the foreign exchange
option arrangements is determined through a standard
option valuation technique used by the counterparty based
on inputs, including foreign exchange rates, interest rates
and volatilities. The fair value of the foreign exchange
f orward contracts designated in an effective hedging
relationship is measured based on the difference between
the contracted rate and the current forward price obtained
from the counterparty, which can be observed and
corroborated in the marketplace. Due to the short-term
nature of the outstanding forward contracts, no discount
rate has been applied.
The fair value of the fuel derivatives designated in an
effective hedging relationship is determined using inputs,
including quoted forward prices for commodities, foreign
exchange rates and interest rates, which can be observed or
corroborated in the marketplace. The fair value of the fuel
swap contracts is estimated by discounting the difference
between the contractual strike price and the current forward
price. The fair value of the fuel derivative collars is estimated
by the use of a standard option valuation technique.
Ineffectiveness is inherent in hedging jet fuel with
derivative instruments in other commodities, such as crude
oil, particularly given the signifi cant volatility observed
in the market on crude oil and related products. Due to
this volatility, we are unable to predict the amount of
ineffectiveness for each period. This may result in increased
volatility in our results.
Non-refundable guest credits
We also make estimates in accounting for our liability
related to certain types of non-refundable guest credits.
We issue future travel credits to guests for fl ight changes
and cancellations, as well as for gift certifi cates. Where
appropriate, future travel credits are also issued for fl ight
delays, missing baggage and other inconveniences. All
credits are non-refundable and expire based on the nature
of the credit, other than gift certifi cates which do not
contain an expiry date. We record a liability depending on