Access the annual report for Air Canada for the December 31, 2009

Access the annual report for Air Canada for the December 31, 2009 fiscal year end from the company’s website (www.aircanada.com). Also, access the annual report for the year ended March 31, 2009, for British Airways plc from the company’s website (www.bashares.com). 

Instructions

(a) What specific items do the airlines discuss in their Accounting Policies notes? (Prepare a list of the headings only.)

(b) Note the similarities and differences in regard to these notes. Comment on these and relate them to the nature of the two businesses.

(c) For what lines of business or segments do the companies present segmented information? What information is provided by segment? Which note disclosure is most useful and why?

(d) Note and comment on the similarities and differences between the auditors’ reports submitted by the independent auditors.

(a) (1) Air Canada commented on the following list of items in its note 2 on accounting policies:

Principles of consolidation Use of estimates Passenger and cargo revenues Capacity purchase agreements Aeroplan loyalty program Other revenues Employee future benefits Employee profit sharing plan Stock-based compensation plan Maintenance and repairs Other operating expenses Financial instruments and hedging activities Foreign currency translation Income taxes Cash and cash equivalents

Short-term investments Restricted cash Aircraft fuel inventory and spare parts inventory Property and equipment Interest capitalized Intangible assets Impairment of long-lived assets Aircraft lease payments in excess of or less than rent expense Asset retirement obligations Related party transactions Variable interest entities Future accounting standards changes

    (2) British Airways commented on the following list of items in its note 2 on accounting policies (*):

Basis of Preparation Basis of consolidation Revenue Revenue recognition: Mileage program Segmental reporting Intangible fixed assets Property, plant, and equipment Inventories Interests in associates Cash and cash equivalents Other current interest bearing deposits Trade and other receivables Available-for-sale financial assets Employee benefits Share-based payment

Taxation Provisions Foreign currency translation Derivatives and financial instruments Cash flow hedges Impairment of financial assets Investment in own shares Derecognition of financial assets and liabilities Exceptional items Discontinued operations Key accounting estimates and judgments Impact of new International Financial Reporting Standards New standards, amendments and interpretations not yet effective

(*) Shares of British Airways trade on both the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE). The information in this sample solution is contained in the 2009 annual report on the company’s website.

(b) Seventeen of the items discussed in their notes on accounting policies are similar. Both companies are in the airline industry. Their policies that are similar and that relate to this industry include revenue recognition for loyalty program, foreign currency translation, and property and equipment. Some policies would be common to all businesses such as cash and cash equivalents, short-term investments, share based payments, financial assets, financial instruments and hedging and taxation.  Other policies relate more to the size of the businesses, such as principles of consolidation.

    Notable differences in the accounting policies deal with restricted cash, aircraft lease payments in excess of or less than rent expense, related party transactions, and variable interest entities in Air Canada’s notes. British Airways’ notes deal with interests in associates, exceptional items, and discontinued operations.

(c) Under note 1, nature of operations, Air Canada states that it operates as only one reportable segment.  As such, the only segmented information provided is with respect to revenues.  In note 13, Air Canada Inc. provides information on passenger revenues and cargo revenues. In addition, geographic segment revenues are provided for Canada, US transborder, Atlantic, Pacific and other. 

    British Airways, in note 3, also states that its cargo and passenger operations are managed as single business unit as management makes resource allocations based on route economics and with little reference to cargo operations.  It also states that although the operations of OpenSkies and CityFlyer are considered separate operating segments, they are similar enough to be grouped in with passenger and cargo operations.  As a result, the company only has one reportable segment for its airline business. Other segments include Air Miles Travel Promotions Limited, British Airways Holidays Limited, Speedbird Insurance Company Limited.  Information provided by segments include: sales to external customers; inter-segment sales; segment results; other non-operating expenses; profit before finance and taxes; net finance costs; profit on sale of assets; share or associate profits; taxes; loss after tax; assets; investment in associates; segment liabilities; unallocated liabilities; property, plant and equipment additions; intangible asset additions, purchase of subsidiary; depreciation, amortization and impairment; impairment of available-for-sale investments; exceptional items including restructuring, unused tickets and impairment of goodwill.

    British Airways also provides geographic segment revenue information for: UK and Continental Europe; The America’s; Africa, Middle East and India subcontinents; Far East and Australasia.

    Since both companies really only have one significant reportable segment, the information has limited use.  The note disclosure for British Airways appears to be more useful since disclosure is made as to why the company believes it has only one reportable unit for its airline operations.  In addition, because it does have more than one reportable segment, a lot of individual segment information is provided which would be difficult to find in the other notes.

(d) Air Canada’s independent auditors are Price waterhouse Coopers LLP, which conducted the audit in accordance with Canadian generally accepted auditing standards. British Airways’ independent auditors are Ernst & Young LLP., which issued an auditor’s reports under International Standard on Auditing

British Airways’ report under International Standard on Auditing is fairly extensive. It provided the details of responsibilities of management and auditors and made more references to the regulations related to the company.