Air Canada is Canada's largest domestic and international airline, providing scheduled and charter air transportation for passengers and cargo. The airline industry has suffered many difficulties and financial setbacks in the past decade. The high costs associated with operating an airline have claimed many "victims," including Canadian Airlines, which was purchased by Air Canada in 2000 in a highly publicized takeover battle. One of the largest cost components on Air Canada's income statement is aircraft fuel.

Since aircraft fuel is a commodity good, its price is subject to significant fluctuations. The cost of a barrel of aircraft fuel is determined by supply and demand relationships and other global economic conditions that affect production. As a result, Air Canada, like all other airlines, faces a high amount of uncertainty about the cost that it will be required to pay for aircraft fuel. In order to reduce the uncertainty and attempt to limit exposure, Air Canada uses a fuel hedging strategy to manage the risk. The notes to the company's 2011 financial statements describe the airline's strategy for its fuel hedging and provide additional disclosure as follows:

Fuel Price Risk

Fuel price risk is the risk that future cash flows arising from jet fuel purchases will fluctuate because of changes in jet fuel prices. In order to manage its exposure to jet fuel prices and to help mitigate volatility in operating cash flows, the Corporation enters into derivative contracts with financial intermediaries. The Corporation uses derivative contracts based on jet fuel, heating oil and crude-oil based contracts. Heating oil and crude-oil derivatives are used due to the relative limited liquidity of jet fuel derivative instruments on a medium to long-term horizon since jet fuel is not traded on an organized futures exchange. The Corporation's policy permits hedging of up to 75% of the projected jet fuel purchases for the next 12 months, 50% for the next 13 to 24 months and 25% for the next 25 to 36 months. These are maximum (but not mandated) limits. There is no minimum monthly hedging requirement. There are regular reviews to adjust the strategy in light of market conditions. The Corporation does not purchase or hold any derivative financial instrument for speculative purposes.

During 2011:

• The Corporation recorded a loss of $26 in Loss on financial instruments recorded at fair value related to fuel derivatives ($11 loss in 2010).

• The Corporation purchased crude-oil call options and collars covering a portion of 2011 and 2012 fuel exposure. The cash premium related to these contracts was $35.

• Fuel derivative contracts cash settled with a net fair value of $31 in favour of the Corporation ($27 in favour of the counterparties in 2010).

As of December 31, 2011, approximately 23% of the Corporation's anticipated purchases of jet fuel for 2012 are hedged at an average West Texas Intermediate ("WTI") equivalent capped price of US$114 per barrel. The Corporation's contracts to hedge anticipated jet fuel purchases over the 2012 period are comprised of call options and call spreads. The fair value of the fuel derivatives portfolio at December 31, 2011 is $11 in favor of the Corporation ($33 in favour of the Corporation in 2010) and is recorded within Prepaid expenses and other current assets.

The following table outlines the notional volumes per barrel along with the WTI equivalent weighted average floor and capped price for each year currently hedged by type of derivative instruments as at December 31, 2011.

The Corporation is expected to generate fuel hedging gains if oil prices increase above the average capped price.
Instructions
Discuss the various accounting issues that arise as a result of Air Canada's aircraft fuel hedging strategy. Specifically, discuss whether or not it makes sense for the company to use hedge accounting (which is optional) and from an accounting perspective, what type of hedge this is.

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WT Weighted Average Weighted Average Derivative Instruments Term (bbls) Floor Price (US$/bbl) Capped Price (US$/bbl) 2012 5,279,106 ot applicable 2012 $115 $107 360,000 not applicable Call spreads