Air Canada’s December 31, 2017 consolidated statement of financial position lists property and equipment at $9 billion and total assets of $17.7 billion.

Air Canada’s Note 4 to the financial statements titled Property and Equipment provides a schedule of the transactions that occurred during the year in four major categories. One category is dedicated to Aircraft and Flight Equipment. Another category is titled Purchase Deposits and Assets under Development (PDAD).

Under the latter category, sources of increases are additions and sources of decreases are reclassifications to Aircraft and Flight Equipment. No depreciation is recorded for this category of Property and Equipment. The balance in PDAD at December 31, 2017, was $1,063 million. In Note 4, more details are provided, including a statement that Aircraft and Flight Equipment includes spare engines. The consolidated statement of operations revealed that interest capitalized during 2017 amounted to $36 million. Although not specifically stated, the purchase deposits are likely for the future deliveries of aircraft and related equipment.

Air Canada’s significant accounting policies are provided in Note 2 to the financial statements. Note 2Q states that spare parts, other than rotables, are included in inventory. Note 2R states that rotables are components that can be repeatedly and economically restored to a fully serviceable condition. In the case of Air Canada, spare engines are rotables. Strict regulations require that engines be used a limited number of flight hours before they must be removed from the aircraft and completely overhauled regardless of their condition. This explains the need for spare engines that are ready for quick replacement, making the aircraft available at all times.

Instructions

a. For each of the following, provide an argument as to why Air Canada has classified the item under Property and Equipment:

1. Capitalized interest

2. Spare engines

3. Purchase deposits

b. Why does Air Canada not record depreciation on Purchase Deposits and Assets under Development?

c. Discuss the accounting treatment of the costs to overhaul spare engines.

d. Digging Deeper If Air Canada were not a public company following IFRS, and instead followed ASPE, would there be any difference in the way it would account for the three items discussed in part (a)? If so, what is the difference?