ABC Aerolíneas, S. A. de C. V., and Subsidiaries

Transcription

1 ABC Aerolíneas, S. A. de C. V., and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2013 and 2012, and Independent Auditors Report Dated April 30, 2014

2 ABC Aerolíneas, S. A. de C. V. and Subsidiaries Independent Auditors Report and Consolidated Financial Statements for 2013 and 2012 Table of contents Page Independent Auditors Report 1 Consolidated Statements of Financial Position 3 Consolidated Statements of Income 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Changes in Stockholders Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8

3 Galaz, Yamazaki, Ruiz Urquiza, S.C. Paseo de la Reforma 489 piso 6 Colonia Cuauhtémoc México, D. F. México Independent Auditors Report to the Board of Directors and Stockholders of ABC Aerolíneas, S. A. de C. V. Tel: +52 (55) Fax:+52 (55) We have audited the accompanying consolidated financial statements of ABC Aerolíneas, S. A. de C. V. and subsidiaries (the Entity ) which comprise the consolidated statements of financial position as of December 31, 2013 and 2012, and the the consolidated statements of income and other comprehensive income, consolidated statement changes in stockholders equity and consolidated statements of cash flows for the years ended December 31, 2013 and 2012, and a summary of the significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting International Financial Reporting Standards, as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Deloitte se refiere a Deloitte Touche Tohmatsu Limited, sociedad privada de responsabilidad limitada en el Reino Unido, y a su red de firmas miembro, cada una de ellas como una entidad legal única e independiente. Conozca en la descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro.

4 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of ABC Aerolíneas, S.A. de C.V. and subsidiaries as of December 31, 2013 and 2012, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Galaz, Yamazaki, Ruiz Urquiza, S. C. Member of Deloitte Touche Tohmatsu Limited C. P. C. Miguel Ángel del Barrio Burgos April 30,

5 ABC Aerolíneas, S. A. d e C. V. and Subsidiaries Consolidated Statements of Financial Position As of December 31, 2013 and 2012 (In thousands of Mexican pesos) Assets Note Current assets: Cash and cash equivalents 6 $ 2,622,495 $ 1,483,955 Accounts receivable 7 413, ,387 Due from related parties 19 11,207 11,207 Recoverable taxes, mainly business flat tax and valueadded tax 226, ,050 Inventories 190, ,603 Prepaid expenses 8 406, ,192 Total current assets 3,871,919 2,552,394 Liabilities and stockholders equity Note Current liabilities: Notes payable to financial institutions 13 $ 5,204,175 $ 2,497,209 Provision of maintenance and retirement conditions 332, ,908 Accounts payable 599, ,280 Other accounts payable and accrued expenses 345, ,513 Payable taxes other than income taxes 92,711 58,676 Air traffic liability 526, ,208 Total current liabilities 7,099,917 4,021,794 Long-term debt 13 5,253,503 6,248,487 Prepaid expenses 8 1,192, ,809 Flight equipment, leasehold improvements, and furniture and equipment - Net (Note 10) 10 8,688,307 8,137,098 Prepaid maintenance 2,355,717 1,652,835 Other assets , ,380 Concession 43,797 43,797 Deposits on aircraft leases , ,369 Total $ 16,755,619 $ 13,991,682 Deferred income taxes ,177 51,380 Employee benefits and other deferred liabilities 15 4,300 2,672 Provision of maintenance and retirement conditions 16 1,112, ,724 Total liabilities 13,585,910 11,143,057 Stockholders equity: Capital stock , ,000 Contributions for future capital increases 5 5 Translation effects of foreign operations 12,105 11,516 Retained earnings 2,235,320 1,924,355 Controlling interest 3,147,430 2,835,876 Noncontrolling interest 22,279 12,749 Total Stockholders equity 3,169,709 2,848,625 Total $ 16,755,619 $ 13,991,682 See accompanying notes to consolidated financial statements. 3

6 ABC Aerolíneas, S. A. de C. V. and Subsidiaries Consolidated Statements of Profit For the years ended December 31, 2013 and 2012 (In thousands of Mexican pesos) Note Operating revenues: Passengers $ 10,943,221 $ 9,795,819 Ancillary revenues 453, ,135 Cargo 27,420 50,843 Other 155, ,398 11,579,659 10,347,195 Operating expenses: Aircraft fuel 4,063,198 3,645,096 Maintenance and return conditions 1,155,311 1,071,972 Airport operating and landing fees 1,369,788 1,115,221 Wages, salaries and benefits 762, ,152 Insurance and passenger service 126, ,546 Selling 920, ,801 Administrative and other 770, ,863 Flight equipment rentals 21 1,276,261 1,084,095 Depreciation and amortization 445, ,731 10,889,794 9,311,477 Income from operations 689,865 1,035,718 Interest income 40,082 11,373 Interest expense (317,221) (287,616) Exchange loss - Net (27,434) (135,793) (304,573) (412,036) Income before income taxes 385, ,682 Income taxes 20 64, ,282 Net income 320, ,400 Attributable to: Controlling interest 310, ,349 Noncontrolling interest 9,530 2,051 Consolidated net income $ 320,495 $ 500,400 See accompanying notes to consolidated financial statements 4

7 ABC Aerolíneas, S. A. de C. V. and Subsidiaries Consolidated Statements of Comprehensive Income For the years ended December 31, 2013 and 2012 (In thousands of Mexican pesos) Note Consolidated net income $ 320,495 $ 500,400 Other comprehensive income: Translation effects of foreign operations 589 (39,284) Consolidated comprehensive income of the year $ 321,084 $ 461,116 Attributable to: Controlling interest $ 310,965 $ 459,065 Noncontrolling interest 9,530 2,051 Consolidated net comprehensive income of the year $ 320,495 $ 461,116 See accompanying notes to consolidated financial statements 5

8 ABC Aerolíneas, S. A. de C. V. and Subsidiaries Consolidated Statements of Changes in Stockholders Equity For the years ended December 31, 2013 and 2012 (In thousands of Mexican pesos) Contributions Translation effects Capital for future of foreign Retained Non-controlling stock capital increases operations earnings interest Total Balances as of January 1, 2012 (transition date) $ 900,000 $ 5 $ 50,800 $ 1,426,006 $ 10,698 $ 2,387,509 Comprehensive Income: Translation effects of foreign operations - - (39,284) - - (39,284) Net income for the year ,349 2, ,400 Comprehensive income - - (39,284) 498,349 2, ,116 Balances as of December 31, , ,516 1,924,355 12,749 2,848,625 Comprehensive Income: Translation effects of foreign operations Net income for the year ,965 9, ,495 Comprehensive income ,965 9, ,084 Balances as of December 31, 2013 $ 900,000 $ 5 $ 12,105 $ 2,235,320 $ 22,279 $ 3,169,709 See accompanying notes to consolidated financial statements. 6

9 ABC Aerolíneas, S. A. de C. V. and Subsidiaries Consolidated Statements of Cash Flows For the years ended December 31, 2013 and 2012 (In thousands of Mexican pesos) Note Operating activities: Income before income taxes $ 320,495 $ 500,400 Items related to investing activities Income tax 64, ,282 Depreciation and amortization 445, ,731 Provision for maintenance and retirement conditions 324, ,500 Interest expense 317, ,616 1,472,333 1,333,529 (Increase) decrease in: Accounts receivable (123,049) 404,467 Due from related parties - (42) Recoverable taxes, mainly business flat tax and valueadded tax (1,936) (99,512) Inventories (71,209) (34,769) Prepaid expenses 15, ,022 Deposits on aircraft leases 5,630 (184,057) Increase (decrease) in: Accounts payable 157,005 27,893 Other accounts payable and accrued expenses 134,828 70,133 Income taxes paid 34,035 (49,973) Due to related parties - (53,849) Air traffic liability 14, ,003 Employee benefits and other deferred liabilities 1,628 2,314 Net cash provided by (used in) operating activities 1,638,511 1,763,159 Investing activities: Flight equipment, leasehold improvements, and furniture and equipment (996,488) (1,569,508) Amortizable maintenance and repair costs (195,951) (630,807) Prepaid maintenance (702,882) (533,300) Net cash used in investing activities (1,895,321) (2,733,615) Financing activities: Repayment of loans received 4,070,828 3,931,643 Paid of loans (2,384,352) (1,861,603) Interest paid (308,072) (281,914) Net cash (used in) provided by financing activities 1,378,404 1,788,126 Effects from exchange rates 16,946 (38,921) Net increase in cash and cash equivalents 1,138, ,749 Cash and cash equivalents at beginning of period 1,483, ,206 Cash and cash equivalents at end of period $ 2,622,495 $ 1,483,955 See accompanying notes to consolidated financial statements. 7

10 ABC Aerolíneas, S. A. de C. V. and Subsidiaries Notes to Consolidated Financial Statements For the years ended December 31, 2013 and 2012 (In thousands of Mexican pesos) 1. Nature of business and significant events a Nature of business - ABC Aerolíneas, S. A. de C. V. ( ABC ) and Subsidiaries (the Entity or Interjet ) are mainly engaged in providing domestic and international public air transportation services for passengers, luggage, correspondence, cargo, parcels and mail, as well as operating flight equipment. The Entity also develops and operates centers for aircraft maintenance and air and land personnel training. Through its associate, it is also engaged in providing ground transportation services from various locations to the airports at which it operates. At December 31, 2013, the Entity provided services with a fleet of 45 aircraft of which seven are owned by the Entity, 12 are under financing leases and 26 are under operating lease schemes. The Entity provides air transportation services to the general public and cargo transportation mainly in Mexico under a concession granted by the Mexican Government through the Secretaria de Comunicaciones y Transportes (the Secretary of Communications and Transportation or SCT ), which was granted on August 8, 2005 and had an original term of five years. The Entity requested an extension of the concession term subject to certain requirements of Law and Regulation of Civil Aviation. On February 12, 2010, the SCT extended the concession granted to the Entity for an additional 30 years, which took effect in August The main offices of the Entity are located in Ignacio Longares 102 lote 2, Manzana 2, Parque industrial Exportec 1, Colonia San Pedro Totoltepec Toluca from Mexico City. 2. Significant events and seasonality Seasonality The business is subject to seasonal fluctuations. Usually, air travel demand is highest during the summer months and during the winter holiday season, particularly in international markets, because there are more vacation trips during these periods. Busiest months in the year are July, August, in March or April (depending on the date of Easter each year) and December, while the lower occupancy months in February, May and September. The results of our operations generally reflect this seasonality, but can also be affected by factors that are not necessarily seasonal, such as economic conditions, weather, delays in air traffic control and other factors. Acquisition of Airbus A320 NEO aircraft On November 8, 2012, Interjet entered into with Airbus, a favorable amendment agreement to the aircraft purchase contracts signed on October 18, Such amendment agreement establishes, among other things, a firm commitment to purchase 40 Airbus A320 Neo aircraft, with scheduled deliveries between the second half of 2018 and the second half of The A320 Neo aircraft incorporate the latest aeronautical technology, providing a 15% saving in fuel consumption due to their greater range and load capacity. With this purchase Interjet will gradually replace its current fleet with more efficient aircraft, improving its operating profitability and maintaining a low average age for the whole fleet. 8

11 The commercial and financial conditions negotiated by Interjet with the manufacturer will enable it to access different financing sources for the acquisition, including without limitation, export financing by export credit agencies (ECA s), long-term commercial bank loans, and sale and leaseback with lessors, or direct financing from the manufacturer, all under convenient terms, which will help improve its financial profile. Furthermore, as part of the same transaction Interjet convinced Airbus to reduce by approximately 10.89% the price of each of the six A320 aircraft that received between November 2012 and december 2013, which represents a significant direct benefit. Strategic alliance with Payback Interjet entered into a strategic alliance with Payback, a subsidiary of American Express Co., to significantly expand its Club Interjet traveler s program. As part of such alliance, Club Interjet members will enjoy the benefits of a new and innovative loyalty program known as Payback, launched a few months ago, which at the date of the accompanying consolidated financial statements has more than 2.8 million subscribers. Interjet and Payback offer value-added to their customers and through a cutting-edge digital platform are hoping to capture the most loyal customer base in the country. Such program is estimated to generate more than 4 million subscribers in the next six months, making it the largest loyalty program in Mexico. New aircraft On October 19, 2013, the Entity signed a contract with Superjet to acquire 20 SSJ100 model aircraft, whose delivery is scheduled between 2013 and The four deliveries were between August and december, New destinations In 2013, the Entity began flights to Bogota, Zacatecas, La Paz, Aguascalientes, Torreon, Mazatlan, Minatitlan, Manzanillo and Campeche. 3. Basis of presentation a. Explanation for preparation in English The accompanying consolidated financial statements have been prepared in English for use outside of Mexico. These consolidated financial statements are presented on the basis of Mexican Financial Reporting Standards ( MFRS ), which are comprised of accounting standards that are individually referred to as Normas de Información Financiera, or NIFs ). Certain accounting practices applied by the Entity that conform with MFRS may not conform with accounting principles generally accepted in the country of use. b. Working capital As of December 31, 2013 and 2012 the Entity has a negative working capital of $ 3,227,998 and $1,469,400 respectively; however, management is making the necessary efforts to obtain the enough resources to comply with its obligations. The Entity since the beginning of its operations decided to enter into short-term loans agreements renewable every year to take advantage of lower interest rates and to reduce the financial costs every year. In 2013, the Entity has been offered by the financial institutions to ensure a better interest rate for a period greater than a year. The Entity is assessing the convenience of renegotiating the short-term loans into long-term loans. c. Basis of preparation The consolidated financial statements have been prepared on the historical cost basis. 9

12 i. Historical cost: Historical cost is generally based on the fair value of the consideration given in exchange for assets. ii. Fair value: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. d. Consolidation of financial statements The consolidated financial statements include the financial statements of ABC and those of its subsidiaries in which it holds control. Entity Ownership 2013 and 2012 % ABC Shuttle Transporte Terrestre, S. A. de C. V. ( ABC Shuttle ) 99% Compañía para la Capacitación y Adiestramiento Integral para Pilotos, S. A de C. V. ( Capacitación y Adiestramiento ) 99% Servicios Administrativos Galem, S. A. de C. V. ( Servicios Galem ) 95% ABC Capacitación y Adiestramiento, S. A. de C. V. ( ABC Capacitación ) 99% 10

13 Entity Ownership 2013 and 2012 ABC Aerolíneas Mantenimiento Técnico Aeronáutico, S. A. de C. V. ( ABC Mantenimiento ) 99% ABC Servicios Terrestres, S. A de C. V. ( ABC Servicios Terrestres ) 95% AV Aerolíneas, S. A de C. V. y subsidiaria ( AV ) 99% Grupo Aleve, S. A. de C. V. ( Aleve ) 99% Taller de Reparación Aeronáutica IJ-TEK, SAPI, de C. V. ( Taller ) 60% IJ Cargo, S.A. de C.V. (IJ Cargo) 98% (1) The 90% of these companies are controlled by the Entity directly and 9% indirectly through a consolidated subsidiary. Balances and transactions between consolidated companies have been eliminated. The noncontrolling interests in the subsidiaries are identified separately in relation to the investments that Entity has in them. The noncontrolling interests may be initially valued, either at fair value or at the proportional interest in the noncontrolling interests over the fair value of the identifiable assets of the entity acquired. The choice of the valuation basis is made individually for each transaction. After the acquisition, the book value of the controlling interests represents the amount of such interests as of the initial recognition, plus the portion of the subsequent noncontrolling interests of the statement of changes in stockholders' equity. The comprehensive result is attributed to the noncontrolling interests even if it gives rise to a deficit in them. i. Subsidiaries The subsidiaries are all the companies over which the Entity has the power to govern their operating and financial policies, generally because it owns more than half of the voting stock. The existence and effects of the potential voting rights which are currently exercisable or convertible are considered when it is evaluated whether the Entity controls other Entity. The subsidiaries are consolidated from the date on which their control is transferred to Entity, and they cease to consolidate from the date on which control is lost. The accounting policies of subsidiaries have been changed to the extent necessary to ensure that there is consistency with the policies adopted by the Entity e. Functional and reporting currency To consolidate financial statements of foreign subsidiaries, the accounting policies of the foreign entities are converted to IFRS using the currency in which transactions are recorded. The financial statements are subsequently translated to Mexican pesos using the following methodologies: Foreign operations whose functional currency is the same as the currency in which transactions are recorded translate their financial statements using the following exchange rates: 1) the closing exchange rate in effect at the balance sheet date for assets and liabilities; 2) historical exchange rates for stockholders equity, and 3) the rate on the date of accrual of revenues, costs and expenses. Translation effects are recorded to other comprehensive income beginning on the transition date to IFRS. 11

14 The currency in which transactions are recorded and the functional currency of foreign operations and the exchange rates used in the different translation processes are as follows: Entity Currency of accounting records Functional currency Mexican peso exchange rates December 31, December 31, Inter-Jet Airlines Ldt. U.S. Dollar U.S. Dollar $ $ f. Statements of Comprehensive Income Costs and expenses presented in the consolidated statements of income were classified according to their nature because this is the practice of the sector to which the Entity belongs. We present a subtotal for Income from operations in order to provide a better understanding of the economic and financial performance, which is the result of subtracting service revenue, operating expenses. g. Statements of Cash Flows The Entity presents statements of cash flows under the indirect method. Cash inflows from interest received are classified in operating activities while cash outflows related to interest expense are presented in financing activities. Dividends are reported as financing activities. h. New and revised IFRSs in issue but not yet effective The Group has not applied the following new and revised IFRSs that have been issued but are not yet effect IFRS 9 Financial Instruments 3 Amendments to IFRS 9 and IFRS 7 Mandatory Effective Date of IFRS 9 and Transition Disclosures² Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities¹ Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities¹ ¹ Effective for annual periods beginning on or after January 1, 2014, with earlier application permitted. ² Effective for annual periods beginning on or after January 1, 2015, with earlier application permitted. 3 Effective for annual periods beginning on or after January 1, 2016, with earlier application permitted. 4. Summary of significant accounting policies a. Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards released by IASB b. Financial assets Financial assets are recognized when the Entity becomes a party to the contractual provisions of the instruments. 12

15 Financial assets are initially valued at fair value. The transaction costs directly attributable to the acquisition or issuance of financial assets (other than financial assets at fair value through profit or loss) are added to or deducted from the fair value of the financial assets, as the case may be, in the initial recognition. The transaction costs directly attributable to the acquisition of financial assets at fair value through profit or loss are recognized immediately in results Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss (FVTPL), held-to-maturity investments, available-for-sale (AFS) financial assets and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Effective interest method The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as of FVTPL. Financial assets at FVTPL Financial assets are classified as of FVTPL when the financial asset is either held for trading or it is designated as of FVTPL. A financial asset is classified as held for trading if: It has been acquired principally for the purpose of selling it in the near term; or On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or It is a derivative that is not designated and effective as a hedging instrument. A financial asset other than a financial asset held for trading may be designated as of FVTPL upon initial recognition if: Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or It forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract to be designated as of FVTPL. Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the other income (expenses) - Net line item. 13

16 Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For AFS equity investments, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment. For all other financial assets, objective evidence of impairment could include: Significant financial difficulty of the issuer or counterparty; or Breach of contract, such as a default or delinquency in interest or principal payments; or It becoming probable that the borrower will enter bankruptcy or financial reorganization; or The disappearance of an active market for that financial asset because of financial difficulties. For certain categories of financial assets, such as trade receivables, assets are assessed for impairment on a collective basis even if they were assessed not to be impaired individually. For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the financial asset s original effective interest rate. For financial assets that are carried at cost, the amount of the impairment loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss. When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognized in other comprehensive income are reclassified to profit or loss in the period. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. 14

17 In respect of AFS equity securities, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in other comprehensive income and accumulated under the heading of investments revaluation reserve. In respect of AFS debt securities, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss. Derecognition of financial assets c. Inventories The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. On derecognition of a financial asset other than in its entirety, the Group allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognizes on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognized and the sum of the consideration received for the part no longer recognized and any cumulative gain or loss allocated to it that had been recognized in other comprehensive income is recognized in profit or loss. A cumulative gain or loss that had been recognized in other comprehensive income is allocated between the part that continues to be recognized and the part that is no longer recognized on the basis of the relative fair values of those parts Inventories of expendable parts, accessories, materials and supplies are stated at the lower of their cost or net realizable values, using the average method. They are recognized in results as consumed, also based on their average cost. d. Prepaid expenses The Entity makes advances for the purchase of aircraft to be recognized in the entity functional currency translated at the exchange rate of the payment date. When the financial effect is relevant, despite the advances that do not qualify as a financial asset, recognizing the implicit financing to accrue the discount interest rate implicit in the agreement. The item also includes prepayments additional minimum lease payments resulting from subtracting the payment of advances for maintenance, fair value, as described in accounting policy advances for maintenance. e. Flight equipment, leasehold improvements and furniture and equipment The flight equipment, adaptations, improvements and equipment are initially recorded at cost. These assets are recorded at acquisition cost. Balances from acquisitions made through December 31, 2007 were restated for the effects of inflation by applying factors derived from the National Consumer Price Index ( NCPI ) through that date as deemed cost in accordance with the transition elections to IFRS applied by the Entity. 15

18 Land is not depreciated. The furniture and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation and amortization is recognized to lead to results of cost or valuation of assets (other than land) less their residual values over their useful lives using the straight line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each year, and the effect of any changes in the estimate recorded is recognized on a prospective basis. Average years Flight equipment and simulator 20 Flight equipment aircraft 19 (average) Flight equipment aircraft (1) 10 Leasehold improvements 20 Communication equipment 12 Airport operating equipment 10 Furniture 10 Transportation equipment 4 Computer equipment 3 Assets held under finance leases are depreciated based on their estimated useful life as owned assets or, if life is lower, in the corresponding lease term. The gain or loss arising from the sale or retirement of an item of flight equipment, leasehold improvements, and furniture and equipment is calculated as the difference between the resources received from sales and the carrying amount of the asset and is recognized in income. The category includes aircraft engines, airframes, landing gear, major maintenance carryforwards and repair costs, on owned aircraft and those obtained through leasing, which are amortized over the hours or accumulated cycles of operation, as applicable. Considering a residual value of 15%. f. Leases (1) The limit is the physical condition of the overhaul (repaired replacement part). The reparable spare parts and replacement parts whose substitution is expected in the short term are at values similar to those existing in the market which consider the prevailing situation each year and are estimated to be recoverable in the regular course of operations. No residual value is considered. Leases are classified as finance leases when the terms of the lease transfer substantially all the Entity risks and rewards of ownership. All other leases are classified as operating leases. The assets held under finance leases are recognized as assets of the entity at fair value at inception of the lease, or if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease liability. Lease payments are apportioned between the finance charge and the reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they can be directly attributable to qualifying assets, in which case they are capitalized in accordance with the entity's accounting policy. Contingent rents are recognized as expenses in the periods in which they are incurred. 16

19 g. Prepaid maintenance The Entity records the amounts paid in advance for maintenance as a financial asset if it is required to make the payment of maintenance, and has made advance payments for maintenance, that they may be reimbursed by the lessor if the institution demonstrates that spending maintenance has been performed. The resulting financial asset is recognized at fair value. Any difference between this and the amount paid is considered part of the lease payments. A financial asset is classified as a receivable, and therefore, it is recognized at amortized cost. For its part, the additional minimum lease payments are recognized in the caption of prepayments. When the amounts paid are not fully recoverable, the unrecoverable amounts are determined and periodically reviewed and represent an impairment of the financial asset. h. Other assets Costs derived from development activities and which give rise to future economic benefits, as they fulfill certain requirements for recognition as assets, are capitalized and amortized based on the straight-line method over ten years. Expenses that do not meet these requirements, as well as research costs, are recorded in operations in the year they are incurred. On August 19, 2008, the Entity commenced operations at the Mexico City International Airport, through a contract with Aerocalifornia, S. A. de C. V., under which the Entity acquired rights to space and flight hours for takeoff and landing of aircraft, documentation counters for passengers and baggage, passenger information desks on the general terminal, as well as parking facilities for short stay and long stay, Aero cares services, baggage revision services, service corridors, telescopic mobile service facilities, equipment and ground support services. The acquisition of these rights and other services paid were recorded as an indefinite lived asset, which is not amortized, but is subject to impairment testing annually. Presented in the balance sheet in the other assets line item. i. Concession On August 8, 2005, the Federal Government, through the SCT, granted the Entity the concession to provide public services related to national air transportation of passengers, cargo and mail for a fiveyear period. As mentioned in Note 1, in 2010, the Entity obtained an extension of the concession term for 30 additional years. The Entity considers that the grant qualifies as an intangible asset with an indefinite life and therefore is not amortized and is subject to impairment tests at least annually. j. Deposits on aircraft leases Deposits on aircraft leases mainly represent deposits paid to lessors of the fleet rented by the Entity as well as deposits with lessors of buildings and airport service providers. These amounts are presented as current or non-current, based on their contractually established recovery date. k. Impairment of long-lived assets in use At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cashgenerating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. 17

20 Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. l. Financial liabilities Financial liabilities are initially valued at fair value. The transaction costs which are directly attributable to the acquisition or issuance of financial liabilities (other than financial liabilities valued at fair value with changes recorded through results) are added or deducted, when applicable, from the initially recognized fair value of financial liabilities. The transaction costs which are directly attributable to financial liabilities at fair value with changes recorded through results are immediately recognized in results. Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. Note 13 describe the characteristics of loans received by the Entity from financial institutions. Financial liabilities at FVTPL Financial liabilities are classified as of FVTPL when the financial liability is either held for trading or it is designated as of FVTPL. A financial liability is classified as held for trading if: It has been incurred principally for the purpose of repurchasing it in the near term; or On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or It is a derivative that is not designated and effective as a hedging instrument. A financial liability other than a financial liability held for trading may be designated as of FVTPL upon initial recognition if: Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or The financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or 18

21 It forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract to be designated as of FVTPL. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any interest paid on the financial liability and is included in the statement of profit or loss. Financial liabilities at FVTPL Other financial liabilities (including borrowings and trade and other payables) are subsequently measured at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. The Entity only eliminates financial liabilities when its obligations are fulfilled, canceled or expire. m. Derivative financial instruments The Entity enters into derivative financial instruments contracts. These instruments are negotiated only with institutions of recognized financial strength and trading limits have been established for each institution. The Entity s policy is not to carry out transactions with derivative financial instruments for the purpose of speculation. The Entity recognizes all assets or liabilities that arise from transactions with derivative financial instruments at fair value in the statements of financial position, regardless of its intent for holding them. Fair value is determined using prices quoted on recognized markets. If such instruments are not traded, fair value is determined by applying valuation techniques recognized in the financial sector. When derivatives are entered into to hedge risks, and such derivatives meet all hedging requirements, their designation is documented at the beginning of the hedging transaction, describing the transaction s objective, characteristics, accounting treatment and how the effectiveness of the instrument will be measured. The Entity discontinues hedge accounting when the derivative instrument matures, is sold, cancelled or exercised, when the derivative instrument does not reach a high percentage of effectiveness to compensate for changes in fair value or cash flows of the hedged item, or when the Entity decides to cancel its designation as a hedge. While certain derivative financial instruments are contracted for hedging from an economic point of view, they are not designated as hedges because they do not meet all of the requirements and are instead classified as held-for-trading for accounting purposes. Changes in fair values are recognized in comprehensive financing results. n. Air traffic liability and service Ticket sales are initially recognized as a liability under air traffic liability. When the transportation service is provided or the right to use the ticket is lost, the earned revenues are recognized and the liability account is reduced. 19

22 With respect to unused tickets, transportation revenues are recognized based on the itinerary date of the last respective coupon. As a policy, the Entity does not reimburse sold tickets. Revenue from freight and excess baggage are recognized when the service is provided. o. Frequent-flier program The Entity maintains the Payback Program (formerly the Interjet Club Program) through which, in exchange for an annual enrollment fee, program members can accrue 10% of their airfares (without taxes or airport tax) to acquire tickets, pay excess baggage charges or itinerary change fees throughout a 12-month period. The fair value attributed to these rewards is deferred as a liability and recognized as income when the Entity has fulfilled its obligation, i.e., when rewards are utilized or expire, whichever occurs first. The price is assigned to rewards at fair value, while the residual amount is assigned to the ticket value. At December 31, 2013 and 2012, the liability generated by this program is insignificant and is presented under accrued expenses in the statement of changes in financial position. p. Employee benefits from termination, retirement and statutory employee profit sharing (PTU) Payments to defined contribution retirement benefit plans are recognized as an expense when employees have rendered service entitling them to the contributions. For defined benefit retirement benefit plans, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at the end of each annual reporting period. Remeasurement, comprising actuarial gains and losses, the effect of the changes to the asset ceiling (if applicable) and the return on plan assets (excluding interest), is reflected immediately in the statement of financial position with a charge or credit recognized in other comprehensive income in the period in which they occur. Remeasurement recognized in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss. Past service cost is recognized in profit or loss in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are categorized as follows: Service cost (including current service cost, past service cost, as well as gains and losses on curtailments and settlements). Net interest expense or income. Remeasurement. The Group presents the first two components of defined benefit costs in profit or loss in the line item employee benefits expense. Gains and losses for reduction of service are accounted for as past service costs The retirement benefit obligation recognized in the consolidated statement of financial position represents the actual deficit or surplus in the Group s defined benefit plans. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans. A liability for a termination benefit is recognized at the earlier of when the entity can no longer withdraw the offer of the termination benefit and when the entity recognizes any related restructuring costs. Statutory employee profit sharing (PTU) PTU is recorded in the results of the year in which it is incurred and presented under other income and expenses in the Entity consolidated statements of operations.. 20