GENERAL ACCOUNTING PROVISIONS Section 1-Introduction to System of Accounts and Reports

Sec. 1-1 Applicability of system of accounts and reports.

Each route air carrier and each supplemental air carrier shall keep its books of account, records and memoranda and make reports to the Board in accordance with this system of accounts and reports. The Civil Aeronautics Board reserves the right, however, under the provisions of sections 407 and 416 of the Federal Aviation Act of 1958, as amended, to expand or otherwise modify the classes of carriers subject to this system of accounts and reports.

Sec. 1-2 Waivers from this system of accounts and reports.

A waiver from any provision of this system of accounts or reports may be made by the Civil Aeronautics Board upon its own initiative or upon the submission of written request therefor from any air carrier, or group of air carriers, provided that such a waiver is in the public interest and each request for waiver expressly demonstrates that: existing peculiarities or unusual circumstances warrant a departure from a prescribed procedure or technique; a specifically defined alternative procedure or technique will result in a substantially equivalent or more accurate portrayal of operating results or financial condition, consistent with the principles embodied in the provisions of this system of accounts and reports; and the application of such alternative procedure will maintain or improve uniformity in substantive results as between carriers.

Sec. 1-3

air

General description of system of accounts and reports.

(a) This system of accounts and reports is designed to permit limited contraction or expansion to reflect the vary

ing needs and capacities of different air carriers without impairing basic accounting comparability as between air carriers. In its administration three air carrier groups, designated Group I, Group II, and Group III, respectively (see section 04), are established by the Civil Aeronautics Board. This grouping will be reviewed from time to time upon petition of individual air carriers or by initiative of the Civil Aeronautics Board with the view of a possible regrouping of the air carrers.

(b) Under the system of accounts prescribed, balance sheet elements are accounted for by all air carrier groups within a fixed uniform pattern of specific accounts. All profit and loss elements are accounted for within specific objective accounts established for each air carrier group resulting from dual classifications, designated for each air carrier group, which are descriptive of both basic areas of financial activity, or functional operation, and objective served. The profit and loss elements of the three air carrier groups can be reduced to broad objectives and general or functional classifications which are comparable for all air carrier groups. Both balance sheet and profit and loss accounts and account groupings are designed, in general, to embrace all activities, both air transport and other than air transport, in which the air carrier engages and provide for the separation of elements identifiable exclusively with other than air transport activities. Profit and loss elements which are recorded during the current accounting year are subclassified as between (1) those which relate to the current accounting year and adjustments of a recurrent nature applicable to prior accounting years, and (2) extraordinary items of material magnitude.

(c) In order to afford air carriers as much flexibility and freedom as possible in establishing ledger and subsidiary accounts to meet their individual needs, a minimum number of account subdivisions have been prescribed in this Uniform System of Accounts. It is intended, however, that each air carrier, in maintaining its accounting records, will provide subaccount and subsidiary account segregations of accounting elements which differ in nature of accounting characteristics, in a manner which will render individual elements readily discernible and traceable throughout the accounting system, and will provide for

relating profit and loss elements to applicable balance sheet counterparts. Sec. 1-4 System of accounts coding.

(a) A four digit control number is assigned for each balance sheet and profit and loss account. Each balance sheet account is numbered sequentially, within blocks, designating basic balance sheet classifications. The first two digits of the four digit code assigned to each profit and loss account denote a detailed area of financial activity or functional operation. The first two digits, thus assigned to each profit and loss account, are numbered sequentially within blocks, designating more general classifications of financial activity and functional operation. The second two digits assigned to profit and loss accounts denote objective classifications.

(b) A fifth digit, appended as a decimal, has been assigned for internal control by the Civil Aeronautics Board of prescribed subdivisions of the primary objective balance sheet and profit and loss classifications. A different fifth digit code number from that assigned by the Civil Aeronautics Board may be adopted for internal record keeping by the air carrier provided the prescribed subclassification of objective accounts is not impaired and the code number assigned by the Civil Aeronautics Board is employed in reporting to the Board on Form 41 Reports. Sec. 1-5

Records.

(a) The general books of account and all books, records, and memoranda which support in any way the entries therein shall be kept in such manner as to provide at any time full information relating to any account. The entries in each account shall be supported by such detailed information as will render certain the identification of all facts essential to a verification of the nature and character of each entry and its proper classification under the prescribed Uniform System of Accounts. Registers, or other appropriate records, shall be maintained of the history and nature of each note receivable and each note payable.

(b) The books and records referred to herein include not only accounting records in a limited technical sense, but all other records such as organization tables and charts, internal accounting manuals and revisions thereto, minute books, stock books, reports, cost distributions and other accounting work sheets, correspondence, memoranda, etc., which

may constitute necessary links in developing the history of, or facts regarding, any accounting or financial transaction. (c) All books, records and memoranda shall be preserved and filed in such manner as to readily permit the audit and examination thereof by representatives of the Civil Aeronautics Board. All books, records and memoranda shall be housed or stored in such manner as to afford protection from loss, theft, or damage by fire, flood or otherwise and no such books and records shall be destroyed or otherwise disposed of, except in conformance with Part 249 of the Economic Regulations of the Civil Aeronautics Board for the preservation of records.

(a) Separate accounting records shall be maintained for each air transport entity for which separate reports to the Civil Aeronautics Board are required to be made by sections 21(i) or 31(h), as applicable, and for each separate corporate or organizational division of the air carrier. For purposes of this Uniform System of Accounts and Reports, each nontransport entity conducting an activity which is not incidental to the air carrier's transport activities and each transport-related activity or group of activities qualifying as a nontransport venture pursuant to paragraph (b) of this section, whether or not formally organized within a distinct organizational unit, shall be treated as a separately operated organizational division.

(b) As a general rule, any activity or group of activities comprising a transport-related service provided for in transport-related revenue and expense accounts 09 through 18 shall be considered a separate nontransport venture under circumstances in which either: (1) A separate corporate or legal entity has been established to perform such services, (2) the aggregate annual revenue rate, as determined in section 2-1(d), during either of the prior two years exceeds the greater of $1 million per annum or one percent of the air carrier's total annual transport revenues, or (3) the aggregate annual expense rate, as determined in section 2-1(d), during either of the prior two years exceeds the greater of $1 million or one percent of the carrier's total annual operating expenses: Provided, That revenues and expenses from in-flight sales, section 406 subsidy, interchange sales, and mutual

aid assistance shall be considered related to air transportation and accounted for accordingly, regardless of the revenue or expense standard set forth above.

(c) The records for each required accounting entity shall be maintained with sufficient particularity to permit a determination that the requirements of section 2-1 have been complied with.

[ER-755, 37 FR 19726, Sept. 21, 1972, as amended by ER-841, 39 FR 11994, Apr. 2, 1974]

Sec. 1-7

Interpretation of accounts.

To the end that uniform accounting may be maintained within the prescribed system, questions involving matters of significance which are not clearly provided for should be submitted to the Director, Bureau of Accounts and Statistics, for explanation, interpretation, or resolution.

Sec. 1-8 Address for reports and correspondence.

Reports, statements. and correspondence submitted to the Civil Aeronautics Board, in accordance with or relating to instructions and requirements contained herein shall be addressed to the Bureau of Accounts and Statistics, Civil Aeronautics Board, Washington, D.C. 20428, the organizational unit responsible for administering the accounting and reporting functions of the Civil Aeronautics Board.

Sec. 1-9 Conversion to this system of accounts and reports.

(a) Upon the adoption of this system of accounts and reports all balance sheet account balances shall be restated as of the effective date of the regulation to conform with the provisions of this Part except as provided in this section 1-9. All necessary adjustments shall be accumulated in an appropriate clearing account and the net transferred to profit and loss classification 9700 Extraordinary Items.

(b) Any adjustments of allowances for depreciation, obsolescence of flight equipment expendable parts, uncollectible accounts or other valuations of assets, shall be applied to current and subsequent accounting periods by spreading the depreciated cost of such assets over the remaining life of the parts and assemblies shall be divided between the portion applicable to flight asset to which applicable and shall not be applied retroactively.

(c) Any allowance accumulated for obsolescence of flight equipment spare parts and assemblies shall be divided between the portion applicable to flight equipment expendable parts and flight equipment rotable parts and shall be recorded in the applicable allowance accounts.

(d) Any provision of this system of accounts respecting allowances for depreciation, or other valuation of assets, shall be made applicable as at the effective date of this regulation to all assets then existing as well as to assets subsequently acquired against which the accrual of allowances would be appropriate.

(e) All statements and plans required to be submitted to the Civil Aeronautics Board by this system or accounts and reports shall be filed by January 1, 1957, or with the first report filled hereunder after an air carrier becomes subject to this part. (See section 22(d) or 32(d), as applicable.)

ER-755, 37 FR 19726, Sept. 21, 1972, as amended by ER-948, 41 FR 12289, Mar. 25, 1976; ER-980, 42 FR 23, Jan. 3, 1977]

Section 2-General Accounting
Policies

Sec. 2-1 Basis of allocation between entities.

(a) The provisions of this section shall apply to each person controlling an air carrier, each person controlled by the air carrier, as well as each transport entity and organizational division of the air carrier for which separate records must be maintained pursuant to section 1-6.

(b) Each transaction shall be recorded and placed initially under accounting controls of the particular air transport entity or organizational division of the air carrier or member of an affiliated group to which directly traceable. If applicable to two or more accounting entities, a proration shall be made from the entity of original recording to other participating entities on such basis that the statements of financial condition and operating results of each entity are comparable to those of distinct legal entities. The allocations involved shall embrace all debits and credits associated with each entity and shall comply with the provisions of section 2-18, as applicable.

(c) For purposes of this section, investments by the air carrier in resources or facilities used in common by the regulated air carrier activity and those transport-related revenue services de

fined as separate nontransport ventures under section 1-6(b) shall not be allocated between such entities but shall be reflected in total in the appropriate accounts of the entity which predominantly uses the facility or resource. Where the entity of predominate use is a nontransport venture, the air carrier shall reflect the investment in account 1520, Advances to Associated Companies.

(d) For purposes of this Uniform System of Accounts and Reports, all revenues shall be assigned to or apportioned between accounting entities on bases which will fully recognize the services provided by each entity, and expenses, or costs, shall be apportioned between accounting entities on such bases as will result: (1) With respect to transport-related services, in the assignment thereto of proportionate direct overheads, as well as direct labor and materials, of the applicable expense functions prescribed by this system of accounts and reports, and (2) with respect to separate ventures, in the assignment thereto of proportional general and administrative overheads as well as the direct overheads, labor, and materials.

(e) In accordance with the provisions of sections 22(d) or 32(d), as applicable, each air carrier shall file a statement with the Civil Aeronautics Board which details the practices and techniques used in directly assigning and prorating revenues and expenses, or costs, in compliance with the provisions of this section. [ER-755, 37 FR 19726, Sept. 21, 1972, as amended by ER-841, 39 FR 11994, Apr. 2, 1974; ER-908, 42 FR 23, Jan. 3, 1977] Sec. 2-2 Distribution of revenues and expenses within entities.

(a) Revenues and expenses attributable to a single natural objective account or functional classification shall be assigned accordingly.

(b) Revenue and expense items which are common to two or more natural objective accounts shall be recorded in the objective accounts to which they predominantly relate.

(c) Expense items contributing to more than one function shall be charged to the general overhead functions to which applicable except that where only incidental contribution is made to more than a single function an item may be included in the function to which primarily related, provided such function is not distorted by including an aggregation of amounts applicable to other

90-055-77—16

functions. When assignment of expense items on the basis of the primary activity to which related does not in the aggregate result in a fair presentation of the expenses applicable to each function, apportionment shall be made between functions based upon a study of the contribution to each function during a representative period.

Sec. 2-3 Transactions in foreign currencies.

(a) All accounts provided herein shall be stated in terms of United States dollars.

(b) At each transaction date, each asset, liability, revenue, or expense arising from a transaction denominated in a foreign currency shall be translated into United States dollars by use of the exchange rate in effect at that date, and shall be recorded at that dollar amount. If the translation of each transaction is impractical, the use of an average exchange rate for the period will be permitted provided that the results obtained. do not differ materially from those that would be achieved through the use of a daily rate.

(c) At the balance sheet date for each quarterly accounting period, recorded dollar balances representing cash and amounts owed by or to the carrier that are denominated in a foreign currency shall be adjusted to reflect the current. rate of foreign exchange. In addition, debt securities held by the carrier that are essentially equivalent to notes receivable shall also be adjusted to reflect the current rate of exchange.

(d) At the balance sheet date for each. quarterly accounting period, assets carried at market whose current market price is stated in a foreign currency shall be adjusted to the equivalent dollar market price at the balance sheet date (that is, the foreign currency market price at. the balance sheet date multiplied by the current rate).

(e) Translation of accounts in foreign statements that are carried at exchange prices shall be in a manner that retains: their measurement bases as follows:

(1) Accounts carried at prices in past exchanges shall be translated at histori-cal rates; and

(2) Accounts carried at prices in curzent purchase or sales exchanges or future exchanges shall be translated at the current rate.

(f) Exchange gains and losses which. result from the application of the pro

visions of paragraphs (a), (b), (c), (d) and (e) of this section shall be included in determining net income for the accounting period in which the rate changes. Such gains or losses which result from normal, routine, current fluctuations in rates of foreign exchange shall be charged to Accounts 6876 or 6976, Foreign Exchange Gains and Losses. Gains or losses of a nonroutine abnormal character and gains or losses which rise from long-term debt principal and interest transactions shall be charged to account 8185, Foreign Exchange Gains and Losses. See paragraph (h) for circumstances under which a gain or loss on a foreign currency transaction may be deferred.

(g) A gain or loss applicable to a forward exchange contract shall be included in determining net income by charging account 8185 for the accounting period in which the rate changes if the gain or loss pertains to a forward contract that is intended to be a:

(1) Hedge of a foreign currency exposed net asset or net liability position;

(2) Hedge of a foreign currency commitment that does not meet the following conditions:

(i) The life of the forward contract extends from the foreign currency commitment date to the anticipated transaction date or a later date,

(ii) The forward contract is denominated in the same currency as the foreign currency commitment and for an amount that is the same or less than the amount of the foreign currency commitment.

(iii) The foreign currency commitment is firm and uncancelable; or,

(3) Speculation.

(h) A gain or loss shall be deferred and included in the measurement of the dollar basis of the related foreign currency transaction if the gain or loss pertains to a forward contract that is intended to be a hedge of an identifiable foreign currency commitment that meets all of the conditions described in paragraph (g) (2) (i) through (iii) of this section. Losses on a forward contract shall not be deferred, however, if deferral could lead to recognizing losses in later periods.

[ER-980, 42 FR 23, Jan. 3, 1977]

Sec. 2-4 Accounting period.

(a) The accounting year of each air carrier subject to this Uniform System of Accounts shall be the calendar year

unless otherwise approved by the Civil Aeronautics Board.

(b) Each air carrier shall keep its financial accounts and records on a full accrual basis for each quarter so that all transactions, as nearly as may reasonably be ascertained, shall be fully reflected in the air carrier's books for the quarter in which revenues have been earned and the costs attaching to the revenues so earned in each quarter have been incurred independently of the incidence of sales or purchases and settlement with debtors or creditors.

(c) Expenditures incurred during the current accounting year which demonstrably benefit operations to be performed during subsequent accounting years to a significant extent shall be deferred and amortized to the period in which the related operations are performed when of sufficient magnitude to distort the accounting results of the year in which incurred.

(d) Expenditures charged directly or amortized to operations within one accounting year shall not be reversed in a subsequent accounting year and reamortized or charged directly against operations of subsequent years except that retroactive adjustments are permitted where necessary to conform with adjustments required by the Civil Aeronautics Board for rate making purposes provided a statement explaining the detailed adjustments is submitted for review by the Civil Aeronautics Board. (See section 22(d) or 32(d), as applicable.)

(a) Charges shall be made against income and accruals made only if it is probable that an asset has been impaired or a liability incurred at the end of the reporting period and the amount of the asset impairment or liability can be reasonably estimated.

(b) Where obligation has accrued in accounting for pension cost, deferred compensation, vacation pay, and other employment-related costs, an estimate may be made of the currently existing liability on such actuarial or other bases as can be justified from available information, provided that balances are reevaluated and adjusted at least once each accounting year to accurately reflect the true detriment (or cost) to the air carrier.

[ER-980, 42 FR 24, Jan. 3, 1977]