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Sec. 2-6 Income tax accruals.

ance with the provisions of balance

sheet accounts 2130, Accrued Taxes, (a) All income taxes shall be accrued

2340, Deferred Income Taxes, and 2345, by proportionate charges or credits to

Deferred Investment Tax Credits. income in each calendar quarter and

(ER-948, 41 FR 12289, Mar. 25, 1976, as shall reflect the application of the effec

amended by ER-980, 42 FR 24, Jan. 3, 1977] tive tax rate expected to be applicable for the full year exclusive of tax related Sec. 2–7 Extraordinary items, discontinto significant unusual or extraordinary

ued operations, prior period adjustitems that are separately disclosed or in

ments, and accounting changes. cluded net of tax in the reporting period.

(a) All items affecting net income, inThe interperiod tax allocation method cluding revenue and expense adjustshall be applied for all material timing ments, shall be reported in the profit differences between pretax accounting

and loss accounts to which they relate income and taxable income.

unless evidence clearly supports their (b) The tax effect of timing differ- treatment as an extraordinary item, as ences which increase or decrease taxes a discontinued operation, a prior period currently payable shall be recognized adjustment, or a change in accounting in balance sheet account 2340, Deferred principle. Income Taxes. Any resulting net debit (b) Extraordinary items recorded in balance in this account shall be treated Section 9700 shall be characterized by for statement purposes as a special sub

their unusual nature and infrequent ocaccount in balance sheet account 1890, currence, taking into account the enviOther Assets. In effecting these accruals, ronment in which the air carrier operrecords with respect to deferred taxes ates. They must also be material. In this (including foreign, state, and local taxes context, unusual means that the underbased upon income) shall be maintained lying event or transaction is abnormal in accordance with the provisions of

and significantly different from the orbalance sheet account 2340, Deferred In- dinary and typical activities of the air come Taxes.

carrier, and infrequently occurring (c) The tax effects of any realizable means that the event or transaction is tax carrybacks shall be recognized in the not reasonably expected to recur in the determination of net income (loss) of foreseeable future. the loss periods; appropriate adjust- (c) The materiality of an unusual and ments of existing deferred income taxes infrequently occurring event or transacmay be necessary.

tion should be measured in relation to (d) The benefits of loss carryforwards its impact on net income (loss) before shall normally be recognized in the year

extraordinary items or to the trend of in which such loss is applied to reduce earnings. As a standard practice, an unincome taxes. However, in unusual cir- usual and infrequently occurring event cumstances when realization is assured or transaction shall be deemed to have beyond a reasonable doubt, the future a material impact on income (loss) bebenefits may be recognized in the year of fore extraordinary items if it would be loss. In cases where deferred taxes at- considered material for the purposes of tributable to prior timing differences filing the Securities and Exchange Comexist to recognize all or a portion of the

mission's Form 10-K or if it exceeds loss carryforward,

an appropriate

one-half of one percent of the twelveamount of the benefit may be offset

months-to-date total operating revenues against deferred taxes. However, net de- or total operating expenses, depending ferred taxes attributable to prior tim

on the nature of the item. When an item ing differences which would not be amor

is not material but does exceed one pertized until after the expiration of the

cent of the total functional classification carryforward period, shall not be offset

of which it is a part, it shall be included by loss carryforwards.

in the ordinary account to which appli

cable, and footnoted on CAB Form 41 (e) At the option of the air carrier,

schedule P-2. As a general rule, items investment tax credits may be treated

shall be considered separately rather as a reduction of income tax expense in

than in the aggregate. However, the efthe year they are actually realized (flow

fects of a series of related transactions through method) or they may be de

arising from a single specific and ferred and amortized over the useful life separately identifiable event or plan of of the property to which it relates and action shall be aggregated for the purthey shall be accounted for in accord- pose of determining materiality.

(d) Events or transactions which are (b) the amount of retained earnings that material as determined in conjunction would have been reported at that date with the criteria set forth in paragraph if the new accounting principle had been (c) above and are either unusual or non- applied retroactively for all prior periods recurring, but not both, should be dis- which would have been affected by recclosed on CAB Form 41 schedule P-2. ognizing only the direct effects of a The events or transactions should be change and the related income tax efidentified both as to their nature and fect. Financial statements of prior petheir financial effects.

riods shall not be restated without the (e) The earnings (losses) of discon- prior approval of the Director, Bureau tinued nontransport operations shall be of Accounts and Statistics. Changes in reported separately from transport, accounting estimates shall be accounted transport-related and continuing non- for in (a) the period of change if the transport operations and separately from change affects that period only or (b) extraordinary items. In addition, any the period of change and future periods gain or loss from the disposal of a non- if the change affects both. Materiality transport operation shall be reported in should be measured both in relation to conjunction with the related results of the effects of each change separately discontinued nontransport operations in and the combined effect of all changes. functional classification 9600 and not as (ER-948, 41 FR 12290, Mar. 25, 1976, as an extraordinary item. For the purposes amended by ER-980, 42 FR 24, Jan. 3, 1977) of this system of accounts and reports,

Sec. 2-8 Unaudited items. discontinued nontransport operations shall refer to the disposal of investor

Il a transaction has occurred but the controlled companies and the cessation

amount involved is not precisely deterof nontransport operations, the results

minable, the amount shall be estimated, of which are accounted for through

included in the proper accounts and profit and loss objective accounts 86, 87,

where significant noted for financial and 88.2.

statement purposes. The carrier is not (f) All material adjustments which required to anticipate or disclose minor can be specifically identified with and

items which would not appreciably affect directly related to business activities of the results of its operations or financial particular prior periods shall be reflected position. as adjustments of the opening balance Sec. 2-9 Improvements, additions and of retained earnings. In order to qualify betterments. for such treatment the adjustment must

(a) As a general rule, expenditures for not be attributable to economic events

additions, betterments or improvements, occurring subsequent to the date of fi

which increase the productive capacity of nancial statements for the prior period; units of land, property or equipment, it must depend primarily on determina

shall be capitalized rather than charged tions by persons other than manage

directly against income of the period in ment; and not be susceptible of rea- which incurred. Expenditures of insonable estimation prior to such

significant amount related to individual determination. Corrections of errors in projects may be expensed as incurred, financial statements of a prior period

rather than capitalized, provided their should be disclosed as a prior period inclusion as individual items or when age adjustment in the period in which the

gregated for like items encompassed by error was discovered and corrected. Ma

& particular program, will not distort teriality should be determined using the

current operating results. criteria set forth in paragraph (c) (b) The costs to be capitalized shall above.

include all costs directly incurred by (g) The cumulative effect of changes

reason of the program together with an in accounting principle shall be reflected

allocated portion of overhead costs to in the account provided for in the de- the full extent overhead expenses have termination of net income and clearly been responsive to the volume of capiand completely described in notes to the talizable projects currently or periodiincome statement (see section 18). The cally in process. amount of the cumulative effect of a (c) When superior parts are subchange in accounting principles shall stituted for old parts in existing units of represent the difference between (a) the

property and equipment as an incident amount of retained earnings at the be- to normal maintenance operations where ginning of the period of the change and normal retirement procedures are not practicable, the excess cost of the new to profit and loss subaccount 83.1-Imparts over the estimated current cost of puted Interest Capitalized-Credit. Innew parts of the kind replaced shall be terest capitalized under paragraph (a) of charged to the related property and this section shall be recorded in such & equipment account.

manner as to facilitate audit and, upon Sec. 2-10 Capitalization of interest.

completion of the project, shall be trans

ferred to subaccounts of the appropriate (a) Interest may be capitalized on property balance sheet accounts as a cost funds actually committed as equipment of the related asset. When imputed inpurchase deposits or actually used to fi- terest is capitalized, a concurrent entry nance the construction or acquisition of shall be recorded by debiting profit and operating property from the date the loss subaccount 83.2–Imputed Interest funds are first so employed to the date Deferred-Debit and crediting balance the property is ready for use: Provided, sheet account 2390 Other Deferred CredThat the capitalization will be limited in its which shall be cleared to profit and both time and amount to the reasonable loss subaccount 83.3-Imputed Interest requirements of such funds and that it

Deferred-Credit periodically as the may include interest on funds set aside amount of such interest in the asset acand carried in balance sheet account counts is written off. 1550 Special Funds-Other and account (e) The capitalization of interest will 1685 Equipment Purchase Deposits and be permitted only to the extent it is reAdvance Payments for a period not to flected in the accounts on & current exceed 6 months in advance of the date basis. Furthermore, in the event that they are scheduled under a legally bind- a construction project is not completed ing contract to be committed for payment

or a developmental project is not brought to the manufacturer or contractor.

to fruition, any related capitalized in(b) Interest may be capitalized on terest shall be eliminated from tho funds actually employed in develop- accounts by reversal of the capitalizing mental and preoperating projects other entries. than property acquistion and construc

(ER-755, 37 FR 19726, Sept. 21, 1972, as tion up to the date the related operations amended by ER-980, 42 FR 24, Jan. 3, 1977) are initiated. (c) In determining the amount of in

Sec. 2-11 Accounting for transactions terest to be capitalized under the pro

in gross amounts. visions of paragraphs (a) and (b) of this (a) All assets and liabilities shall be section 2-10, the effective interest rate stated in balance sheet presentations in shall be representative of the current gross values, provided that all depreciarate for long-term debt of the carrier. tion, provisions for uncollectible accounts Imputed interest at the same rate may and other valuation allowances shall be De capitalized on equity funds whenever offset against the class of asset to which commitments under paragraph (a) or related. Amounts receivable from, and (b) of this section 2–10 exceed the bal- amounts payable to, associated comance of long-term debt. The amount of panies and other air carriers, which are interest so computed shall be reduced by normally settled on a current basis any interest or other earnings from such shall be stated in gross amounts refunds on deposit with or for the account ceivable and gross amounts payable. of the manufacturer or contractor. With Amounts receivable from, and amounts respect to funds set aside pending actual payable to, individual associated comcommitment, the earnings shall be com- panies which are not settled on a current puted on the basis of the average rate basis, and are not includible in current earned on the carrier's current or long- assets or current Habilities, shall be term investment of special funds in stated in net amounts receivable or payinterest-bearing securities but not to ex- able. Receivables from particular asceed the total amount of such interest sociated companies shall not be offset actually earned.

against payables to other associated (d) Interest capitalized under para- companies. graph (a) or (b) of this section 2-10 (b) The cost of Treasury Certificates shall be charged to the balance sheet ac- or other tax notes, which are to be surcount in which the funds are carried rendered to the United States Treasury, (1550, 1685, 1689, or 1830) and credited to rather than independently sold, in satisprofit and loss subaccount 83.4-Interest fying Federal income tax liabilities may Capitalized-Credit or, imputed interest, be offset against accrued Federal incomo tax liabilities provided both the gross (5) If there is a change in the classifiincome tax lability and the value of the cation of a marketable equity security tax notes are reflected on the face of between current and noncurrent (acthe balance sheet. The offset of other counts 1100 and 1530, respectively), the government securities or other assets security shall be transferred between the against Federal income tax Habilities is corresponding portfolios at the lower of prohibited.

its cost or market value at the date of (ER-755, 37 FR 19726, Sept. 21, 1972, as

transfer. If market value is less than amended by ER-980, 42 FR 24, Jan, 3, 1977] cost, the market value becomes the new

cost basis, and the difference shall be Sec. 2-12 Acquisition and valuation of

accounted for as if it were a realized loss assets.

and included in the determination of net (a) As a general rule, all assets shall income by charging account 8188 4 be recorded at cost to the air carrier and

(6) Changes in the valuation allowshall not be adjusted to reflect changes ance for a marketable equity securities in market value. Exceptions to this rule portfolio included in current assets shall shall be limited to the following items: be included in the determination of net

(1) Investments in investor controlled income of the period in which they occompanies (as that term is defined in cur by charging account 8188.3. Accumusection (3) shall be recorded at cost (ex- lated changes in the valuation allowance cept as provided in section 5–2(c)) plus for a marketable equity securities portthe equity in the undistributed earnings folio included in noncurrent assets shall or losses of such companies since acquisi- be included in the equity section of the tion. (Investments in associated com- balance sheet and shown separately in panies, other than investor controlled account 2950. companies, and other companies shall be (7) For those marketable securities for recorded at cost, except as provided in which the effect of a change in carrying section 5-2(c).)

amount is included in stockholders' (2) Spare parts and materials of a equity rather than in net income, a declass for which the accrual of allowances termination must be made as to whether for loss in value may not be feasible, a decline in market value below cost as which have been expensed from current of the balance sheet date of an individinventories and are recovered, may be re- ual security is other than temporary. If turned to inventory at estimated value the decline is judged to be other than with contra credit to the expense ac- temporary, the cost basis of the individcounts initially charged. The cost (88 ual security shall be written down to & defined in section 03, “Cost") to be re- new cost basis and the amount of the corded shall represent the cash price of write-down shall be accounted for as a the asset acquired unless otherwise spe- realized loss by charging account 8188.4. cifically provided in paragraphs (b) and The new cost basis shall not be changed (c) of this section. When the considera- for subsequent recoveries in market tion given for property is other than cash. value. the value of such consideration shall be (b) Costs of assets charged against determined on a cash basis, in accord

income by an air carrier shall not be ance with the following provisions.

reinstated through property exchanges, (3) The carrying amount of a market

and again charged against income by able equity securities portfolio shall be

another air carrier but shall be recorded

by each successive user at the unrecovthe lower of its aggregate cost or market

ered cost of property given in exchange, value, determined at the balance sheet

adjusted by the amount of any addidate. The amount by which aggregate

tional cash or other consideration given cost of the portfolio exceeds market value

or received. For purposes of this sysshall be accounted for as a valuation al

tem of accounts, an exchange is defined lowance. (See paragraph (a) (6) of this as transaction in which tangible propsection.)

erty represents more than 75 percent of (4) Marketable equity securities owned the fair market value of the total conby a carrier shall be grouped into sepa- sideration. Capital gains or losses, as rate portfolios according to the current a matter of policy, will not be recognized or noncurrent classification of the securi- in property exchanges. (See also secties for the purpose of comparing aggre- tion 5-3(e) (8).) gate cost and market value to determine (c) The cost of properties obtained carrying amount.

under a conditional sales contract shall be recorded as assets as at the date upon Sec. 2-14 Depreciation and amortizawhich delivery has been completed even

tion. though legal title remains in the vendor

(a) Depreciation shall be calculated unless there is material uncertainty as

by the air carrier in such a manner as to the complete consummation of the

will prevent the charging of either extransaction.

cessive or inadequate expense or the ac(ER-755, 37 FR 19726, Sept. 21, 1972, as cumulation of excessive or inadequate alamended by ER-948, 41 FR 12290, Mar. 25,

lowances, and shall be based upon a 1976; ER-980, 42 FR 24, Jan. 3, 1977)

study of the air carrier's history and exSec. 2-13 Establishment of allowances. perience or such engineering or other (a) Provisions for allowances cover

information as may be available with ing loss contingencies, which are not ac

respect to prospective future conditions cruable because it is less than probable

and without regard to depreciation acthat an asset has been impaired or a lia

counting practices adopted for tax purbility has been incurred as of the report

poses. Undepreciable residual values shall

be established for each class of property date and/or the amount of the loss cannot be reasonably estimated, are per

and equipment and shall represent the

fair and reasonable estimate of the recovmitted as an appropriation of retained

erable value as of the end of the service earnings and shall be maintained as a subaccount of 2900 Retained Earnings.

life over which the property is depreWhen accrued losses and related costs

ciated. Depreciation chargeable against

operations shall be limited to the actual are incurred, they shall not be charged

costs incurred in the accuisition of the to the appropriation and at no time shall the appropriation be transferred in whole

properties to which related. The cost or in part to income.

of properties which are generally re(b) All allowances shall be classified in

paired and reused shall not upon retirebalance sheet presentations in terms of

ment be charged against current opertheir inherent impact upon the air car

ating expenses but, to the extent not rier's financial condition as either valua

written off in the form of depreciation, tion of assets (offsetting the assets to

shall be treated as part of the capital which related), accrued Uabilities, or

gain or loss. The cost of properties of appropriations of retained earnings.

a type which are recurrently expended

and replaced shall be charged to operat(c) (Reserved]

ing expenses as issued for use. How(d) Additional allowances over those

ever, the net charge to operating expense prescribed in this system of accounts

for any asset used, consumed or abanmay be established for the purpose of doned shall be limited to the difference allocating expense charges between cal

between the cost incurred in acquisition endar quarters of each accounting year and any related accrued depreciation. in accordance with operations performed, (b) In accordance with the provisions in the event such expenditures are part of section 22(d) or 32(d), as applicable, of a specific program to which the air each air carrier shall file with the Civil carrier is demonstrably committed and Aeronautics Board a statement which are of sufficient magnitude to signifi- shall clearly and completely describe for cantly distort the financial results of the each classification of property and current quarter if expensed directly. equipment the methods, service lives, and Each air carrier shall submit, for ap- residual values used for computing deproval by the Civil Aeronautics Board, a preciation on the different subcategories plan for each such equalization allow- of property or equipment included thereance which shall set forth the proposed in. This statement shall be sufficiently accounting and rates of accrual. Such descriptive to permit a pro forma conplans shall provide for the liquidation of struction of the depreciation calculation each expense allocation allowance at the of each accounting period and shall inclose of each accounting year. Allocation clude identification of those categories allowances shall not be used in respect to depreciated on a unit basis and those tions of which spread over a cycle of categories depreciated on a group basis, longer than one year. (See section 22(d) as well as the mathematical bases emor 32(d), as applicable.)

ployed for allocating applicable costs to (ER-755, 37 FR 19726, Sept. 21, 1972, às

the different accounting periods. amended by ER-948, 41 FR 12290, Mar. 25, (ER-755, 37 FR 19726, Sept. 21, 1972, as 1976; ER-980, 41 FR 25, Jan. 3, 1977)

amended by ER-980, 42 FR 25, Jan. 3, 1977]

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