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cluding all expenditures applicable to of dismantling differs from the costs reacquisition, other costs of a preliminary lated to the property less accrued allownature, costs incident to placing in post- ances for depreciation, such difference tion and conditioning for operations and shall be recorded in the appropriate capicosts of additions, betterments, improve- tal gain or loss accounts. ments and modifications.

(6) Upon disposal by sale, retirement, (2) The cost of additions, betterments, abondonment, dismantling, or otherwise improvements and modifications shall be of property or equipment depreciated on charged to the balance sheet account in a group basis, the air carrier shall credit which the property or equipment to the account in which the property or which related is carried. (See section 2–9 equipment is carried, and charge the refor applicable accounting policy.) The lated allowance for depreciation with the cost of parts and appurtenances re- original cost thereof, less any salvage moved, and the allowance for deprecia- realized, regardless of the age of the tion applicable thereto, shall be treated item. No gain or loss is recognized on the as for retired property and accounted for retirement of individual items of propaccordingly.

erty or equipment depreciated on a group (3) If different classes of property and basis. However, the proceeds from sales equipment chargeable to more than one of scrapped parts and assemblies, which property account are purchased for a (are accumulated and sold in lots for single sum and the cost of each class nominal amounts and without identificacannot be definitely ascertained, appor- tion of the individual items, shall be tionment shall be based upon the most credited to profit and loss account 18 accurate information available. I nec- Other Transport-Related Revenues and essary, appraisals shall be made to es- Expenses. tablish the relative costs.

(7) If property is retired or disposed (4) If property and equipment is ac- of as a result of major accident or other quired as part of a business from another casualty, the costs related to such propair carrier through consolidation, merg- erty, less accrued allowances for deprecier, or reorganization, pursuant to a plan ation, shall be charged to balance sheet approved by the Civil Aeronautics Board, account 1890 Other Assets pending adthe costs and related allowances for de- justments and settlement of insurance. preciation as carried on the books of the The resulting profit or loss, after reflectpredecessor company at the date of

ing adjustments for insurance coverage transfer shall be entered by the acquir- shall be recorded as a capital gain or loss. ing air carrier in the appropriate ac- If the air carrier has no option but to accounts prescribed for recording invest

cept replacement by an equivalent unit, ments in tangible assets. Any difference the book cost and accrued allowance for between the purchase price of the prop- depreciation applicable to the unit diserty and equipment acquired and its de- posed of shall be assigned to the new preciated cost at date of acquisition shall property or equipment. Where the air be recorded in balance sheet account 1870 carrier has the option in settlement to seProperty Acquisition Adjustment. Prop- lect between replacement in kind and erty acquired from an associated com- cash or its equivalent, the air carrier pany shall also be accounted for in shall account for the property or equipaccordance with this paragraph unless ment disposed of in accordance with otherwise approved by the Board.

subparagraph (5) or (6) of this section (5) Upon disposal by sale, retirement, 5–3(e). Any property or equipment purabandonment, dismantling, or otherwise, chased in replacement shall be recorded of equipment depreciated on a unit basis, pursuant to subparagraph (1) of this the air carrier shall credit the accounts section 5-3(e). in which the costs related to the roperty (8) When property and equipment or equipment are carried with the bal- owned by the air carrier is applied as ances thereof; charge the related allow- part payment of the purchase price of ances for depreciation with the balances new property and equipment, the new applicable to the property disposed of; property and equipment shall be reand charge the cash proceeds of the sale corded at its full purchase price provided or the value of salvaged material to the an excessive allowance is not made for appropriate asset accounts. Where the assets traded in, in lieu of price adjustsales price or salvage value less the cost ments or discounts on the purchase price of assets acquired. The difference be- together with applicable allowances for tween the depreciated cost of assets ap- depreciation, shall be transferred to balplied as payment and the amount al- ance sheet classification 1700 Nonoperlowed therefor shall be treated as retire- ating Property and Equipment. If propment gain or loss. When used tangible erty is transferred for exclusive use of property is exchanged for other used nontransport divisions, the cost less retangible property and no other form of lated allowances for depreciation shall consideration is involved, the book cost be recorded in balance sheet account less related allowance for depreciation of 1520 Advances to Associated Companies. the property given in exchange shall be (11) The air carrier shall maintain assigned to the property received. When property and equipment records setting the consideration consists of both cash forth the description of all property and or its equivalent and tangible property, equipment recorded in balance sheet and the cash or its equivalent is less classifications 1600 and 1700 Property than 25 percent of the fair market value and Equipment. With respect to each of the total consideration, the entire unit or group of property or equipment, transaction is to be treated as an ex- the record shall show the date of acquchange of property. The cost of the prop- sition, the original cost, the cost of addierties received by each party shall be the tions and betterments, the cost of parts book cost less related allowance for de- retired, rates of depreciation, residual preciation of the properties given in ex- values not subject to depreciation, and change, plus or minus the cash, or the the date of retirement or other disposicash value of any other consideration, tion. paid or received. Capital gain or loss is (12) Property and equipment loaned, not to be recorded on the books of either in the custody of, or consigned to the air party, except to the extent that the addi- carrier without a purchase obligation, tional cash or other consideration re- shall not be recorded in the same manceived exceeds the depreciated book cost ner as similar classes or types of propof the properties given. When the addi- erty purchased by the air carrier. The tional cash, or the cash value of other property and equipment accounts shall consideration, is at least 25 percent of not be charged with the value of such the fair market value, the transaction property, and liability accounts shall not shall be treated as a purchase and sale. be established: Provided, however, That The property received by each party shall appropriate memoranda accounts may be entered on the books at its fair market be maintained. value and the net increase or decrease (13) Charges to the accounts prein asset values resulting from the trans- scribed in section 6 shall be made upon action shall be treated as capital gain or the basis of functions performed without loss.

regard to the location at which the (9) The cost of property and equip- equipment or property is installed or ment acquired shall, upon acquisition, be placed. recorded in the appropriate classifica- (14) Objective acoounts shall be maintion specifically established for such tained for each class of property and property and equipment; Provided, That equipment in accordance with the inwhen operating property and equipment structions set forth in section 6. acquired requires conditioning or modifi- (ER-755, 37 FR 19726, Sept. 21, 1972, as cation before placing in air transport or amended by ER-980, 42 FR 27, Jan. 3, 1977) its transport-related services, the cost thereof and related conditioning and

Sec. 5-4 Property and equipment demodification costs shall be accumulated

preciation and overhaul. in balance sheet account 1689 Construc

(a) The balance sheet classification tion Work in Progress. The total accu- "allowance for depreciation" shall inmulated cost shall be transferred to the

clude the accumulation of all provisions appropriate operating property and for losses occurring in property and equipment account coincidentally with equipment from use and obsolescence. the placing of the property and equip- For example, it shall include allowances ment into regular air transport or trans- for depreciation established to record port-related services.

current lessening in service value due to (10) When operating property or wear and tear from use and the action equipment is retired from air transpor- of time and the elements, as well as losses tation or transport-related operations in capacity for use or service occasioned and retained by the air carrier, its cost, by obsolescence, supersession, discoveries,

change in popular demand, or the re- "overhaul" shall be deemed to encompass quirement of public authority. Residual the total of those inspections or replacevalues and rates for accrual of deprecia-' ments of major components performed tion shall be calculated to prevent charg- in phrases, or in one operation, as are reing excessive or inadequate expense or quired to be performed at specified maxithe accumulation of inadequate or ex- mum periodic intervals by the Civil Air cessive allowances.

Regulations to recertify that airframes (b) Depreciation chargeable against or aircraft engines are in a completely operations shall be calculated from the airworthy condition. Costs which attach date on which a building, structure, or to the routine replacement of minor unit of property is placed in or con- drawal from line service, to maintain airtributes to regular service and shall cease frames and aircraft engines, performed on the date such property is withdrawn on a recurrent but not scheduled basis, from service by reason of sale, retire- or on a scheduled basis without withment, abandonment, or dismantling, or drawal from line srevice, to maintain airwhen the difference between the cost and frames and aircraft engines in an operresidual value shall have been charged ating condition, shall not be considered to expense.

to be “overhauls” and shall be expensed (c) Property for which depreciation directly as ordinary recurrent mainteshall not be chargeable against opera- nance. Extraordinary costs of material tions shall include (1) land owned or amounts associated with the renewal of held in perpetuity, and (2) expendi- major structural parts of airframes and tures on uncompleted units of property aircraft engines beyond the scope of norand equipment during the process of mal period overhauls, or which are inconstruction or manufacture.

curred at periodic intervals approximat(d) Rates of depreciation and unde- ing the depreciable service life of the airpreciable residual values applied to each frame and aircraft engine types to which class of depreciable property and equip- related, shall not be considered overment shall be calculated to distribute the hauls. Such costs shall be accounted for estimated depreciable cost to operating as restoration of assets chargeable to the expense accounts and other accounts related property accounts. The cost of over the estimated service life of the components removed, together with reproperty and equipment in such manner lated allowance, shall be treated as reas will prevent the charging of either ex- tired property and accounted for accordcessive or inadequate expense or the ac- ingly. In the event identification of the cumulation of excessive or inadequate cost of the components removed is not allowances (see section 2–14(a)) and feasible, the costs incurred in substitutfully recognize the extent to which all ing components may be charged against expenditures attaching to property and the related allowance for depreciation. equipment are otherwise recoverable (g) The accounting procedures in this through income charges and disposal paragraph (g) shall be observed as a proceeds.

consistent practice for all airframe or (e) Adjustments in rates of deprecia- aircraft engine types (both owned and Hon occasioned by changing conditions leased) for which the direct expensing shall be applied in accordance with the of overhaul costs as incurred will distort general policies set forth in section 2–14. total maintenance expense between ac

(f) Airframe and aircraft engine counting years. However, if an air caroverhauls shall be expensed directly as rier has been using the reserve method of performed when this will produce a rela- accounting for overhauls prior to Janutively equitable allocation of total main- ary 1, 1976, an election may be made to tenance costs between accounting years.

continue the use of this method for all In the event that direct expensing of existing aircraft types and for all airoverhauls will distort maintenance ex- craft of the same type even if acquired pense charges between calendar quarters, after January 1, 1976, but, for new types allowances may be established to equal- of aircraft acquired after this date, the ize or distribute maintenance expense

following procedures shall be observed. charges between calendar quarters of (1) When the period benefited by the each accounting year in accordance with performance of an overhaul is greater operations performed consistent with than one accounting year and overhauls provisions of section 2–13(d). For the are scheduled in such a manner that the purposes of this system of accounts and direct expensing of overhauls as perreports, an airframe or aircraft engine formed will not result in an equitable allocation of total maintenance expense lated allowances for depreciation of the between accounting years, the costs of property retired, to profit and loss subsuch overhauls shall be deferred and account 88.5 Capital Gains and Lossesamortized over the period benefited. An Operating Property or 88.6 Capital Gains overhaul permits the use of an airframe and Losses-Other. or aircraft engine for subsequent addi- (h) In accordance with the provisions tional periods in conformity with over- of section 22(d) or 32(d), as applicable, haul procedures approved by the Federal each air carrier shall file with the Civil Aviation Administration. The period Aeronautics Board a statement fully debenefited by an overhaul is the author- scribing its plans of accounting for airized interval until the related overhaul frame and aircraft engine overhauls. The procedures are required to be performed required statement shall indicate for again. The costs of airframe and aircraft each airframe or aircraft engine type engine overhauls shall not be accrued in whether the costs of overhauls related advance by charges to maintenance ex- thereto are, as a matter of consistent pense before the costs are incurred; ex- practice, expensed directly or deferred cept that, allowances for equalization and amortized. If deferred and amormay be established pursuant to section tized, the statement shall indicate 2-13(d) to distribute expense charges whether projects are established for inbetween calendar quarters of each ac- dividual units or on a group basis for counting year in accordance with opera- specific types of airframes or aircraft tions performed.

engines, the types of cost deferred, the (2) When overhauls are performed, basis for maintenance burden rates, the the related costs of labor, materials, out- time between overhauls, and the amorside overhauis, and maintenance burden tization period and basis. shall be charged to the applicable direct

(ER-755, 37 F.R. 19726, Sept. 21, 1972, as maintenance and maintenance burden amended by ER-948, 41 FR 12292, Mar. 25, objective expense accounts as incurred. 1976; ER-980, 42 FR 28, Jan. 3, 1977] With respect to those airframe or air

Sec. 5–5 Other assets. craft engine types for which overhauls are being deferred and amortized, a

(a) Include in this classification all project cost ledger shall be maintained

debit balances in general clearing acto control and identify overhauls costs,

counts, including charges held in susand the accumulated overhauls costs pense pending receipt of information shall be debited each month to appro

necessary for final disposition, prepaypriate subaccounts of the related air

ments chargeable against operations frame, aircraft engine, or leasehold

over a period of years, capitalized exinprovement accounts with a corre

penditures of an organizational or desponding credit to account 72.3 Airframe

velopmental character, unamortized debt Overhauls Deferred (Credit) or account

expense, property acquisition adjust

ments, the cost of patents, copyrights 72.8 Aircraft Engine Overhauls De

and miscellaneous intangibles, and other ferred (Credit).

noncurrent assets which cannot be re(3) Upon completion of each overhaul

corded elsewhere within the chart of acphase or project, the deferred costs shall

counts. be amortized to account 72.4 Amortiza

(b) Deferred charges having & deltion of Airframe Overhauls or to account

nite time incidence shall be amortized 72.9 Amortization of Aircraft Engine

over the periods to which they apply. Overhauls over the authorized interval

When property acquisition adjustments, until the related overhauls procedures

developmental and preoperating costs, are required to be performed over again.

and other intangibles are capitalized, (4) When improvements and better

each air carrier shall Alle & statement of ments of owned airframes or aircraft

accounting procedures, setting forth & engines are effected in conjunction with overhauls of such property, the costs re

description of the items capitalized and lated to such improvements or better

the monthly rates at which it proposes

to amortize such costs. (See sec. 22(d) ments shall be charged to the appro

or 32(d), as applicable.) priate asset subaccount for depreciation

(ER-755, 37 FR 19726, Sept. 21, 1972, as over the remaining service life.

amended by ER-980, 42 FR 28, Jan. 3, 1977) (5) Upon retirement of owned airframes or aircraft engines, the applicable Sec. 5-6 Current liabilitics. unamortized overhaul costs shall be Include in this classification all debts transferred, along with the cost and re- or obligations the liquidation or payment

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of which is reasonably expected to re- lished and the ability to consummate quire the use, within one year, of exist. this refinancing can be demonstrated. ing resources of a type which are prop- (c) Gains or losses on liquidation of erly classifiable as current assets, or the bonds, debentures or other debt securicreation of other current Uabilities. ties of the air carrier shall be entered Current Habilities shall include payables in profit and loss classification 8100 Nonincurred in the acquisition of materials, operating Income and ExpenseNet collections received in advance of per- Gains and losses or adjustments to laformance of services, debts accruing bilities accrued from expenses incurred from expenses incurred from operations in operations shall be entered in the exand other labilities that are regularly pense accounts initially charged. and ordinarily subject to current (ER-755, 37 FR 19726, Sept. 21, 1972, as liquidation

amended by ER-980, 42 FR 28, Jan. 3, 1977] Sec. 5–7 Noncurrent liabilities.

Sec. 5-8 Deferred credits and commit(a) This classification shall include all

ments and contingent liabilities. debts or obligations the liquidation or

(a) Include in the deferred credit payment of which is not reasonably ex- classification all credit balances in genpected to require the use within one year eral clearing accounts, including credits of existing resources of a type which are held in suspense pending receipt of inproperly classifiable as current assets formation necessary for final disposition. or the creation of current liabilities. (b) Deferred credits having a definite Noncurrent liabilities shall include mort- time incidence shall be amortized over gages, bonds and debentures maturing the periods to which they apply. more than one year from the date of the (c) Include in the commitments and bayance sheet, and other obligations not contingent liabilities classification all payable within twelve months. Expense anticipated losses from commitments or on long-term debt assumed by the air contingencies that are not accruable carrier shall be recorded as a deferred under the conditions presented in seccharge and discounts or premiums on tion 2-5 Liability accruals but for which nontrade debt should be recorded as a there is a reasonable possibility that a deduction from or addition to the face loss has been incurred. The nature and amount of the liability through the use extent of these commitments and conof a subaccount in the account used to tingencies shall be disclosed in a footrecord the liability. Subaccounts shall note. be maintained in such a manner as to (ER-980, 42 FR 29, Jan. 3, 1977) enable identification of each discount or

Sec. 5-9 Stockholder equity. premium with the debt issue to which it relates. Such discounts or premiums

(a) This general classification shall shall be amortized through profit and

include all items which record the aggreloss account 84 Amortization of Debt gate interests of holders of the air carDiscount Premium and Expense on a

rier's stock in assets owned by the air basis which applies a constant rate of carrier. interest to the balance outstanding at (b) The general classification "Stockthe beginning of each quarter. When holders' Equity," shall be subdivided bedebt securities are issued with warrants tween that portion representing direct to purchase stock, the portion of the contributions of the stockholders, or proceeds attributable to the warrants “Total Paid-In Capital,” that portion shall be accounted for as paid-in capital

representing income retained from the by crediting account 2890 Additional

operation of the air carrier, or "Retained Capital Invested.

Earnings," that portion representing the

valuation allowance net unrealized loss (b) In cases where debt coming due

applicable to the noncurrent portion of within 12 months is to be refunded, or

marketable equity securities, or “Net Unwhere payment is to be made from assets

realized Loss on Noncurrent Marketable of a type not properly classifiable as

Equity Securities," and that portion, current, the amount payable shall not be

“Treasury Stock," representing the cost removed from this classification. In ad

to the air carrier of capital stock issued dition, this classification shall include by the air carrier which has been reacshort-term debt obligations when both quired and is held for disposition. the intent to refinance the short-term (c) The “Total Paid-In Capital" obligations on a long-term basis is estab- classification shall be subdivided between

247 90-055-77-17

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