cluding all expenditures applicable to acquisition, other costs of a preliminary nature, costs incident to placing in position and conditioning for operations and costs of additions, betterments, improvements and modifications.

(2) The cost of additions, betterments, improvements and modifications shall be charged to the balance sheet account in which the property or equipment to which related is carried. (See section 2-9 for applicable accounting policy.) The cost of parts and appurtenances removed, and the allowance for depreciation applicable thereto, shall be treated as for retired property and accounted for accordingly.

(3) If different classes of property and equipment chargeable to more than one property account are purchased for a single sum and the cost of each class cannot be definitely ascertained, apportionment shall be based upon the most accurate information available. If necessary, appraisals shall be made to establish the relative costs.

(4) If property and equipment is acquired as part of a business from another air carrier through consolidation, merger, or reorganization, pursuant to a plan approved by the Civil Aeronautics Board, the costs and related allowances for depreciation as carried on the books of the predecessor company at the date of transfer shall be entered by the acquiring air carrier in the appropriate accounts prescribed for recording investments in tangible assets. Any difference between the purchase price of the property and equipment acquired and its depreciated cost at date of acquisition shall be recorded in balance sheet account 1870 Property Acquisition Adjustment. Property acquired from an associated company shall also be accounted for in accordance with this paragraph unless otherwise approved by the Board.

(5) Upon disposal by sale, retirement, abandonment, dismantling, or otherwise, of equipment depreciated on a unit basis, the air carrier shall credit the accounts in which the costs related to the property or equipment are carried with the balances thereof; charge the related allowances for depreciation with the balances applicable to the property disposed of; and charge the cash proceeds of the sale or the value of salvaged material to the appropriate asset accounts. Where the sales price or salvage value less the cost

of dismantling differs from the costs related to the property less accrued allowances for depreciation, such difference shall be recorded in the appropriate capital gain or loss accounts.

(6) Upon disposal by sale, retirement, abondonment, dismantling, or otherwise of property or equipment depreciated on a group basis, the air carrier shall credit the account in which the property or equipment is carried, and charge the related allowance for depreciation with the original cost thereof, less any salvage realized, regardless of the age of the item. No gain or loss is recognized on the retirement of individual items of property or equipment depreciated on a group basis. However, the proceeds from sales of scrapped parts and assemblies, which (are accumulated and sold in lots for nominal amounts and without identification of the individual items, shall be credited to profit and loss account 18 Other Transport-Related Revenues and Expenses.

(7) If property is retired or disposed of as a result of major accident or other casualty, the costs related to such property, less accrued allowances for depreciation, shall be charged to balance sheet account 1890 Other Assets pending adjustments and settlement of insurance. The resulting profit or loss, after reflecting adjustments for insurance coverage shall be recorded as a capital gain or loss. If the air carrier has no option but to accept replacement by an equivalent unit, the book cost and accrued allowance for depreciation applicable to the unit disposed of shall be assigned to the new property or equipment. Where the air carrier has the option in settlement to select between replacement in kind and cash or its equivalent, the air carrier shall account for the property or equipment disposed of in accordance with subparagraph (5) or (6) of this section 5-3(e). Any property or equipment purchased in replacement shall be recorded pursuant to subparagraph (1) of this section 5-3(e).

(8) When property and equipment owned by the air carrier is applied as part payment of the purchase price of new property and equipment, the new property and equipment shall be recorded at its full purchase price provided an excessive allowance is not made for assets traded in, in lieu of price adjustments or discounts on the purchase price

of assets acquired. The difference between the depreciated cost of assets applied as payment and the amount allowed therefor shall be treated as retirement gain or loss. When used tangible property is exchanged for other used tangible property and no other form of consideration is involved, the book cost less related allowance for depreciation of the property given in exchange shall be assigned to the property received. When the consideration consists of both cash or its equivalent and tangible property, and the cash or its equivalent is less than 25 percent of the fair market value of the total consideration, the entire transaction is to be treated as an exchange of property. The cost of the properties received by each party shall be the book cost less related allowance for depreciation of the properties given in exchange, plus or minus the cash, or the cash value of any other consideration, paid or received. Capital gain or loss is not to be recorded on the books of either party, except to the extent that the additional cash or other consideration received exceeds the depreciated book cost of the properties given. When the additional cash, or the cash value of other consideration, is at least 25 percent of the fair market value, the transaction shall be treated as a purchase and sale. The property received by each party shall be entered on the books at its fair market value and the net increase or decrease in asset values resulting from the transaction shall be treated as capital gain or loss.

(9) The cost of property and equipment acquired shall, upon acquisition, be recorded in the appropriate classification specifically established for such property and equipment; Provided, That when operating property and equipment acquired requires conditioning or modification before placing in air transport or its transport-related services, the cost thereof and related conditioning and modification costs shall be accumulated in balance sheet account 1689 Construction Work in Progress. The total accumulated cost shall be transferred to the appropriate operating property and equipment account coincidentally with the placing of the property and equipment into regular air transport or transport-related services.

(10) When operating property or equipment is retired from air transportation or transport-related operations and retained by the air carrier, its cost,

together with applicable allowances for depreciation, shall be transferred to balance sheet classification 1700 Nonoperating Property and Equipment. If property is transferred for exclusive use of nontransport divisions, the cost less related allowances for depreciation shall be recorded in balance sheet account 1520 Advances to Associated Companies.

(11) The air carrier shall maintain property and equipment records setting forth the description of all property and equipment recorded in balance sheet classifications 1600 and 1700 Property and Equipment. With respect to each unit or group of property or equipment, the record shall show the date of acquisition, the original cost, the cost of additions and betterments, the cost of parts retired, rates of depreciation, residual values not subject to depreciation, and the date of retirement or other disposition.

(12) Property and equipment loaned, in the custody of, or consigned to the air carrier without a purchase obligation, shall not be recorded in the same manner as similar classes or types of property purchased by the air carrier. The property and equipment accounts shall not be charged with the value of such property, and liability accounts shall not be established: Provided, however, That appropriate memoranda accounts may be maintained.

(13) Charges to the accounts prescribed in section 6 shall be made upon the basis of functions performed without regard to the location at which the equipment or property is installed or placed.

(14) Objective accounts shall be maintained for each class of property and equipment in accordance with the instructions set forth in section 6.

[ER-755, 37 FR 19726, Sept. 21, 1972, as amended by ER-980, 42 FR 27, Jan. 3, 1977] Sec. 5-4 Property and equipment depreciation and overhaul.

(a) The balance sheet classification "allowance for depreciation" shall inIclude the accumulation of all provisions for losses occurring in property and equipment from use and obsolescence. For example, it shall include allowances for depreciation established to record current lessening in service value due to wear and tear from use and the action of time and the elements, as well as losses in capacity for use or service occasioned by obsolescence, supersession, discoveries,

change in popular demand, or the requirement of public authority. Residual values and rates for accrual of depreciation shall be calculated to prevent charging excessive or inadequate expense or the accumulation of inadequate or excessive allowances.

(b) Depreciation chargeable against operations shall be calculated from the date on which a building, structure, or unit of property is placed in or contributes to regular service and shall cease on the date such property is withdrawn from service by reason of sale, retirement, abandonment, or dismantling, or when the difference between the cost and residual value shall have been charged to expense.

(c) Property for which depreciation shall not be chargeable against operations shall include (1) land owned or held in perpetuity, and (2) expenditures on uncompleted units of property and equipment during the process of construction or manufacture.

(d) Rates of depreciation and undepreciable residual values applied to each class of depreciable property and equipment shall be calculated to distribute the estimated depreciable cost to operating expense accounts and other accounts over the estimated service life of the property and equipment in such manner as will prevent the charging of either excessive or inadequate expense or the accumulation of excessive or inadequate allowances (see section 2-14(a)) and fully recognize the extent to which all expenditures attaching to property and equipment are otherwise recoverable through income charges and disposal proceeds.

(e) Adjustments in rates of depreciation occasioned by changing conditions shall be applied in accordance with the general policies set forth in section 2-14.

(f) Airframe and aircraft engine overhauls shall be expensed directly as performed when this will produce a relatively equitable allocation of total maintenance costs between accounting years. In the event that direct expensing of overhauls will distort maintenance expense charges between calendar quarters, allowances may be established to equalize or distribute maintenance expense charges between calendar quarters of each accounting year in accordance with operations performed consistent with provisions of section 2-13(d). For the purposes of this system of accounts and reports, an airframe or aircraft engine

"overhaul" shall be deemed to encompass the total of those inspections or replacements of major components performed in phrases, or in one operation, as are required to be performed at specified maximum periodic intervals by the Civil Air Regulations to recertify that airframes or aircraft engines are in a completely airworthy condition. Costs which attach to the routine replacement of minor drawal from line service, to maintain airframes and aircraft engines, performed on a recurrent but not scheduled basis, or on a scheduled basis without withdrawal from line srevice, to maintain airframes and aircraft engines in an operating condition, shall not be considered to be "overhauls" and shall be expensed directly as ordinary recurrent maintenance. Extraordinary costs of material amounts associated with the renewal of major structural parts of airframes and aircraft engines beyond the scope of normal period overhauls, or which are incurred at periodic intervals approximating the depreciable service life of the airframe and aircraft engine types to which related, shall not be considered overhauls. Such costs shall be accounted for as restoration of assets chargeable to the related property accounts. The cost of components removed, together with related allowance, shall be treated as retired property and accounted for accordingly. In the event identification of the cost of the components removed is not feasible, the costs incurred in substituting components may be charged against the related allowance for depreciation.

(g) The accounting procedures in this paragraph (g) shall be observed as a consistent practice for all airframe or aircraft engine types (both owned and leased) for which the direct expensing of overhaul costs as incurred will distort total maintenance expense between accounting years. However, if an air carrier has been using the reserve method of accounting for overhauls prior to January 1, 1976, an election may be made to continue the use of this method for all existing aircraft types and for all aircraft of the same type even if acquired after January 1, 1976, but, for new types of aircraft acquired after this date, the following procedures shall be observed.

(1) When the period benefited by the performance of an overhaul is greater than one accounting year and overhauls are scheduled in such a manner that the direct expensing of overhauls as performed will not result in an equitable

allocation of total maintenance expense between accounting years, the costs of such overhauls shall be deferred and amortized over the period benefited. An overhaul permits the use of an airframe or aircraft engine for subsequent additional periods in conformity with overhaul procedures approved by the Federal Aviation Administration. The period benefited by an overhaul is the authorized interval until the related overhaul procedures are required to be performed again. The costs of airframe and aircraft engine overhauls shall not be accrued in advance by charges to maintenance expense before the costs are incurred; except that, allowances for equalization may be established pursuant to section 2-13(d) to distribute expense charges between calendar quarters of each accounting year in accordance with operations performed.

(2) When overhauls are performed, the related costs of labor, materials, outside overhauls, and maintenance burden shall be charged to the applicable direct maintenance and maintenance burden objective expense accounts as incurred. With respect to those airframe or aircraft engine types for which overhauls are being deferred and amortized, a project cost ledger shall be maintained to control and identify overhauls costs, and the accumulated overhauls costs shall be debited each month to appropriate subaccounts of the related airframe, aircraft engine, or leasehold inprovement accounts with a

corre

sponding credit to account 72.3 Airframe Overhauls Deferred (Credit) or account 72.8 Aircraft Engine Overhauls Deferred (Credit).

(3) Upon completion of each overhaul phase or project, the deferred costs shall be amortized to account 72.4 Amortization of Airframe Overhauls or to account 72.9 Amortization of Aircraft Engine Overhauls over the authorized interval until the related overhauls procedures are required to be performed over again.

(4) When improvements and betterments of owned airframes or aircraft engines are effected in conjunction with overhauls of such property, the costs related to such improvements or betterments shall be charged to the appropriate asset subaccount for depreciation over the remaining service life.

(5) Upon retirement of owned airframes or aircraft engines, the applicable unamortized overhaul costs shall be transferred, along with the cost and re

lated allowances for depreciation of the property retired, to profit and loss subaccount 88.5 Capital Gains and Losses Operating Property or 88.6 Capital Gains and Losses Other.

(h) In accordance with the provisions of section 22(d) or 32(d), as applicable, each air carrier shall file with the Civil Aeronautics Board a statement fully describing its plans of accounting for airframe and aircraft engine overhauls. The required statement shall indicate for each airframe or aircraft engine type whether the costs of overhauls related thereto are, as a matter of consistent practice, expensed directly or deferred and amortized. If deferred and amortized, the statement shall indicate whether projects are established for individual units or on a group basis for specific types of airframes or aircraft engines, the types of cost deferred, the basis for maintenance burden rates, the time between overhauls, and the amortization period and basis.

[ER-755, 37 F.R. 19726, Sept. 21, 1972, as amended by ER-948, 41 FR 12292, Mar. 25, 1976; ER-980, 42 FR 28, Jan. 3, 1977] Sec. 5-5 Other assets.

(a) Include in this classification all debit balances in general clearing accounts, including charges held in suspense pending receipt of information necessary for final disposition, prepayments chargeable against operations over a period of years, capitalized expenditures of an organizational or developmental character, unamortized debt expense, property acquisition adjustments, the cost of patents, copyrights and miscellaneous intangibles, and other noncurrent assets which cannot be recorded elsewhere within the chart of accounts.

(b) Deferred charges having a defnite time incidence shall be amortized over the periods to which they apply. When property acquisition adjustments, developmental and preoperating costs, and other intangibles are capitalized, each air carrier shall file a statement of accounting procedures, setting forth a description of the items capitalized and the monthly rates at which it proposes to amortize such costs. (See sec. 22(d) or 32 (d), as applicable.)

[ER-755, 37 FR 19726, Sept. 21, 1972, as amended by ER-980, 42 FR 28, Jan. 3, 1977] Sec. 5-6 Current liabilitics.

Include in this classification all debts or obligations the liquidation or payment

(a) This classification shall include all debts or obligations the liquidation or payment of which is not reasonably expected to require the use within one year of existing resources of a type which are properly classifiable as current assets or the creation of current liabilities. Noncurrent liabilities shall include mortgages, bonds and debentures maturing more than one year from the date of the bayance sheet, and other obligations not payable within twelve months. Expense on long-term debt assumed by the air carrier shall be recorded as a deferred charge and discounts or premiums on nontrade debt should be recorded as a deduction from or addition to the face amount of the liability through the use of a subaccount in the account used to record the liability. Subaccounts shall be maintained in such a manner as to enable identification of each discount or premium with the debt issue to which it relates. Such discounts or premiums shall be amortized through profit and loss account 84 Amortization of Debt Discount Premium and Expense on a basis which applies a constant rate of interest to the balance outstanding at the beginning of each quarter. When debt securities are issued with warrants to purchase stock, the portion of the proceeds attributable to the warrants shall be accounted for as paid-in capital by crediting account 2890 Additional Capital Invested.

(b) In cases where debt coming due within 12 months is to be refunded, or where payment is to be made from assets of a type not properly classifiable as current, the amount payable shall not be removed from this classification. In addition, this classification shall include short-term debt obligations when both the intent to refinance the short-term obligations on a long-term basis is estab

90-055-77-17

lished and the ability to consummate this refinancing can be demonstrated. (c) Gains or losses on liquidation of bonds, debentures or other debt securities of the air carrier shall be entered in profit and loss classification 8100 Nonoperating Income and Expense-Net Gains and losses or adjustments to liabilities accrued from expenses incurred in operations shall be entered in the expense accounts initially charged.

[ER-755, 37 FR 19726, Sept. 21, 1972, as amended by ER-980, 42 FR 28, Jan. 3, 1977] Sec. 5-8 Deferred credits and commitments and contingent liabilities.

(a) Include in the deferred credit classification all credit balances in general clearing accounts, including credits held in suspense pending receipt of information necessary for final disposition.

(b) Deferred credits having a definite time incidence shall be amortized over the periods to which they apply.

(c) Include in the commitments and contingent liabilities classification all anticipated losses from commitments or contingencies that are not accruable under the conditions presented in section 2-5 Liability accruals but for which there is a reasonable possibility that a loss has been incurred. The nature and extent of these commitments and contingencies shall be disclosed in a footnote.

[ER-980, 42 FR 29, Jan. 3, 1977] Sec. 5-9 Stockholder equity.

(a) This general classification shall include all items which record the aggregate interests of holders of the air carrier's stock in assets owned by the air carrier.

(b) The general classification "Stockholders' Equity," shall be subdivided between that portion representing direct contributions of the stockholders, or "Total Paid-In Capital," that portion representing income retained from the operation of the air carrier, or "Retained Earnings," that portion representing the valuation allowance net unrealized loss applicable to the noncurrent portion of marketable equity securities, or "Net Unrealized Loss on Noncurrent Marketable Equity Securities," and that portion, "Treasury Stock," representing the cost to the air carrier of capital stock issued by the air carrier which has been reacquired and is held for disposition.

(c) The "Total Paid-In Capital" classification shall be subdivided between