Sec. 2-15 Contingent assets and contingent liabilities.

Contingent assets and contingent liabilities shall not be included in the body of the balance sheet but shall be explained in the footnotes to the financial statements.

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

Sec. 2-16 Notes to financial statements.

All matters which are not clearly iden-tified in the body of the financial statements but which may influence materially interpretations or conclusions

which may reasonably be drawn in regard to financial condition or earnings position shall be clearly and completely stated as footnotes to the financial statements.

Sec. 2-17 Revenue and accounting practices.

(a) Revenue accounting practices shall conform to the provisions of account 2160, Air Traffic Liability.

(b) Physical verification of the relia'bility of passenger revenue accounting practices shall be made at least once each accounting year by each route air carrier and an analysis showing the results of such verification shall be submitted to the Board within 30 days following its completion.

(c) For those carriers who use the yield or average-fare method to determine earned revenue, the analysis supporting the verification shall include:

(1) The cutoff date for the liability to 'be verified; such cutoff date shall be at the end of a calendar month.

(2) The number of months after the cutoff date during which documents were examined to verify the liability; the number of months after the cutoff date during which documents are examined shall not exceed the maximums set forth 'below:

(5) A description of the sampling technique and conversion to totals, if sampling was employed.

(6) The amount and basis for all estimates employed in the verification.

(7) The amount of resulting adjustments and the quarter in which such adjustments were, or are to be, made in the accounts.

(d) For those carriers who use the sales-lift match method to determine earned revenue, the analysis supporting the physical inventory verification shall include:

(1) The cutoff date for the liability to be verified; such cutoff date shall be at the end of a calendar month.

(2) A trial balance as of the cutoff date of all subaccounts supporting the Air Traffic Liability control account; the subsidiary trial balance must agree with the Air Traffic Liability control account or a reconciliation statement furnished.

(3) A statement to the effect that a sales listing of the value of all unmatched auditor coupons has been compiled and compared to the general ledger control figure; the statement required by this subparagraph shall indicate whether or not the value of the unmatched coupons is in agreement with the general ledger. If the sales listing is not in agreement with the Air Traffic Liability control account, the amount of such difference shall be shown on such statement.

(e) Those carriers who are on a saleslift match method for determining earned revenue shall submit to the Board an annual statement showing the value of purged auditor coupons from the sales listing, during the calendar year, by quarters. This statement shall accompany the analysis supporting the physical verification, as described in paragraph (b) above.

(f) An annual statement shall be filed with the Board by those carriers who use the sales-lift match method to determine earned revenue, showing the value of revenue earned due to loss, destruction, or mutilation of lifted coupons from passengers who have been furnished transportation. This statement shall show the basis used in computing the amount of revenue taken up as income. The amount of revenue shall be shown by calendar quarters. The statement shall accompany the analysis supporting the physical verification, as described in paragraph (b) above.

[ER-948, 41 FR 12290, Mar. 25, 1976]

Sec. 2-18 Transactions between members of an affiliated group.

(a) Unless otherwise approved by the Board's Director, Bureau of Accounts and Statistics, transactions between the regulated activity of an air carrier and activities conducted by nontransport divisions or other corporate members of an affiliated group shall be recorded by the air carrier as provided in paragraphs (b) through (e) of this section 2-18.

(b) Charges for services and assets purchased by or transferred to a regulated activity of an air carrier from other activities of an affiliated group shall be recorded initially in the accounts of the regulated air carrier activity at their invoice price, if determinative from a prevailing price list held out to the general public in the normal course of business. Where the services and assets received by the regulated activity of the air carrier are not marketed by the affiliated supplier to the general public under a prevailing price list, the charges recorded by the air carrier activity for such services and assets shall be the lower of their cost to the originating activity of the affiliated group, less all applicable valuation allowances, or their estimated fair market value. In the case of charges against income for services received, as distinguished from charges for property and equipment or other assets acquired, any difference in the amount recorded and the consideration given by the air carrier shall be entered in subaccount 88.1 Intercompany Transaction Adjustment-Credit or in subaccount 89.1 Intercompany Transaction Adjustment-Debit. In the case of property and other assets acquired, any difference between the amount recorded and the consideration given by the air carrier shall be entered in appropriate subaccounts of account 1870 Property Acquisition Adjustment, paralleling subaccount 88.1 Intercompany Transaction Adjustment-Credit and subaccount 89.1 Intercompany Transaction Adjustment-Debit, and shall be cleared to such income accounts through periodic amortization at rates coinciding with those applied to other associated assets.

(c) The cost, less all associated valuation allowance accumulations, of services and assets sold by or transferred from the regulated activity of an air carrier to other activities of an affiliated group shall be charged by the air carrier to either applicable incidental services or capital gain income accounts, as appro

priate. Where such services and assets are reflected in tariffs filed with the Board or in price lists held out to the general public, the associated revenues shall be recorded at the rates, fares or charges contained therein in the appropriate incidental services, capital gains or air transport income accounts. Where no tariff or prevailing price list is applicable, the associated revenue shall be recorded at the higher of cost or estimated fair market value of the asset or service involved. Any difference between the revenue so recorded and the agreed consideration to the air carrier shall be recorded in subaccount 88.1 Intercompany Transaction Adjustment-Credit or subaccount 89.1 Intercompany Transaction Adjustment-Debit.

(d) Income taxes shall be allocated among the transport entities of the air carrier, its nontransport divisions, and members of an affiliated group. Under circumstances in which income taxes are determined on a consolidated basis by an air carrier and other members of an affiliated group, the income tax expense to be recorded by the air carrier shall be the same as would result if determined for the air carrier separately for all time periods, except that the tax effect of carryback and carry-forward operating losses, investment tax credits, or other tax credits generated by operations of the air carrier shall be recorded by the air carrier during the period in which applied in settlement of the taxes otherwise attributable to any member, or combination of members, of the affiliated group. Any difference between the income tax so recorded and the amount at which settlement is to be made shall be recorded in subaccount 88.1 Intercompany Transaction Adjustment-Credit or in subaccount 89.1 Intercompany Transaction Adjustment-Debit, as is appropriate.

(e) The principles set forth in this section 2-18 shall apply equally to corporations, proprietorships, partnerships, or other forms of business organizations. [ER-755, 37 FR 19726, Sept. 21, 1972, as amended by ER-980, 42 FR 25, Jan. 3, 1977] § 2-19 Accounting for pension plans.

(a) In accordance with the provisions of section 22(d) or 32(d), as applicable, each air carrier which has an employee pension plan or plans shall file with the Director, Bureau of Accounts and Statistics, a standard statement showing with respect to each pension plan covered by

the statement, the following information: (1) A copy of the text, or if there is no text, a comprehensive outline of each pension plan covering pensions, other than those required by law, to active, retired, or former employees or their representatives or beneficiaries, the cost of which is borne in whole or in part by the carrier, except that no filing will be required for a plan which does not currently apply to present employees and pursuant to which payment to less than 100 former employees and the beneficiaries or representatives of such former employees were made during the reported year; (2) the number (rounded to the nearest 50) and types of employees covered (ie., pilots, stewardesses, mechanics, etc.); (3) for each fund which forms a part of said plan: A copy of the trust agreement, declaration of trust or other instrument pursuant to which said pension was established, or, if there is no such agreement, declaration of trust or other instrument, a description of the arrangement, if any, which requires the payment of any pensions or benefits under each plan; and (4) description of the accounting policies for each plan which,

in the case of any unfunded plans, or plans for which no Department of Labor Form D-2 is filed, shall include actuarial assumptions made.

(b) In the event of a change in any of the items covered in the statement filed pursuant to paragraph (a) of this section, the carrier shall file with the Director, Bureau of Accounts and Statistics, prior to the date on which said change is implemented, a supplemental statement showing: (1) The item affected and a detailed explanation of the change; and (2) the estimated effect of the change on the carrier's pension benefit accounts.

(c) Each air carrier which is required to file the statement prescribed by paragraph (a) of this section shall also file annually with the Director, Bureau of Accounts and Statistics, in duplicate if applicable, a copy of its Department of Labor Form D-2. Employee Welfare or Pension Benefit Plan Annual Report Form, concurrent with the filing due dates prescribed by the Department of Labor.

[ER-797, 38 FR 10925, May 3, 1973]

Section 4--General

(a) The balance sheet accounts are designed to show the financial condition of the air carrier as at a given date, reflecting the asset and liability balances carried forward subsequent to the closing or constructive closing of the air carrier's books of account.

(b) The balance sheet accounts prescribed in this system of accounts for each air carrier group are set forth in Section 3, Chart of Balance Sheet Accounts. The balance sheet elements to be included in each account are presented in section 6 and the balance sheet groupings to be accorded each account are set forth in section 5.

Section 5-Balance Sheet Account Groupings

(a) Include in this classification all resources which may reasonably be expected to be realized in cash or sold or consumed within one year, such as unrestricted cash, those assets that are readily convertible into cash or are held for current use in operations, and current claims against others to the extent settlement is reasonably assured, except that securities of others classified in investment and special fund accounts at date of acquisition need not be reclassified until disposition thereof.

(b) Perpetual inventories of all materials, supplies, lubricating oils, motor fuels and flight equipment expendable parts shall be maintained and shall be physically verified at least annually. Any shortage, overage, shrinkage, etc., shall be adjusted by charges or credits to the appropriate expense account.

(c) Items of general current asset characteristics which are not expected to be realized or consumed within one year may be included in this classification provided the noncurrent portion is not substantial in amount and classification as a current item will not impair the significance of working capital.

Sec. 5-2 Investments and special funds.

(a) Include in this classification longterm investments in securities, securities which are not readily marketable, funds set aside for specific purposes or involving restrictions preventing current use, contract performance deposits and other securities, receivables, or funds not available for current operations.

(b) Investments in associated companies, other than those defined in sec

tion 03 as investor controlled companies, and investments in other than associated companies shall be recorded at cost, except as provided in paragraph (f) of this section. Investments in investor controlled companies shall be recorded at cost, except as provided in paragraph (c), plus the equity in undistributed earnings or losses since acquisition.

(c) Permanent impairment in the value of securities may be reflected through charges to profit and loss classification 8100 Nonoperating Income and Expense-Net.

[ER-755, 37 FR 19726, Sept. 21, 1972, as amended by ER-948, 41 FR 12292, Mar. 25, 1976; ER-980, 42 FR 27, Jan. 3, 1977] Sec. 5-3 Property and equipment.

(a) All investments of the air carrier in land and units of tangible property and equipment shall be included within this general classification.

(b) The cost of properties covered by conditional sales contracts shall be recorded in the appropriate property and equipment accounts of the buyer, and removed from the property and equipment accounts of the seller, as at the date on which possession is delivered to the buyer unless there is material uncertainty as to the complete consummation of the transaction.

(c) Property obtained under an agreement for lease or lease with option to purchase, not constituting a conditional sale, shall not be recorded on the books of the lessee until actual purchase, at which time the price at actual date of purchase plus leasehold improvements shall be recorded in the appropriate property and equipment accounts.

(d) The general classification "Property and Equipment" shall be subclassified as between "Operating Property and Equipment" and "Nonoperating Property and Equipment." "Operating Property and Equipment" shall encompass items used in air transportation services and services incidental thereto. "Nonoperating Property and Equipment" shall encompass investments in property and equipment not separately accounted for within a nontransport division but assigned to other than air transportation and its incidental services, and property and equipment held for future use.

(e) Operating and nonoperating property and equipment shall be accounted for separately in accordance with the following instructions:

(1) Investment in property and equipment shall be recorded at total cost in