4.44 Airlines frequently decide to either decrease capacity by removing certain aircraft from service on a temporary or permanent basis or, for strategic reasons, to realign their fleets with a new mix of aircraft. The airline's fleet plan is the primary source of information on the planned number of aircraft for the airline and includes information about new aircraft deliveries, anticipated retirements, and temporary groundings.
4.45 Aircraft can be removed from active service temporarily until they are needed to support operations. Temporarily grounded aircraft are parked and stored but are intended to be returned to service in the future. Temporarily grounded aircraft are treated like operating aircraft, and depreciation or rental expense continues to be recognized.
4.46 Capacity decisions or changes in fleet structure can dictate that craft are no longer needed in the fleet. Permanently grounded aircraft are air-craft that will never return to active revenue service.
4.47 FASB ASC 360-10-45 provides guidance on the treatment of assets that are to be held and used, held for sale, or to be disposed of other than by sale. FASB ASC 360-10-45-9 states that assets that are to be disposed of by sale should be accounted for as held for sale only if they meet all of the following criteria:
r
Management, having the authority to approve the action, commits to a plan to sell the asset.r
The asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets.r
An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated.r
The sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale, within 1 year, with some limited exceptions to the 1-year requirement provided in FASB ASC 360-10-45-11.r
The asset is being actively marketed for sale at a price that is reasonable in relation to its current value. The price at which a long-lived asset is being marketed is indicative of whether the en-tity currently has the intent and ability to sell the asset. A market price that is reasonable in relation to fair value indicates that the asset is available for immediate sale, whereas a market price in excess of fair value indicates that the asset is not available for immediate sale.r
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.4.48 An aircraft would generally have to be permanently grounded in order to meet the definition of held for sale because the complexity of fleet movements and scheduling make it unlikely that an aircraft in service would meet the definition of available for immediate sale. Aircraft classified as held for sale should be recorded at the lower of carrying amount or fair value less the cost to sell. The difference between carrying amount and fair value less the cost to sell should be recognized as an impairment charge in the period that the aircraft meets the held-for-sale criteria. AcSEC believes that such impairment charges should be included in operating income for both operating and nonoperating aircraft. No further depreciation or amortization should be recorded on an aircraft that is classified as held for sale. Changes in the fair value less the cost to sell should be recognized as gains or losses in the period of change, and the asset's carrying amount should be adjusted for both increases and decreases, provided that the asset's carrying amount does not exceed its carrying amount as of the date the aircraft was classified as held for sale.
4.49 Any aircraft that does not meet the criteria of held for sale is con-sidered held and used until the asset is disposed of. Under the requirements of FASB ASC 360-10-35-21 a long-lived asset (or assets grouped at the lowest level of identifiable cash flows) should be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
4.50 FASB ASC 360-10-35-17 states that an impairment loss should be recognized only if the carrying amount of a long-lived asset (or asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (or asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (or asset group). That assessment should be based on the carrying amount of the asset (or asset group) at the date it is tested for recoverability, whether in use or under development. An impairment loss should be recognized for the
amount by which the carrying amount of a long-lived asset (or asset group) exceeds its fair value. Such impairment losses should be included in operating income, per FASB 360-10-45-4.
4.51 The following table summarizes the different accounting models and treatments for nonoperating aircraft once the aircraft are either temporarily or permanently grounded by an airline.
Disposition Status Accounting Treatment Timing of Accounting Temporarily Grounded Continue to depreciate for sale or abandon at a fixed date
1 An impairment indicator would most likely occur prior to the actual grounding.
2 Aircraft still in operation for an airline will not meet held-for-sale criteria unless use of the aircraft is extremely limited (for example, being used as spare aircraft and not actively scheduled).
4.52 At the point a decision is made to permanently ground an aircraft that is not intended to be sold and, therefore, does not meet the held-for-sale criteria of FASB ASC 360-10-45-9, AcSEC believes that an impairment evalu-ation should be performed. In addition to the possible impairment charge, the remaining depreciable life and salvage value of the aircraft should be adjusted to reflect the last expected in service date. Once removed from service, a per-manently grounded aircraft is classified as a long-lived nonoperating asset and no longer depreciated (at that point the aircraft should be fully depreciated to its salvage value). Furthermore, a permanently grounded aircraft that is not intended for sale may be stripped of usable parts. These usable parts from such aircraft are recorded in rotable parts at their fair value, with the aggregate value of the parts not to exceed the carrying amount of the aircraft at the time it was permanently grounded. In the event the fair value of the individual parts exceeds the carrying amount of the aircraft, the carrying value of the aircraft is allocated to the parts based on their relative fair values.
Impairment Indicators
4.53 The following are examples of events or changes in circumstances that may indicate impairment:
r
Disposal or planned disposal of an entire fleet or a major portion of a fleetr
Management's commitment to permanently ground a fleet (or a major portion of a fleet) that is currently operatingr
Significant fleet plan changes, including new aircraft ordersr
Operational downsizingr
Adverse changes in the way the aircraft are being used, affect-ing cash flows (for example, significant reductions in fleet-wide aircraft utilization rates)r
Permanent and significant declines in fleet fair valuesr
Significant changes in the anticipated time period that a fleet will be used by the airliner
Significant changes in cash flowsr
Regulatory changes and requirements that affect an airline's abil-ity to operate its aircraft4.54 When an asset group (for example, a fleet of aircraft) is tested for recoverability, it also may be necessary to review estimates of remaining useful lives and salvage values of those aircraft, regardless of whether an impairment is recognized.
4.55 Changes in depreciation from changes in estimated remaining useful lives or salvage values should be recognized prospectively, in accordance with FASB ASC 250-10-45-17.
Cash Flows
4.56 A long-lived asset or assets should be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, per FASB ASC 360-10-35-23.
4.57 Identifying the group of assets at which cash flows are largely inde-pendent requires judgment; however, most passenger airlines have concluded that each aircraft type (and potentially each aircraft model) provides largely independent cash flows. When making the determination of how to group air-craft and related fleet assets (that is, rotable parts, leasehold improvements, and expendable parts that are used by a particular fleet and are considered part of the asset group; see the "Related Fleet Assets" section of this chapter for fur-ther discussion) for impairment testing, airlines consider whefur-ther a particular fleet depends on another fleet for connecting traffic (for example, a short haul flight feeds traffic to longer haul connecting flights) and whether it is necessary to combine those fleets for impairment testing. Although cash flows for specific aircraft may be obtainable, it is generally not practical to evaluate cash flows at this level due to the interchangeability of aircraft in an airline's operations, unless the aircraft is not interchangeable with other aircraft in the airline's fleet. Cargo airlines cash flows are typically assessed at the network level due to the significant integration of the short haul and long haul cargo operations.
Regional carriers' cash flows may be assessed at a contract level as the regional
carrier's contract with the major airline may be the lowest level of identifiable cash flows.
4.58 Estimates of future cash flows include all future revenues expected to be collected net of costs expected to be paid. This is generally accomplished us-ing data from an airline's route profitability system, which allocates revenue to flights based on prorated fares or some other metric and expenses based on the nature of the expense and, if necessary, an allocation basis (such as available seat miles and passengers boarded). For passenger airlines, earnings can in-clude the effects of both downstream and upstream revenues (for example, the value of connecting passengers on a short haul flight that feeds traffic to longer haul connecting flights) and include onboard passenger revenue, onboard cargo revenue, and other in-flight revenue. If an airline elects to use upstream and downstream revenue in its analysis, it would need to show consistently that total revenue to all flights does not exceed total external revenues from opera-tions. Variable costs associated with the operation of the aircraft include items such as fuel, passenger variable expense, cargo variable expense, direct capac-ity expense, and variable overhead (training, ramp services, and line mainte-nance). Fixed costs include items such as aircraft rent, maintenance facilities, and station rent. Undiscounted cash flow assumptions are further adjusted to reflect the effect of future events, such as planned fleet changes, projections of passenger yield, anticipated fluctuations in the market price of jet fuel, labor costs, and other relevant factors in the markets in which the fleet operates.
4.59 When a fleet comprises both owned aircraft (including aircraft under capital leases) and aircraft under operating leases, fleet level cash flows include the full ownership cost of the leased aircraft (that is, the full operating rent ex-pense, which includes both capital cost and financing cost), whereas for owned aircraft and related fleet assets, only the capital cost are assessed for recover-ability. As a result, cash flows for the entire fleet will be determined, inclusive of the rental payments for leased aircraft, and compared to the carrying value of the assets in the asset group (that is, owned aircraft and related fleet assets) in the impairment assessment, under FASB ASC 360-10-35. If the carrying value of assets in the asset group exceeds the sum of the expected future cash flows, then the airline should measure the fair value of the fleet to determine whether to recognize an impairment loss on any or all of the assets in the asset group. Under FASB ASC 360-10-35-28 an impairment loss will reduce only the carrying amounts of the owned aircraft and related long-lived fleet assets in the asset group (expendable parts would be included in the asset group, but they would not be subject to impairment because they are not long-lived assets; see the "Related Fleet Assets" section in this chapter). The loss is allocated to the owned aircraft and related long-lived fleet assets in the asset group on a pro rata basis using the relative carrying amounts of the assets, except that the loss allocated to an individual asset should not reduce the carrying amount of each asset below its fair value.
4.60 For example, group all assets related to a fleet type level (for example, B767-300ER and related fleet assets) and then estimate future cash flows based on earnings projections over the remaining operating life of the fleet. One way to perform this analysis is to select a representative base year (generally using the most recent history) and determine the earnings and expenses of the fleet in that base year. This net earnings amount becomes the basis for projecting future cash flows for each subsequent year the fleet will be in operation, factoring in the effects of the events noted previously, such as aircraft retirements and additions. The sum of future undiscounted cash flows over the life of the primary
asset in the asset group (in this case, the owned fleet assets), inclusive of the rental payments for any leased B767-300ER aircraft, is then compared to the carrying value of the owned B767-300ER aircraft and related assets in the fleet.
If the owned assets' carrying value exceeds the sum of the expected future cash flows, then the airline will measure the fair value of these assets to determine whether to recognize an impairment loss on any or all of the long-lived assets in the fleet.
Fair Value
4.61 The objective of a fair value measurement of an asset is to determine the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date, as discussed in FASB ASC 820-10-35-3.
4.62 The determination of fair value should consider attributes specific to the asset; for example, the condition or location, or both, of the asset and any re-strictions on its sale or use. A fair value measurement assumes the transaction to sell the asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. A quoted price in an active market provides the most reliable evidence of fair value and should be used to measure fair value whenever available. However, because quoted market prices are often not available for used aircraft, the best information available should be used to estimate fair value, including published sources and independent appraisals based on long-term use assumptions. Prices from distress sales or forced liquidations or values obtained as part of a debt financ-ing arrangement are not representative of fair value; however, they may be considered in conjunction with other market indicators. Airlines may also want to review recent and proposed transactions, such as sales of similar aircraft and engine types, when publicly available.
Recognition of Impairment
4.63 Assets evaluated for impairment under the held-for-use criteria, whose carrying amount is determined to be not recoverable and exceeds their fair value, should be written down to their fair value, which should be used as the new cost basis to continue to depreciate the aircraft over their remaining useful lives. Salvage values may also need to be reevaluated in light of newly determined fair value.
Related Fleet Assets
4.64 When an airline tests its fleet for impairment as discussed in the "Cash Flows" section in this chapter, it includes the carrying value of the related rotable parts, leasehold improvements, and expendable parts that are used by the particular fleet as part of the asset group. For example, if certain rotable parts can only be used on the primary aircraft in the asset group, then an impairment analysis would include these assets as discussed in FASB ASC 360-10-15.
4.65 Although expendable parts would be included in the asset group, they would not be subject to impairment (because they are not long-lived assets).
However, they may be subject to net realizable value considerations if there will be excess or obsolete parts as a result of fleet-related changes that triggered the impairment evaluation. Please see the "Spare Parts" section in this chapter for definitions and descriptions of rotable and expendable parts.