Airtran 2002 Annual Report Download - page 37

1. Summary of Significant Accounting Policies
Basis of Presentation and Business
Our consolidated financial statements include the accounts of AirTran Holdings, Inc. (Holdings) and our wholly-owned subsidiaries, including our principal subsidiary, AirTran Airways,
Inc. Significant intercompany accounts and transactions have been eliminated in consolidation.
AirTran Airways, Inc. (Airways) offers scheduled air transportation of passengers and mail, serving short-haul markets primarily in the eastern United States.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results inevitably will differ from those estimates, and such differences may be
material to the consolidated financial statements.
Cash, Cash Equivalents and Restricted Cash
We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Restricted cash primarily represents amounts escrowed relating
to air traffic liability.
Accounts Receivable
Accounts receivable are due primarily from major credit card processors, travel agents, from municipalities related to guaranteed revenue agreements and from the Transportation
Security Administration. We provide an allowance for doubtful accounts equal to the estimated losses expected to be incurred in the collection of accounts receivable.
Spare Parts, Materials and Supplies
Spare parts, materials and supplies are stated at the lower of cost or market using the first-in, first-out method (FIFO). These items are charged to expense when used. Allowances for
obsolescence are provided over the estimated useful life of the related aircraft and engines for spare parts expected to be on hand at the date aircraft are retired from service.
Property and Equipment
Property and equipment is stated on the basis of cost. Flight equipment is depreciated to its salvage values using the straight-line method.
The estimated salvage values and depreciable lives are periodically reviewed for reasonableness, and revised if necessary. The Boeing 717 (B717) fleet has a salvage value of 10 percent.
At July 1, 2001, we revised the useful lives on our B717 fleet in order to more accurately reflect the estimated useful life of the aircraft. The lives of the B717 airframes and engines were
increased from 25 years to 30 years while the lives of the related B717 aircraft parts increased from 5 years to 30 years. The effect of this change was to increase our net income by
approximately $1.2 million, or $0.02 per diluted share, and to decrease our net loss by approximately $0.6 million, or $0.01 per share for 2002 and 2001, respectively.
In conjunction with the 2001 impairment charge (see Note 13), the McDonnell Douglas DC-9 (DC-9) fleet was written down to its fair market value. Accordingly, the salvage values were
revised to 40 percent, and the useful lives were revised to range from three months to two years. In conjunction with the 2001 impairment charge, the Boeing 737 (B737) fleet was
written down to its fair market value and subsequently retired. Aircraft parts are depreciated over the respective fleet life to a salvage value of 5 percent.
Other property and equipment is depreciated over 3 to 10 years.
Measurement of Impairment
Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144
supercedes Statement of Financial Accounting Standards No. 121 (SFAS 121), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.”
The adoption of SFAS 144 had no effect on our results of operations. We record impairment losses on long-lived assets used in operations when events or circumstances indicate that
the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the net book value of those assets. See Note 13.
Intangibles
The trade name and intangibles resulting from business acquisitions consist of cost in excess of net assets acquired. We adopted Statement of Financial Accounting Standards No. 142
(SFAS 142), “Goodwill and Other Intangible Assets,” effective January 1, 2002. Pursuant to SFAS 142, goodwill and indefinite-lived intangibles, such as trade names, are no longer
amortized but are subject to periodic impairment reviews. We performed impairment tests upon the adoption of SFAS 142 and annual tests in the fourth quarter of 2002. Our tests
indicated that we did not have any impairment of our trade name or of our intangibles resulting from business acquisitions. See Note 2.
Capitalized Interest
Interest attributable to funds used to finance the acquisition of new aircraft is capitalized as an additional cost of the related asset. Interest is capitalized at our weighted-average interest
rate on long-term debt or, where applicable, the interest rate related to specific borrowings. Capitalization of interest ceases when the asset is placed in service. In 2002, 2001 and
2000, approximately $4.8 million, $8.0 million and $8.8 million of interest cost was capitalized, respectively.
Aircraft and Engine Maintenance
We account for airframe and engine overhaul costs using the direct-expensing method. Overhauls are performed on a continuous basis, and the cost of overhauls and routine maintenance
costs for airframe and engine maintenance are charged to maintenance expense as incurred.
Advertising Costs
Advertising costs are charged to expense in the period the costs are incurred. Advertising expense was approximately $20.1 million, $17.5 million and $15.7 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
Revenue Recognition
Passenger and cargo revenue is recognized when transportation is provided. Transportation purchased but not yet used is included in air traffic liability.
Notes to Consolidated Financial Statements
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