Alaska Airlines and Horizon Air 2013 Annual Report Download - page 150

between market participants on the
measurement date. The standards also establish
a fair value hierarchy, which requires an entity to
maximize the use of observable inputs and
minimize the use of unobservable inputs when
measuring fair value. There are three levels of
inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for
identical assets or liabilities.
Level 2—Observable inputs other than Level 1
prices such as quoted prices for similar assets
or liabilities, quoted prices in markets that are
not active, or other inputs that are observable or
can be corroborated by observable market data
for substantially the full term of the assets or
liabilities.
Level 3—Unobservable inputs that are supported
by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
The Company has elected not to use the Fair
Value Option for non-financial instruments, and
accordingly those assets and liabilities are
carried at amortized cost. For financial
instruments, those assets and liabilities are
carried at fair value and are determined based
on the market approach or income approach
depending upon the level of inputs used.
Income Taxes
The Company uses the asset and liability
approach for accounting and reporting income
taxes. Deferred tax assets and liabilities are
recognized for future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets
and liabilities and their respective tax bases, and
for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to
taxable income in the years in which those
temporary differences are expected to be
recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is
recognized in the period that includes the
enactment date. A valuation allowance would be
established, if necessary, for the amount of any
tax benefits that, based on available evidence,
are not expected to be realized. The Company
accounts for unrecognized tax benefits in
accordance with the accounting standards.
Stock-Based Compensation
Accounting standards require companies to
recognize as expense the fair value of stock
options and other equity-based compensation
issued to employees as of the grant date. These
standards apply to all stock awards that the
Company grants to employees as well as the
Company’s Employee Stock Purchase Plan
(ESPP), which features a look-back provision and
allows employees to purchase stock at a 15%
discount. All stock-based compensation expense
is recorded in wages and benefits in the
consolidated statements of operations.
Earnings Per Share (EPS)
Diluted EPS is calculated by dividing net income
by the average common shares outstanding plus
additional common shares that would have been
outstanding assuming the exercise of in-the-
money stock options and restricted stock units,
using the treasury-stock method. In 2013, 2012,
and 2011, antidilutive stock options excluded
from the calculation of EPS were not material.
NOTE 2. MODIFIED AFFINITY CARD AGREEMENT
Multiple-Deliverable Revenue Arrangements
Alaska operates a frequent flyer program
(“Mileage Plan”) that provides travel awards to
members based on accumulated mileage.
Members can accumulate miles either by
(i) flying on Alaska or on the Company's airline
partners, or (ii) earning miles based on the
amount spent with the affinity credit cards and
the Company's other non-airline partners, such
as hotels and car rental agencies. For miles
earned by flying, the estimated cost of providing
award travel is recognized as a selling expense
and accrued as a liability as miles are earned
64