American Airlines 1998 Annual Report Download - page 44

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1.SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial state-
ments include the accounts of AMR Corporation (AMR or
the Company), its wholly-owned subsidiaries, including its
principal subsidiary American Airlines, Inc. (American), and
its majority-owned subsidiaries, including The Sabre Group
Holdings, Inc. (The Sabre Group). All significant intercom-
pany transactions have been eliminated. The results of
operations for AMR Services, AMR Combs and TeleService
Resources have been reflected in the consolidated state-
ments of operations as discontinued operations. All share
and per share amounts have been restated to give effect to
the stock split on June 9, 1998, where appropriate. Certain
amounts from prior years have been reclassified to conform
with the 1998 presentation.
USE OF ESTIMATES The preparation of financial state-
ments in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the amounts reported in the consoli-
dated financial statements and accompanying notes. Actual
results could differ from those estimates.
INVENTORIES Spare parts, materials and supplies relating
to flight equipment are carried at average acquisition cost
and are expensed when incurred in operations. 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,
plus allowances for spare parts currently identified as
excess. These allowances are based on management esti-
mates, which are subject to change.
EQUIPMENT AND PROPERTY The provision for deprecia-
tion of operating equipment and property is computed on
the straight-line method applied to each unit of property,
except that major rotable parts, avionics and assemblies are
depreciated on a group basis. The depreciable lives and
residual values used for the principal depreciable asset
classifications are:
Depreciable Life Residual Value
Boeing 727-200 (Stage II) December 31, 19991None
Boeing 727-200 (to be
converted to Stage III) December 31, 20031None
DC-10 December 31, 20021None
Other American jet aircraft 20 years 5%
Regional jet aircraft 16 years (2)
Other regional aircraft
and engines 17 years 10%
Major rotable parts, avionics Life of equipment 0-10%
and assemblies to which applicable
Improvements to leased flight
equipment Term of lease None
Buildings and improvements 10-30 years or term
(principally on leased land) of lease None
Furniture, fixtures
and other equipment 3-20 years None
Capitalized software 3-10 years None
1Approximate common retirement date.
2Depreciated to guaranteed residual value.
Effective January 1, 1999, in order to more accu-
rately reflect the expected useful life of its aircraft, the
Company changed its estimate of the depreciable lives of
certain American aircraft types from 20 to 25 years and
increased the residual value from five to 10 percent.
In addition, the Company will depreciate its new Boeing
737-800s and Boeing 777-200IGWs over a period of 25
and 30 years, respectively, with a 10 percent residual value.
Equipment and property under capital leases are
amortized over the term of the leases or, in the case of
certain aircraft, over their expected useful lives, and such
amortization is included in depreciation and amortization.
Lease terms vary but are generally 10 to 25 years for
aircraft and seven to 40 years for other leased equipment
and property.
MAINTENANCE AND REPAIR COSTS Maintenance and
repair costs for owned and leased flight equipment are
charged to operating expense as incurred, except engine
overhaul costs incurred by AMR Eagle, which are accrued
on the basis of hours flown.
NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS