American Airlines 1998 Annual Report Download - page 50

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are offset by changes in the value of the yen-denominated
lease obligations translated at the current exchange rate.
Discounts or premiums are accreted or amortized as an
adjustment to interest expense over the lives of the underly-
ing lease obligations. The related amounts due to or from
counterparties are included in other liabilities or other
assets. The net fair values of the Company’s currency
exchange agreements, representing the amount the
Company would pay to terminate the agreements, were
(in millions):
December 31,
1998 1997
Notional Notional
Amount ( Fair Value ) Amount Fair Value
Japanese yen 33.7 billion $(5) 24.5 billion $(15)
The exchange rates on the Japanese yen agreements
range from 66.50 to 118.35 yen per U.S. dollar.
FAIR VALUES OF FINANCIAL INSTRUMENTS The fair val-
ues of the Company’s long-term debt were estimated using
quoted market prices where available. For long-term debt
not actively traded, fair values were estimated using dis-
counted cash flow analyses, based on the Company’s
current incremental borrowing rates for similar types of bor-
rowing arrangements. The carrying amounts and estimated
fair values of the Company’s long-term debt, including cur-
rent maturities, were (in millions):
December 31,
1998 1997
Carrying Fair Carrying Fair
Val u e Value Value Value
8.05% - 10.62% notes $875 $973 $ 1,249 $ 1,372
Secured debt 890 1,013 660 766
9.0% - 10.20% debentures 437 531 437 540
6.0% - 7.10% bonds 176 189 176 194
Variable rate indebtedness 86 86 86 86
Other 20 20 35 36
$2,484 $2,812 $ 2,643 $ 2,994
All other financial instruments, except for the invest-
ment in Equant, are either carried at fair value or their
carrying value approximates fair value.
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (SFAS 133), which is required to be
adopted in years beginning after June 15, 1999. SFAS 133
permits early adoption as of the beginning of any fiscal
quarter after its issuance. SFAS 133 will require the
Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted
to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change
in fair value of the hedged assets, liabilities, or firm commit-
ments through earnings or recognized in other
comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative’s change
in fair value will be immediately recognized in earnings.
The Company is currently evaluating the impact of SFAS
133 to the Company’s financial condition or results of
operations.
7.INCOME TAXES
The significant components of the income tax provision
were (in millions):
Year Ended December 31,
1998 1997 1996
Current $546 $288 $ 296
Deferred 312 363 217
$858 $651 $ 513
The income tax provision includes a federal income
tax provision of $741 million, $566 million and $452 mil-
lion and a state income tax provision of $93 million, $71
million and $53 million for the years ended December 31,
1998, 1997 and 1996, respectively.
The income tax provision differed from amounts
computed at the statutory federal income tax rate as follows
(in millions):
Year Ended December 31,
1998 1997 1996
Statutory income tax provision $757 $568 $ 559
State income tax provision, net 60 46 35
Meal expense 19 21 18
Minority interest 14 12 1
Gain on sale of stock by subsidiary -- (174)
Change in valuation allowance (4) - 67
Other, net 12 4 7
Income tax provision $858 $651 $ 513