Amtrak 2013 Annual Report Download - page 31

32 | Amtrak Annual Report 2013
judgments on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these estimates.
We believe the following accounting estimates are most critical to an understanding of our financial
statements. Estimates are considered to be critical if they meet both of the following criteria: (i) the
estimate requires assumptions about material matters that are uncertain at the time the accounting
estimates are made, and (ii) material changes in the estimates are reasonably likely from period to
period. For a detailed discussion on the application of these and other accounting estimates, refer to
Note 4 in our Consolidated Financial Statements.
Capitalization, Depreciation and Amortization of Property and Equipment
Due to the highly capital intensive nature of the railroad industry, capitalization and depreciation of
property and equipment are substantial components of our financial statements. Property and
equipment, including leasehold improvements, comprised 91.7% of our total assets at the end of FY
2013, and related depreciation and amortization comprised 16.3% of total operating expenses in FY
2013.
As disclosed in Note 4 to the Consolidated Financial Statements, property and equipment that we
own are carried at cost and are depreciated using the group method of depreciation (“group
method”) in which a single composite depreciation rate is applied to the gross investment in a
particular class of property or equipment, despite differences in the service life or salvage value of
individual property units within the same class. This excludes computer equipment and software,
which are carried at cost and are individually depreciated on a straight-line basis over their
estimated useful lives, which are generally 5 to 10 years. Property held under capital leases and
leasehold improvements are depreciated over the shorter of their estimated useful lives or their
respective lease terms.
We periodically engage a civil engineering firm with expertise in railroad property usage to conduct
a study to evaluate depreciation rates for assets subject to the group method. These rates are used
for the group depreciation calculations. In addition to the adjustment to group depreciation rates as
a result of periodic depreciation studies, certain other events could occur that would materially
affect our estimates and assumptions related to depreciation. Unforeseen changes in operations or
technology could substantially alter assumptions regarding our ability to realize the return of
investment on our operating assets and, therefore, affect the amount of depreciation expense to
charge against both current and future revenues. Because group method depreciation expense is a
function of analytical studies made of property and equipment, subsequent studies could result in
different estimates of useful lives and net salvage values. If future group method depreciation studies
yield results indicating that assets have shorter lives as a result of obsolescence, physical condition,
changes in technology, or changes in net salvage values, the group method calculation of
depreciation expense could increase. Likewise, if future studies indicate that assets have longer lives,
the group method calculation of depreciation expense could decrease.
Impairment of Long-Lived Assets
Properties and other long-lived assets are reviewed for impairment whenever events or business
conditions indicate that the carrying amount of an asset may not be recoverable. Initial assessments
of recoverability are based on estimates of undiscounted future net cash flows. If impairment
indicators are present, the assets are evaluated for sale or other dispositions, and their carrying
amount is reduced to fair value based on discounted cash flows or other estimates of fair value.