Delta Airlines 2006 Annual Report Download - page 83

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Deferred Gains on Sale and Leaseback Transactions
We amortize deferred gains on the sale and leaseback of property and equipment under operating leases over the lives of these leases. The amortization
of these gains is recorded as a reduction to rent expense. Gains on the sale and leaseback of property and equipment under capital leases reduce the carrying
value of the related assets.
Manufacturers’ Credits
We periodically receive credits in connection with the acquisition of aircraft and engines. These credits are deferred until the aircraft and engines are
delivered, and then applied on a pro rata basis as a reduction to the cost of the related equipment.
Maintenance Costs
We record maintenance costs in operating expenses as they are incurred.
Inventories
Inventories of expendable parts related to flight equipment are carried at moving average cost and charged to operations as consumed. An allowance for
obsolescence is provided for the cost of these parts over the remaining useful life of the related fleet. We also provide allowances for parts currently identified
as excess or obsolete to reduce the carrying costs to the lower of cost or net realizable value. These parts are assumed to have an estimated residual value of
5% of the original cost.
Advertising Costs
We expense advertising costs as other selling expenses in the year incurred. Advertising expense was $150 million, $164 million, and $148 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
Commissions
We record passenger commissions in prepaid expenses and other on our Consolidated Balance Sheets when the related passenger tickets are sold.
Passenger commissions are recognized in operating expenses on our Consolidated Statements of Operations when the transportation is provided and the
related revenue is recognized.
Stock-Based Compensation
Effective January 1, 2006, we adopted the fair value provisions of SFAS 123R. This standard requires companies to measure the cost of employee services in
exchange for an award of equity instruments (typically stock options) based on the grant-date fair value of the award. The fair value is estimated using option-
pricing models. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the awards (usually
the vesting period of the awards). Prior to the adoption of SFAS 123R, we accounted for stock option grants in accordance with APB 25, and accordingly
recognized no compensation expense for the stock option grants if the exercise price is equal to or more than the fair value of the shares at the date of grant.
SFAS 123R is effective for any stock options granted after December 31, 2005. For stock options granted prior to January 1, 2006, but for which vesting was
not complete on that date, we applied the modified prospective transition method in accordance with SFAS 123R. Under this method, we account for such
awards on a prospective basis, with expense being recognized in our Consolidated Statement of Operations beginning in the March 2006 quarter using the
grant-date fair values previously calculated for our pro forma disclosures. Due to the application of the modified prospective transition method, comparable
prior periods have not been retroactively adjusted to include share-based compensation.
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