Delta Airlines 2014 Annual Report Download - page 45

In September 2013, we modified our marketing agreements with American Express that required us to change the accounting method for recording
SkyMiles sold. Under the previous method, the embedded premium or discount was allocated to the residual products or services in a combined
transaction. The new method allocates consideration received based on the relative selling price of each product or service. We determined our best
estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number
of miles awarded and number of miles redeemed, (2) the rate at which we sell mileage credits to other airlines, (3) published rates on our website for
baggage fees, access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value. The impact of adopting the relative
selling price method re-allocated a portion of the embedded discount to the travel component, lowering the deferral rate we use to record miles sold
under the agreements and increasing revenue recognized on the remaining deliverables.
We recognize revenue as we deliver each sales element. We defer the travel deliverable (miles) as part of frequent flyer deferred revenue and
recognize passenger revenue as the mileage credits are used for travel. The revenue allocated to the remaining deliverables is recorded in other
revenue. We recognize the revenue for these services as they are performed.
Breakage. For mileage credits that we estimate are not likely to be redeemed (“breakage”), we recognize the associated value proportionally during
the period in which the remaining mileage credits are expected to be redeemed. Management uses statistical models to estimate breakage based on
historical redemption patterns. A change in assumptions as to the period over which mileage credits are expected to be redeemed, the actual
redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our
revenue in the year in which the change occurs and in future years. At December 31, 2014 , the aggregate deferred revenue balance associated with the
SkyMiles Program was $4.2 billion . A hypothetical 1% change in the number of outstanding miles estimated to be redeemed would result in a $28
million impact on our deferred revenue liability at December 31, 2014 .
Goodwill and Indefinite-Lived Intangible Assets
We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of
October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. We assess the value of
our goodwill and indefinite-lived assets under either a qualitative or quantitative approach. Under a qualitative approach, we consider various market
factors, including the key assumptions listed below. We analyze these factors to determine if events and circumstances have affected the fair value of
goodwill and indefinite-lived intangible assets. If we determine that it is more likely than not that the asset may be impaired, we use the quantitative
approach to assess the asset's fair value and the amount of the impairment. Under a quantitative approach, we calculate the fair value of the asset using
the key assumptions listed below. If the asset's carrying value exceeds its fair value calculated using the quantitative approach, we will record an
impairment charge for the difference in fair value and carrying value.
When we evaluate goodwill for impairment using a quantitative approach, we estimate the fair value of the reporting unit by considering market
capitalization and other factors. When we perform a quantitative impairment assessment of our indefinite-lived intangible assets, fair value
is estimated
based on (1) recent market transactions, where available, (2) a combination of limited market transactions and the lease savings method for certain
airport slots (which reflects potential lease savings from owning the slots rather than leasing them from another airline at market rates), (3) the royalty
method for the Delta tradename (which assumes hypothetical royalties generated from using our tradename) or (4) projected discounted future cash
flows (an income approach).
Key Assumptions. The key assumptions in our impairment tests include: (1) forecasted revenues, expenses and cash flows, (2) terminal period
revenue growth and cash flows, (3) an estimated weighted average cost of capital, (4) assumed discount rates depending on the asset and (5) a tax rate.
These assumptions are consistent with those hypothetical market participants would use. Since we are required to make estimates and assumptions
when evaluating goodwill and indefinite-lived intangible assets for impairment, actual transaction amounts may differ materially from these estimates.
In addition, we consider the amount by which the intangible assets' fair value exceeded their carrying value in the most recent fair value measurement
calculated using a quantitative approach.
Changes in certain events and circumstances could result in impairment. Factors which could cause impairment include, but are not limited to, (1)
negative trends in our market capitalization, (2) reduced profitability resulting from lower passenger mile yields or higher input costs (primarily related
to fuel and employees), (3) lower passenger demand as a result of weakened U.S. and global economies, (4) interruption to our operations due to a
prolonged employee strike, terrorist attack, or other reasons, (5) changes to the regulatory environment (e.g., diminished slot restrictions or additional
Open Skies agreements), (6) competitive changes by other airlines and (7) strategic changes to our operations leading to diminished utilization of the
intangible assets.
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