SkyWest Airlines 2010 Annual Report Download - page 50

Critical Accounting Policies
Our significant accounting policies are summarized in Note 1 to our consolidated financial
statements for the year ended December 31, 2010, included in Item 8 of this Report. Critical
accounting policies are those policies that are most important to the preparation of our consolidated
financial statements and require management’s subjective and complex judgments due to the need to
make estimates about the effect of matters that are inherently uncertain. Our critical accounting
policies relate to revenue recognition, aircraft maintenance, aircraft leases, impairment of long-lived
assets and intangibles, stock-based compensation expense and fair value as discussed below. The
application of these accounting policies involves the exercise of judgment and the use of assumptions as
to future uncertainties and, as a result, actual results will differ, and could differ materially from such
estimates.
Revenue Recognition
Passenger and ground handling revenues are recognized when service is provided. Under our
contract and pro-rate flying agreements with our code-share partners, revenue is considered earned
when the flight is completed. Our agreements with our code-share partners contain certain provisions
pursuant to which the parties could terminate the respective agreement, subject to certain rights of the
other party, if certain performance criteria are not maintained. Our revenues could be impacted by a
number of factors, including changes to the code-share agreements, contract modifications resulting
from contract renegotiations and our ability to earn incentive payments contemplated under applicable
agreements. In the event contracted rates are not finalized at a quarterly or annual financial statement
date, we record that period’s revenues based on the lower of the prior period’s approved rates adjusted
for the current contract negotiations and our estimate of rates that will be implemented in accordance
with revenue recognition guidelines. Also, in the event we have a reimbursement dispute with a major
partner at a quarterly or annual financial statement date, we evaluate the dispute under established
revenue recognition criteria and, provided the revenue recognition criteria have been met, we recognize
revenue for that period based on our estimate of the resolution of the dispute. Accordingly, we are
required to exercise judgment and use assumptions in the application of our revenue recognition policy.
Maintenance
We use the direct-expense method of accounting for our regional jet aircraft engine overhaul costs.
Under this method, the maintenance liability is not recorded until the maintenance services are
performed. We use the ‘‘deferral method’’ of accounting for our Brasilia turboprop engine overhauls,
which provides for engine overhaul costs to be capitalized and depreciated to the next estimated
overhaul event or to the remaining useful life, whichever is shorter. For leased aircraft, we are subject
to lease return provisions that require a minimum portion of the ‘‘life’’ of an overhaul be remaining on
the engine at the lease return date. With respect to engine overhauls related to leased Brasilia
turboprops to be returned, we adjust the estimated useful lives of the final engine overhauls based on
the respective lease return dates. With respect to SkyWest Airlines, a third-party vendor provides our
long-term engine services covering the scheduled and unscheduled repairs for engines on our CRJ700s
operated under the SkyWest Airlines United Express Agreement. Under the terms of the vendor
agreement, we pay a set dollar amount per engine hour flown on a monthly basis and the third-party
vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain
specified exclusions. Thus, under the third-party vendor agreement, we expense the engine maintenance
costs as flight hours are incurred on the engines and using the contractual rate set forth in the
agreement.
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