Southwest Airlines 2008 Annual Report Download - page 68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for future travel and amounts due from counterparties
associated with fuel derivative instruments that have
settled. The amount of allowance for doubtful
accounts as of December 31, 2008, 2007, and 2006
was immaterial. In addition, the provision for
doubtful accounts and write-offs for 2008, 2007, and
2006 were immaterial.
Inventories
Inventories primarily consist of flight equipment
expendable parts, materials, aircraft fuel, and
supplies. All of these items are carried at average
cost, less an allowance for obsolescence. These items
are generally charged to expense when issued for use.
The reserve for obsolescence was immaterial at
December 31, 2008, 2007, and 2006. In addition, the
Company’s provision for obsolescence and write-offs
for 2008, 2007, and 2006 was immaterial.
Property and equipment
Property and equipment is stated at cost.
Depreciation is provided by the straight-line method
to estimated residual values over periods generally
ranging from 23 to 25 years for flight equipment and
5 to 30 years for ground property and equipment
once the asset is placed in service. Residual values
estimated for aircraft are generally 10 to 15 percent
and for ground property and equipment range from
zero to 10 percent. Property under capital leases and
related obligations is recorded at an amount equal to
the present value of future minimum lease payments
computed on the basis of the Company’s incremental
borrowing rate or, when known, the interest rate
implicit in the lease. Amortization of property under
capital leases is on a straight-line basis over the lease
term and is included in depreciation expense.
When appropriate, the Company evaluates its
long-lived assets used in operations for impairment.
Impairment losses would be recorded when events
and circumstances indicate that an asset might be
impaired and the undiscounted cash flows to be
generated by that asset are less than the carrying
amounts of the asset. Factors that would indicate
potential impairment include, but are not limited to,
significant decreases in the market value of the long-
lived asset(s), a significant change in the long-lived
asset’s physical condition, and operating or cash flow
losses associated with the use of the long-lived asset.
Excluding the impact of cash collateral deposits with
counterparties based on the fair value of the
Company’s fuel derivative instruments, the Company
continues to experience positive cash flow associated
with its aircraft fleet, and there have been no
impairments of long-lived assets recorded during
2008, 2007, or 2006.
Aircraft and engine maintenance
The cost of scheduled inspections and repairs
and routine maintenance costs for all aircraft and
engines are charged to maintenance expense as
incurred. Modifications that significantly enhance the
operating performance or extend the useful lives of
aircraft or engines are capitalized and amortized over
the remaining life of the asset.
Intangible assets
Intangible assets primarily consist of leasehold
rights to airport owned gates. These assets are
amortized on a straight-line basis over the expected
useful life of the lease, approximately 20 years. The
accumulated amortization related to the Company’s
intangible assets at December 31, 2008, and 2007,
was $12 million and $9 million, respectively. The
Company periodically assesses its intangible assets
for impairment in accordance with SFAS 142,
Goodwill and Other Intangible Assets; however, no
impairments have been noted.
Revenue recognition
Tickets sold are initially deferred as “Air traffic
liability”. Passenger revenue is recognized when
transportation is provided. “Air traffic liability”
primarily represents tickets sold for future travel
dates and estimated refunds and exchanges of tickets
sold for past travel dates. The majority of the
Company’s tickets sold are nonrefundable. Tickets
that are sold but not flown on the travel date (whether
refundable or nonrefundable) can be reused for
another flight, up to a year from the date of sale, or
refunded (if the ticket is refundable). A small
percentage of tickets (or partial tickets) expire
unused. The Company estimates the amount of future
refunds and exchanges, net of forfeitures, for all
unused tickets once the flight date has passed.
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