Southwest Airlines 2008 Annual Report Download - page 70

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
equation with data from market forward prices of like
commodities. This equation is then adjusted for
certain items, such as transportation costs, that are
stated in the Company’s fuel purchasing contracts
with its vendors.
For the effective portion of settled hedges, as
defined in SFAS 133, the Company records the
associated gains or losses as a component of “Fuel
and oil” expense in the Consolidated Statement of
Income. For amounts representing ineffectiveness, as
defined, or changes in fair value of derivative
instruments for which hedge accounting is not
applied, the Company records any gains or losses as a
component of “Other (gains) losses, net”, in the
Consolidated Statement of Income. Amounts that are
paid or received associated with the purchase or sale
of financial derivative instruments (i.e., premium
costs of option contracts) are classified as a
component of “Other (gains) losses, net”, in the
Consolidated Statement of Income in the period in
which the instrument settles or expires. All cash
flows associated with purchasing and selling
derivatives are classified as operating cash flows in
the Consolidated Statement of Cash Flows, within
“Changes in certain assets and liabilities.” See Note
10 for further information on SFAS 133 and financial
derivative instruments.
Software capitalization
The Company capitalizes certain costs related to
the acquisition and development of software in
accordance with Statement of Position 98-1,
“Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use.” The
Company amortizes these costs using the straight-line
method over the estimated useful life of the software
which is generally five years.
Income taxes
The Company accounts for deferred income
taxes utilizing Statement of Financial Accounting
Standards No. 109 (SFAS 109), “Accounting for
Income Taxes”, as amended. SFAS 109 requires an
asset and liability method, whereby deferred tax
assets and liabilities are recognized based on the tax
effects of temporary differences between the
financial statements and the tax bases of assets and
liabilities, as measured by current enacted tax rates.
When appropriate, in accordance with SFAS 109, the
Company evaluates the need for a valuation
allowance to reduce deferred tax assets.
The Company’s policy for recording interest and
penalties associated with audits is to record such
items as a component of income before taxes.
Penalties are recorded in “Other (gains) losses, net,”
and interest paid or received is recorded in interest
expense or interest income, respectively, in the
statement of income. For the year ended
December 31, 2008, the Company recorded no
interest related to the settlement of audits for certain
prior periods.
Concentration Risk
Approximately 77 percent of the Company’s
Employees are unionized and are covered by
collective bargaining agreements. Historically, the
Company has managed this risk by maintaining
positive relationships with its Employees and its
Employee’s Representatives. The following
Employee groups are under agreements that have
become amendable and are currently in negotiations:
Pilots, Flight Attendants, Ramp, Operations,
Provisioning, and Freight Agents, Stock Clerks, and
Customer Service and Reservations Agents. The
Company reached a Tentative Agreement with its
Mechanics during fourth quarter 2008, and the
agreement was ratified by this group during
January 2009. The Company’s Aircraft Appearance
Technicians and its Flight Dispatchers are subject to
agreements that become amendable during 2009.
The Company attempts to minimize its
concentration risk with regards to its cash, cash
equivalents, and its investment portfolio. This is
accomplished by diversifying and limiting amounts
among different counterparties, the type of
investment, and the amount invested in any
individual security or money market fund.
To manage risk associated with financial
derivative instruments held, the Company selects and
will periodically review counterparties based on
credit ratings, limits its exposure to a single
counterparty, and monitors the market position of the
program and its relative market position with each
counterparty. The Company also has agreements with
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