Southwest Airlines 2009 Annual Report Download - page 66

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
For the effective portion of settled hedges, 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 hedge accounting and financial derivative instruments.
The Company classifies its cash collateral provided to or held from counterparties in a “net” presentation on
the Consolidated Balance Sheet against the fair value of the derivative positions with those counterparties. See
Note 10 for further information.
Software capitalization
The Company capitalizes certain internal and external costs related to the acquisition and development of
internal use software during the application development stages of projects. The Company amortizes these costs
using the straight-line method over the estimated useful life of the software which ranges from five to ten years.
Costs incurred during the preliminary project or the post-implementation/operation stages of the project are
expensed as incurred.
Income taxes
The Company accounts for deferred income taxes utilizing 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,
the Company evaluates the need for a valuation allowance to reduce deferred tax assets to estimated recoverable
amounts.
The Company’s policy for recording interest and penalties associated with uncertain tax positions 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, 2009, the Company recorded no interest related to uncertain tax
positions.
Concentration Risk
Approximately 82 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. Employee groups that are under agreements that have
become amendable and are currently in negotiations include its Aircraft Appearance Technicians and its Flight
Dispatchers. The Company recently negotiated a Tentative Agreement with its Stock Clerks that will be voted on
during 2010. The Company has no Employee group subject to agreements that become amendable during 2010.
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.
58