Southwest Airlines 2009 Annual Report Download - page 99

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Changes in Internal Control over Financial Reporting. On October 14, 2009, the Company determined that
its financial statements for the three and six months ended June 30, 2009, contained an error with respect to one
rule within Accounting Standards Codification (“ASC”) Topic 815 and that this error arose from a material
weakness in the Company’s internal control over financial reporting. Specifically, to facilitate the
implementation of new hedge accounting software, in April 2009, existing hedging instruments were
de-designated and re-designated as new hedges. Included in the re-designation, however, were certain derivative
instruments that were in a net written option position that did not qualify as hedges according to paragraph 94 of
ASC Subtopic 815-20-25. Therefore, the Company determined that it did not maintain effective controls to
ensure the proper application of paragraph 94 of ASC Subtopic 815-20-25. In response, during the quarter ended
December 31, 2009, the Company changed its internal control over financial reporting to implement the
following:
• Increased staffing of the Company’s financial reporting department;
• Enhanced education of the Company’s financial reporting staff;
• Incorporation of expanded explicit instructions and guidance into the Company’s future hedge
documentation regarding the types of instruments that cannot qualify for special hedge accounting;
• Additional periodic recurrent training of the Company’s financial reporting staff by external experts;
and
• Revision of the Company’s fuel hedging policy to require that any change to the Company’s
methodologies for recording hedge-related accounting transactions be pre-approved by the Company’s
Chief Financial Officer.
Except as noted above, there were no changes in the Company’s internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2009, that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Item 9B. Other Information
None.
91