Southwest Airlines 2011 Annual Report Download - page 84

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011
1. Summary of Significant Accounting Policies
Basis of Presentation
Southwest Airlines Co. (the “Company”) operates Southwest Airlines, a major domestic airline that
provides point-to-point, low-fare service. The Consolidated Financial Statements include the accounts of the
Company and its wholly owned subsidiaries, which include AirTran Holdings, LLC. On May 2, 2011 (the
“acquisition date”), the Company acquired all of the outstanding equity of AirTran Holdings, Inc. (“AirTran
Holdings”), the former parent company of AirTran Airways, Inc. (“AirTran Airways”), in exchange for common
stock of the Company and cash. Throughout these Notes, the Company makes reference to AirTran, which is
meant to be inclusive of the following: (i) for periods prior to the acquisition date, AirTran Holdings and its
subsidiaries, including, among others, AirTran Airways; and (ii) for periods on and after the acquisition date,
AirTran Holdings, LLC, the successor to AirTran Holdings, and its subsidiaries, including among others, AirTran
Airways. The accompanying Consolidated Financial Statements include the results of operations and cash flows
for AirTran from May 2, 2011 through December 31, 2011. See Note 2. All significant inter-entity balances and
transactions have been eliminated. The preparation of financial statements in conformity with generally accepted
accounting principles in the United States (GAAP) requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from
these estimates.
Cash and cash equivalents
Cash in excess of that necessary for operating requirements is invested in short-term, highly liquid,
income-producing investments. Investments with original maturities of three months or less when purchased are
classified as cash and cash equivalents, which primarily consist of certificates of deposit, money market funds,
and investment grade commercial paper issued by major corporations and financial institutions. Cash and cash
equivalents are stated at cost, which approximates fair value.
As of December 31, 2011 and 2010, the Company had provided cash collateral deposits to its fuel hedge
counterparties totaling $226 million and $125 million, respectively. As of December 31, 2010, the Company also
held cash collateral deposits of $60 million from a counterparty. Cash collateral amounts provided or held
associated with fuel derivative instruments are not restricted in any way and earn interest income at an agreed
upon rate that approximates the rates earned on short-term securities issued by the U.S. Government. Depending
on the fair value of the Company’s fuel derivative instruments, the amounts of collateral deposits held or
provided at any point in time can fluctuate significantly. See Note 10 for further information on these collateral
deposits and fuel derivative instruments.
Short-term and noncurrent investments
Short-term investments consist of investments with original maturities of greater than three months but less
than twelve months when purchased. These are primarily short-term securities issued by the U.S. Government
and certificates of deposit issued by domestic banks. All of these investments are classified as available-for-sale
securities and are stated at fair value, which approximates cost. For all short-term investments, at each reset
period or upon reinvestment, the Company accounts for the transaction as Proceeds from sales of short-term
investments for the security relinquished, and Purchases of short-investments for the security purchased, in the
accompanying Consolidated Statement of Cash Flows. Unrealized gains and losses, net of tax, if any, are
recognized in Accumulated other comprehensive income (loss) (“AOCI”) in the accompanying Consolidated
Balance Sheet. Realized net gains and losses on specific investments, if any, are reflected in Interest income in
the accompanying Consolidated Statement of Income. Both unrealized and realized gains and/or losses
associated with investments were immaterial for all years presented.
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