Southwest Airlines 2011 Annual Report Download - page 88

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use of present value methods or option value models with assumptions about commodity prices based on those
observed in underlying markets. Also, since there is not a reliable forward market for jet fuel, the Company must
estimate the future prices of jet fuel in order to measure the effectiveness of the hedging instruments in offsetting
changes to those prices. Forward jet fuel prices are estimated through utilization of a statistical-based regression
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 fuel 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 in connection 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 fifteen
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 effect of temporary differences between the financial
statements and the tax basis of assets and liabilities, as measured by current enacted tax rates. The Company also
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 income 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
Consolidated Statement of Income. Amounts recorded for penalties and interest related to uncertain tax positions
were immaterial for all years presented.
Concentration risk
Approximately 82 percent of the Company’s fulltime equivalent Employees are unionized and are covered
by collective bargaining agreements, including 82 percent of Southwest’s Employees and 81 percent of AirTran’s
Employees. Historically, the Company has managed this risk by maintaining positive relationships with its
Employees and its Employee’s Representatives. Southwest’s Ramp, Operations, Provisioning, and Freight
Agents, Aircraft Appearance Technicians, and Dispatchers are under agreements that have become amendable
and are in discussions on new agreements. In addition, Southwest’s Pilots, Mechanics, and Customer Service
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