Southwest Airlines 2011 Annual Report Download - page 91

Recording of assets acquired and liabilities assumed
The transaction has been accounted for using the acquisition method of accounting (“purchase
accounting”), which requires, among other things, that most assets acquired and liabilities assumed be recognized
at their fair values as of the acquisition date. No material assets or liabilities arose from contingencies recognized
at the acquisition date. Certain estimated values are not yet finalized (see below) and are subject to change. Fair
value adjustments made during the second half of 2011 primarily included a $10 million increase in the value
assigned to the deferred tax asset, a $7 million reduction in the value assigned to the customer relationship
intangible, a $3 million increase in the value assigned to operating property and equipment, and the related
impact on goodwill. The Company will finalize the amounts recognized as it obtains the information necessary to
complete the analyses. The Company expects to finalize these amounts prior to March 31, 2012. The following
table summarizes the assets acquired and liabilities assumed as of the acquisition date at estimated fair value:
(in millions) May 2, 2011
Assets
Cash and cash equivalents .............................. $ 477
Restricted cash ....................................... 6
Other current assets ................................... 234
Operating property and equipment ........................ 1,154
Goodwill ............................................ 970
Other identified intangibles ............................. 125
Deferred income taxes ................................. 160
Other noncurrent assets ................................ 45
Liabilities
Long-term debt and capital leases, including current portion . . . (1,119)
Air traffic liability ..................................... (354)
Other liabilities assumed ............................... (657)
Net assets acquired ....................................... $1,041
The fair values of the assets acquired and liabilities assumed were determined using the market, income,
and cost approaches. The market approach, which indicates value for a subject asset based on available market
pricing for comparable assets, was utilized to estimate the fair value of AirTran’s aircraft and operating leases.
The market approach used by the Company included prices and other relevant information generated by market
transactions involving comparable assets, as well as industry pricing guides and other sources. The Company
considered the current market for the aircraft, the maintenance condition of the aircraft and the expected proceeds
from the sale of the assets, among other factors. The fair value of AirTran’s frequent flyer program liability was
estimated based on the weighted average equivalent ticket value of outstanding frequent flyer credits that were
expected to be redeemed as of May 2, 2011. The income approach was primarily used to value intangible assets,
including customer relationships and marketing agreements, noncompete agreements with certain AirTran
executives, the AirTran trademark and trade name, and certain domestic airport take-off and landing slots. The
income approach indicates value for a subject asset based on the present value of future cash flows projected to
be generated by the asset. Projected future cash flows are discounted at a required market rate of return that
reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which
estimates value by determining the current cost of replacing an asset with another of equivalent economic utility,
was used, as appropriate, for certain assets for which the market and income approaches could not be applied due
to the nature of the asset. The cost to replace a given asset reflects the estimated reproduction or replacement cost
for the asset, less an allowance for loss in value due to depreciation.
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