Alaska Airlines and Horizon Air 2007 Annual Report Download - page 196

Company’s consolidated balance sheets.
However, the accumulated difference would have
been material to the consolidated statements of
operations. As such, in order to correct the
accumulated depreciation of leasehold
improvements to depreciate them over the
shorter of their economic lives or the remaining
lease term, the Company adjusted its beginning
retained earnings for 2006.
Horizon Fleet Subsidy
In connection with the purchase of certain
aircraft, the manufacturer paid Horizon a “market
subsidy” payment as an inducement to purchase
larger aircraft. This market subsidy was paid
quarterly for seven years for Q200 aircraft and
eight years for Q400 aircraft following delivery of
the aircraft.
Previously, the fleet subsidy credit was
recognized as the cash was received, i.e. over
the payment period. However, upon further
review, management determined that the correct
method of accounting would have been to
recognize the credit ratably over the full lease
term of the aircraft, generally 15 to 17 years,
rather than at the time of the cash payments.
The difference between the Company’s historical
accounting practice and the current practice for
income statement recognition was not material
to the consolidated statements of operations in
any individual year, nor was the deferred credit
that should have been recorded deemed material
to the Company’s consolidated balance sheets.
However, the accumulated difference would have
been material to the consolidated statements of
operations. As such, in order to correct the
amount of deferred credit recognized, the
Company adjusted its beginning retained
earnings for 2006.
Impact of Adjustments
The impact of each of the items noted above,
net of tax, on 2006 beginning balances are
presented below (in millions):
Cumulative Effect as of
January 1, 2006
Accumulated depreciation ..... $10.3 $ — $ 10.3
Other liabilities .............. — 19.4 19.4
Deferred income taxes ........ (4.3) (6.8) (11.1)
Retained earnings ........... (6.0) (12.6) (18.6)
Total .................. $ — $ — $ —
NOTE 17. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2005, the Company changed
its method of accounting for major airframe and
engine overhauls from the capitalize and
amortize method to the direct expense method.
Under the former method, these costs were
capitalized and amortized to maintenance
expense over the shorter of the life of the
overhaul or the remaining lease term. Under the
direct expense method, overhaul costs are
expensed as incurred. The Company believes
that the direct expense method is preferable
because it eliminates the judgment and
estimation needed to determine overhaul versus
repair allocations in maintenance activities.
Additionally, the Company’s approved
maintenance program for the majority of its
airframes now focuses more on shorter, but
more frequent, maintenance visits. Management
also believes that the direct expense method is
the predominant method used in the airline
industry. Accordingly, effective January 1, 2005,
the Company wrote off the net book value of its
previously capitalized airframe and engine
overhauls for all aircraft resulting in a charge of
$144.7 million pretax ($90.4 million after tax).
The Company does not believe disclosing the
effect of adopting the direct expense method on
net income for 2005 provides meaningful
information because of changes in the
Company’s maintenance program, including the
execution of a “power-by-the-hour” engine
maintenance agreement with a third party in late
2004.
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