Alaska Airlines and Horizon Air 2012 Annual Report Download - page 148

$16 million, $16 million, and $16 million during
the years ended December 31, 2012, 2011, and
2010, respectively.
Derivative Financial Instruments
The Company’s operations are significantly
impacted by changes in aircraft fuel prices and
interest rates. In an effort to manage our
exposure to these risks, the Company
periodically enters into fuel and interest rate
derivative instruments. These derivative
instruments are recognized at fair value on the
balance sheet and changes in the fair value is
recognized in AOCL or in the consolidated
statements of operations, depending on the
nature of the instrument.
The Company does not hold or issue derivative
fuel hedge contracts for trading purposes and
does not apply hedge accounting. For cash flow
hedges related to our interest rate swaps, the
effective portion of the derivative represents the
change in fair value of the hedge that offsets the
change in fair value of the hedged item. To the
extent the change in the fair value of the hedge
does not perfectly offset the change in the fair
value of the hedged item, the ineffective portion
of the hedge is immediately recognized in
interest expense.
Fair Value Measurements
Accounting standards define fair value as the
exchange price that would be received for an
asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for
the asset or liability in an orderly transaction
between market participants on the
measurement date. The standards also establish
a fair value hierarchy, which requires an entity to
maximize the use of observable inputs and
minimize the use of unobservable inputs when
measuring fair value. There are three levels of
inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for
identical assets or liabilities.
Level 2—Observable inputs other than Level 1
prices such as quoted prices for similar assets
or liabilities, quoted prices in markets that are
not active, or other inputs that are observable or
can be corroborated by observable market data
for substantially the full term of the assets or
liabilities.
Level 3—Unobservable inputs that are supported
by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
The Company has elected not to use the Fair
Value Option for non-financial instruments, and
accordingly those assets and liabilities are
carried at amortized cost. For financial
instruments, those assets and liabilities are
carried at fair value and are determined based
on the market approach or income approach
depending upon the level of inputs used.
Income Taxes
The Company uses the asset and liability
approach for accounting and reporting income
taxes. Deferred tax assets and liabilities are
recognized for future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets
and liabilities and their respective tax bases, and
for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to
taxable income in the years in which those
temporary differences are expected to be
recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is
recognized in the period that includes the
enactment date. A valuation allowance would be
established, if necessary, for the amount of any
tax benefits that, based on available evidence,
are not expected to be realized. The Company
accounts for unrecognized tax benefits in
accordance with the accounting standards.
Stock-Based Compensation
Accounting standards require companies to
recognize as expense the fair value of stock
options and other equity-based compensation
issued to employees as of the grant date. These
standards apply to all stock awards that the
Company grants to employees as well as the
Company’s Employee Stock Purchase Plan
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