Southwest Airlines 1999 Annual Report Download - page 33

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DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes purchased crude oil
call options and fixed price swap agreements to hedge a portion of its exposure to fuel
price increases. The cost of purchased crude oil call options and gains and losses on fixed
price swap agreements, including those terminated or settled early, are deferred and
charged or credited to fuel expense in the same month that the underlying fuel being
hedged is used. The Company recognized gains of $14.8 million in 1999 from hedging
activities. The gains are recorded as a reduction of fuel and oil expense. Gains and losses
on hedging transactions for 1998 and 1997 were not material.
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. In 1999, the FASB issued SFAS 137, which delayed
the effective date of SFAS 133 by one year. SFAS 133 is required to be adopted in years
beginning after June 15, 2000. SFAS 133 permits early adoption as of the beginning of
any fiscal quarter after its issuance. The Company expects to adopt the new Statement
effective January 1, 2001. SFAS 133 will require the Company to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the change in fair value
of the hedged assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative’s change in fair value will be immediately recognized in
earnings. The Company has not yet determined what the effect of SFAS 133 will be on the
earnings and financial position of the Company.
RECENT ACCOUNTING DEVELOPMENTS In December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin 101 (SAB 101), Revenue
Recognition in Financial Statements. This statement gives specific guidance and
clarification on the conditions that must be met before an entity may recognize revenue.
SAB 101 must be adopted no later than the first fiscal quarter of the fiscal year beginning
after December 15, 1999. The Company will adopt SAB 101 effective January 1, 2000,
and change its method of accounting used to recognize revenue for the sale of flight
segment credits to companies participating in its Rapid Rewards frequent flyer program.
F13