Southwest Airlines 2002 Annual Report Download - page 52

SOUTHWEST AIRLINES CO. 2002 10-K | 33
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER 31, 2002
1. Summary of Significant Accounting Policies
Basis of Presentation. Southwest Airlines
Co. (Southwest) is a major domestic airline
that provides predominantly shorthaul, high-
frequency, point-to-point, low-fare service. The
Consolidated Financial Statements include
the accounts of Southwest and its wholly
owned subsidiaries (the Company). All signif-
icant intercompany balances and transactions
have been eliminated. The preparation of
financial statements in conformity with
accounting principles generally accepted in
the United States (GAAP) requires
management to make estimates and
assumptions that affect the amounts reported
in the financial statements and accompanying
notes. Actual results could differ from these
estimates.
Cash and Cash Equivalents. Cash
equivalents consist of certificates of deposit,
money market funds, and investment grade
commercial paper issued by major corpor-
ations and financial institutions. Cash and
cash equivalents are highly liquid and
generally have original maturities of three
months or less. Cash and cash equivalents
are carried at cost, which approximates
market value.
Inventories. Inventories of flight equipment
expendable parts, materials, and supplies are
carried at average cost. These items are
generally charged to expense when issued for
use.
Property and Equipment. Depreciation is
provided by the straight-line method to esti-
mated residual values over periods ranging
from 20 to 25 years for flight equipment and
3 to 30 years for ground property and
equipment once the asset is placed in
service. Property under capital leases and
related obligations are recorded at an amount
equal to the present value of future minimum
lease payments computed on the basis of the
Company’s incremental borrowing rate or,
when known, the interest rate implicit in the
lease. Amortization of property under capital
leases is on a straight-line basis over the
lease term and is included in depreciation
expense.
In estimating the lives and expected
residual values of its aircraft, the Company
has primarily relied upon actual experience
with the same or similar aircraft types and
recommendations from Boeing, the
manufacturer of the Company’s aircraft.
Subsequent revisions to these estimates,
which can be significant, could be caused by
changes to the Company’s maintenance
program, changes in utilization of the aircraft
(actual flight hours or cycles during a given
period of time), governmental regulations on
aging aircraft, changing market prices of new
and used aircraft of the same or similar types,
etc. The Company evaluates its estimates and
assumptions each reporting period and, when
warranted, adjusts these estimates and
assumptions. Generally, these adjustments
are accounted for on a prospective basis
through depreciation expense, as required by
GAAP.
The Company periodically evaluates its
long-lived assets used in operations for
impairment. Impairment losses would be
recorded when events and circumstances
indicate that an asset might be impaired and
the undiscounted cash flows to be generated
by that asset are less than the carrying
amounts of the asset. Factors that would
indicate potential impairment include, but are
not limited to, significant decreases in the
market value of the long-lived asset(s), a
significant change in the long-lived asset’s
physical condition, operating or cash flow
losses associated with the use of the long-
lived asset, etc. While the airline industry as a
whole has experienced many of these