Southwest Airlines 2004 Annual Report Download - page 50

SOUTHWEST AIRLINES CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. Summary of SigniÑcant Accounting Policies capital leases is on a straight-line basis over the lease
term and is included in depreciation expense.
Basis Of Presentation. Southwest Airlines Co.
In estimating the lives and expected residual values
(Southwest) is a major domestic airline that provides
of its aircraft, the Company primarily has relied upon
point-to-point, low-fare service. The Consolidated Fi-
actual experience with the same or similar aircraft types
nancial Statements include the accounts of Southwest
and recommendations from Boeing, the manufacturer of
and its wholly owned subsidiaries (the Company). All
the Company's aircraft. Subsequent revisions to these
signiÑcant intercompany balances and transactions have
estimates, which can be signiÑcant, could be caused by
been eliminated. The preparation of Ñnancial statements
changes to the Company's maintenance program,
in conformity with accounting principles generally ac-
changes in utilization of the aircraft (actual Öight hours
cepted in the United States (GAAP) requires manage-
or cycles during a given period of time), governmental
ment to make estimates and assumptions that aÅect the
regulations on aging aircraft, changing market prices of
amounts reported in the Ñnancial statements and ac-
new and used aircraft of the same or similar types, etc.
companying notes. Actual results could diÅer from these
The Company evaluates its estimates and assumptions
estimates.
each reporting period and, when warranted, adjusts
Cash And Cash Equivalents. Cash in excess of these estimates and assumptions. Generally, these ad-
that necessary for operating requirements is invested in justments are accounted for on a prospective basis
short-term, highly liquid, income-producing invest- through depreciation and amortization expense, as re-
ments. Investments with maturities of three months or quired by GAAP.
less are classiÑed as cash and cash equivalents, which
When appropriate, the Company evaluates its
primarily consist of certiÑcates of deposit, money mar-
long-lived assets used in operations for impairment.
ket funds, and investment grade commercial paper
Impairment losses would be recorded when events and
issued by major corporations and Ñnancial institutions.
circumstances indicate that an asset might be impaired
Cash and cash equivalents are stated at cost, which
and the undiscounted cash Öows to be generated by that
approximates market value.
asset are less than the carrying amounts of the asset.
Inventories. Inventories of Öight equipment ex- Factors that would indicate potential impairment in-
pendable parts, materials, and supplies are carried at clude, but are not limited to, signiÑcant decreases in the
average cost. These items are generally charged to market value of the long-lived asset(s), a signiÑcant
expense when issued for use. change in the long-lived asset's physical condition,
operating or cash Öow losses associated with the use of
Property And Equipment. Depreciation is pro- the long-lived asset, etc. While the airline industry as a
vided by the straight-line method to estimated residual whole has experienced many of these indicators, South-
values over periods generally ranging from 20 to west has continued to operate all of its aircraft and
25 years for Öight equipment and 5 to 30 years for continues to experience positive cash Öow.
ground property and equipment once the asset is placed
in service. Residual values estimated for aircraft are Aircraft And Engine Maintenance. The cost of
15 percent, except for 737-200 aircraft, which were scheduled engine inspections and repairs and routine
retired from the Company's Öeet in January 2005. The maintenance costs for all aircraft and engines are
estimated residual value for these aircraft is two percent, charged to maintenance expense as incurred. For the
based on current market values. Residual value percent- Company's 737-200, 737-300, and 737-500 aircraft
ages for ground property and equipment range from Öeet types, scheduled airframe inspections and repairs,
zero to 10 percent. Property under capital leases and known as D checks, are generally performed every ten
related obligations are recorded at an amount equal to years. Costs related to D checks are capitalized and
the present value of future minimum lease payments amortized over the estimated period beneÑted, presently
computed on the basis of the Company's incremental the least of ten years, the time until the next D check,
borrowing rate or, when known, the interest rate im- or the remaining life of the aircraft. ModiÑcations that
plicit in the lease. Amortization of property under signiÑcantly enhance the operating performance or ex-
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