Southwest Airlines 2005 Annual Report Download - page 51

SOUTHWEST AIRLINES CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
1. Summary of Significant Accounting Policies Inventories. Inventories of flight equipment ex-
pendable parts, materials, and supplies are carried at
Basis Of Presentation. Southwest Airlines Co. average cost. These items are generally charged to
(Southwest) is a major domestic airline that provides expense when issued for use.
point-to-point, low-fare service. The Consolidated Fi-
Property And Equipment. Depreciation is pro-
nancial Statements include the accounts of Southwest
vided by the straight-line method to estimated residual
and its wholly owned subsidiaries (the Company). All
values over periods generally ranging from 23 to
significant intercompany balances and transactions have
25 years for flight equipment and 5 to 30 years for
been eliminated. The preparation of financial state-
ground property and equipment once the asset is placed
ments in conformity with accounting principles gener-
in service. Residual values estimated for aircraft are
ally accepted in the United States (GAAP) requires
15 percent and for ground property and equipment
management to make estimates and assumptions that
range from zero to 10 percent. Property under capital
affect the amounts reported in the financial statements
leases and related obligations are recorded at an amount
and accompanying notes. Actual results could differ
equal to the present value of future minimum lease
from these estimates.
payments computed on the basis of the Company's
Certain prior period amounts have been reclassified incremental borrowing rate or, when known, the inter-
to conform to the current presentation. In the Consoli- est rate implicit in the lease. Amortization of property
dated Balance Sheet as of December 31, 2004, the under capital leases is on a straight-line basis over the
Company has reclassified certain amounts as ""Short- lease term and is included in depreciation expense.
term investments'', that were previously classified as
In estimating the lives and expected residual values
""Cash and cash equivalents.'' In the Consolidated State-
of its aircraft, the Company primarily has relied upon
ment of Cash Flows for 2004 and 2003, changes in the
actual experience with the same or similar aircraft types
amounts of ""Short-term investments'' are classified as
and recommendations from Boeing, the manufacturer of
cash flows from investing activities. In the Consolidated
the Company's aircraft. Subsequent revisions to these
Statement of Income for 2004 and 2003, amounts
estimates, which can be significant, could be caused by
previously classified as ""Agency commissions'' are now
changes to the Company's maintenance program, modi-
classified in ""Other operating expenses.''
fications or improvements to the aircraft, changes in
Cash And Cash Equivalents. Cash in excess of utilization of the aircraft (actual flight hours or cycles
that necessary for operating requirements is invested in during a given period of time), governmental regula-
short-term, highly liquid, income-producing invest- tions on aging aircraft, changing market prices of new
ments. Investments with maturities of three months or and used aircraft of the same or similar types, etc. The
less are classified as cash and cash equivalents, which Company evaluates its estimates and assumptions each
primarily consist of certificates of deposit, money mar- reporting period and, when warranted, adjusts these
ket funds, and investment grade commercial paper estimates and assumptions. Generally, these adjustments
issued by major corporations and financial institutions. are accounted for on a prospective basis through depre-
Cash and cash equivalents are stated at cost, which ciation and amortization expense, as required by
approximates market value. GAAP.
Short-Term Investments. Short-term investments When appropriate, the Company evaluates its
consist of auction rate securities with auction reset long-lived assets used in operations for impairment.
periods of less than 12 months. These investments are Impairment losses would be recorded when events and
classified as available-for-sale securities and are stated at circumstances indicate that an asset might be impaired
fair value. Unrealized gains and losses, net of tax, are and the undiscounted cash flows to be generated by that
recognized in ""Accumulated other comprehensive in- asset are less than the carrying amounts of the asset.
come (loss)'' in the accompanying Consolidated Bal- Factors that would indicate potential impairment in-
ance Sheet. Realized gains and losses are reflected in clude, but are not limited to, significant decreases in the
""Interest income'' in the accompanying Consolidated market value of the long-lived asset(s), a significant
Income Statement. change in the long-lived asset's physical condition,
32