Southwest Airlines 2007 Annual Report Download - page 60

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 primarily has relied upon
actual experience with the same or similar aircraft types,
recommendations from Boeing, the manufacturer of the
Company’s aircraft, and current fair values in markets for
similar used aircraft. Subsequent revisions to these esti-
mates, which can be significant, could be caused by
changes to the Company’s maintenance program, mod-
ifications or improvements to the aircraft, 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 and
amortization expense, as required by GAAP.
When appropriate, the Company evaluates its long-
lived assets used in operations for impairment. Impair-
ment losses would be recorded when events and circum-
stances 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. The
Company continues to experience positive cash flow and
operate all of its aircraft, and there have been no signif-
icant impairments of long-lived assets recorded during
2005, 2006, or 2007.
Aircraft and Engine Maintenance
The cost of scheduled inspections and repairs and
routine maintenance costs for all aircraft and engines are
charged to maintenance expense as incurred. Modifica-
tions that significantly enhance the operating perfor-
mance or extend the useful lives of aircraft or engines
are capitalized and amortized over the remaining life of
the asset.
Intangible Assets
Intangible assets primarily consist of leasehold
rights to airport owned gates. These assets are amortized
on a straight-line basis over the expected useful life of the
lease, approximately 20 years. The accumulated amorti-
zation related to the Company’s intangible assets at
December 31, 2007, and 2006, was $9 million and
$5 million, respectively. The Company periodically
assesses its intangible assets for impairment in accordance
with SFAS 142, Goodwill and Other Intangible Assets;
however, no impairments have been noted.
Revenue Recognition
Tickets sold are initially deferred as “Air traffic
liability”. Passenger revenue is recognized when trans-
portation is provided. “Air traffic liability” primarily
represents tickets sold for future travel dates and esti-
mated refunds and exchanges of tickets sold for past travel
dates. The majority of the Company’s tickets sold are
nonrefundable. Tickets that are sold but not flown on the
travel date (whether refundable or nonrefundable) can be
reused for another flight, up to a year from the date of
sale, or refunded (if the ticket is refundable). A small
percentage of tickets (or partial tickets) expire unused.
The Company estimates the amount of future refunds and
exchanges, net of forfeitures, for all unused tickets once
the flight date has passed. These estimates are based on
historical experience over many years. The Company and
many members of the airline industry have consistently
applied this accounting method to estimate revenue from
forfeited tickets at the date travel is provided. Estimated
future refunds and exchanges included in the air traffic
liability account are constantly evaluated based on sub-
sequent refund and exchange activity to validate the
accuracy of the Company’s revenue recognition method
with respect to forfeited tickets.
Events and circumstances outside of historical fare
sale activity or historical Customer travel patterns can
result in actual refunds, exchanges or forfeited tickets
differing significantly from estimates; however, these
differences have historically not been material. Additional
factors that may affect estimated refunds, exchanges, and
forfeitures include, but may not be limited to, the Com-
pany’s refund and exchange policy, the mix of refundable
and nonrefundable fares, and fare sale activity. The
Company’s estimation techniques have been consistently
applied from year to year; however, as with any estimates,
actual refund and exchange activity may vary from esti-
mated amounts.
The Company is also required to collect certain
taxes and fees from Customers on behalf of government
agencies and remit these back to the applicable
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)