Southwest Airlines 2008 Annual Report Download - page 67

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
1. Summary of Significant Accounting Policies
Basis of Presentation
Southwest Airlines Co. (the Company) is a major
domestic airline that provides point-to-point, low-fare
service. The Consolidated Financial Statements
include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The
preparation of financial statements in conformity with
generally accepted accounting principles 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.
Certain prior period amounts have been
reclassified to conform to the current presentation. In
the Consolidated Statement of Income for the years
ended December 31, 2007 and 2006, jet fuel sales
taxes and jet fuel excise taxes are both presented as a
component of “Fuel and oil” instead of being included
in “Other operating expenses” as previously presented.
For the years ended December 31, 2007 and 2006, the
Company reclassified a total of $154 million and $146
million, respectively, in jet fuel sales taxes and jet fuel
excise taxes as a result of this change in presentation.
For the year ended December 31, 2008, “Fuel and oil”
includes $187 million in jet fuel sales taxes and jet fuel
excise taxes.
Cash and cash equivalents
Cash in excess of that necessary for operating
requirements is invested in short-term, highly liquid,
income-producing investments. Investments with
maturities of three months or less are classified as cash
and cash equivalents, which primarily consist of
certificates of deposit, money market funds, and
investment grade commercial paper issued by major
corporations and financial institutions. Cash and cash
equivalents are stated at cost, which approximates
market value.
Short-term investments
Short-term investments consist of investments
with maturities of greater than three months but less
than twelve months. These are primarily money
market funds and investment grade commercial paper
issued by major corporations and financial institutions,
short-term securities issued by the U.S. Government,
and certain auction rate securities with auction reset
periods of less than 12 months for which auctions have
been successful or are expected to be successful within
the following 12 months. All of these investments are
classified as available-for-sale securities and are stated
at fair value, except for $17 million in auction rate
securities that are classified as trading securities as
discussed in Note 11. For all short-term investments, at
each reset period, the Company accounts for the
transaction as “Proceeds from sales of short-term
investments” for the security relinquished, and a
“Purchase of short-investments” for the security
purchased, in the accompanying Consolidated
Statement of Cash Flows. Unrealized gains and losses,
net of tax, are recognized in “Accumulated other
comprehensive income (loss)” in the accompanying
Consolidated Balance Sheet. Realized net gains on
specific investments, which totaled $13 million in
2008, $17 million in 2007, and $17 million in 2006,
are reflected in “Interest income” in the accompanying
Consolidated Statement of Income.
The Company’s cash and cash equivalents and
short-term investments as of December 31, 2007
included $2.0 billion in collateral deposits received
from a counterparty of the Company’s fuel derivative
instruments. As of December 31, 2008, the Company
did not hold any cash collateral deposits from
counterparties, but had $240 million of its cash on
deposit with a counterparty. Although amounts
provided or held are not restricted in any way,
investment earnings from these deposits generally
must be remitted back to the entity that provided the
deposit. Depending on the fair value of the Company’s
fuel derivative instruments, the amounts of collateral
deposits held or provided at any point in time can
fluctuate significantly. Therefore, the Company
generally excludes cash collateral deposits held, but
includes deposits provided, in its decisions related to
long-term cash planning and forecasting. See Note 10
for further information on these collateral deposits and
fuel derivative instruments.
Accounts and other receivables
Accounts and other receivables are carried at cost.
They primarily consist of amounts due from credit
card companies associated with sales of tickets
48