Southwest Airlines 2010 Annual Report Download - page 75

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 for future travel and amounts due from counterparties associated with
fuel derivative instruments that have settled. The amount of allowance for doubtful accounts as of December 31,
2010, 2009, and 2008 was immaterial. In addition, the provision for doubtful accounts and write-offs for 2010,
2009, and 2008 were both immaterial.
Inventories
Inventories consist primarily of flight equipment expendable parts, materials, aircraft fuel, and supplies. All
of these items are carried at average cost, less an allowance for obsolescence. These items are generally charged
to expense when issued for use. The reserve for obsolescence was immaterial at December 31, 2010, 2009, and
2008. In addition, the Company’s provision for obsolescence and write-offs for 2010, 2009, and 2008 were each
immaterial.
Property and equipment
Property and equipment is stated at cost. Depreciation is provided by the straight-line method to estimated
residual values over periods generally ranging from 23 to 25 years for flight equipment and 5 to 30 years for
ground property and equipment once the asset is placed in service. Residual values estimated for aircraft
generally range from 10 to 15 percent and for ground property and equipment generally range from zero to 10
percent. See Note 3 for further information about a third quarter 2010 change in estimated residual values for the
Company’s remaining fleet of owned 737-300 and 737-500 aircraft. Property under capital leases and related
obligations are initially 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. Leasehold improvements generally are amortized on a straight-line basis over
the shorter of the estimated useful life of the improvement or the remaining term of the lease.
The Company evaluates its long-lived assets used in operations for impairment when events and
circumstances indicate that the undiscounted cash flows to be generated by that asset are less than the carrying
amounts of the asset and may not be recoverable. 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, and operating or cash flow losses associated with the use of the long-lived
asset. If an asset is deemed to be impaired, an impairment loss is recorded for the excess of the asset book value
in relation to its estimated fair value.
Aircraft and engine maintenance
The cost of scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are
charged to Maintenance materials and repairs expense as incurred. The Company has “power-by-the-hour”
agreements related to virtually all of its aircraft engines with an external service provider. Under these
agreements, which the Company has determined effectively transfer the risk associated with the maintenance on
such engines to the counterparty, expense is recorded commensurate with each hour flown on an engine.
Modifications that significantly enhance the operating performance 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 acquired leasehold rights to certain airport owned gates at Chicago’s
Midway International Airport and take-off and landing slots at certain domestic slot-controlled airports. These
assets have a combined cost basis of approximately $80 million, and are amortized on a straight-line basis over
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