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SOUTHWEST AIRLINES CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Southwest Airlines Co. (the “Company”) operates Southwest Airlines, a major domestic airline. The
Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries,
which include AirTran Holdings, LLC. On May 2, 2011 (the “acquisition date”), the Company acquired all of the
outstanding equity of AirTran Holdings, Inc. (“AirTran Holdings”), the former parent company of AirTran
Airways, Inc. (“AirTran Airways”). Throughout these Notes, the Company makes reference to AirTran, which is
meant to be inclusive of the following: (i) for periods prior to the acquisition date, AirTran Holdings and its
subsidiaries, including, among others, AirTran Airways; and (ii) for periods on and after the acquisition date,
AirTran Holdings, LLC, the successor to AirTran Holdings, and its subsidiaries, including among others, AirTran
Airways. The accompanying Consolidated Financial Statements include the results of operations and cash flows
for AirTran since May 2, 2011. See Note 2. All significant inter-entity 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 Comprehensive Income for the year ended December 31, 2012, the Company has
reclassified $17 million from Other to Unrealized losses on defined benefit plan items, net of deferred tax.
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 original maturities of three months or less when purchased 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 fair value.
As of December 31, 2013, no cash collateral deposits were either held by or provided by the Company to
its fuel hedge counterparties and the Company had provided cash collateral deposits totaling $32 million to its
interest rate hedge counterparties. As of December 31, 2012, the Company had no cash collateral deposits held
by or provided by the Company to its fuel hedge counterparties and cash collateral deposits totaling $89 million
to its interest rate hedge counterparties. Cash collateral amounts provided or held associated with fuel and
interest rate derivative instruments are not restricted in any way and earn interest income at an agreed upon rate
that approximates the rates earned on short-term securities issued by the U.S. Government. Depending on the fair
value of the Company’s fuel and interest rate derivative instruments, the amounts of collateral deposits held or
provided at any point in time can fluctuate significantly. See Note 10 for further information on these collateral
deposits and fuel derivative instruments.
Short-term and noncurrent investments
Short-term investments consist of investments with original maturities of greater than three months but less
than twelve months when purchased. These are primarily short-term securities issued by the U.S. Government
and certificates of deposit issued by domestic banks. All of these investments are classified as available-for-sale
securities and are stated at fair value, which approximates cost. For all short-term investments, at each reset
period or upon reinvestment, the Company accounts for the transaction as Proceeds from sales of short-term
investments for the security relinquished, and Purchases of short-investments for the security purchased, in the
accompanying Consolidated Statement of Cash Flows. Unrealized gains and losses, net of tax, if any, are
recognized in Accumulated other comprehensive income (loss) (“AOCI”) in the accompanying Consolidated
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