Southwest Airlines 2014 Annual Report Download - page 99

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Amortization of property under capital leases is on a straight-line basis over the lease term and is
included in Depreciation and amortization 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. Assets constructed for others primarily consists of airport improvement
projects, once placed into service, in which the Company is considered the accounting owner of the
facilities, and such assets are amortized to estimated residual value over the term of the Company’s
lease or the expected life of the asset. See Note 4 for further information.
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.
During first quarter 2012 the Company changed the estimated retirement dates of several
737-300 and 737-500 aircraft based on revisions in the Company’s fleet plan. This change, which was
accounted for on a prospective basis, resulted in an acceleration of depreciation expense, since the
majority of these aircraft had previously been expected to retire in periods beyond 2012, but were
subsequently expected to be retired during 2012. The impact of this change on the year ended
December 31, 2012 was an increase to Depreciation expense of $12 million. Excluding the impact of
Profitsharing and income taxes, the change resulted a $6 million decrease to Net income and a $0.01
decrease to Basic and Diluted Net income per share for the year ended December 31, 2012.
During third quarter 2012 the Company changed the estimated residual values of its entire fleet
of owned 737-300 and 737-500 aircraft. This change was based on an agreement entered into during
July 2012, pursuant to which the Company will lease or sublease certain aircraft to Delta Air Lines,
Inc., and the resulting impact this transaction will have on how the Company manages the ultimate
retirement of its owned 737-300 and 737-500 aircraft. See Note 7 for further information on the lease/
sublease transaction. Based on the expected retirement dates and then current and expected future
market conditions related to its owned 737-300 and 737-500 aircraft, the Company reduced the
residual values of these aircraft from approximately ten percent of original cost to approximately two
percent of original cost. As this reduction in residual value was considered a change in estimate, it was
accounted for on a prospective basis, and thus the Company will record additional depreciation
expense over the remainder of the useful lives for each aircraft. The impact of this change on the year
ended December 31, 2012 was an increase to Depreciation expense of $34 million. Excluding the
impact of Profitsharing and income taxes, the change resulted an $18 million decrease to Net income
and a $0.02 decrease to Basic and Diluted Net income per share for the year ended December 31, 2012.
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 also has
“power-by-the-hour” agreements related to certain of its aircraft engines with external service
providers. Under these agreements, which the Company has determined effectively transfers the risk
and creates an obligation associated with the maintenance on such engines to the counterparty, expense
is recorded commensurate with each hour flown on an engine. In situations where the payments to the
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