Southwest Airlines 2015 Annual Report Download - page 91

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ground property and equipment once the asset is placed in service, and 25 to 30 years for Assets
constructed for others. Residual values estimated for aircraft generally range from 2 to 20 percent, for
ground property and equipment generally range from 0 to 10 percent, and for Assets constructed for
others range from 17 to 25 percent. 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 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.
Based on a revision of the Company’s future firm aircraft order book with Boeing at the end of
December 2015, the Company changed the estimated retirement dates of many of its owned 737-300
and 737-500 aircraft. Previously, this fleet was estimated to retire by mid-2021; however, pursuant to
this change, the fleet and related parts are expected to be retired by mid-2018. See Note 4 for further
information on the Company’s future firm aircraft deliveries. This change in retirement dates is
considered a change in estimate. It has been accounted for on a prospective basis, and thus the
Company will record accelerated depreciation expense over the remainder of the useful lives for each
aircraft and its related parts. The impact of this change on the year ended December 31, 2015 was
immaterial. The impact of this change in estimate in 2016 is an approximate $89 million increase to
Depreciation and amortization expense.
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 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 transfer the risk and create 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 counterparty
do not sufficiently match the level of services received during the period, expense is recorded on a
straight-line basis over the term of the agreement based on the Company’s best estimate of expected
future aircraft utilization. For its engine maintenance contracts that do not transfer risk to the service
provider, the Company records expense on a time and materials basis when an engine repair event
takes place. 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.
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