Southwest Airlines 2015 Annual Report Download - page 95

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Advertising
Advertising costs are charged to expense as incurred. Advertising and promotions expense for the
years ended December 31, 2015, 2014, and 2013 was $218 million, $207 million, and $208 million,
respectively, and is included as a component of Other operating expense in the accompanying
Consolidated Statement of Income.
Share-based Employee Compensation
The Company has share-based compensation plans covering certain Employees, including a plan that
also covers the Company’s Board of Directors. The Company accounts for share-based compensation
based on its grant date fair value. See Note 9 for further information.
Financial Derivative Instruments
The Company accounts for financial derivative instruments at fair value and applies hedge accounting
rules where appropriate. The Company utilizes various derivative instruments, including jet fuel, crude
oil, unleaded gasoline, and heating oil-based derivatives, to attempt to reduce the risk of its exposure to
jet fuel price increases. These instruments consist primarily of purchased call options, collar structures,
call spreads, put spreads, and fixed price swap agreements, and upon proper qualification are
accounted for as cash-flow hedges. The Company also has interest rate swap agreements to convert a
portion of its fixed-rate debt to floating rates and has swap agreements that convert certain floating-rate
debt to a fixed-rate. These interest rate hedges are appropriately designated as either fair value hedges
or as cash flow hedges.
Since the majority of the Company’s financial derivative instruments are not traded on a market
exchange, the Company estimates their fair values. Depending on the type of instrument, the values are
determined by the use of present value methods or option value models with assumptions about
commodity prices based on those observed in underlying markets. Also, since there is not a reliable
forward market for jet fuel, the Company must estimate the future prices of jet fuel in order to measure
the effectiveness of the hedging instruments in offsetting changes to those prices. Forward jet fuel
prices are estimated through utilization of a statistical-based regression equation with data from market
forward prices of like commodities. This equation is then adjusted for certain items, such as
transportation costs, that are stated in the Company’s fuel purchasing contracts with its vendors.
For the effective portion of settled fuel hedges, the Company records the associated gains or losses as a
component of Fuel and oil expense in the Consolidated Statement of Income. For amounts representing
ineffectiveness, as defined, or changes in fair value of derivative instruments for which hedge
accounting is not applied, the Company records any gains or losses as a component of Other (gains)
losses, net, in the Consolidated Statement of Income. Amounts that are paid or received in connection
with the purchase or sale of financial derivative instruments (i.e., premium costs of option contracts)
are classified as a component of Other (gains) losses, net, in the Consolidated Statement of Income in
the period in which the instrument settles or expires. All cash flows associated with purchasing and
selling derivatives are classified as operating cash flows in the Consolidated Statement of Cash Flows,
within Changes in certain assets and liabilities. See Note 10 for further information on hedge
accounting and financial derivative instruments.
The Company classifies its cash collateral provided to or held from counterparties in a “net”
presentation on the Consolidated Balance Sheet against the fair value of the derivative positions with
those counterparties. See Note 10 for further information.
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