Department of Transportation, Bureau of Transportation Statistics, Office of Airline
Issue Date: 11/24/97
Effective Date: 1/1/98
Section: 2.1, 14
In March 1995, the Financial Accounting Standards Board issued Financial Accounting Statement (FAS) No. 121, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of. This statement became effective for fiscal years beginning after December 15, 1995, with earlier implementation encouraged. Essentially, Statement No. 121 requires the recognition of an impairment loss when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This applies to long lived assets, certain identifiable intangibles, and goodwill related to those assets to be held or used; and for long lived assets and certain intangibles to be disposed of.
Section 2.1(a) of 14 CFR Part 241, Uniform System of Accounts and Reports for Large Certificated Air Carriers, states:
(a) The accounting provisions contained in this part are based on generally accepted accounting principles (GAAP). Persons subject to this part are authorized to implement, as prescribed by the Financial Accounting Standards Board, newly issued GAAP pronouncements until and unless the Director, Office of Airline Information (OAI), issues an Accounting Directive making an initial determination that implementation of a new pronouncement would adversely affect the Department's programs.
Large certificated air carriers' financial and traffic data are used to perform periodic updates to the Standard Foreign Fare Level (SFFL), which are based on changes in air carrier operating cost per available seat mile. These updates are mandated by the International Air Transportation Competition Act of 1979. The same cost data are also used in computing changes in the Standard Industry Fare Level (SIFL) and the international service mail rates.
Under Part 241 Section 6, Objective Classification of Balance Sheet Elements, Paragraph (c) of Account 1311, Allowance for Obsolescence - Spare Parts and Supplies states:
(c) Where changing conditions necessitate a revision or adjustment in rates of accrual, such revision or adjustment shall be made applicable to current and subsequent accounting periods and shall not be applied retroactively to prior accounting periods. Following retirement of airframe or aircraft engine types to which related, any balance remaining in this account shall be offset against related balances carried in balance sheet account 1300, Spare Parts and Supplies and the net cleared to profit and loss accounts 88.5 Capital Gains and Losses - Operating Property or 88.6 Capital Gains and Losses - Other. (emphasis added)
Similarly, any capital gains and losses relating to the retirement of airframes and aircraft engines, should also be recorded under nonoperating income and expense as a capital gain or loss related to operating property in Account 8188.5. A conflict has arisen under the provisions of FAS No. 121 in that the various independent public accounting firms engaged by the air carriers for their annual audit have permitted the classification of the impairment of long lived assets under FAS No. 121, as an element of "operating income and expense" in published air carrier annual reports to stockholders.
While the Department's general policy is to rely on GAAP accounting for its uniform accounting system of large certificated air carriers, the significance of the amount of impairment recognized under FAS No. 121 has adversely affected the Department's ability to establish reasonable adjustments to the standard fares and rates, as required by law. In recognition of this problem, Order 97-5-23, which established the final service mail rates for the period January 1 through June 30, 1997, addressed this problem in Footnote 2 (Page 3) by stating:
2We note that Delta's treatment in the Form 41 submissions that contained the restructuring charges as an operating expense is consistent with the standards set forth in Generally Accepted Accounting Principles (GAAP). Part 241 of our Uniform System of Accounts (14 CFR Part 241) requires the recognition of the gains and losses associated with the restructuring charges to be reported as nonoperating expenses on Form 41; however,
Section 2.1 of Part 241 allows air carriers to adopt new GAAP pronouncements isued by the Financial Accounting Standards Board unless otherwise directed by our Bureau of Transportation Statistics (BTS). Since ratemaking principles require that such charges continue to be treated as nonoperating expenses, we have asked BTS to instruct air carriers to include specific notes to their relevant Form 41 schedules, by entity, describing the nature and treatment of any future expenses, such as restructuring charges, that may be subject to exclusion from applicable ratemaking databases, as in the instant case.
Accordingly, it is the purpose of this directive to inform air carriers that impairments of long lived assets and long lived assets to be disposed of, which are recognized in accordance with the provisions of FAS No. 121, must be accounted for as capital gains and losses, which are included in nonoperating income and expense, as required by the Uniform System of Accounts in 14 CFR Part 241.
The impact of impairments recognized under FAS No. 121 must also be fully disclosed on Form 41 Schedule P-2, Notes to BTS Form 41 Report. At a minimum, disclosure must include a brief description of the impairment being recognized, category(ies) of assets that are affected, the specific account(s) on the Statement of Operations (Form 41 Schedules P-1.1 or P-1.2, as applicable) where the impairment is recorded along with the accompanying dollar amount. Those air carriers filing schedule p-1.2 must report the above information for each operating entity (domestic, atlantic, pacific, latin america) that is affected by the impairment.
This action is taken under authority delegated in 14 CFR 385.19(b).
If you have any questions, please contact Mr. Clay Moritz at (202) 366-4385.
Timothy E. Carmody