Lecture15_Spring_2009

Lecture15_Spring_2009 - Lecture 15 Spring 2009 Property,...

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Unformatted text preview: Lecture 15 Spring 2009 Property, Plant and Equipment PP&E Accounting for Goals of Today’s Class • Review of Depreciation – Accelerated Depreciation (Declining Balance) – Change in Depreciation • Delta Case Study Declining Balance Depreciation Method Modifies the normal straight­line rate to accelerate depreciation Commonly 2 times the straight­line rate (double­declining balance) Or 1.5 times the straight­line rate (150%­declining balance) Straight­line annual percentage rate = 100% / useful years 100% / 4 years = 25% Double­declining will use 2 x 25% = 50% 150%­declining will use 1.5 x 25% = 37.5% Begins with Book Value and ends with Salvage Value Double­Declining Balance Method Year Book Value, Beg Straight­ Line % 1 20,000 25% 50% 10,000 10,000 2 10,000 25% 50% 5,000 5,000 3 5,000 25% 50% 2,500 1,000 2,500 4,000 25% 50% 0 4 200% of SL Depr. Expense Too low—need to stop at Salvage Value Book Value, End What happens when estimates change? • On January 1, 20x1, a firm acquired a depreciable asset at a cost of $160,000. The estimated useful life of the asset and its salvage value were determined to be 20 years and $10,000 respectively. The firms uses the straight line method for depreciation. • What is annual depreciation? • (160,000-10,000)/20 = 7,500 • At the end of 20x10 (10 years later) what would the balance sheet look like? Equipment Accumulated Depreciation Book Value of Equipment 160,000 75,000 85,000 What happens when estimates change? • • • • • • At the start of 20x11 the firm revises its estimate of the useful life, determining that 5 years are left (instead of 10 from the original estimate). What do we do? We do NOT make retro-active adjustments to the financial statements. That is, we do not restate depreciation for the last 10 years to 10,000 per year [ i.e.,(160,000-10,000)/15] which would give a book value of 60,000 at the start of 20x11. We simply revise the depreciation charge going forward. Thus, for the remaining 5 years annual depreciation is: [(160,000-75,000)-10,000]/5 = 15,000 • This is called the prospective method and it is used to account for all changes in the estimates used to derive the amounts reported in the financial statements. But it is NOT used if a firm changes accounting method (i.e., straight line to accelerated). An Example for Changes in Estimates Note extracted from Delta’s 1994 Annual Report Depreciation and Amortization -- Prior to April 1, 1993, substantially all of the Company's flight equipment was being depreciated on a straight-line basis to residual values (10% of cost) over a 15-year period from the dates placed in service. As a result of a review of its fleet plan, effective April 1, 1993, the Company increased the estimated useful lives of substantially all of its flight equipment. Flight equipment that was not already fully depreciated is being depreciated on a straight-line basis to residual values (5% of cost) over a 20-year period from the dates placed in service. The effect of this change was a $34 million decrease in depreciation expense and a $22 million ($0.44 per common share) decrease in net loss for fiscal 1993. Ground property and equipment are depreciated on a straight-line basis over their estimated service lives, which range from three years to thirty years. Things to note about depreciation Firms can change their depreciation methods or assumptions Changes happen prospectively (i.e., going forward) Firm X has a truck purchased for $20,000; salvage value is $4,000 Estimated useful life is 4 years [20,000 (BV) ­ $4,000 (SV)] / 4 $4,000 Truck $20,000 Accum Depr: Truck $4,000 Depr Expense $4,000 Things to note about depreciation Firms can change their depreciation methods or assumptions Changes happen prospectively (i.e., going forward) Firm X has a truck purchased for $20,000; salvage value is $4,000 Estimated useful life is 4 years [20,000 (BV) ­ $4,000 (SV)] / 4 $4,000 Truck $20,000 Accum Depr: Truck $4,000 $2,400 After first year of use, Firm X adjusts estimate of useful life to total of 6 years [16,000 (BV) ­ $4,000 (SV)] / 5 remaining years $2,400 Depr Expense $4,000 $2,400 Property, Plant and Equipment in the Cash Flow Statement (1) or (2) Operations: Net Income Net Income (as reported) + Dep'n Expense + Dep'n Expense + W rite-down Loss + W rite-down Loss + Loss on Disposal – Gain on Disposal + Loss on Disposal – Gain on Disposal Cash from Operations Cash from Operations Investing: Cash proceeds from Disposals/Retirements Cash proceeds from Disposals/Retirements NET of Acquisitions = NBV + Gain – Loss OR Cash used for Acquisitions Cash used NET of Disposals/Retirements Cash from Investing Cash from Investing Disclosure Firms are required to make the following disclosures with respect to their PPE: • The carrying values (i.e., net book values) of the major classes of PPE • The amount of accumulated depreciation (by major classes or in total) • The method(s) used to compute depreciation. • The amount of interest capitalized in PPE for the period. Some firms will also disclose the following information to the SEC on Form 10-K: • Schedule V - A reconciliation of the beginning and ending balances of the major classes of PPE (Gross). This separately identifies changes caused by additions, retirements, adjustments, and any other changes. • Schedule VI - A reconciliation of the beginning and ending balances of Accumulated Depreciation for the major classes of PPE. This separately lists additions charged to cost and expenses, retirements, and any other changes. Property, Plant and Equipment PP&E Accounting for Delta - Questions 1. 2. 3. 4. 5. 6. How much in new flight equipment and ground property, plant and equipment was acquired by Delta in fiscal 2005? How much cash was used for the purchase of the new flight equipment and ground property, plant and equipment in fiscal 2005? How much flight equipment was written down in fiscal 2005? What was the historical cost of the flight equipment which was sold during fiscal 2005? What were the cash proceeds in 2005 from the sale of the flight equipment? Where does the gain or loss from that sale show up on the Statement of Cash Flows? ASSETS (in millions) CURRENT ASSETS: Cash and cash equivalents Short-term investments Restricted cash Accounts receivable, net of an allowance for uncollectible accounts of $41 and $38 at December 31, 2005 and 2004, respectively Expendable parts and supplies inventories, net of an allowance for obsolescence of $201 and $184 at December 31, 2005 and 2004, respectively Deferred income taxes, net Prepaid expenses and other Total current assets PROPERTY AND EQUIPMENT: Flight equipment Accumulated depreciation Flight equipment, net Flight and ground equipment under capital leases Accumulated amortization Flight and ground equipment under capital leases, net Ground property and equipment Accumulated depreciation Ground property and equipment, net Advance payments for equipment Total property and equipment, net OTHER ASSETS: Goodwill Operating rights and other intangibles, net of accumulated amortization of $189 and $185 at December 31, 2005 and 2004, respectively Restricted investments for Boston airport terminal project Other noncurrent assets Total other assets Total assets 2005 $ 2,008 — 870 819 172 99 512 4,480 18,591 (6,621 ) 11,970 535 (213 ) 322 4,791 (2,847 ) 1,944 44 14,280 227 74 46 932 1,279 $ 20,039 2004 $ 1,463 336 348 696 203 35 525 3,606 20,627 (6,612 ) 14,015 717 (364 ) 353 4,805 (2,706 ) 2,099 89 16,556 227 79 127 1,206 1,639 $ 21,801 LIABILITIES AND SHAREOWNERS’ DEFICIT (in millions, except share data) 2005 2004 CURRENT LIABILITIES: Current maturities of long-term debt and capital leases $ 1,186 $ 893 Accounts payable, deferred credits and other accrued liabilities 1,407 1,560 Air traffic liability 1,712 1,567 Taxes payable 525 499 Accrued salaries and related benefits 435 1,151 Accrued rent — 271 Total current liabilities 5,265 5,941 NONCURRENT LIABILITIES: Long-term debt and capital leases 6,557 12,507 Long-term debt issued by Massachusetts Port Authority — 498 Postretirement benefits — 1,771 Accrued rent — 633 Pension and related benefits — 5,099 Other 299 340 Total noncurrent liabilities 6,856 20,848 DEFERRED CREDITS: Deferred gains on sale and leaseback transactions — 376 Deferred revenue and other credits 186 155 Total deferred credits 186 531 17,380 — LIABILITIES SUBJECT TO COMPROMISE (Note 1) COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 5, 8, 9 and 10) EMPLOYEE STOCK OWNERSHIP PLAN PREFERRED STOCK: Series B ESOP Convertible Preferred Stock, $1.00 par value, $72.00 stated and liquidation value; 4,667,568 and 5,417,735 shares issued and outstanding at December 31, 2005 and 2004, respectively 336 390 Unearned compensation under employee stock ownership plan (89) (113 ) Total Employee Stock Ownership Plan Preferred Stock 247 277 SHAREOWNERS’ DEFICIT: Common stock: $0.01 par value, 900,000,000 shares authorized, 202,081,648 shares issued at December 31, 2005; and $1.50 par value, 450,000,000 shares authorized, 190,745,445 shares issued at December 31, 2004 2 286 Additional paid-in capital 1,635 3,052 Accumulated deficit (8,209) (4,373 ) Accumulated other comprehensive loss (2,722) (2,358 ) Treasury stock at cost, 12,738,630 shares at December 31, 2005, and 50,915,002 shares at December 31, 2004 (601) (2,403 ) Total shareowners’ deficit (9,895) (5,796 ) Total liabilities and shareowners’ deficit $20,039 $21,801 (in millions, except per share data) OPERATING REVENUES: Passenger: Mainline Regional affiliates Cargo Other, net Total operating revenues OPERATING EXPENSES: Salaries and related costs Aircraft fuel Depreciation and amortization Contracted services Contract carrier arrangements Landing fees and other rents Aircraft maintenance materials and outside repairs Aircraft rent Passenger commissions and other selling expenses Passenger service Impairment of intangible assets Restructuring, asset writedowns, pension settlements and related items, net Appropriations Act reimbursements Other Total operating expenses OPERATING LOSS OTHER INCOME (EXPENSE): Interest expense (contractual interest expense equals $1,169 for the year ended December 31, 2005) Interest income (Loss) gain from sale of investments, net Gain from extinguishment of debt, net Fair value adjustments of SFAS 133 derivatives Miscellaneous (expense) income, net Total other expense, net LOSS BEFORE REORGANIZATION ITEMS, NET REORGANIZATION ITEMS, NET (Note 1) LOSS BEFORE INCOME TAXES INCOME TAX BENEFIT (PROVISION) NET LOSS PREFERRED STOCK DIVIDENDS NET LOSS ATTRIBUTABLE TO COMMON SHAREOWNERS BASIC AND DILUTED LOSS PER SHARE 2005 $ 11,399 3,225 524 1,043 16,191 2004 $ 10,880 2,910 500 945 15,235 2003 $ 10,393 2,629 467 819 14,308 5,058 4,271 1,273 1,096 1,318 863 776 541 948 345 — 888 — 815 18,192 (2,001) 6,338 2,924 1,244 999 932 875 681 716 939 349 1,875 (41) — 712 18,543 (3,308) 6,342 1,938 1,230 886 784 858 630 727 911 325 — 268 (398) 592 15,093 (785) $ (1,032) 59 (1) — 1 (1) (974) (2,975) (884) (3,859) 41 (3,818) (18) (3,836) $ (824) 37 123 9 (31) 2 (684) (3,992) — (3,992) (1,206) (5,198) (19) (5,217) $ (757) 36 321 — (9) 5 (404) (1,189) — (1,189) 416 (773) (17) (790) $ (23.75) $ (41.07) $ (6.40) (in millions) Cash Flows From Operating Activities: Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Asset and other writedowns Depreciation and amortization Deferred income taxes Pension, postretirement and postemployment expense in excess of (less than) payments Reorganization items Gain on extinguishment of debt, net Dividends in excess of income from equity method investments Loss (gain) from sale of investments, net Changes in certain current assets and liabilities: Decrease (increase) in short-term investments, net (Increase) decrease in receivables Increase in prepaid expenses and other current assets Increase in air traffic liability Increase (decrease) in other payables, deferred credits and accrued liabilities Other, net Net cash provided by (used in) operating activities 2005 $ 14 1,273 (41 896 884 (9 — 1 336 (122 (67 145 667 16 175 Cash Flows From Investing Activities: Property and equipment additions: Flight equipment, including advance payments Ground property and equipment, including technology Decrease in restricted investments related to the Boston airport terminal project Proceeds from sales of flight equipment Proceeds from sale of wholly owned subsidiary, net of cash remaining with subsidiary Proceeds from sales of investments Increase in restricted cash Other, net Net cash used in investing activities (570 (244 81 425 417 1 (578 8 (460 Cash Flows From Financing Activities: Proceeds from long-term obligations Proceeds from DIP financing Payments on long-term debt and capital lease obligations Payments on DIP financing Make-whole payments on extinguishment of ESOP Notes Payment on termination of accounts receivable securitization Cash dividends Other, net Net cash provided by financing activities Net Increase (Decrease) In Cash and Cash Equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (3,818 295 2,250 (1,615 (50 — — — (50 830 $ 545 1,463 2,008 2004 ) $ (5,198 1,915 1,244 1,206 (121 — (9 — (123 ) ) 204 (27 (151 259 (233 26 (1,008 ) ) ) ) (373 (387 159 234 — 146 (115 1 (335 ) ) 2,123 — (1,452 — — — — (35 636 ) ) ) $ (707 2,170 1,463 2003 ) $ (773 ) 47 1,230 (416 ) 532 — — 30 (321 ) ) ) ) (311 ) 317 (90 ) 38 (276 ) 237 244 ) ) ) ) ) ) (382 (362 131 15 — 325 (102 13 (362 ) ) 1,774 — (802 — (15 (250 (19 (140 548 ) ) ) $ 430 1,740 2,170 ) ) ) ) ) ) ) ) ) DELTA AIR LINES, INC. FINANCIAL REVIEW from Management's Discussion and Analysis of Financial Condition and Results of Operations, for the year ended December 31, 2005 Cash used for flight equipment additions, including advanced deposits, totaled $570 million. This includes $417 million we paid to purchase 11 B737-800 aircraft that we sold to a third party immediately after those aircraft were delivered to us by the manufacturer. This also includes approximately $66 million in improvements to our aircraft. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the year ended December 31, 2005 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Long-Lived Assets We record our property and equipment at cost and depreciate or amortize these assets on a straight -line basis to their estimated residual values over their respective estimated useful lives. Residual values for flight equipment range from 5% -40% of cost. We also capitalize certain internal and external costs incurred to develop internal-use software; these assets are included in ground property and equipment, net on our Consolidated Balance Sheets. The estimated useful lives for major asset classifications are as follows: Asset Classification Owned flight equipment Flight and ground equipment under capital lease Ground property and equipment Estimated Useful Life 10-25 years Shorter of lease term or useful life 3-10 years DELTA AIR LINES, INC. Note 16. Restructuring, Asset Writedowns, Pension Settlements and Related Items, Net In 2005, we recorded an $888 million charge in restructuring, asset writedowns, pension settlements and related items, net on our Consolidated Statements of Operations, as follows: • Pension Curtailment Charge. A $447 million curtailment charge related to our defined benefit pension plans for our pilot (“Pilot Plan”) and nonpilot (“Nonpilot Plan”) employees. This charge relates to the impact on the Nonpilot Plan of the planned reduction of 6,000 to 7,000 jobs announced in November 2004 and the freeze of service accruals under the Pilot Plan effective December 31, 2004 (see Note 12). • Pension Settlements. $388 million in settlement charges primarily related to the Pilot Plan due to a significant increase in pilot retirements and lump sum distributions from plan assets (see Note 12). • Workforce Reduction. A $46 million charge related to our decision to reduce staffing by approximately 7,000 to 9,000 jobs by December 2007. This charge was offset by a net $3 million reduction in accruals associated with prior year workforce reduction programs. • Asset Charges. A $10 million charge related to the removal from service of six B737-200 aircraft prior to their lease expiration dates. 1) How much in new flight equipment and ground property, plant and equipment was acquired by Delta in fiscal 2005? In the MD&A, Delta stated: “Cash used for flight equipment additions, including advanced deposits, totaled $570 million. This includes $417 million we paid to purchase 11 B737-800 aircraft that we sold to a third party immediately after those aircraft were delivered to us by the manufacturer… Thus, the total amount invested is unknown 2) How much cash was used for the purchase of the new flight equipment and ground property, plant and in fiscal 2005? In the Investing section of the Cash Flow Statement for 2005, Delta reported the following cash payments (outflows) resulting from property and equipment additions: Property and equipment additions: Flight equipment, including advance payments Ground property and equipment Thus, $814 in cash was used to purchase property, plant and equipment (570) (244) 3) How much flight equipment was written down in fiscal 2005? In Note 16, Delta stated: Asset Charges. A $10 million charge related to the removal from service of six B737-200 aircraft prior to their lease expiration dates. 4) What was the historical cost of the flight equipment which was sold during fiscal 2005? The answer to this question is not explicitly reported in the financial statements or in the notes. However, we may be able to derive it by analyzing the flight equipment account. What are the assumptions? Flight Equipment BB Acquisitions – flight equipment 20,627 0 2,606 Disposals 570 (CFS) EB Write-down (Note 16) 18,591 5) What were the cash proceeds in 2005 from the sale of the flight equipment? From the Investing section of the Cash Flow Statement, for 2005: Proceeds from sale of flight equipment . . . . . . . . . 425 6) Where does the gain or loss from that sale show up on the Statement of Cash Flows? Operations: Net Income + Dep'n Expense + Write-down Loss + Loss on Disposal – Gain on Disposal Cash from Operations Investing: Cash proceeds from Disposals/Retirements = NBV + Gain – Loss Cash used for Acquisitions Cash from Investing < • Can we calculate the gain (or loss) on sale of flight equipment? Original cost of flight equipment sold 2,606 Less: Proceeds from sale (425) Loss from sale of flight equipment 2,181 ??? What is wrong with this calculation? Accumulated Depreciation Cash Loss (?) Flight Equipment Gain (?) X 425 Y 2,606 Y Two unknowns. Not enough information Can we calculate the gain (or loss) on sale of flight equipment? 6,612 + 1,273 – X = 6,621. Solving for X we get X = 1,264 Accumulated Depreciation – Flight Equipment 6,612 Disposal X 1,273 (?) 6,621 BB Depreciation EB Accumulated Depreciation Cash Loss Flight Equipment 1,264 425 917 2,606 ...
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This note was uploaded on 02/02/2012 for the course ACCT 101 taught by Professor Armstrong during the Spring '09 term at UPenn.

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