depreciation at delta
TRANSCRIPT
![Page 1: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/1.jpg)
Depreciation at Delta Air Lines and Singapore Airlines
UAA – ACCT 650 - Seminar in Executive Uses of Accounting Dr. Fred Barbee
![Page 2: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/2.jpg)
Financial Reporting
Dep
i
rec atio n
![Page 3: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/3.jpg)
Yeah!
MBA
![Page 4: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/4.jpg)
MB
A
![Page 5: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/5.jpg)
5
Why study this case?
To “compare and contrast” depreciation assumptions from two airlines that . . .Are in some ways alike, and
In other ways vastly different
![Page 6: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/6.jpg)
6
Why Look at an Airline?
PP&E for airlines usually comprise greater than 50% of total assets.
Aircraft of one airline are substantially similar to aircraft of another airline (at least to the lay person).
![Page 7: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/7.jpg)
Depreciation – The Concept
1
![Page 8: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/8.jpg)
![Page 9: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/9.jpg)
Time
Consumed as Depreciation Expense
![Page 10: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/10.jpg)
Depreciation is not an attempt to establish the value of an asset.
Depreciation is not a measure of the decline in value of an asset.
![Page 11: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/11.jpg)
11
Depreciation Defined
The process of allocating the cost of property, plant, and equipment as an expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
![Page 12: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/12.jpg)
DepreciationBEGINNING
ENDING
Life of the Asset
96 97 98 99 00 01 02 03 04 05
Depreciation is a process of allocation,
not valuation.
![Page 13: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/13.jpg)
13
Cost
Allocation
AcquisitionCost
Balance Sheet Income Statement
Expense
Depreciation
Unused Used
An application of the matching principle.
![Page 14: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/14.jpg)
14
Income
StatementDepreciation
Expense Depreciation for
the current year
Balance
SheetAccumulatedDepreciation Total depreciation to
date of balance sheet
Depreciation
![Page 15: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/15.jpg)
Long-Term Assets
![Page 16: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/16.jpg)
16
Long-Term Assets
Have a useful life of more than one year.
Are acquired for use in the business.
Are not intended for resale to customers.
Are reported at carrying (book) value.
![Page 17: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/17.jpg)
Management Issues related to Accounting for Long Term Assets
![Page 18: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/18.jpg)
18
Management Issues
The cost of the asset must be measured.
The depreciable life of the asset must be estimated.
![Page 19: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/19.jpg)
19
Management Issues
The salvage value of the asset at the end of its life must be estimated
A pattern for recognizing depreciation over the depreciable life of the asset must be selected.
![Page 20: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/20.jpg)
Issues Related to Long-Lived Assets
Asset Service Potential
Acquisition DisposalUse in business operations
Time
Decline in future service benefits.
Book Value
Accounting Issues
Measuring Cost
Recording Disposals
Allocation of costAccounting For post
acquisition expenses.
![Page 21: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/21.jpg)
Issues Related to Long-Lived Assets
Asset Service Potential
Acquisition DisposalUse in business operations
Time
Decline in future service benefits.
Book Value
Accounting Issues
Measuring Cost
Recording Disposals
Allocation of costAccounting For post
acquisition expenses.
![Page 22: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/22.jpg)
Acquisition cost of Property, Plant, and Equipment
Fundamental Issue #1: What is the value of the asset?
![Page 23: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/23.jpg)
Measuring the Carrying Amount of Long-Lived Assets
1
![Page 24: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/24.jpg)
24
Expected Benefit Approach
Recognizes that assets are valuable because of the future cash inflows they are expected to generate.
![Page 25: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/25.jpg)
25
Focuses on the amount of resource expenditures required to acquire an asset.
Economic Sacrifices Approach
![Page 26: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/26.jpg)
26
Measuring the Carrying Value of Long-Lived Assets
Expected Benefit ApproachesDiscounted present value.
Net realizable value.
Economic Sacrifice ApproachesHistorical cost less accumulated
depreciation.
Replacement cost.
![Page 27: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/27.jpg)
1
![Page 28: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/28.jpg)
28
Hypothetical Case – A Truck
Original cost $100,000
Two years old, has remaining useful life of 8 years
No salvage value
Depreciated using straight-line
![Page 29: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/29.jpg)
1
![Page 30: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/30.jpg)
30
Discounted Present Value
Expected net operating cash inflows = $18,000 per year (assumed) for eight remaining years, discounted at a 10% (assumed) rate.
5.33493 x $18,000 = $96,029
![Page 31: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/31.jpg)
31
Net Realizable Value
Current resale price from an over-the-road equipment listing (Purple Book) for the specific vehicle model.
$85,000 (Assumed)
![Page 32: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/32.jpg)
1
![Page 33: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/33.jpg)
33
Historical Cost
Historical Cost less Accumulated Depreciation
$100,000 – [(100,000/10 years) x 2 years] = $80,000
![Page 34: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/34.jpg)
34
Replacement Cost
Replacement cost of a two-year-old vehicle in equivalent condition
$90,000 (assumed)
![Page 35: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/35.jpg)
35
Possibilities
Discounted PV Approach $96,029
Net Realizable Value 85,000
Historical Cost (Less A/D) 80,000
Replacement Cost 90,000
![Page 36: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/36.jpg)
36
Possibilities
Discounted PV Approach $96,029
Net Realizable Value 85,000
Historical Cost (Less A/D) 80,000
Replacement Cost 90,000
![Page 37: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/37.jpg)
37
“Value” of Asset
“Cost” includes all reasonable and necessary expenditures incurred in:
Acquiring an operational asset;
Placing it in its operational setting; and
Preparing it for use;
Less any cash discounts allowed.
![Page 38: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/38.jpg)
Acquisition cost of Property, Plant, and Equipment
Fundamental Issue #2: Allocating the Cost of an Asset?
![Page 39: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/39.jpg)
39
Theoretical Justification
The matching principle requires the cost of an asset be charged to expense in the periods benefited.
The allocation process is called depreciation.
![Page 40: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/40.jpg)
40
Revenue-Expense AssociationThe Matching Principle
Three principles govern the inclusion of an expense in the matching process:Association of cause and effect
Systematic and rational allocation
![Page 41: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/41.jpg)
Cost Flows in a Manufacturing FirmCost Flows in a Manufacturing Firm
DMDM
DLDL
MOHMOH
DM Inv.DM Inv.
WIP Inv.WIP Inv.
FG Inv.FG Inv.
WIPWIP
Manufacturing Costs
COGSCOGS
S&AS&A
Sales
-= Gross Margin
-Net Income=
Balance Sheet
Period Costs
Income Statement
Pro
du
ct C
ost
s
Unfinished
Finished
Sold
UsedUsed
Applied
Unused
Sale
![Page 42: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/42.jpg)
42
Revenue-Expense AssociationThe Matching Principle
Three principles govern the inclusion of an expense in the matching process:Association of cause and effect
Systematic and rational allocation
Immediate recognition
![Page 43: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/43.jpg)
Factors in Computing Depreciation
![Page 44: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/44.jpg)
45
Factors in Computing Depreciation
The calculation of depreciation requires three amounts for each asset:Cost
Useful life
Salvage value
![Page 45: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/45.jpg)
46
Depreciation Methods Based on Time
Straight-Line
Accelerated
Sum-of-the-years’-digits
Declining Balance
![Page 46: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/46.jpg)
47
Depreciation Methods Based on Activity Level
Productive output
Service quantity
![Page 47: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/47.jpg)
48
Depreciation
If an asset is expected to benefit all periods equally,
a straight-line method of depreciation would be appropriate.
![Page 48: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/48.jpg)
49
Depreciation
If more benefits are expected early in the life of an asset . . .
an accelerated method of depreciation would be appropriate.
![Page 49: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/49.jpg)
50
Depreciation
If benefits are related to the output of an asset . . .
the units-of-production method of depreciation would be appropriate.
![Page 50: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/50.jpg)
Types of Accounting Changes
![Page 51: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/51.jpg)
52
Types of Accounting Changes
Change in Accounting Principle
Change in Accounting Estimate
Change in Reporting Entity
Errors in Financial Statements
![Page 52: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/52.jpg)
53
What Can Change?
Estimated Life
Estimated Salvage Value
Pattern of Depreciation
These are set at
acquisition
A change can be made if another method is
preferable.
![Page 53: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/53.jpg)
Methods of Depreciation
Straight-Line Method
![Page 54: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/54.jpg)
55
Straight-Line Depreciation –The Rationale
Decline in service potential relates primarily to the passage of time.
Level of activity is important but use of asset is relatively constant.
![Page 55: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/55.jpg)
Cost - Salvage Value
Useful life in years
Depreciation
Expense per Year=
Straight-Line Method
Appropriate if an asset is expected to benefit all periods equally.
Known Estimated
Estimated
![Page 56: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/56.jpg)
On December 31, 2001, equipment was purchased for $50,000 cash. The equipment has an estimated useful life of 5 years and an estimated salvage value of $5,000.
Straight-Line Method
Depreciation Expense Per Year =
$50,000 - $5,000
5 Years
= $9,000
![Page 57: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/57.jpg)
Depreciation Accumulated Accumulated UndepreciatedExpense Depreciation Depreciation Balance
Year (debit) (credit) Balance (book value)2001 50,000$ 2002 9,000$ 9,000$ 9,000$ 41,000 2003 9,000 9,000 18,000 32,000 2004 9,000 9,000 27,000 23,000 2005 9,000 9,000 36,000 14,000 2006 9,000 9,000 45,000 5,000
45,000$ 45,000$
Salvage Value
Depreciation Schedule
Straight-Line Method
![Page 58: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/58.jpg)
$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000
$10,000
2001 2002 2003 2004 2005 2006
For the year ended December 31
$50,000
$41,000
$32,000
$23,000
$14,000
$5,000$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
2001 2002 2003 2004 2005 2006
As of December 31
Boo
k V
alue
Dep
reci
atio
n
Exp
ense
Depreciation Expense is
reported on the Income
Statement.
Book Value is reported on the Balance
Sheet.
![Page 59: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/59.jpg)
Methods of Depreciation
Declining-Balance
![Page 60: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/60.jpg)
61
Accelerated Depreciation –The Rationale
Superior Performance
Repair and Maintenance
Obsolescence
![Page 61: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/61.jpg)
Repair Costs
Depreciation
Accelerated Depreciation
![Page 62: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/62.jpg)
Step 2:Double-declining-
balance rate= 2 ×
Straight-linedepreciation rate
Double-Declining-Balance Method
Step 1:Straight-line
depreciation rate=
100 % Useful life in periods
![Page 63: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/63.jpg)
Step 3:Depreciation
expense=
Double-declining-balance rate
×Beginning period
book value
Double-Declining-Balance Method
Ignores salvage value.
A Constant Rate
A Declining Balance
![Page 64: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/64.jpg)
65
Double-Declining-Balance Method
On December 31, 2001, equipment was purchased for $50,000 cash.
The equipment has an estimated useful life of 5 years and an estimated residual value of $5,000.
Calculate the depreciation expense for 2002 and 2003
![Page 65: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/65.jpg)
Step 2:Double-declining-
balance rate= 2 × 20% = 40%
Step 3:Depreciation
expense= 40% × $50,000 = $20,000 (2002)
Step 1:Straight-line
depreciation rate=
100 % 5 years
= 20%
Double-Declining-Balance Method
![Page 66: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/66.jpg)
67
2002 Depreciation: 40% × $50,000 = $20,000
2003 Depreciation: 40% × ($50,000 - $20,000) = $12,000
Double-Declining-Balance Method
![Page 67: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/67.jpg)
Depreciation Accumulated UndepreciatedExpense Depreciation Balance
Year (debit) Balance (book value)2001 50,000$ 2002 20,000$ 20,000$ 30,000 2003 12,000 32,000 18,000 2004 7,200 39,200 10,800 2005 4,320 43,520 6,480 2006 2,592 46,112 3,888
46,112$
($50,000 – $43,520) × 40% = $2,592
Below salvage value
Double-Declining-Balance Method
![Page 68: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/68.jpg)
Depreciation Accumulated UndepreciatedExpense Depreciation Balance
Year (debit) Balance (book value)2001 50,000$ 2002 20,000$ 20,000$ 30,000 2003 12,000 32,000 18,000 2004 7,200 39,200 10,800 2005 4,320 43,520 6,480 2006 1,480 45,000 5,000
45,000$
We usually have to force depreciation expense in thelatter years to an amount that brings BV to salvage value.
Double-Declining-Balance Method
![Page 69: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/69.jpg)
Life in Years
An
nu
alD
epre
ciat
ion
$0
$5,000
$10,000
$15,000
$20,000
1 2 3 4 5
Double-Declining-Balance
Comparing Depreciation Methods
Life in Years
$0
$2,000
$4,000
$6,000
$8,000
$10,000
1 2 3 4 5
An
nu
alD
epre
ciat
ion
Straight-Line
![Page 70: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/70.jpg)
Net property, plant, and equipment is the undepreciated cost (book value) of the plant assets.
Book value Market value
Reporting Depreciation
Property, plant, and equipment: Land and buildings 150,000$ Machinery and equipment 200,000 Office furniture and equipment 175,000 Land improvements 50,000 Total 575,000$ Less Accumulated depreciation (122,000) Net property, plant, and equipment 453,000$
![Page 71: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/71.jpg)
Selecting an Appropriate Depreciation Method
What are the factors that should be considered in
selecting a depreciation
method?
![Page 72: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/72.jpg)
Depreciation at Delta Air Lines and Singapore Airlines
Now . . . On to the case!!!
![Page 73: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/73.jpg)
Let’s Compare
Delta Singapore
![Page 74: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/74.jpg)
Delta Air Lines
![Page 75: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/75.jpg)
76
Delta Air Lines
Third largest U.S. airline in 1993
$12 billion in annual revenues (almost $15 billion in 1999)
Served 161 cities in 44 states
Operated flights to 33 foreign countries.
![Page 76: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/76.jpg)
77
Delta Air Lines
Losing money
Average age of aircraft 8.8 years (9.6 in 2000)
Changed depreciation assumptions in 1993
![Page 77: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/77.jpg)
78
Delta Air Lines
Average passenger trip length was 969 miles in 1993.
Capacity utilization 62.3%
Long term debt was $3,717
![Page 78: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/78.jpg)
Singapore Airlines
![Page 79: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/79.jpg)
80
Singapore Airlines
Largest private-sector employer in Singapore
Route network covered 70 cities in 40 countries
Total operating revenues in 1993 $5.1 billion (Singapore $)
![Page 80: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/80.jpg)
81
Singapore Airlines
Average age of aircraft was 5.1 years
Profitable
Capacity utilization 71.3%
Average trip length 2,720 miles
No long-term debt
![Page 81: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/81.jpg)
Let’s Compare Depreciation
Delta Singapore
![Page 82: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/82.jpg)
83
Comparison . . .
Calculate the annual depreciation expense that Delta and Singapore would record for each $100 gross value of aircraft.
![Page 83: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/83.jpg)
84
Delta Air Lines . . .
20-year depreciable life
Salvage value equal to 5% of cost
![Page 84: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/84.jpg)
85
Singapore Airlines . . .
10-year depreciable life
Salvage value equal to 20% of cost
![Page 85: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/85.jpg)
Life (in Years)
Salvage Value
Depr. Exp Per $100
Singapore Airlines
< 4/01/89 8 10% $11.25
> 4/01/89 10 20% 8.00
Delta Air Lines
< 7/01/8610 10 10% $9.00
7/86 to 3/93 15 10% 6.00
> 4/01/93 20 5% 4.75
![Page 86: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/86.jpg)
Life (in Years)
Salvage Value
Depr. Exp Per $100
Singapore Airlines
< 4/01/89 8 10% $11.25
> 4/01/89 10 20% 8.00
Delta Air Lines
< 7/01/8610 10 10% $9.00
7/86 to 3/93 15 10% 6.00
> 4/01/93 20 5% 4.75
![Page 87: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/87.jpg)
88
Comparison . . .
Are the differences in the ways the two airlines account for depreciation expense significant?
Why would companies depreciate aircraft using different depreciable lives and salvage?
![Page 88: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/88.jpg)
Useful Life
![Page 89: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/89.jpg)
90
Comparison . . .
Why would companies depreciate aircraft using different depreciable lives and salvage values?
What reasons could be given to support these differences?
Is different treatment proper?
![Page 90: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/90.jpg)
Useful Life
Singapore Air
Delta Air
![Page 91: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/91.jpg)
92
Useful Life - Factors
TechnologySingapore has newer aircraft
Aircraft UseFrequent takeoffs and landings
MaintenanceRemember Valuejet?
![Page 92: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/92.jpg)
Financial Considerations
Singapore Air
Delta Air
For three year period 1990 - 1993
![Page 93: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/93.jpg)
Delta Air Lines
Can we quantify Delta’s more liberal depreciation
policies?
![Page 94: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/94.jpg)
95
Delta Air Lines
Assuming the average value of flight equipment that Delta had in 1993, how much of a difference do the depreciation assumptions it adopted on April 1, 1993 make?
![Page 95: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/95.jpg)
96
Delta Air Lines
How much more or less will its annual depreciation expense be compared to what it would be were it using Singapore’s depreciation assumptions?
![Page 96: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/96.jpg)
97
Look at Exhibit 2
1993 1992
Owned Aircraft $9,043 $8,354
Leased Aircraft 173 173
Gross Value of Aircraft $9,216 $8,527
Average Gross Value $8,872
![Page 97: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/97.jpg)
Life (in Years)
Salvage Value
Depr. Exp Per $100
Singapore Airlines
< 4/01/89 8 10% $11.25
> 4/01/89 10 20% 8.00
Delta Air Lines
< 7/01/8610 10 10% $9.00
7/86 to 3/93 15 19% 6.00
> 4/01/93 20 5% 4.75
![Page 98: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/98.jpg)
Look at Current Policies
Singapore Air
Delta Air
Average Gross Value
Difference in Depreciation
![Page 99: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/99.jpg)
Look at Previous Delta Policies
Delta’s Previous
Policy
Delta’s Current Policy
Average Gross Value
Difference in Depreciation
![Page 100: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/100.jpg)
101
Delta Vs. Singapore
There is yet another difference in the two airlines leading to a savings of Delta over Singapore on depreciation expense.Historical cost basis; and
Age of the aircraft
![Page 101: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/101.jpg)
102
Delta Vs. Singapore
Does the difference in the average age of Delta’s and Singapore’s aircraft fleets have any impact on the amount of depreciation expense they record?
If so, how much?
![Page 102: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/102.jpg)
103
Look at the age of the aircraft
Age
Delta 8.8
Singapore 5.1
Difference in age 3.7
Assume a 3% - 4% annual inflation in the mid to late 80s.
![Page 103: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/103.jpg)
Average Gross Value $8,872
3.5% Inflation x 3.7 Years 12.95%
Increased Value $1,150
Adjusted Gross Value $10,022
Increased Value
Singapore’s Rate
Additional Depreciation
![Page 104: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/104.jpg)
105
Savings in depreciation expense due to more liberal assumptions
$288
Savings in depreciation due to older aircraft 92
Total savings Delta over Singapore $380
Delta Vs. Singapore
![Page 105: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/105.jpg)
106
Delta Vs. Singapore
Singapore Airlines maintains depreciation assumptions that are very different from Delta’s
What does it gain or lose by doing so?
How does this relate to the company’s overall strategy?
Compare Strategies
![Page 106: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/106.jpg)
107
Singapore Airlines
1. Renowned for customer service
State-of-the-art aircraft
Capacity utilization = 71.3%
1993 Annual Report: “A superior product will probably enable us to sustain relatively high load factors.
![Page 107: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/107.jpg)
108
Singapore Airlines
2. Long-haul Airline
Average passenger trip length in 1993 was 2,720 miles (Delta = 969)
Less wear and tear on aircraft – long trips are less stressful than frequent landings and takeoffs
![Page 108: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/108.jpg)
109
Singapore Airlines
3. Gain on sale of aircraft
Average gain $134 million
Direct result of depreciation policies?
Result of corporate strategy
Depreciate fast resulting in low book values on disposal
![Page 109: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/109.jpg)
110
Singapore Airlines
4. Owned Vs. Leased Aircraft
Singapore operates none of their aircraft under operating leases
Delta operates close to 50% of their aircraft under non-cancelable operating leases.
![Page 110: Depreciation at Delta](https://reader033.vdocuments.us/reader033/viewer/2022061105/54405fcaafaf9f64388b4784/html5/thumbnails/110.jpg)
111
Delta Air Lines
4. Owned Vs. Leased Aircraft
Singapore operates none of their aircraft under operating leases
Delta operates close to 50% of their aircraft under non-cancelable operating leases.