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BAO2203 Corporate Accounting
Assignment
Case study (Replicated)

Aviator Airways Ltd and Eagle Airlines Ltd
This comparative study of
accounting policies adopted by two international airlines for the depreciation
of aircraft, spares and spare engines provides an insight into the differences
in accounting policy that may emerge, even when accounting practice in the
jurisdictions involved is regulated.
§ Non-current assets
§ Depreciation
§ Depreciable amount
§ Useful
§ Comparability of results
§ Financial statement
analysis
Aviator Airways Ltd
(Aviator) and Eagle Airlines Limited (Eagle) both operate in the international
aviation industry. Aviator is Australia’s largest airline, having been formed
in 1920 and the Eagle was formed in 1972, although its origins date back to
1947, and is based in Asia-Pacific region.
Both companies operate a
diverse airline fleet. Aircraft, spares and spare engines collectively
constitute a major asset of such corporations as is demonstrated by reference
to the 2012 Statements of financial position of these two companies. In the
case of Aviator, this non-current asset, shown as ‘Property plant and
equipment’ at a stated written-down value (i.e., carrying amount) of $9 753.7
million, represented 55.5 per cent of the total group assets of $17 574.2 as at
30 June 2012. For eagle, this fixed asset category, disclosed as ‘Aircraft,
spares and spare engines’ at a written-down value of $12 464.5 million,
constituted 62.4 per cent of total group assets as at 31 March 2012 of $19 990
million. Accordingly, the accounting policies adopted in depreciating such
assets over their useful lives assume importance in assessing the financial
performance and position of airline operator.
In the case of Aviator, the ‘Depreciation and amortisation’
policy for aircraft, spares and spare engines was disclosed in Note 1 (n) of
the ‘Notes to the financial statements’ for the year ending 30 June 2012. The
relevant portion of this note is reproduced as follows:
Depreciation and amortisation

Depreciation
and amortisation are provided on a straight-line basis on all items of
property, plant and equipment except for freehold and leasehold land. The
depreciation and amortisation rates of owned assets are calculated so as to
allocate the costs or valuation of an asset, less any estimated residual value,
over the asset’s estimated useful life to the Aviator Group. Assets are
depreciated or amortised from the date of acquisition or, in respect of
internally constructed assets, from the time an asset is completed and held ready
for use. The costs of improvements to assets are amortised over the remaining
useful life of the asset or the estimated life of the improvement, whichever is
the shorter. Assets under finance lease are amortised over the term of the
relevant lease or, where it is likely the Aviator Group will obtain ownership
of the asset, the life of the asset.

The principal asset
depreciation and amortisation periods and estimated residual value percentages
(for aircraft, spares and spare engines) are:

Years

Residual values %

Jet aircraft and engines

20

20

Non-jet aircraft and engines

10 – 20

20

Aircraft spare parts

15 – 20

20

These rates are in line
with those for the prior year, with the exception of the residual value
assumption on wide-bodied aircraft (Boeing 747 and 767 and Airbus A330
aircraft) which was revised from 2 per cent to 20 per cent.
Depreciation and
amortisation rates and residual values are reviewed annually and reassessed
having regard to commercial and technological developments and the estimated
useful life of assets to the Aviator Group.

On the other hand, Eagle reported its policy relating to the
‘Depreciation of fixed assets’ at Note 2 (g), entitled ‘Accounting policies’.
The portion of this note pertaining to aircraft, spares and spare engines is
reproduced hereunder:
Depreciation of fixed assets
Fixed assets are
depreciated on a straight-line basis at rates which are calculated to
write-down their cost to their estimated residual values at the end of their
operational lives. Operational lives and residual values are reviewed annually
in the light of experience and changing circumstances.
Fully depreciated assets
are retained in the financial statements until they are no longer in use. No
depreciation is charged after assets are depreciated to their residual values.

Aircraft fleet
The Group depreciates its
new passenger aircraft, spares and spare engines over 15 years to 10 per cent
residual values.
For used passenger
aircraft, the Group depreciates them over the remaining life (15 years less age
of aircraft) to 10 per cent residual values.
The Group depreciates its
new freighter aircraft over 15 years to 20 per cent residual values. For used
freighter aircraft, the Group depreciates them over the remaining life (15
years less age of aircraft) to 20 per cent residual value.
Aviator provided the following more specific information on
aircraft, spares and spare engines in Note12, ‘Property, plant and equipment’,
to the financial statements for the year ending 30 June 2012. This information
has been extracted from the group accounts:

At cost $m

Accumulated depreciation $m

Written-down value $m

Total aircraft and engines

13 358.9

3 989.1

9 369.8

Total aircraft spare parts

750.7

366.8

383.9

Note: the amounts are based on the average useful life estimate 18
years and 20% residual value

For Eagle, Note 17,
entitled ‘fixed asset’, stated similar information with respect to aircraft,
spares and spare engines as at 31 March 2012. The relevant information
extracted from the group accounts is set out as follows:

At cost $m

Accumulated depreciation $m

Written-down value $m

Total aircraft and engines

17 718.1

5 848.8

11 869. 3

Total aircraft spare parts

1306.1

710.9

595.2

Note: the amounts are based on the average useful life estimate 15
years and 12% residual value

For the year ended 30 June
2012, Aviator reported a group ‘net profit’ of $648.8 million. Eagle reported a
group ‘net profit’ of $895.3 million for the year ended 31 March 2012.

Additional information on the operations of the two companies
Aviator has larger
domestic operation than the international flights. Hence it has more short-haul
flight passengers. On the other hand, Eagle has very small domestic operations
but larger international operations compared to Aviator. It carried almost 1.5
times international passengers than that of Aviator in the 2011/2012 financial
year. Hence, Eagle is concentrated on long-haul flight. Arguably, there are
higher costs and wear and tear on aircraft from short-haul operations compared
to long-haul operations with more take offs and landings relative to passengers
carried, plus higher tarmac and terminal fees, and passenger ‘handling ‘costs.
Further, the company websites show that the average fleet age* of Eagle
airlines was 5 years while the Aviator aircrafts was 10 years in the 2012
financial year.
*The average fleet age is
calculated by taking an average of the age of every aircraft used by a company
in a particular year.
Required:

1.Review the 2012 annual report of any (one) national aircraft
company (listed in the Australian/ Malaysian or Chinese Stock Exchange) and
comment on its depreciation policy in estimating the useful lives of long-lived
assets, such as aircraft used by major international commercial carriers based
on the guidance provided under relevant accounting standards (AASB/IASB).

2.Based on your analysis of the case study, provide a
discussion on the significance of
depreciation policy in terms of its impact on the financial statements and
financial ratios of companies under the same industry that adopt varying
depreciation policies.
**apply the useful life and residual value estimates of
Aviator to Eagle and vice versa.