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Author Topic: [ok] Profit vs. Cash flow, Accounting, Income statement  (Read 19779 times)

Offline dmoose42

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #100 on: January 02, 2014, 01:41:14 AM »
Thanks Sami.  A couple questions/thoughts.

1) Where does a 15 year lease go on the balance sheet?  If you are taking out the lease, are we assuming a 0 value for that liability (and conversely a 0 value for the airline that you are leasing from - assuming that it is human).

I'm not saying this is the wrong approach - but just thinking if we should consider it as typically I would expect to see this item on a financial statement disclosure so maybe a line item below liabilities and  equity that says something like 'other financial obligations' and would have lease termination value (xx.x million) and the average remaining lease term amount.

2) Obviously the income statement and cash statements reflect flows (what happened in the period), but the balance sheet reflects the company status on a certain day.  When we say it's the balance sheet of 2004 or Week 31 of 2004 - do we mean the starting balance sheet or the ending balance?  I assume it's the period ending 2004 (for example), but wanted to clarify (and ask that we put that clarification on the page to avoid confusion).

3) we have retained earnings, but technically the equity component of starting capital is not retained earnings but typically 'paid in capital' or something similar.  Not sure if anyone cares, but thought I would mention it.

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #101 on: January 02, 2014, 01:45:03 AM »
Leased planes do not appear on balance sheet as you do not own them. Any lease prepayments (new planes) will be under 'Deposits on flight equipment purchases' and for used planes (4 month prepayment) under 'Prepaid expenses'.   (and owned planes, their book value, is under 'Flight equipment' when they are in service)    ...or what did you mean?

...edit: read again, and got your point now. Indeed for a long lease you are 'liable' to pay the termination cost or the lease for its duration. Have to see how this would work. Any examples of actual balance sheets with this data on it handy?


Balance sheet's data's technical storage (#2) hasn't been yet done, but it will be simply a snapshot of the situation at the given day. it will be stored 1x weekly, 23.59 each Sunday probably, so enable the weekly view too .. In real life they always show the year-end balance sheets but decided to expand that a bit since the data is already stored in the weekly way. Anyway, end of the year/month/week status, yes.

#3 perhaps too minor in the long scale to make own line for it .. (?)  ...the equity side is rather useless for now since we don't have stocks and such (yet).
« Last Edit: January 02, 2014, 01:50:32 AM by sami »

Offline schro

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #102 on: January 02, 2014, 05:35:57 AM »

...edit: read again, and got your point now. Indeed for a long lease you are 'liable' to pay the termination cost or the lease for its duration. Have to see how this would work. Any examples of actual balance sheets with this data on it handy?

When he says "financial statement disclosure", that would typically be found in the footnotes of micetype accompanying the statements. Operating leases are not recorded as liabilities on the balance sheet, while capital leases are. Since all leases in AWS are operating in nature, it should not be a liability. What he's saying is that from a financial reporting perspective, an investor would find the information regarding potential contingent liabilities (i.e. lease termination, future lease payments, etc) to be potentially material to their analysis of the financials and therefore worth noting somehow.

Of course, FASB is about to change their minds on this particular topic....

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #103 on: January 02, 2014, 10:45:53 AM »
#1)  Earlier (a few pages back) talk about slots... What's the final verdict?

Keep slots in balance sheet as an asset at their original cost, no amortization. Show them as capex in cash flow statement. And on income statement they do not show up as expenses until you lose/close them? (for transition all old slots would be valued at zero and only new slots would count here...)

Or write them down as expenses at income statement immediately, no record on balance sheet - like we have now?


#2)  And also. Not sure if weekly view in balance sheet is needed? If it would update at the end of each month only, or?  (can be either way, not a huge thing really)


#3) And then thoughts how we deal with C/D maintenance? C checks I guess should be directly into expenses, but the D check spanning over 8 years may be a different thing. Should the D check's value 'depreciate' over the whole period of 8 years or should it be written as a single expense when it happens?  Accounting-wise the first is probably the correct way, but technically that may be rather difficult (when we have to take into account the scenarios of planes being sold/scrapped etc). And also, how would the plane's book value fit into this; should C/D checks increase the plane's book value as they could be considered as 'investments' towards the plane's usage (well D check at least).    ...would like to keep it simple though.


..and also some difficulty in finding the best way to present aircraft depreciation and other a/c related changes on balance sheet (= how it's presented without confusions; there seem to be rather many ways to present this data, depending on country and company .. have to choose some understandable method.), but will get back to this later. This is mainly UI thing, as I cannot really add a third level of "zoom" there ..
« Last Edit: January 02, 2014, 01:22:52 PM by sami »

Offline Infinity

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #104 on: January 02, 2014, 12:45:10 PM »
Slots cannot be sold in this game, so treating them as an asset would not be right.

Offline dmoose42

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #105 on: January 02, 2014, 03:30:38 PM »
Sami,

#1) - I think we should keep slots on the balance sheet at their original cost with no amortization.  The 'expense' would occur when you lose/close them.

#2) Weekly balance sheet is probably not necessary - monthly should be sufficient.

#3) C checks should be expense in the period incurred (similar to today).  As for D-checks, I recommend that we add the cost of the D-check to the depreciated value of the aircraft and then amortize it over the remaining life.  For example.  You buy a $10M aircraft.  It is worth $8M at year 8 when the D-check is due.  The D-check is $500k.  The value of the plane would be increased to $8.5 (which would cause the annual depreciation amount to increase)

#4) Presenting aircraft depreciation - not sure what the issue is on this one - i would think that the aircraft value would be the sum of the original value of all planes currently owned plus D-check's (if approach in item #3 is taken).  The depreciation row would then have the sum of all the accumulated depreciation since the acquisition of each aircraft.  When a plane is sold, the original value (+ any D-checks) would be removed from the aircraft value and the accumulated depreciation for that plane would be removed from that bucket.  The gain/loss on sale would be added to retained earnings.

#5) on the long-term leasing issue.  If I get a few examples of how airlines disclose this information, would you be open to updating the balance sheet page accordingly to display this information?


Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #106 on: January 02, 2014, 03:54:12 PM »
#2) Weekly balance sheet is probably not necessary - monthly should be sufficient.

Monthly wouldn't be sufficient because the way months are counted with full weeks.  You can't compare one month to another properly because because a 9 week period will be processed as 4 weeks in one month and 5 in another instead of splitting that extra week based on the calendar date (one of my pet peeves with the current system).

Slots should be an asset because they are--whether you can sell it or not is irrelevant because they still have value and thus if you spend $10 million on slots, you should retain $10 million in CV.  If the airline were acquired by another airline, those slots have value despite whether or not it is possible to buy/sell slots or airlines in AWS.

Heavy maintenance checks shouldn't count towards anything.  Just because a plane needs a D-check in 8 years doesn't mean it will get one as it could go without, be scrapped, etc.  It should be made crystal clear that book value is just that--book value--and really means nothing outside of accounting methods.  Depreciation is setup so the actual value is nearly always higher than the book value.  For example, the US government had a depreciation bonus for heavy equipment where companies could write off 50-100% of the cost in the first year as depreciation instead of multiple years.  The value of the equipment didn't go to zero (or scrap value) when they took 100% depreciation the first year.  So when talking resale price book value only matters in an accounting sense in providing RONA (return on net assets).  At some point, the aircraft depreciates to 10% and the scrap value is 30%.  This means the aircraft is worth 3x the book value, which is another example of book value just being on paper.

Inflation MUST be a part of the equation somehow because scrap value should not simply be 30% of the purchase price.  I bought BAC 1-11 500 in DOTM in the late 70s for $12 million or so and now a new one is $25 million in 1992 and the calculated value of my late 70s models are in the $10-12 million range.  The 70s/80s saw considerable inflation which kept my assets flat in nominal dollars, but without that inflation they would be worth ~$5 million instead.  That means the scrap value of a new aircraft would be higher than the book value of my 10-15yr old models under the new system, which is wrong.

Perhaps a better system of determining scrap value would be MTOW - Max Payload = Dry Weight * salvage rate in kg = scrap price?  This would largely account for the metal etc. in the aircraft that gives it value.  Thus, the salvage rate in kg could be subject to inflation and reflect current market conditions without turning the whole book value system upside down.

Also, since we are going from cash accounting to accrued, will staff costs be accrued and spread out over 7 days or will we be maintaining the Tuesday bank account raid?

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #107 on: January 02, 2014, 04:05:20 PM »
#3) C checks should be expense in the period incurred (similar to today).  As for D-checks, I recommend that we add the cost of the D-check to the depreciated value of the aircraft and then amortize it over the remaining life.  For example.  You buy a $10M aircraft.  It is worth $8M at year 8 when the D-check is due.  The D-check is $500k.  The value of the plane would be increased to $8.5 (which would cause the annual depreciation amount to increase)

This would be technically simple (and also understandable to everyone usagewise). Only 'but' is still how to display that on the balance sheet. If we'd just show it as an increase to the aircraft value then it's simple enough. Creating own line/account for the D check costs would be easily too complicated.


Quote
#4) Presenting aircraft depreciation - not sure what the issue is on this one

UI issue mainly, on how to display the stuff clearly. But I'll work on this later (current balance sheet example is incomplete).


Quote
#5) on the long-term leasing issue.  If I get a few examples of how airlines disclose this information, would you be open to updating the balance sheet page accordingly to display this information?

Sure, however may be a bit unnecessary for the scope of AWS already (= trying to find a bit of balance between 'playability' and full accounting realism). But let's see and think.



because scrap value should not simply be 30% of the purchase price.

It has never been such, and it isn't now either.

The book value & depreciation is also directly related to taxation, and continuously adjusting the book values based on assumed aircraft market value (w/inflation) isn't really feasible in my mind. Again - if you paid $10mil of the plane in 1970 and you sell it for $15mil in 1980, then you are getting the profits for the split.

Staff cost can be very well on every day or once a week, it doesn't really matter in my mind?


And also, I guess I'd keep the balance sheet with the weekly view too. There's no real harm of it (a bit more stored data but not much) and it then retains the same UI as other pages. And indeed this way you can easily track the same periods and so on.
« Last Edit: January 02, 2014, 04:10:50 PM by sami »

Offline schro

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #108 on: January 02, 2014, 04:05:51 PM »
Sami,

#1) - I think we should keep slots on the balance sheet at their original cost with no amortization.  The 'expense' would occur when you lose/close them.

#2) Weekly balance sheet is probably not necessary - monthly should be sufficient.

#3) C checks should be expense in the period incurred (similar to today).  As for D-checks, I recommend that we add the cost of the D-check to the depreciated value of the aircraft and then amortize it over the remaining life.  For example.  You buy a $10M aircraft.  It is worth $8M at year 8 when the D-check is due.  The D-check is $500k.  The value of the plane would be increased to $8.5 (which would cause the annual depreciation amount to increase)

#4) Presenting aircraft depreciation - not sure what the issue is on this one - i would think that the aircraft value would be the sum of the original value of all planes currently owned plus D-check's (if approach in item #3 is taken).  The depreciation row would then have the sum of all the accumulated depreciation since the acquisition of each aircraft.  When a plane is sold, the original value (+ any D-checks) would be removed from the aircraft value and the accumulated depreciation for that plane would be removed from that bucket.  The gain/loss on sale would be added to retained earnings.

#5) on the long-term leasing issue.  If I get a few examples of how airlines disclose this information, would you be open to updating the balance sheet page accordingly to display this information?



#1 - This could cause a tax issue (i.e. taxes higher than expected thereby causing confusion). If purchased slots are essentially an asset transaction (cash (asset) exchanged for slots (asset)), there's no expense associated with the transaction which would increase taxable income.

#2 - Lower frequency is probably fine. As long as the income statements can be reconciled back to the balance sheets its all good.

#3 - Given the described technical limitations, I think this would be the best approach (even if it isn't 100% accurate from an accounting perspective, it is at least more accurate than expensing the D check). The only consideration would be for planes that are over 25 years old - how would the D check get expensed? Perhaps planes that are at "salvage" value, D check gets expensed right away instead of being added to book value.


Offline dmoose42

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #109 on: January 02, 2014, 04:21:28 PM »
This would be technically simple (and also understandable to everyone usagewise). Only 'but' is still how to display that on the balance sheet. If we'd just show it as an increase to the aircraft value then it's simple enough. Creating own line/account for the D check costs would be easily too complicated.



Agree - I think that adding it to the aircraft value is the best way.  Simple, directionally correct, and understandable.

As for the leasing information - this was more for informational purposes than having any real game impact.  I will do a little research and get back to you.

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #110 on: January 02, 2014, 05:07:10 PM »
Staff cost can be very well on every day or once a week, it doesn't really matter in my mind?

I don't know how granular the database is and if all costs are tracked weekly versus daily and then compiled to make it weekly, but having staff costs spread out across 7 days means you could assign staff costs/revenue/etc. to individual days.  Then instead of having a 4/5 week split between two months you could assign 30/31 days to those months and then the monthly sheet actually becomes useful.  Right now, the monthly sheets are useless because you can't compare apples to apples.  Even with 28/29/30/31 days in a month there is slight variation (number of weekends in a month, etc), but it becomes more useful.

Ideally, I'd like to see the monthly sheet go to 4 week periods and have 13 periods in a year.  This means you can compare apples to apples the 4 week periods with an equal number of days, weekends, etc. in a period.  However, this would end up being skewed because B-checks are on a monthly basis instead of every 4 weeks.  HOWEVER, if B-checks weren't forced to be completed on the last week of each month, you could have rolling B-checks that happen every week of the year instead of 12 predetermined weeks of the year which would smooth the variation.

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #111 on: January 02, 2014, 05:13:03 PM »
Also having 4 week periods would allow for some pretty robust financial analysis.  You could accurately determine whether a change in revenue was due to a change in volume, change in sales mix, or change in pricing--which I think is pretty critical when running a business.  You can also do comparisons for COGS (cost of goods sold) and analyze why your expenses changed.  Monthly is ideal for these comparisons (or quarterly), but monthly as I stated is useless in the current state because of how weeks are grouped into months.

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #112 on: January 02, 2014, 10:08:19 PM »
Started the manual page already too a bit .. (a lot missing)

http://www.airwaysim.com/game/Manual/Office/Accounting/

I find it a bit hard to explain the principles and basics in layman's terms. But a few practical examples should to the trick perhaps?   ..if there are any Shakespeares or Hemingways around, I'll gladly "outsource" this task :P

Offline dmoose42

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #113 on: January 02, 2014, 10:13:37 PM »
Sami, I will take a crack at writing the manual page for the accounting change...

dmoose42

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #114 on: January 02, 2014, 10:15:21 PM »
(yay!)

Please use that page as basis (copy paste to word or something .. never mind about formatting) ...  (unless I blabbered along with something unnecessary)

Had in mind that it should have a general section explaining the basics, together with "changelog" type of "what's new" section for old players. And then short descriptions for each of the three financial info pages. Together with some practical examples to assist in understanding the stuff.

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #115 on: January 02, 2014, 10:36:42 PM »
I would add:

Assets - Liabilities = Company Value

Assets = cash, aircraft, slots, prepayments (leases, deposits for purchasing aircraft)

Liabilities = loans, lease prepayments received

Balance Sheet = statement of assets and liabilities and resulting company value

Income Statement = statement of revenues and expenses including non-cash transactions (depreciation, prepaid leases converting from an asset to an expense)

Cashflow Statement = statement of cash flows in and out of the business

Here is also a quick "primer" on the differences between to two accounting methods which should be helpful: http://www.investopedia.com/ask/answers/09/accrual-accounting.asp

A good example to include would be airlines IRL.  If you buy a plane ticket today for $500, the airline takes your $500 and their cash increases by $500 (shown on cashflow statement).  However, they have a liability on the books of $500 (providing the flight you paid for).  So their assets increase by $500 and their liabilities increase by $500 and the company value does not change.

When the flight occurs, the ticket you purchased is no longer a liability for the airline and liabilities decrease by $500.  The $500 is booked as revenue for the day the flight occurred as are operating expenses to fly the aircraft between airports.  If it cost the airline $450 to fly you from point A to point B, then their cash (assets) would decrease by $450 with a net effect of increasing company value by $50.

If you were flying a brand new aircraft that was purchased for $100 million that day, the aircraft is now used and no longer worth $100 million.  It did not cost the airline $100 million to conduct the single flight, so in order to allocate costs across the life of the entire aircraft instead of just the first day, depreciation is used.  If an aircraft is worth $100 million and flown for 20 years, that means the aircraft costs roughly $5 million/year to operate.  Much like the airline ticket, the expenses are allocated to the timeframe they were realized.  So Year 1 would show $5 million in depreciation as an operating expense, Year 2 would be $5 million, and so on.  If the aircraft is sold after 5 years and $25 million in depreciation, the book value of the aircraft is $75 million.  If the aircraft is sold on the used market for $80 million, the airline would pay taxes on $5 million in income versus a $20 million loss ($100 million - $80 million) because the airline already took $25 million in expenses/losses on the aircraft through depreciation expenses.

Offline dmoose42

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #116 on: January 02, 2014, 11:09:48 PM »
Thanks LemonButt...

Sami - we need to add unearned revenue on the balance sheet or are we assuming that the 4 months of lease payments just go straight into leasing income?

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #117 on: January 02, 2014, 11:27:24 PM »
Lease prepayments (both paid and received ones) should and will have their own entries. The income side of it is not there yet.

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #118 on: January 03, 2014, 06:23:59 AM »
#1)  Earlier (a few pages back) talk about slots... What's the final verdict?

Keep slots in balance sheet as an asset at their original cost, no amortization. Show them as capex in cash flow statement. And on income statement they do not show up as expenses until you lose/close them? (for transition all old slots would be valued at zero and only new slots would count here...)

Or write them down as expenses at income statement immediately, no record on balance sheet - like we have now?

I don't think it is worth the effort to keep the value of the slots on the balance sheet.  Might be nice, just not worth the effort.

#2)  And also. Not sure if weekly view in balance sheet is needed? If it would update at the end of each month only, or?  (can be either way, not a huge thing really)

I would keep them "live", updated daily, the same way income statement gets updated.  With 4 week history, like income statement, the player will see some history.  Also, for all airlines, I would publish quarterly statements on the stats page, just like public companies do.  Greatly expanding the Stats Page, that now only shows Sales, Profit and Margin.  (eventually).

#3) And then thoughts how we deal with C/D maintenance? C checks I guess should be directly into expenses, but the D check spanning over 8 years may be a different thing. Should the D check's value 'depreciate' over the whole period of 8 years or should it be written as a single expense when it happens?  Accounting-wise the first is probably the correct way, but technically that may be rather difficult (when we have to take into account the scenarios of planes being sold/scrapped etc). And also, how would the plane's book value fit into this; should C/D checks increase the plane's book value as they could be considered as 'investments' towards the plane's usage (well D check at least).    ...would like to keep it simple though.

As much as I would like to see a better treatment of D checks from accounting and financial POV (returning an aircraft prior to $20m D check should cost a player something), I think this subject should be left for future refinement, after the basics are done.  And for the time being, continue to treat it as a one time expense.

..and also some difficulty in finding the best way to present aircraft depreciation and other a/c related changes on balance sheet (= how it's presented without confusions; there seem to be rather many ways to present this data, depending on country and company .. have to choose some understandable method.), but will get back to this later. This is mainly UI thing, as I cannot really add a third level of "zoom" there ..

I think the way it is may be fine.  Maybe info on depreciation of any given aircraft could be on the aircraft page, so that 3rd level of zoom (and loading of a lot of data) is avoided.

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #119 on: January 03, 2014, 06:37:30 AM »
The book value & depreciation is also directly related to taxation, and continuously adjusting the book values based on assumed aircraft market value (w/inflation) isn't really feasible in my mind. Again - if you paid $10mil of the plane in 1970 and you sell it for $15mil in 1980, then you are getting the profits for the split.

Maybe another value could be added (eventually), Market Value, where assets (flight equipment = aircraft) are marked to market.  I guess recommended value of aircraft would serve this purpose.  Perhaps once per quarter update would be good enough for this one since it would not really do anything, but it would have a better reflection of Market value of an airline than the book value.

For example, a player acquiring an aircraft at time of launch, with 36% discount may have a 100m aircraft on books with 64, value.  10 years later, when it is delivered, it may have a market value of 140m, and a player acquiring the identical aircraft with approximately the same delivery would have the aircraft with book value of 140m (more than double).  Which is all fine for accounting and taxation.

But Mark to Market would more correctly identify the valuation of these two aircraft (airlines owning them).

(edited)
« Last Edit: January 03, 2014, 06:43:45 AM by JumboShrimp »

 

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